FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 1997.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File Number: 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 Identification No.)
Incorporation or organization)
4720 Kingsway Drive, Indianapolis Indiana 46205
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including
area code: (317) 259-6300
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to Common Stock
Section 12(g) of the Act: without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the 3,450,000 shares of the Issuer's Common Stock
held by non-affiliates, as of March 20, 1998 was $17.25.
The number of shares Common Stock of the Registrant, without par value,
outstanding as of March 20, 1998 was 10,453,332.
<PAGE>
SYMONS INTERNATIONAL GROUP INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1997
PART I PAGE
Item 1. Business 3
Forward Looking Statements - Safe Harbor Provisions 31
Item 2. Properties 37
Item 3. Legal Proceedings 38
Item 4. Submission of Matters to a Vote of Security Holders 38
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 38
Item 6. Selected Consolidated Financial Data 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial
Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 39
SIGNATURES 48
<PAGE>
BUSINESS
Overview
Symons International Group, Inc., a specialty property and casualty
insurer, underwrites and markets nonstandard private passenger automobile
insurance and crop insurance. Through its Subsidiaries, the Company writes
business in the United States exclusively through independent agencies and seeks
to distinguish itself by offering high quality, technology based services for
its agents and policyholders. The Company had consolidated Gross Premiums
Written of approximately $461 million for the twelve months ended December 31,
1997. Based on the Company's Gross Premiums Written in 1997, the Company
believes that it is the tenth largest underwriter of nonstandard automobile
insurance in the United States. Based on premium information compiled in 1996 by
the NCIS, the Company believes that IGF is the fourth largest underwriter of
MPCI in the United States.
The following table sets forth the premiums written by line of business
for the periods indicated:
<TABLE>
(in thousands) Years Ended December 31,
---------------------------------------
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Nonstandard Automobile: (1)
Gross Premiums Written $49,005 $187,176 $323,915
Net Premiums Written 37,302 186,579 256,745
Crop Hail:
Gross Premiums Written $16,966 $27,957 $38,349
Net Premiums Written 11,608 23,013 20,796
MPCI: (2)
Gross Premiums Written $53,408 $82,102 $88,052
Net Premiums Written --- --- ---
Commercial: (3)
Gross Premiums Written $5,255 $8,264 $10,284
Net Premiums Written 4,537 --- ---
Total: (4)
Gross Premiums Written $124,634 $305,499 $460,600
======= ======= =======
Net Premiums Written $53,447 $209,592 $277,541
====== ======= =======
</TABLE>
(1) Does not reflect Net Premiums Written for Superior for the year ended
December 31, 1995 and for the four months ended April 30, 1996. For the
year ended December 31, 1995, Superior and its subsidiaries had Gross
Premiums Written of $94.8 million and Net Premiums Written of $94.1
million. For the four months ended April 30, 1996, Superior and its
subsidiaries had Gross Premiums Written of $44.0 million and Net
Premiums Written of $43.6 million.
(2) For a discussion of the accounting treatment of MPCI Premiums, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company."
(3) All commercial premiums written were written by Pafco and 100% ceded to
Granite Re.
(4) For additional financial segment information concerning the Company's
nonstandard automobile and crop insurance operations, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations of the Company."
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<PAGE>
Nonstandard Automobile Insurance
Industry Background
The Company, through its Subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile physical damage and liability
policies for "nonstandard risks." The Company believes that the voluntary
nonstandard market has accounted for approximately 15% of total private
passenger automobile insurance premiums written in recent years. According to
statistical information derived from insurer annual statements compiled by A.M.
Best, the nonstandard automobile market accounted for $19 billion in annual
premium volume for 1997.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
o The Company seeks to achieve profitability through a
combination of internal growth and the acquisition of other
insurers and blocks of business. The Company regularly
evaluates acquisition opportunities.
o The Company will seek to expand the multi-tiered marketing
approach currently employed in certain states in order to
offer to its independent agency network a broader range of
products with different premium and commission structures.
o The Company is committed to the use of integrated technologies
which permit it to rate, issue, bill and service policies in
an efficient and cost effective manner.
o The Company competes primarily on the basis of underwriting
criteria and service to agents and insureds and generally does
not match price decreases implemented by competitors which are
directed towards obtaining market share.
o The Company encourages agencies to place a large share of
their profitable business with its subsidiaries by offering,
in addition to fixed commissions, a contingent commission
based on a combination of volume and profitability.
o The Company responds to claims in a manner designed to reduce
the costs of claims settlements by reducing the number of
pending claims and uses computer databases to verify repair
and vehicle replacement costs and to increase subrogation and
salvage recoveries.
Products
The Company offers both liability and physical damage coverage in the
insurance marketplace, with policies having terms of three to twelve months,
with the majority of policies having a term of six months. Most nonstandard
automobile insurance policyholders choose the basic limits of liability coverage
which, though varying from state to state, generally are $25,000 per person and
$50,000 per accident for bodily injury and in the range of $10,000 to $20,000
for property damage. Of the approximately 300,218 combined policies of Pafco and
Superior in force on December 31, 1997, fewer than approximately 10% had policy
limits in excess of these basic limits of coverage. Of the 72,626 policies of
Pafco in force on December 31, 1997, approximately 81.9% had policy periods of
six months or less. Of the approximately 227,592 policies of Superior in force
as of December 31, 1997, approximately 62.5% had policy periods of six months
and approximately 37.5% had policy periods of twelve months.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Choice
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard marketplace. The Superior Standard policy is intended for risks
which do not qualify for Superior Choice but which nevertheless present a more
favorable risk profile than many other nonstandard risks. The Superior Specialty
policies cover risks which do not qualify for either the Superior Choice or the
Superior Standard. Pafco offers a product similar to the Superior product.
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<PAGE>
Marketing
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Virginia, Indiana and Georgia and also
writes nonstandard automobile insurance in 14 additional states, with plans to
continue to expand selectively into additional states. The Company will select
states for expansion based on a number of criteria, including the size of the
nonstandard automobile insurance market, state-wide loss results, competition
and the regulatory climate. The following table sets forth the geographic
distribution of Gross Premiums Written for the Company for the periods indicated
including Gross Premiums Written for Superior prior to its acquisition by the
Company on April 30, 1996.
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<PAGE>
Symons International Group, Inc. and Superior Insurance Company (Combined)
Year Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
State 1995 1996 1997
- ----- ---- ---- ----
<S> <C> <C> <C>
Arkansas $1,796 $2,004 $1,539
California 15,350 25,131 59,819
Colorado 9,257 10,262 9,865
Florida 54,535 97,659 141,907
Georgia 5,927 7,398 11,858
Illinois 2,483 2,994 3,541
Indiana 13,842 16,599 17,227
Iowa 3,832 5,818 7,079
Kentucky 7,840 11,065 9,538
Mississippi 2,721 2,250 2,830
Missouri 8,513 13,423 9,705
Nebraska 3,660 5,390 6,613
Nevada --- --- 4,273
Ohio 3,164 3,643 3,731
Oklahoma 317 2,559 3,418
Oregon --- --- 2,302
Tennessee 332 (2) ---
Texas 3,464 10,122 7,192
Virginia 5,035 14,733 21,446
Washington 1,693 106 32
----- --- --
Total $143,761 $231,154 $323,915
======= ======= =======
</TABLE>
The Company markets its nonstandard products exclusively through
approximately 6,000 independent agencies and focuses its marketing efforts in
rural areas and the peripheral areas of metropolitan centers. As part of its
strategy, management is continuing its efforts to establish the Company as a low
cost provider of nonstandard automobile insurance while maintaining a commitment
to provide quality service to both agents and insureds. This element of the
Company's strategy is being accomplished primarily through the automation of
certain marketing, underwriting and administrative functions. In order to
maintain and enhance its relationship with its agency base, the Company has 27
territorial managers, each of whom resides in a specific marketing region and
has access to the technology and software necessary to provide marketing, rating
and administrative support to the agencies in his or her region.
The Company attempts to foster strong service relationships with its
agencies and customers. The Company is currently completing its development of
computer software that will provide on-line communication with its agency force.
In addition, to deliver prompt service while ensuring consistent underwriting,
the Company offers rating software to its agents in some states which permits
them to evaluate risks in their offices. The agent has the authority to sell and
bind insurance coverages in accordance with procedures established by the
Company, which is a common practice in the nonstandard automobile insurance
business. The Company reviews all coverages bound by the agents promptly and
generally accepts all coverages which fall within its stated underwriting
criteria. In most jurisdictions, the Company has the right within a specified
time period to cancel any policy even if the risk falls within its underwriting
criteria.
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<PAGE>
The Company compensates its agents by paying a commission based on a
percentage of premiums produced. The Company also offers its agents a contingent
commission based on volume and profitability, thereby encouraging the agents to
enhance the placement of profitable business with the Company.
The Company believes that the combination of Pafco with Superior and
its two Florida-domiciled insurance subsidiaries allows the Company the
flexibility to engage in multi-tiered marketing efforts in which specialized
automobile insurance products are directed toward specific segments of the
market. Since certain state insurance laws prohibit a single insurer from
offering similar products with different commission structures or, in some
cases, premium rates, it is necessary to have multiple licenses in certain
states in order to obtain the benefits of market segmentation. The Company is
currently offering multi-tiered products in its major states. The Company
intends to continue the expansion of the marketing of its multi-tiered products
into other states and to obtain multiple licenses for its subsidiaries in these
states to permit maximum flexibility in designing commission structures.
Underwriting
The Company underwrites its nonstandard automobile business with the
goal of achieving adequate pricing. The Company seeks to classify risks into
narrowly defined segments through the utilization of all available underwriting
criteria. The Company maintains an extensive, proprietary database which
contains statistical records with respect to its insureds on driving and repair
experience by location, class of driver and type of automobile. Management
believes this database gives the Company the ability to be more precise in the
underwriting and pricing of its products. Further, the Company uses motor
vehicle accident reporting agencies to verify accident history information
included in applications.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and
use of rates, while others, such as Florida, Arkansas and California, require
approval of the insurance department prior to the use of the rates.
The Company has integrated its automated underwriting process with the
functions performed by its agency force. For example, the Company has a rating
software package for use by agents in some states. In many instances, this
software package, combined with agent access to the automated retrieval of motor
vehicle reports, ensures accurate underwriting and pricing at the point of sale.
The Company believes the automated rating and underwriting system provides a
significant competitive advantage because it (i) improves efficiencies for the
agent and the Company, thereby reenforcing the agents' commitment to the
Company, (ii) makes more accurate and consistent underwriting decisions possible
and (iii) can be changed easily to reflect new rates and underwriting
guidelines.
Underwriting results of insurance companies are frequently measured by
their Combined Ratios. However, investment income, federal income taxes and
other non-underwriting income or expense are not reflected in the Combined
Ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are generally considered profitable when the Combined Ratio is under
100% and unprofitable when the Combined Ratio is over 100%. The following table
sets forth Loss and LAE Ratios, Expense Ratios and Combined Ratios for the
periods indicated for the nonstandard automobile insurance business of the
Company. The ratios exclude the effects of Superior prior to the acquisition by
the Company on April 30, 1996. The Ratios shown in the table below are computed
based upon GAAP.
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<PAGE>
<TABLE>
Years Ended December 31,
----------------------------
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Loss and LAE Ratio 73.8% 73.7% 78.0%
Underwriting Expense Ratio, net of billing fees 32.3% 23.2% 22.7%
----- ----- -----
Combined Ratio 106.1% 96.9% 100.7%
====== ===== ======
</TABLE>
In an effort to maintain and improve underwriting profits, the
territorial managers regularly monitor loss ratios of the agencies in their
regions and meet periodically with the agencies in order to address any adverse
trends in Loss Ratios.
Claims
The Company's nonstandard automobile claims department handles claims
on a regional basis from its Indianapolis, Indiana; Atlanta, Georgia; Tampa,
Florida and Anaheim, California locations. Management believes that the
employment of salaried claims personnel, as opposed to independent adjusters,
results in reduced ultimate loss payments, lower LAE and improved customer
service. The Company generally retains independent appraisers and adjusters on
an as needed basis for estimation of physical damage claims and limited elements
of investigation. The Company uses the Audapoint, Audatex and Certified
Collateral Corporation computer programs to verify, through a central database,
the cost to repair a vehicle and to eliminate duplicate or "overlap" costs from
body shops. Autotrak, which is a national database of vehicles, allows the
Company to locate vehicles nearly identical in model, color and mileage to the
vehicle damaged in an accident, thereby reducing the frequency of disagreements
with claimants as to the replacement value of damaged vehicles.
Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claim-related litigation is monitored by a home
office supervisor or litigation manager. The claims policy of the Company
emphasizes prompt and fair settlement of meritorious claims, appropriate
reserving for claims and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a
portion of its risks and paying for that protection based upon premiums received
on all policies subject to such Reinsurance. Insurance is ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large losses, including catastrophic losses. Although
Reinsurance does not legally discharge the ceding insurer from its primary
obligation to pay the full amount of losses incurred under policies reinsured,
it does render the reinsurer liable to the insurer to the extent provided by the
terms of the Reinsurance treaty. As part of its internal procedures, the Company
evaluates the financial condition of each prospective reinsurer before it cedes
business to that carrier. Based on the Company's review of its reinsurers'
financial health and reputation in the insurance marketplace, the Company
believes its reinsurers are financially sound and that they therefore can meet
their obligations to the Company under the terms of the Reinsurance treaties.
Effective January 1, 1997, Pafco and Superior ceded 20% of its
nonstandard automobile business written during the first three quarters of 1997
and 25% during the fourth quarter in accordance with a quota share Reinsurance
agreement. 90% of the cession was with Vesta Fire Insurance Company (rated "A"
by A,M. Best) and 10% was with Granite Re. Effective January 1, 1998, the
cession rate was changed to a minimum of 10% and includes the same reinsurers.
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<PAGE>
In 1997, Pafco and Superior maintained casualty excess of loss
reinsurance on its nonstandard automobile insurance business covering 100% of
losses on an individual occurrence basis in excess of $200,000 up to a maximum
of $5,000,000.
Amounts recoverable from reinsurers relating to nonstandard automobile
operations as of December 31, 1997 follows:
<TABLE>
Reinsurance
Recoverables as of
A.M. Best December 31, 1997 (1)
Reinsurers Rating (in thousands)
<CAPTION>
<S> <C> <C>
Everest Reinsurance Company A (2) 1,880
Federal Government A+ (3) 1,248
Granite Reinsurance Not Rated (4) 14,647
Sentinel Reinsurance Company, Ltd. 345
Vesta Fire Insurance Company A 12,939
</TABLE>
(1) Only recoverable greater than $200,000 are shown. Total nonstandard
automobile reinsurance receoverables as of December 31, 1997 were approximately
$31,932,000.
(2) An A.M. Best Rating of "A" is the third highest of 15 ratings. (3) An A.M.
Best Rating of "A+" is the second highest of 15 ratings.
(4) Granite Re is an affiliate of the Company.
On April 29, 1996, Pafco retroactively ceded all of its commercial
business relating to 1995 and previous years to Granite Re, with an effective
date of January 1, 1996. Approximately $3,519,000 and $2,380,000 of loss and
loss adjustment expense reserves and unearned premium reserves, respectively,
were ceded and no gain or loss recognized. Effective January 1, 1998, Granite Re
ceded the 1995 and prior commercial business back to Pafco. Approximately
$1,803,000 in loss and loss adjustment expense reserves were ceded back to Pafco
and no gain or loss was recognized.
On April 29, 1996, Pafco also entered into a 100% quota share
reinsurance agreement with Granite Re, whereby all of Pafco's commercial
business from 1996 and thereafter was ceded effective January 1, 1996.
Neither Pafco nor Superior has any facultative Reinsurance with respect
to its nonstandard automobile insurance business.
Competition
The Company competes with both large national and smaller regional
companies in each state in which it operates. The Company's competitors include
other companies which, like the Company, serve the agency market, as well as
companies which sell insurance directly to customers. Direct writers may have
certain competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and, potentially, reduced
acquisition costs. The Company's primary competitors are Progressive Casualty
Insurance Company, Guaranty National Insurance Company, Integon Corporation
Group, Deerbrook Insurance Company (a member of the Allstate Insurance Group)
and the companies of the American Financial Group. Generally, these competitors
are larger and have greater financial resources than the Company. The
nonstandard automobile insurance business is price sensitive and certain
competitors of the Company have, from time to time, decreased their prices in an
apparent attempt to gain market share. Although the Company's pricing is
inevitably influenced to some degree by that of its competitors, management
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of the Company believes that it is generally not in the Company's best interest
to match such price decreases, choosing instead to compete on the basis of
underwriting criteria and superior service to its agents and insureds.
Crop Insurance
Industry Background
The two principal components of the Company's crop insurance business
are MPCI and private named peril, primarily crop hail insurance. Crop insurance
is purchased by farmers to reduce the risk of crop loss from adverse weather and
other uncontrollable events. Farms are subject to drought, floods and other
natural disasters that can cause widespread crop losses and, in severe cases,
force farmers out of business. Because many farmers rely on credit to finance
their purchases of such agricultural inputs as seed, fertilizer, machinery and
fuel, the loss of a crop to a natural disaster can reduce their ability to repay
these loans and to find sources of funding for the following year's operating
expenses.
MPCI was initiated by the federal government in the 1930s to help
protect farmers against loss of their crops as a result of drought, floods and
other natural disasters. In addition to MPCI, farmers whose crops are lost as a
result of natural disasters have, in the past, occasionally been supported by
the federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available only
on major crops in major producing areas. In 1980, Congress expanded the scope
and coverage of the MPCI program. In addition, the delivery system for MPCI was
expanded to permit private insurance companies and licensed agents and brokers
to sell MPCI policies and the FCIC was authorized to reimburse participating
companies for their administrative expenses and to provide federal Reinsurance
for the majority of the risk assumed by such private companies.
Although expansion of the federal crop insurance program in 1980 was
expected to make crop insurance the farmer's primary risk management tool,
participation in the MPCI program was only 32% of eligible acreage in the 1993
crop year. Due in part to low participation in the MPCI program, Congress
provided an average of $1.5 billion per year in ad hoc disaster payments over
the six years prior to 1994. In view of the combination of low participation
rates in the MPCI program and large federal payments on both crop insurance
(with an average loss ratio of 147%) and ad hoc disaster payments since 1980,
Congress has, since 1990, considered major reform of its crop insurance and
disaster assistance policies. The 1994 Reform Act was enacted in order to
increase participation in the MPCI program and eliminate the need for ad hoc
federal disaster relief payments to farmers.
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage (i.e., the minimum available level of MPCI providing coverage
for 50% of farmers' historic yield at 60% of the price per unit for such crop
set by the FCIC) in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of CAT
Coverage by the local USDA offices which has been eliminated for the 1998 crop
year.
The Federal Agriculture Improvement and Reform Act of 1996 ("the 1996
Reform Act"), signed into law by President Clinton in April 1996, limited the
role of the USDA offices in the delivery of MPCI coverage beginning in July
1996, which was the commencement of the 1997 crop year, and also eliminated the
linkage between CAT Coverage and qualification for certain federal farm program
benefits. This limitation should provide the Company with the opportunity to
realize increased revenues from the distribution and servicing of its MPCI
product. In accordance with the 1996 Reform Act, the USDA announced in July
1996, the following 14 states in which CAT Coverage will no longer be available
through USDA offices but rather will be solely available through private
companies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota,
Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and
Wyoming. Through June 1996, the FCIC transferred to the Company approximately
8,900 insureds for CAT Coverage who previously purchased such coverage from USDA
field offices. The Company believes that any future potential negative impact of
the delinkage mandated by the 1996 Reform Act will be mitigated by, among other
factors, the likelihood that farmers will continue to purchase MPCI to provide
basic protection against natural disasters since ad hoc federal disaster relief
programs have been reduced or eliminated. In addition, the Company believes that
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<PAGE>
(i) lending institutions will likely continue to require this coverage as a
condition to crop lending and (ii) many of the farmers who entered the MPCI
program as a result of the 1994 Reform Act have come to appreciate the
reasonable price of the protection afforded by CAT Coverage and will remain with
the program regardless of delinkage. There can, however, be no assurance as to
the ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
On June 9, 1997, the Secretary of Agriculture announced that the USDA
would no longer provide CAT Coverage through USDA offices in any state effective
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 an additional approximate $2 to $3 million in premium from such
transferred policies, however, there can be no assurance that this number will
be realized.
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
o The Company seeks to enhance underwriting profits and reduce
the volatility of its crop insurance business through
geographic diversification and the appropriate allocation of
risks among the federal reinsurance pools and the effective
use of federal and third-party catastrophic Reinsurance
arrangements.
o The Company also limits the risks associated with crop
insurance through selective underwriting of crop risks based
on its historical loss experience data base.
o The Company continues to develop and maintain a proprietary
knowledge-based underwriting system which utilizes a database
of Company-specific underwriting rules.
o The Company has further strengthened its independent agency
network by using technology to provide fast, efficient service
to its agencies and providing application documentation
designed for simplicity and convenience.
o Unlike many of its competitors, the Company employs
approximately 89 full-time claims adjusters, most of whom are
agronomy-trained, to reduce the cost of losses experienced by
IGF.
o The Company stops selling its crop hail policies after certain
selected dates to prevent farmers from adversely selecting
against IGF when a storm is forecast or hail damage has
already occurred.
o The Company continues to explore growth opportunities and
product diversification through new specialty coverages,
including Crop Revenue Coverage (CRC) and specific named peril
crop insurance. Further, IGF is in the initial stages of
opening new markets and attracting new customers by developing
timber, crop completion and agricultural production
interruption coverages.
o The Company continues to explore new opportunities in
administrative efficiencies and product underwriting made
possible by advances in Precision Farming software, Global
Positioning System (GPS) software and Geographical Information
System (GIS) technology, all of which continue to be adopted
by insureds in their farming practices.
Products
MPCI is a federally subsidized program which is designed to provide
participating farmers who suffer insured
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crop damage with funds needed to continue operating and plant crops for the next
growing season. All of the material terms of the MPCI program and of the
participation of private insurers, such as the Company, in the program are set
by the FCIC under applicable law. MPCI provides coverage for insured crops
against substantially all natural perils. Purchasing an MPCI policy permits a
farmer to insure against the risk that his crop yield for any growing season
will be less than 50% to 75% (as selected by the farmer at the time of policy
application or renewal) of his historic crop yield. If a farmer's crop yield for
the year is greater than the yield coverage he selected, no payment is made to
the farmer under the MPCI program. However, if a farmer's crop yield for the
year is less than the yield coverage selected, MPCI entitles the farmer to a
payment equal to the yield shortfall multiplied by 60% to 100% of the price for
such crop (as selected by the farmer at the time of policy application or
renewal) for that season as set by the FCIC.
In order to encourage farmers to participate in the MPCI program and
thereby reduce dependence on traditional disaster relief measures, the 1994
Reform Act established CAT Coverage as a new minimum level of MPCI coverage,
which farmers may purchase upon payment of a fixed administrative fee of $50 per
policy instead of any premium. CAT Coverage insures 50% of historic crop yield
at 60% of the FCIC-set crop price for the applicable commodities standard unit
of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private
insurers such as the Company.
In addition to CAT Coverage, MPCI policies that provide a greater level
of protection than the CAT Coverage level are also offered ("Buy-up Coverage").
Most farmers purchasing MPCI have historically purchased at Buy-up Coverage
levels, with the most frequently sold policy providing coverage for 65% of
historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up
Coverages require payment of a premium in an amount determined by a formula set
by the FCIC. Buy-up Coverage can only be purchased from private insurers. The
Company focuses its marketing efforts on Buy-up Coverages, which have higher
premiums and which the Company believes will continue to appeal to farmers who
desire, or whose lenders encourage or require, revenue protection.
The number of MPCI Buy-up policies written has historically tended to
increase after a year in which a major natural disaster adversely affecting
crops occurs and to decrease following a year in which favorable weather
conditions prevail.
The Company, like other private insurers participating in the MPCI
program, generates revenues from the MPCI program in two ways. First, it
markets, issues and administers policies, for which it receives administrative
fees; and second, it participates in a profit-sharing arrangement in which it
receives from the government a portion of the aggregate profit, or pays a
portion of the aggregate loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex profit sharing formula established by the FCIC. Under
this formula, the primary factors that determine the Company's MPCI profit or
loss share are (i) the gross premiums the Company is credited with having
written, (ii) the amount of such credited premiums retained by the Company after
ceding premiums to certain federal reinsurance pools and (iii) the loss
experience of the Company's insureds. The following discussion provides more
detail about the implementation of this profit sharing formula.
The Company recently began offering a new product in its crop insurance
business called Crop Revenue Coverage ("CRC"). In contrast to standard MPCI
coverage, which features a yield guarantee or coverage for the loss of
production, CRC provides the insured with a guaranteed revenue stream by
combining both yield and price variability protection. CRC protects against a
grower's loss of revenue resulting from fluctuating crop prices and/or low
yields by providing coverage when any combination of crop yield and price
results in revenue that is less than the revenue guarantee provided by the
policy. CRC was approved by the FCIC as a pilot program for revenue insurance
coverage plans for the 1996 Crop Year and has been available for corn and
soybeans in all counties in Iowa and Nebraska since 1996. CRC policies
represented approximately 30% of the combined corn policies written by IGF in
Iowa and Nebraska since 1996. Since July 1996, CRC was made available for winter
wheat in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas
and Washington and in parts of Montana. In May 1997, the FCIC announced that CRC
will be expanded to include wheat in twenty-five additional states. Currently,
CRC represents approximately 7% of all of the Company's wheat policies.
-12-
<PAGE>
Revenue insurance coverage plans such as CRC are the result of the 1994
Reform Act, which directed the FCIC to develop a pilot crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company other than the
Company under the auspices of this pilot program, which authorizes private
companies to design alternative revenue coverage plans and to submit them for
review, approval and endorsement by the FCIC. As a result, although CRC is
administered and reinsured by the FCIC and risks are allocated to the federal
reinsurance pools, CRC remains partially influenced by the private sector,
particularly with respect to changes in its rating structure.
CRC plans to use the policy terms and conditions of the Actual
Production History ("APH") plan of MPCI as the basic provisions for coverage.
The APH provides the yield component by utilizing the insured's historic yield
records. The CRC revenue guarantee is the producer's approved APH times the
coverage level, times the higher of the spring futures price or harvest futures
price (in each case, for post-harvest delivery) of the insured crop for each
unit of farmland. The coverage levels and exclusions in a CRC policy are similar
to those in a standard MPCI policy. For the 1997 Crop Year, the Company received
from the FCIC an expense reimbursement payment equal to 25% of Gross Premiums
Written in respect of each CRC policy it writes. The MPCI Buy-up Expense
Reimbursement Payment is currently administratively established by FCIC in the
absence of a applicable legislation. This expense reimbursement payment was
reduced from 27% in 1996 to 23.25% in 1998.
CRC protects revenues by extending crop insurance protection based on
APH to include price as well as yield variability. Unlike MPCI, in which the
crop price component of the coverage is set by the FCIC prior to the growing
season and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice in
the CRC plan. The spring futures price is used to establish the initial policy
revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to recompute
the revenue guarantee (and resulting indemnity payments) when the harvest price
is higher than the spring price.
In addition to MPCI, the Company offers stand alone crop hail
insurance, which insures growing crops against damage resulting from hail storms
and which involves no federal participation, as well as its proprietary
HAILPLUS(R) product which combines the application and underwriting process for
MPCI and hail coverages. The HAILPLUS(R) product tends to produce less volatile
loss ratios than the stand alone product since the combined product generally
insures a greater number of acres, thereby spreading the risk of damage over a
larger insured area. Approximately 50% of IGF's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide insurance
against hail damage, under crop hail coverages farmers can receive payments for
hail damage which would not be severe enough to require a payment under an MPCI
policy. The Company believes that offering crop hail insurance enables it to
sell more MPCI policies than it otherwise would.
In addition to crop hail insurance, the Company also sells a small
volume of insurance against crop damage from other specific named perils. These
products cover specific crops, including hybrid seed corn, cranberries, cotton,
sugar cane, sugar beets, citrus, tomatoes and onions and are generally written
on terms that are specific to the kind of crops and farming practices involved
and the amount of actuarial data available. The Company plans to seek potential
growth opportunities in this niche market by developing basic policies on a
diverse number of named crops grown in a variety of geographic areas and to
offer these polices primarily to large producers through certain select agents.
The Company's experienced product development team will develop the underwriting
criteria and actuarial rates for the named peril coverages. As with the
Company's other crop insurance products, loss adjustment procedures for named
peril policies are handled by full-time professional claims adjusters who have
specific agronomy training with respect to the crop and farming practice
involved in the coverage. IGF is currently in the initial stages of opening new
markets and attracting new customers by developing timber, crop completion and
agricultural production interruption coverages.
Gross Premiums
For each year, the FCIC sets the formulas for determining premiums for
different levels of Buy-up Coverage. Premiums are based on the type of crop,
acreage planted, farm location, price per bushel for the insured crop as set by
the FCIC for that year and other factors. The federal government will generally
subsidize a portion of the total premium
-13-
<PAGE>
set by the FCIC and require farmers to pay the remainder. Cash premiums are
received by the Company from farmers only after the end of a growing season and
are then promptly remitted to the federal government. Although applicable
federal subsidies change from year to year, such subsidies will range up to
approximately 40% of the Buy-up Coverage premium depending on the crop insured
and the level of Buy-up Coverage purchased, if any. Federal premium subsidies
are recorded on the Company's behalf by the government. For purposes of the
profit sharing formula, the Company is credited with having written the full
amount of premiums paid by farmers for Buy-up Coverages, plus the amount of any
related federal premium subsidies (such total amount, its "MPCI Premium").
As previously noted, farmers pay an administrative fee of $50 per
policy but are not required to pay any premium for CAT Coverage. However, for
purposes of the profit sharing formula, the Company is credited with an imputed
premium (its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount
of such MPCI Imputed Premium credited is determined by formula. In general, such
MPCI Imputed Premium will be less than 50% of the premium that would be payable
for a Buy-up Coverage policy that insured 65% of historic crop yield at 100% of
the FCIC-set crop price per standard unit of measure for the commodity,
historically the most frequently sold Buy-up Coverage. For income statement
purposes under GAAP, the Company's Gross Premiums Written for MPCI consist only
of its MPCI Premiums and do not include MPCI Imputed Premiums.
Reinsurance Pools
Under the MPCI program, the Company must allocate its MPCI Premium or
MPCI Imputed Premium in respect of a farm to one of three federal reinsurance
pools, at its discretion. These pools provide private insurers with different
levels of Reinsurance protection from the FCIC on the business they have
written. For insured farms allocated to the "Commercial Pool," the Company, at
its election, generally retains 50% to 100% of the risk and the FCIC assumes 0%
- - 50% of the risk; for those allocated to the "Developmental Pool," the Company
generally retains 35% of the risk and the FCIC assumes 65%; and for those
allocated to the "Assigned Risk Pool," the Company retains 20% of the risk and
the FCIC assumes 80%. The MPCI Retention is protected by private third-party
stop-loss treaties.
Although the Company in general must agree to insure any eligible farm,
it is not restricted in its decision to allocate a risk to any of the three
pools, subject to a minimum aggregate retention of 35% of its MPCI Premiums and
MPCI Imputed Premiums written. The Company uses a sophisticated methodology
derived from a comprehensive historical data base to allocate MPCI risks to the
federal reinsurance pools in an effort to enhance the underwriting profits
realized from this business. The Company has crop yield history information with
respect to over 100,000 farms in the United States. Generally, farms or crops
which, based on historical experience, location and other factors, appear to
have a favorable net loss ratio and to be less likely to suffer an insured loss,
are placed in the Commercial Pool. Farms or crops which appear to be more likely
to suffer a loss are placed in the Developmental Pool or Assigned Risk Pool. The
Company has historically allocated the bulk of its insured risks to the
Commercial Pool.
The Company's share of profit or loss depends on the aggregate amount
of MPCI Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention"). As previously
described, the Company purchases Reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds
Under the MPCI program the Company pays losses to farmers through a
federally funded escrow account as they are incurred during the growing season.
The Company requests funding of the escrow account when a claim is settled and
the escrow account is funded by the federal government within three business
days. After a growing season ends, the aggregate loss experience of the
Company's insureds in each state for risks allocated to each of the three
Reinsurance pools is determined. If, for all risks allocated to a particular
pool in a particular state, the Company's share of losses incurred is less than
its aggregate MPCI Retention, the Company shares in the gross amount of such
profit according to a schedule set by the FCIC for each year. The profit and
loss sharing percentages are different for risks allocated to each of the three
Reinsurance pools and private insurers will receive or pay the greatest
percentage of profit
-14-
<PAGE>
or loss for risks allocated to the Commercial Pool.
The percentage split between private insurers and the federal
government of any profit or loss that emerges from an MPCI Retention is set by
the FCIC and generally is adjusted from year to year. For 1995, 1996 and 1997
crop years, the FCIC increased the maximum potential profit share of private
insurers for risks allocated to the Commercial Pool above the maximum potential
profit share set for 1994, without increasing the maximum potential share of
loss for risks allocated to that pool for 1995. This change increased the
potential profitability of risks allocated to the Commercial Pool by private
insurers.
The following table presents MPCI Premiums, MPCI Imputed Premiums and
underwriting gains or losses of IGF for the periods indicated:
<TABLE>
(in thousands) Year Ended December 31,
---------------------------------------------
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
MPCI premiums $53,408 $82,102 $88,052
MPCI imputed premiums $19,552 $38,944 $33,294
Gross underwriting gain $10,870 $15,801 $30,325
Net private third party reinsurance
expense and other (1,217) (3,524) (3,736)
------- ------- -------
Net underwriting gain $9,653 $12,277 $26,589
===== ====== ======
</TABLE>
MPCI Fees and Reimbursement Payments
The Company receives Buy-up Expense Reimbursement Payments from the
FCIC for writing and administering Buy-up Coverage policies. These payments
provide funds to compensate the Company for its expenses, including agents'
commissions and the costs of administering policies and adjusting claims. For
1995, 1996 and 1997, the maximum Buy-up Expense Reimbursement Payment was set at
31%, 31%, and 29%, respectively, of the MPCI Premium. Historically, the FCIC has
paid the maximum MPCI Buy-up Expense Reimbursement Payment rate allowable under
law, although no assurance can be given that this practice will continue.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced in
an amount that corresponds to the reduction in the expense reimbursement rate,
there can be no assurance that the Company's actual costs will not exceed the
expense reimbursement rate. For the 1998 crop year, the Buy-up Expense
Reimbursement payment has been set at 27%.
Farmers are required to pay a fixed administrative fee of $50 per
policy (maximum of $100 per county) in order to obtain CAT Coverage. This fee is
retained by the Company to defray the cost of administration and policy
acquisition. The Company also receives from the FCIC a separate CAT LAE
Reimbursement Payment equal to approximately 13.0% of MPCI Imputed Premiums in
respect of each CAT Coverage policy it writes and a small MPCI Excess LAE
Reimbursement Payment. In general, fees and payments received by the Company in
respect of CAT Coverage are significantly lower than those received for Buy-up
Coverage.
-15-
<PAGE>
In addition to premium revenues, the Company received the following
fees and commissions from its crop insurance segment for the periods indicated:
<TABLE>
(in thousands) Year Ended December 31,
------------------------------------
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CAT Coverage Fees (1) $1,298 $1,181 $1,191
Buy-up Expense Reimbursement Payments 16,366 24,971 24,788
CAT LAE Reimbursement Payments and MPCI
Excess LAE Reimbursement Payments 3,427 5,753 4,565
----- ----- -----
Total $21,091 $31,905 $30,544
====== ====== ======
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company" for a discussion of the
accounting treatment accorded to the crop insurance business.
Third-Party Reinsurance In Effect for 1997
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss Reinsurance from other private
reinsurers in addition to Reinsurance obtained from the FCIC. In addition, since
the FCIC and state regulatory authorities require IGF to limit its aggregate
writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of
capital, and retain a net loss exposure of not in excess of 50% of capital, IGF
may also obtain Reinsurance from private reinsurers in order to permit it to
increase its premium writings. Such private Reinsurance would not eliminate the
Company's potential liability in the event a reinsurer was unable to pay or
losses exceeded the limits of the stop loss coverage. For crop hail insurance,
the Company has in effect quota share Reinsurance of 40% of business, although
the reinsurer is only liable to participate in losses of the Company up to a
150% pure loss ratio. The Company also has stop loss treaties for its crop hail
business which reinsure net losses in excess of an 80% pure Loss Ratio to 130%
at 95% coverage with IGF retaining the remaining 5%. With respect to its MPCI
business, the Company has stop loss treaties which reinsure 93.75% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 100% of the Company's MPCI
Retention up to 125% of MPCI Retention. The Company also has an additional layer
of MPCI stop loss Reinsurance which covers 95% of the underwriting losses
experienced by the Company to the extent that aggregate losses of its insureds
nationwide are in excess of 125% of MPCI Retention up to 160% of MPCI Retention.
Based on a review of the reinsurers' financial health and reputation in
the insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they therefor can meet their
obligations to the Company under the terms of the Reinsurance treaties. Reserves
for uncollectible Reinsurance are provided as deemed necessary. The following
table provides information with respect to ceded premiums in excess of $250,000
on crop hail and named perils and for any affiliates.
-16-
<PAGE>
Year Ended December 31, 1997 (1)
(in thousands, except footnotes)
<TABLE>
<CAPTION>
A.M. Best Ceded
Reinsurers Rating Premiums
<S> <C> <C>
Folksam International Insurance Co. Ltd. (2) A- $746
Frankona Ruckversicherungs AG (3) A $415
Granite Re (4) Not Rated $176
Insurance Corporation of Hannover A- $268
Liberty Mutual Insurance Co. (UK) Ltd. A $433
Monde Re (5) Not Rated $4,213
Munich Re (6) A+ $3,004
National Grange A- $736
Partner Reinsurance Company Ltd. A $1,112
R & V Versicherung AG Not Rated $1,286
Reinsurance Australia Corporation, Ltd. (REAC) (5) Not Rated $4,956
Scandinavian Reinsurance Company Ltd. A+ --
- --------
</TABLE>
(1) For the twelve months ended December 31, 1997, total ceded premiums were
$17,345.
(2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
(3) An A.M. Best rating of "A" is the third highest of 15 ratings.
(4) Granite Re is an affiliate of the Company.
(5) Monde Re is owned by REAC.
(6) An A.M. Best rating of "A+" is the second highest of 15 ratings.
As of December 31, 1997, IGF's Reinsurance recoverables aggregated
approximately $268,766 excluding recoverables from the FCIC.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 42
states through approximately 2,400 agents associated with approximately 925
independent insurance agencies, with its primary geographic concentration in the
states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has, however,
diversified outside of the Midwest and Texas in order to reduce the risk
associated with geographic concentration. IGF is licensed in 23 states and
markets its products in additional states through a fronting agreement with a
third-party insurance company. IGF has a stable agency base and it experienced
negligible turnover in its agencies in 1997. Through its agencies, IGF targets
farmers with an acreage base of at least 1,000 acres. Such larger farms
typically have a lower risk exposure since they tend to utilize better farming
practices and to have noncontiguous acreage, thereby making it less likely that
the entire farm will be affected by a particular occurrence. Many farmers with
large farms tend to buy or rent acreage which is increasingly distant from the
central farm location. Accordingly, the likelihood of a major storm (wind, rain
or hail) or a freeze affecting all of a particular farmer's acreage decreases.
-17-
<PAGE>
The following table presents MPCI and crop hail premiums written by IGF
by state for the periods indicated.
<TABLE>
(in thousands)
-------------------------------------------------------------------------------
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1997
----------------------------------- --------------------------------------
State Crop Hail MPCI Total Crop Hail MPCI Total
- ----- --------- ---- ----- --------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Alabama $97 $2,951 $3,048 $144 $1,707 $1,851
Arkansas 314 1,784 2,098 652 2,270 2,922
California 1,164 1,992 3,156 1,062 4,418 5,480
Colorado 1,651 3,334 4,985 1,309 3,183 4,492
Florida --- 1,738 1,738 19 1,809 1,828
Illinois 526 11,228 11,754 655 12,221 12,876
Indiana 115 3,870 3,985 92 4,540 4,632
Iowa 6,590 15,205 21,795 7,628 12,949 20,577
Kansas 662 5,249 5,911 832 6,278 7,110
Louisiana 28 1,674 1,702 41 856 897
Minnesota 2,300 2,244 4,544 4,405 3,469 7,874
Mississippi 482 2,222 2,704 509 2,711 3,220
Missouri 556 2,427 2,983 383 1,711 2,094
Montana 5,632 1,554 7,186 2,879 1,854 4,733
Nebraska 1,567 3,206 4,773 1,597 3,160 4,757
North Dakota 2,294 2,796 5,090 787 3,014 3,801
Oklahoma 403 1,436 1,839 451 1,127 1,578
South Dakota 1,457 1,106 2,563 932 1,541 2,473
Texas 1,262 12,361 13,623 3,211 1,593 4,804
Wisconsin 370 2,187 2,557 407 1,479 1,886
All Other 487 1,538 2,025 10,354 16,162 26,516
--- ----- ----- ------ ------ ------
Total $27,957 $82,102 $110,059 $38,349 $88,052 $126,401
======= ======= ======== ======= ======= ========
</TABLE>
-18-
<PAGE>
The Company seeks to maintain and develop its agency relationships by
providing agencies with faster, more efficient service as well as marketing
support. IGF owns an IBM AS400 along with all peripheral and networking
equipment and has developed its own proprietary software package, APlus, which
allows agencies to quote and examine various levels of coverage on their own
personal computers. The Company's regional managers are responsible for the
Company's field operations within an assigned geographic territory, including
maintaining and enhancing relationships with agencies in those territories. IGF
also uses application documentation which is designed for simplicity and
convenience. The Company believes that IGF is the only crop insurer which has
created a single application for MPCI, crop hail and named peril coverage.
IGF generally compensates its agents based on a percentage of premiums
produced and, in the case of CAT Coverage and crop hail insurance, a percentage
of underwriting gain realized with respect to business produced. This
compensation structure is designed to encourage agents to place profitable
business with IGF (which tends to be insurance coverages for larger farms with
respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact
that rates are established by the FCIC, the primary underwriting functions
performed by the Company's personnel with respect to MPCI coverage are (i)
selecting of marketing territories for MPCI based on the type of crops being
grown in the area, typical weather patterns and loss experience of both agencies
and farmers within a particular area, (ii) recruiting agencies within those
marketing territories which service larger farms and other more desirable risks
and (iii) ensuring that policies are underwritten in accordance with the FCIC
rules.
With respect to its hail coverage, IGF seeks to minimize its
underwriting losses by maintaining an adequate geographic spread of risk by rate
group. In addition, IGF establishes sales closing dates after which hail
policies will not be sold. These dates are dependent on planting schedules, vary
by geographic location and range from May 15 in Texas to July 15 in North
Dakota. Prior to these dates, crops are either seeds in the ground or young
growth newly emerged from the ground and hail damage to crops in either of these
stages of growth is minimal. The cut-off dates prevent farmers from adversely
selecting against IGF by waiting to purchase hail coverage until a storm is
forecast or damage has occurred. For its hail coverage, IGF also sets limits by
policy ($400,000 each) and by township ($2.0 million per township). The Company
also uses a daily report entitled "Severe Weather Digest" which shows the time
and geographic location of all extraordinary weather events to check incoming
policy applications against possible previous damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters
on a part-time basis for loss adjusting services, IGF employs full-time
professional claims adjusters, most of whom are agronomy trained, as well as
part-time adjusters. Management believes that the professionalism of the IGF
full-time claims staff coupled with their exclusive commitment to IGF helps to
ensure that claims are handled in a manner designed to reduce overpayment of
losses experienced by IGF. The adjusters are located throughout IGF's marketing
territories. In order to promote a rapid claims response, the Company has
available several small four wheel drive vehicles for use by its adjusters. The
adjusters report to a field service representative in their territory who
manages adjusters' assignments, assures that all preliminary estimates for loss
reserves are accurately reported and assists in loss adjustment. Within 72 hours
of reported damage, a loss notice is reviewed by an IGF service office claims
manager and a preliminary loss reserve is determined which is based on the
representative's and/or adjuster's knowledge of the area or the particular storm
which caused the loss. Generally, within approximately two weeks, hail and MPCI
claims are examined and reviewed on site by an adjuster and the insured signs a
proof of loss form containing a final release. As part of the adjustment
process, IGF's adjusters use Global Positioning System Units, which are hand
held devices using navigation satellites to determine the precise location where
a claimed loss has occurred. IGF has a team of catastrophic claims specialists
who are available on 48 hours notice to travel to any of IGF's six regional
service offices to assist in heavy claim work load
-19-
<PAGE>
situations.
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies for MPCI, crop hail and named peril coverage.
Many of the Company's competitors have substantially greater financial and other
resources than the Company and there can be no assurance that the Company will
be able to compete effectively against such competitors in the future. The
Company competes on the basis of the commissions paid to agents, the speed with
which claims are paid, the quality and extent of services offered, the
reputation and experience of its agency network and, in the case of private
insurance, policy rates. Because the FCIC establishes the rates that may be
offered for MPCI policies, the Company believes that quality of service and
level of commissions offered to agents are the principal factors on which it
competes in the area of MPCI. The Company believes that the crop hail and other
named peril crop insurance industry is extremely rate-sensitive and the ability
to offer competitive rate structures to agents is a critical factor in the
agent's ability to write crop hail and other named peril premiums. Because of
the varying state laws regarding the ability of agents to write crop hail and
other named peril premiums prior to completion of rate and form filings (and, in
some cases, state approval of such filings), a company may not be able to write
its expected premium volume if its rates are not competitive.
The crop insurance industry has become increasingly consolidated. From
the 1985 crop year to the 1997 crop year, the number of insurance companies
having agreements with the FCIC to sell and service MPCI policies has declined
from fifty to thirty-six. The Company believes that IGF is the fourth largest
MPCI crop insurer in the United States based on premium information compiled in
1996 by the FCIC and NCIS. The Company's primary competitors are Rain & Hail
Insurance Service, Inc. (affiliated with Cigna Insurance Company), Rural
Community Insurance Services, Inc. (which is owned by Norwest Corporation),
American Growers Insurance Company (Redland), Crop Growers Insurance, Inc.,
Great American Insurance Company, Blakely Crop Hail (an affiliate of Farmers
Alliance Mutual Insurance Company) and North Central Crop Insurance, Inc. The
Company believes that in order to compete successfully in the crop insurance
business it will have to market and service a volume of premiums sufficiently
large to enable the Company to continue to realize operating efficiencies in
conducting its business. No assurance can be given that the Company will be able
to compete successfully if this market further consolidates.
Reserves for Losses and Loss Adjustment Expenses
Loss Reserves are estimates, established at a given point in time based
on facts then known, of what an insurer predicts its exposure to be in
connection with incurred losses. LAE Reserves are estimates of the ultimate
liability associated with the expense of settling all claims, including
investigation and litigation costs resulting from such claims. The actual
liability of an insurer for its Losses and LAE Reserves at any point in time
will be greater or less than these estimates.
The Company maintains reserves for the eventual payment of Losses and
LAE with respect to both reported and unreported claims. Nonstandard automobile
reserves for reported claims are established on a case-by-case basis. The
reserving process takes into account the type of claim, policy provisions
relating to the type of loss and historical paid Loss and LAE for similar
claims. Reported crop insurance claims are reserved based upon preliminary
notice to the Company and investigation of the loss in the field. The ultimate
settlement of a crop loss is based upon either the value or the yield of the
crop.
Loss and LAE Reserves for claims that have been incurred but not
reported are estimated based on many variables including historical and
statistical information, inflation, legal developments, economic conditions,
trends in claim severity and frequency and other factors that could affect the
adequacy of loss reserves.
The Company's reserves are reviewed by independent actuaries on a
semi-annual basis. The Company's recorded Loss Reserves are certified by an
independent actuary for each calendar year.
-20-
<PAGE>
The following loss reserve development table illustrates the change
over time of reserves established for loss and loss expenses as of the end of
the various calendar years for the nonstandard automobile segment of the
Company. The table includes the loss reserves acquired from the acquisition of
Superior in 1996 and the related loss reserve development thereafter. The first
section shows the reserves as originally reported at the end of the stated year.
The second section, reading down, shows the cumulative amounts paid as of the
end of successive years with respect to the reserve liability. The third
section, reading down, shows the re-estimates of the original recorded reserve
as of the end of each successive year which is a result of sound insurance
reserving practices of addressing new emerging facts and circumstances which
indicate that a modification of the prior estimate is necessary. The last
section compares the latest re-estimated reserve to the reserve originally
established, and indicates whether or not the original reserve was adequate or
inadequate to cover the estimated costs of unsettled claims.
The loss reserve development table is cumulative and, therefore, ending
balances should not be added since the amount at the end of each calendar year
includes activity for both the current and prior years.
The reserve for losses and loss expenses is an accumulation of the
estimated amounts necessary to settle all outstanding claims as of the date for
which the reserve is stated. The reserve and payment data shown below have been
reduced for estimated subrogation and salvage recoveries. The Company does not
discount its reserves for unpaid losses and loss expenses. No attempt is made to
isolate explicitly the impact of inflation from the multitude of factors
influencing the reserve estimates though inflation is implicitly included in the
estimates. The Company regularly updates its reserve forecasts by type of claim
as new facts become known and events occur which affect unsettled claims.
During 1997, the Company, as part of its efforts to reduce costs and
combine the operations of the two nonstandard automobile insurance companies,
emphasized a unified claim settlement practice as well as reserving philosophy
for Superior and Pafco. Superior had historically provided strengthened case
reserves and a level of IBNR which reflected the strength of the case reserves.
Pafco had historically carried case reserves which generally did not reflect the
level of future payments but yet a higher IBNR reserve. This change in claims
management philosophy during 1997 coupled with the growth in premium volume
produced sufficient volatility in prior year loss patterns to warrant the
Company to re-estimate its 1996 reserve for losses and loss expenses and record
an additional reserve during 1997. The effects of changes in settlement
patterns, costs, inflation, growth and other factors have all been considered in
establishing the current year reserve for unpaid losses and loss expenses.
-21-
<PAGE>
Symons International Group, Inc.
Nonstandard Automobile Insurance Only
For The Years Ended December 31, (in thousands)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995(A) 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for unpaid
losses and LAE $25,248 $71,748 $79,551 $101,185
Deduct reinsurance
recoverable 10,927 9,921 8,124 16,378
Reserve for unpaid losses and
LAE, net of reinsurance $4,687 $10,747 $13,518 $15,923 $15,682 $17,055 $14,822 14,321 61,827 71,427 84,807
Paid cumulative as of:
One Year Later 2,708 5,947 7,754 7,695 7,519 10,868 8,875 7,455 42,183 59,410
Two Years Later 4,448 7,207 10,530 10,479 12,358 15,121 11,114 10,375 53,350 --
Three Years Later 4,570 7,635 11,875 12,389 13,937 16,855 13,024 12,040 -- --
Four Years Later 4,310 7,824 12,733 13,094 14,572 17,744 13,886 -- -- --
Five Years Later 4,331 8,009 12,998 13,331 14,841 18,195 -- -- -- --
Six Years Later 4,447 8,135 13,095 13,507 14,992 -- -- -- -- --
Seven Years Later 4,448 8,154 13,202 13,486 -- -- -- -- -- --
Eight Years Later 4,447 8,173 13,216 -- -- -- -- -- -- --
Nine Years Later 4,447 8,174 -- -- -- -- -- -- -- --
Ten Years Later 4,447 -- -- -- -- -- -- -- -- --
Liabilities re-estimated as of:
One Year Later 5,352 8,474 13,984 13,888 14,453 17,442 14,788 13,365 59,626 82,011
Two Years Later 4,726 8,647 13,083 13,343 14,949 18,103 13,815 12,696 60,600 --
Three Years Later 4,841 8,166 13,057 13,445 15,139 18,300 14,051 13,080 -- --
Four Years Later 4,474 8,108 13,152 13,514 15,218 18,313 14,290 -- -- --
Five Years Later 4,412 8,179 13,170 13,589 15,198 18,419 -- -- -- --
Six Years Later 4,471 8,165 13,246 13,612 15,114 -- -- -- -- --
Seven Years Later 4,448 8,196 13,260 13,529 -- -- -- -- -- --
Eight Years Later 4,462 8,198 13,248 -- -- -- -- -- -- --
Nine Years Later 4,447 8,199 -- -- -- -- -- -- -- --
Ten Years Later 4,447 -- -- -- -- -- -- -- -- --
Net cumulative (deficiency)
or redundancy 240 2,548 270 2,394 568 (1,364) 532 1,241 1,227 (10,584)
Expressed as a percentage of
unpaid losses and LAE 5.1% 23.7% 2.0% 15.0% 3.6% (8.0%) 3.6% 8.7% 2.0% (14.8%)
</TABLE>
(A) Includes Superior loss and loss expense reserves of $44,423 acquired on
April 29, 1996 and subsequent development thereon.
-22-
<PAGE>
Investments
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate. The Company's investment policies are determined by
the Company's Board of Directors and are reviewed on a regular basis. The
Company's investment strategy is to maximize the after-tax yield of the
portfolio while emphasizing the stability and preservation of the Company's
capital base. Further, the portfolio is invested in types of securities and in
an aggregate duration which reflect the nature of the Company's liabilities and
expected liquidity needs, and the Company's fixed maturity and common equity
investments are substantially all in public companies. The Company's investments
in real estate and mortgage loans represent 1.2% of the Company's aggregate
investments. The investment portfolios of the Company are managed by third-party
professional administrators, in accordance with pre-established investment
policy guidelines established by the Company. The investment portfolios of the
Company at December 31, 1997, consisted of the following:
<TABLE>
(in thousands)
<CAPTION>
Cost or
Amortized Market
Type of Investment Cost Value
<S> <C> <C>
Fixed maturities:
United States Treasury securities and obligations
of United States government corporations and agencies $83,661 $84,523
Foreign Governments 537 548
Obligations of states and political subdivisions 1,000 1,000
Corporate securities 82,628 83,314
------ ------
Total Fixed Maturities 167,826 169,385
Equity Securities:
Common stocks 34,220 35,542
Short-term investments 8,871 8,871
Real estate 450 450
Mortgage loans 2,220 2,220
Other loans 50 50
-- --
Total Investments $213,637 $216,518
======== ========
- ---------------
</TABLE>
-23-
<PAGE>
The following table sets forth composition of the fixed maturity
securities portfolio of the Company by time to maturity as of December 31:
<TABLE>
(in thousands) 1996 1997
---------------------- ---------------------
<CAPTION>
Market Percent Total Market Percent Total
Time To Maturity Value Market Value Value Market Value
<S> <C> <C> <C> <C>
1 year or less $6,423 5.0% $1,880 1.1%
More than 1 year through 5 years 71,086 55.7% 57,782 34.1%
More than 5 years through 10 years 43,404 34.0% 30,793 18.2%
More than 10 years 6,768 5.3% 8,390 5.0%
----- ---- ----- ----
127,681 100.0% 98,845 58.4%
Mortgage-backed securities --- 0.0% 70,540 41.6%
--- ---- ------ -----
Total $127,681 100.0% $169,385 100.0%
======= ====== ======= ======
</TABLE>
The following table sets forth the ratings assigned to the fixed
maturity securities of the Company as of December 31:
<TABLE>
(in thousands) 1996 1997
--------------------- ---------------------
<CAPTION>
Market Percent Total Market Percent Total
Rating (1) Value Market Value Value Market Value
- ------ --- ----- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C>
Aaa or AAA $50,444 39.5% $112,366 66.3%
Aa or AA 2,976 2.3% 2,410 1.4%
A 50,365 39.4% 18,271 10.8%
Baa or BBB 11,671 9.1% 19,065 11.3%
Ba or BB 2,840 2.3% 16,519 9.8%
Other below investment grade 2,091 1.6% --- ---
Not rated (2) 7,294 5.8% 754 0.4%
----- ---- --- ----
Total $127,681 100.0% $169,385 100.0%
======= ====== ======= ======
</TABLE>
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available, are based on ratings assigned by Standard & Poor's Corporation.
(2) These securities were not rated by the rating agencies. However, these
securities are designated as Category 1 securities by the NAIC, which
is the equivalent rating of "A" or better.
-24-
<PAGE>
The investment results of the Company for the periods indicated are set
forth below:
<TABLE>
(in thousands) Years Ended December 31,
-----------------------------------
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net investment income (1) $1,173 $6,733 $11,447
Average investment portfolio (2) $22,653 $153,565 $189,473
Pre-tax return on average investment
portfolio 5.2% 5.9% 6.0%
Net realized gains (losses) $(344) $(1,015) $9,444
- ---------------
</TABLE>
(1) Includes dividend income received in respect of holdings of common stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio. For 1996, the
average investment portfolio was adjusted for the effect of the
Acquisition.
Ratings
A.M. Best has currently assigned a "B+" rating to Superior and a
"B-" rating to Pafco.
A.M. Best's ratings are based upon a comprehensive review of a
company's financial performance, which is supplemented by certain data,
including responses to A.M. Best's questionnaires, phone calls and other
correspondence between A.M. Best analysts and company management, quarterly NAIC
filings, state insurance department examination reports, loss reserve reports,
annual reports, company business plans and other reports filed with state
insurance departments. A.M. Best undertakes a quantitative evaluation, based
upon profitability, leverage and liquidity, and a qualitative evaluation, based
upon the composition of a company's book of business or spread of risk, the
amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus, the soundness of a company's capital
structure, the extent of a company's market presence and the experience and
competence of its management. A.M. Best's ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations to
policyholders. A.M. Best's ratings are not a measure of protection afforded
investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest rating
classifications, respectively, out of 15 ratings. A "B+" rating is awarded to
insurers which, in A.M. Best's opinion, "have demonstrated very good overall
performance when compared to the standards established by the A.M. Best Company"
and "have a good ability to meet their obligations to policyholders over a long
period of time." A "B-" rating is awarded to insurers which, in A.M. Best's
opinion, "have demonstrated adequate overall performance when compared to the
standards established by the A.M. Best Company" and "have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions." There
can be no assurance that such ratings or changes therein will not in the future
adversely affect the Company's competitive position.
-25-
<PAGE>
Recent Acquisitions
On January 31, 1996, Goran, the Company, Fortis, Inc. and its
wholly-owned subsidiary, Interfinancial, Inc., a holding company for Superior,
entered into a Stock Purchase Agreement (the "Superior Purchase Agreement")
pursuant to which the Company agreed to purchase Superior from Interfinancial,
Inc. for a purchase price of approximately $66.6 million. Simultaneously with
the execution of the Superior Purchase Agreement, Goran, the Company, GGS
Holdings and the GS Funds, a Delaware limited partnership, entered into an
agreement (the "GGS Agreement") to capitalize GGS Holdings and to cause GGS
Holdings to issue its capital stock to the Company and to the GS Funds, so as to
give the Company a 52% ownership interest and the GS Funds a 48% ownership
interest (the "Formation Transaction"). Pursuant to the GGS Agreement (a) the
Company contributed to GGS Holdings (i) all the outstanding common stock of
Pafco, with a book value of $16.9 million, (ii) its right to acquire Superior
pursuant to the Superior Purchase Agreement and (iii) certain fixed assets,
including office furniture and equipment, having a value of approximately
$350,000 and (b) the GS Funds contributed to GGS Holdings $21.2 million in cash.
The Formation Transaction and the Acquisition were completed on April 30, 1996.
On August 12, 1997, the Company acquired the remaining 48% interest in GGS
Holdings that had been owned by the GS funds for $61 million with a portion of
the proceeds from the sale of the Preferred Securities.
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities"). These Preferred Securities were
offered through a wholly-owned trust subsidiary of the Company and are backed by
Senior Subordinated Notes to the Trust from the Company. These Preferred
Securities were offered under Rule 144A of the SEC ("Offering") and, pursuant to
the Registration Rights Agreement executed at closing, the Company filed a Form
S-4 Registration Statement with the SEC on September 16, 1997 to effect the
Exchange Offer. The S-4 Registration Statement was declared effective on
September 30, 1997 and the Exchange Offer successfully closed on October 31,
1997. The proceeds of the Preferred Securities Offering were used to repurchase
the remaining minority interest in GGSH for $61 million, repay the balance of
the term debt of $44.9 million and the Company expects to contribute the
balance, after expenses, of approximately $24 million to the nonstandard
automobile insurers of which $10.5 million was contributed in 1997. Expenses of
the issue aggregated $5.1 million and will be amortized over the term of the
Preferred Securities (30 years). In the third quarter the Company wrote off the
remaining unamortized costs of the term debt of approximately $1.1 million
pre-tax or approximately $0.07 per share (basic), which was recorded as an
extraordinary item.
The Preferred Securities have a term of 30 years with semi-annual
interest payments commencing February 15, 1998. The Preferred Securities may be
redeemed in whole or in part after 10 years.
The Company shall not, and shall not permit any subsidiary, to incur
directly or indirectly, any indebtedness unless, on the date of such incurrence
(and after giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5
to 1. The Coverage Ratio is the aggregate of net earnings, plus interest
expense, income taxes, depreciation, and amortization divided by interest
expense for the same period.
Regulation
General
The Company's insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition,
(ii) periodic financial examination, (iii) approval of rates and policy
forms,(iv) loss reserve adequacy, (v) insurer solvency, (vi) the licensing of
insurers and their agents, (vii) restrictions on the payment of dividends and
other distributions, (viii) approval of changes in control and (ix) the type and
amount of permitted investments.
-26-
<PAGE>
Pafco, IGF and Superior and its insurance subsidiaries are subject to
triennial examinations by state insurance regulators. All of these Companies
have been examined through December 31, 1996 and each of the final reports are
pending. The Company does not expect any material findings from the examinations
of its insurance subsidiaries.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding
companies in Florida and Indiana, where the insurers are domiciled. These laws,
among other things, (i) require the Company to file periodic information with
state regulatory authorities including information concerning its capital
structure, ownership, financial condition and general business operations, (ii)
regulate certain transactions between the Company, its affiliates and IGF, Pafco
and Superior (the "Insurers"), including the amount of dividends and other
distributions and the terms of surplus note and (iii) restrict the ability of
any one person to acquire certain levels of the Company's voting securities
without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of Common Stock
of the Company would be presumed to have acquired control of Pafco and IGF
unless the Indiana Commissioner, upon application, has determined otherwise. In
addition, any purchaser of 5% or more of the outstanding shares of Common Stock
of the Company will be presumed to have acquired control of Superior unless the
Florida Commissioner, upon application, has determined otherwise.
Indiana law defines as "extraordinary" any dividend or distribution
which, together with all other dividends and distributions to shareholders
within the preceding twelve months, exceeds the greater of: (i) 10% of statutory
surplus as regards policyholders as of the end of the preceding year or (ii) the
prior year's net income. Dividends which are not "extraordinary" may be paid ten
days after the Indiana Department receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without prior
approval of the Indiana Commissioner or until the Indiana Commissioner has been
given thirty days prior notice and has not disapproved within that period. The
Indiana Department must receive notice of all dividends, whether "extraordinary"
or not, within five business days after they are declared. Notwithstanding the
foregoing limit, a domestic insurer may not declare or pay a dividend of funds
other than earned surplus without the prior approval of the Indiana Department.
"Earned surplus" is defined as the amount of unassigned funds set forth in the
insurer's most recent annual statement, less surplus attributable to unrealized
capital gains or reevaluation of assets. As of December 31, 1997, IGF and Pafco
had earned surplus of $27,952,000 and $(4,713,000), respectively. Further, no
Indiana domiciled insurer may make payments in the form of dividends or
otherwise to shareholders as such unless it possesses assets in the amount of
such payment in excess of the sum of its liabilities and the aggregate amount of
the par value of all shares of its capital stock; provided, that in no instance
shall such dividend reduce the total of (i) gross paid-in and contributed
surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus
(iv) treasury stock at cost, below an amount equal to 50% of the aggregate
amount of the par value of all shares of the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to stockholders
without prior approval of the Florida Department if the dividend or distribution
would exceed the larger of (i) the lesser of (a) 10% of surplus or (b) net
income, not including realized capital gains, plus a two-year carryforward, (ii)
10% of surplus with dividends payable constrained to unassigned funds minus 25%
of unrealized capital gains or (iii) the lesser of (a) 10% of surplus or (b) net
investment income plus a three-year carryforward with dividends payable
constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department if the dividend is
equal to or less than the greater of (i) 10% of the insurer's surplus as regards
policyholders derived from realized net operating profits on its business and
net realized capital gains or (ii) the insurer's entire net operating profits
and realized net capital gains derived during the immediately preceding calendar
year; (2) the insurer will have policyholder surplus equal to or exceeding 115%
of the minimum
-27-
<PAGE>
required statutory surplus after the dividend or distribution, (3) the insurer
files a notice of the dividend or distribution with the department at least ten
business days prior to the dividend payment or distribution and (4) the notice
includes a certification by an officer of the insurer attesting that, after the
payment of the dividend or distribution, the insurer will have at least 115% of
required statutory surplus as to policyholders. Except as provided above, a
Florida domiciled insurer may only pay a dividend or make a distribution (i)
subject to prior approval by the Florida Department or (ii) thirty days after
the Florida Department has received notice of such dividend or distribution and
has not disapproved it within such time. In the consent order approving the
Acquisition, the Florida Department has 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.
Under these laws, the maximum aggregate amounts of dividends permitted
to be paid to the Company in 1998 by IGF and Pafco without prior regulatory
approval are $13,404,000 and $0, respectively, none of which have been paid.
Although the Company believes that amounts required for it to meet its financial
and operating obligations will be available, there can be no assurance in this
regard. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Liquidity and Capital Resources."
Further, there can be no assurance that, if requested, the Indiana Department
will approve any request for extraordinary dividends from Pafco or IGF or that
the Florida Department will allow any dividends to be paid by Superior during
the four year period described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written and the ability to pay future dividends. Further, state insurance
laws and regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly
to the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to GGS Management. The management agreement
between the Company and Pafco has been assigned to GGS Management, Inc. ("GGS
Management") and provides for an annual management fee equal to 15% of gross
premiums. A similar management agreement with a management fee of 17% of gross
premiums has been entered into between GGS Management and Superior. Employees of
the Company relating to the nonstandard automobile insurance business and all
Superior employees became employees of GGS Management effective April 30, 1996.
In the consent order approving the Acquisition, the Florida Department has
reserved, for three years, the right to reevaluate the reasonableness of fees
provided for in the Superior management agreement at the end of each calendar
year and to require Superior to make adjustments in the management fees based on
the Florida Department's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the
federal government by means of premium subsidies to farmers, expense
reimbursement and federal reinsurance pools for private insurers. Consequently,
the MPCI program is subject to oversight by the legislative and executive
branches of the federal government, including the FCIC. The MPCI program
regulations generally require compliance with federal guidelines with respect to
underwriting, rating and claims administration. The Company is required to
perform continuous internal audit procedures and is subject to audit by several
federal government agencies. No material compliance issues were noted during
IGF's most recent FCIC compliance review.
-28-
<PAGE>
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. The most recent significant changes to the MPCI
program came as a result of the passage by Congress of the 1994 Reform Act and
the 1996 Reform Act.
Certain provisions of the 1994 Reform Act, when implemented by the
FCIC, may increase competition among private insurers in the pricing of Buy-up
Coverage. The 1994 Reform Act authorizes the FCIC to implement regulations
permitting insurance companies to pass on to farmers in the form of reduced
premiums certain cost efficiencies related to any excess expense reimbursement
over the insurer's actual cost to administer the program, which could result in
increased price competition. To date, the FCIC has not enacted regulations
implementing these provisions but is currently collecting information from the
private sector regarding how to implement these provisions.
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including but not limited to low interest loans and crop price
supports. The 1994 Reform Act also authorized for the first time the marketing
and selling of CAT Coverage by the local USDA offices. Partly as a result of the
increase in the size of the MPCI market resulting from the 1994 Reform Act, the
Company's MPCI Premium increased to $53.4 million in 1995 from $44.3 million in
1994. However, the 1996 Reform Act, signed into law by President Clinton in
April 1996, eliminated the linkage between CAT Coverage and qualification for
certain federal farm program benefits and also limited the role of the USDA
offices in the delivery of MPCI coverage. In accordance with the 1996 Reform
Act, the USDA announced in July 1996 the following 14 states where CAT Coverage
will no longer be available through USDA offices but rather would solely be
available through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa,
Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South
Dakota, Washington and Wyoming. The limitation of the USDA's role in the
delivery system for MPCI should provide the Company with the opportunity to
realize increased revenues from the distribution and servicing of its MPCI
product. The Company has not experienced any material negative impact in 1996
from the delinkage mandated by the 1996 Reform Act. In addition, through June
30, 1996, the FCIC transferred to the Company approximately 8,900 insureds for
CAT Coverage who previously purchased such coverage from USDA field offices. The
Company believes that any future potential negative impact of the delinkage
mandated by the 1996 Reform Act will be mitigated by, among other factors, the
likelihood that farmers will continue to purchase MPCI to provide basic
protection against natural disasters since ad hoc federal disaster relief
programs have been reduced or eliminated. In addition, the Company believes that
(i) lending institutions will likely continue to require this coverage as a
condition to crop lending and (ii) many of the farmers who entered the MPCI
program as a result of the 1994 Reform Act have come to appreciate the
reasonable price of the protection afforded by CAT Coverage and will remain with
the program regardless of delinkage. There can, however, be no assurance as to
the ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to deal with the
cyclical nature of the insurance industry, catastrophic events and insurance
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to rescind or otherwise cancel
certain policies in mid-term, (iii) advance notice requirements or limitations
imposed for certain policy non-renewals and (iv) limitations upon or decreases
in rates permitted to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of twelve ratios with defined acceptable ranges. They are used as an
initial screening process for identifying companies that may be in need of
special attention. Companies
-29-
<PAGE>
that have several ratios that fall outside of the acceptable range are selected
for closer review by the NAIC. If the NAIC determines that more attention may be
warranted, one of five priority designations is assigned and the insurance
department of the state of domicile is then responsible for follow-up action.
During 1997, Pafco had unusual values for three IRIS tests. These
included two-year overall operating ratio where Pafco's ratio was 107 compared
to the IRIS upper limit of 100, change in surplus where Pafco's ratio was
(26.7%) compared to the IRIS lower limit of (10%) and one year reserve
development to surplus where Pafco's ratio was 31.2 compared to the IRIS upper
limit of 20. Pafco failed these tests due to the additional reserves of $7.5
million booked in 1997 on accident years 1996 and prior due to deficient reserve
development. Pafco does not expect such results to continue. However, reserves
are subjective and based on estimates and there is no guarantee such results
will not continue.
During 1997 IGF had unusual values for three IRIS tests. IGF continued
to have unusual values in the liabilities to liquid assets and agents balances
to surplus tests. IGF generally has an unusual value in these tests due to the
reinsurance program mandated by the FCIC for the distribution of the MPCI
program and the fact that agents' balances at December 31 are usually not
settled until late February. IGF's investment yield exceeded the upper end of
the IRIS range due to the fact the calculation is based on a simple average of
beginning and ending investment balances.
During 1997, the IRIS ratios for Superior were within the acceptable
range.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement risk-based capital ("RBC")
requirements for property and casualty insurance companies designed to assess
minimum capital requirements and to raise the level of protection that statutory
surplus provides for policyholder obligations. Indiana and Florida have
substantially adopted the NAIC model law, and Indiana directly, and Florida
indirectly, have adopted the NAIC model formula. The RBC formula for property
and casualty insurance companies measures four major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses the risk of
adverse loss developments and inadequate pricing, (ii) declines in asset values
arising from credit risk, (iii) declines in asset values arising from investment
risks and (iv) off-balance sheet risk arising from adverse experience from
non-controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The
extent of regulatory intervention and action increases as the level of surplus
to RBC falls. The first level, the Company Action Level (as defined by the
NAIC), requires an insurer to submit a plan of corrective actions to the
regulator if surplus falls below 200% of the RBC amount. The Regulatory Action
Level (as defined by the NAIC) requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below 70%
of the RBC amount. Based on the foregoing formulae, as of December 31, 1997, the
RBC ratios of the Insurers were in excess of the Company Action Level, the first
trigger level that would require regulatory action.
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Guaranty Funds; Residual Markets
The Insurers also may be required under the solvency or guaranty laws
of most states in which they do business to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would not
ordinarily accept. The Company recognizes its obligations for guaranty fund
assessments when it receives notice that an amount is payable to the fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.
Employees
At December 31, 1997 the Company and its subsidiaries employed
approximately 947 full and part-time employees. The Company believes that
relations with its employees are excellent.
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
The statements contained in this Annual Report which are not historical
facts, including but not limited to, statements concerning (i) the impact of
federal and state laws and regulations, including but not limited to, the 1994
Reform Act and 1996 Reform Act, on the Company's business and results of
operations, (ii) the competitive advantage afforded to IGF by approaches adopted
by management in the areas of information, technology, claims handling and
underwriting, (iii) the sufficiency of the Company's cash flow to meet the
operating expenses, debt service obligations and capital needs of the Company
and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense
Reimbursements on the Company's results of operations, are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. From
time to time the Company may also issue other statements either orally or in
writing, which are forward looking within the meaning of these statutory
provisions. Forward looking statements are typically identified by the words
"believe", "expect", "anticipate", "intend", "estimate", "plan" and similar
expressions. These statements involve a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from the forward looking statements in this Form 10-K or from other
forward looking statements made by the Company. In addition to the risks and
uncertainties of ordinary business operations, some of the facts that could
cause actual results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements are the risks
and uncertainties (i) discussed herein, (ii) contained in the Company's other
filings with the Securities and Exchange Commission and public statements from
time to time, and (iii) set forth below.
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty
industry is that its products generally are priced, before its costs are known,
because premium rates usually are determined before losses are reported. Premium
rate levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in surplus
have generally been accompanied by increased price competition among property
and casualty insurers. The nonstandard automobile insurance business in recent
years has experienced very competitive pricing conditions and there can be no
assurance as to the Company's ability to achieve adequate pricing. Changes in
case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. New products also present special issues in
establishing appropriate premium levels in
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the absence of a base of experience with such products' performance.
The number of competitors and the similarity of products offered, as
well as regulatory constraints, limit the ability of property and casualty
insurers to increase prices in response to declines in profitability. In states
which require prior approval of rates, it may be more difficult for the Company
to achieve premium rates which are commensurate with the Company's underwriting
experience with respect to risks located in those states. In addition, the
Company does not control rates on its MPCI business, which are instead set by
the FCIC. Accordingly, there can be no assurance that these rates will be
sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance
company are also determined, in part, by the establishment of, and adjustments
to, reserves reflecting estimates made by management as to the amount of losses
and loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses and
LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material adverse
effect on the insurer's financial position or results of operations in future
periods.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many
factors which can cause fluctuation in the results of operations of this
business. Many of these factors are not subject to the control of the Company.
The size of the nonstandard market can be significantly affected by, among other
factors, the underwriting capacity and underwriting criteria of standard
automobile insurance carriers. In addition, an economic downturn in the states
in which the Company writes business could result in fewer new car sales and
less demand for automobile insurance. Severe weather conditions could also
adversely affect the Company's business through higher losses and LAE. These
factors, together with competitive pricing and other considerations, could
result in fluctuations in the Company's underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can
vary substantially from period to period as a result of various factors,
including timing and severity of losses from storms, drought, floods, freezes
and other natural perils and crop production cycles. Therefore, the results for
any quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insurance business are recognized
throughout the year with a reconciliation for the current crop year in the
fourth quarter.
The Company expects that for the foreseeable future a majority of its
crop insurance will continue to be derived from MPCI business. The MPCI program
is federally regulated and supported by the federal government by means of
premium subsidies to farmers, expense reimbursement and federal reinsurance
pools for private insurers. As such, legislative or other changes affecting the
MPCI program could impact the Company's business prospects. The MPCI program has
historically been subject to modification at least annually since its
establishment in 1980, and some of these modifications have been significant. No
assurance can be given that future changes will not significantly affect the
MPCI program and the Company's crop insurance business.
The 1994 Reform Act also reduced the expense reimbursement rate payable
to the Company for its costs of servicing MPCI policies that exceed the basic
CAT Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and
1999 crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium
serviced, a decrease from the 31% level established for the 1994, 1995 and 1996
crop years. Although the 1994 Reform Act directs the FCIC to alter program
procedures and administrative requirements so that the administrative and
operating costs of private insurance companies participating in the MPCI program
will be reduced in an amount that corresponds to the reduction in the expense
reimbursement rate, there can be no assurance that the Company's actual costs
will not exceed the expense reimbursement rate. The FCIC has appointed several
committees comprised of members of the insurance industry to make
recommendations concerning this matter. The 1994 Reform Act also directs the
FCIC to
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establish adequate premiums for all MPCI coverages at such rates as the FCIC
determines are actuarially sufficient to attain a targeted loss ratio. Since
1980, the average MPCI loss ratio has exceeded this target ratio. There can be
no assurance that the FCIC will not increase rates to farmers in order to
achieve the targeted loss ratio in a manner that could adversely affect
participation by farmers in the MPCI program above the CAT Coverage level.
The 1996 Reform Act, signed into law by President Clinton in April,
1996, provides that, MPCI coverage is not required for federal farm program
benefits if producers sign a written waiver that waives eligibility for
emergency crop loss assistance. The 1996 Reform Act also provides that,
effective for the 1997 crop year, the Secretary of Agriculture may continue to
offer CAT Coverage through USDA offices if the Secretary of Agriculture
determines that the number of approved insurance providers operating in a state
is insufficient to adequately provide catastrophic risk protection coverage to
producers. There can be no assurance as to the ultimate effect which the 1996
Reform Act may have on the business or operations of the Company.
Total MPCI Premium for each farmer depends upon the kinds of crops
grown, acreage planted and other factors determined by the FCIC. Each year, the
FCIC sets, by crop, the maximum per unit commodity price ("Price Election") to
be used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The Company's crop insurance business is also affected by market
conditions in the agricultural industry which vary depending on such factors as
federal legislation and administration policies, foreign country policies
relating to agricultural products and producers, demand for agricultural
products, weather, natural disasters, technologic advances in agricultural
practices, international agricultural markets and general economic conditions
both in the United States and abroad. For example, the number of MPCI Buy-up
Coverage policies written has historically tended to increase after a year in
which a major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
Highly Competitive Businesses
Both the nonstandard automobile insurance and crop insurance businesses
are highly competitive. Many of the Company's competitors in both the
nonstandard automobile insurance and crop insurance business segments have
substantially greater financial and other resources than the Company, and there
can be no assurance that the Company will be able to compete effectively against
such competitors in the future.
In its nonstandard automobile business, the Company competes with both
large national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers. Direct
writers may have certain competitive advantages over agency writers, including
increased name recognition, loyalty of the customer base to the insurer rather
than an independent agency and, potentially, reduced acquisition costs. In
addition, certain competitors of the Company have from time to time decreased
their prices in an apparent attempt to gain market share. Also, in certain
states, state assigned risk plans may provide nonstandard automobile insurance
products at a lower price than private insurers.
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1996 crop year, the
number of insurance companies that have entered into agreements with the FCIC to
sell and service MPCI policies has declined from 50 to 16. The Company believes
that to compete successfully in the crop insurance business it will have to
market and service a volume of premiums sufficiently large to enable the Company
to continue to realize operating efficiencies in conducting its business. No
assurance can be given that the Company will be able to compete successfully if
this market consolidates further.
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Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and
Pafco a B- (Adequate) rating. Subsequent to the Acquisition, the rating of
Superior was reduced from A- to B+ as a result of the leverage of GGS Holdings
resulting from indebtedness in connection with the Acquisition. A "B+" and a
"B-" rating are A.M. Best's sixth and eighth highest rating classifications,
respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in
A.M. Best's opinion, "have demonstrated very good overall performance when
compared to the standards established by the A.M. Best Company" and "have a good
ability to meet their obligations to policyholders over long period of time". A
"B-" rating is awarded to insurers which, in A.M. Best's opinion, "have
demonstrated adequate overall performance when compared to the standards
established by the A.M. Best Company" and "generally have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions." IGF
recently received an "NA-2" rating (a "rating not assigned" category for
companies that do not meet A.M. Best's minimum size requirement) from A.M. Best.
IGF intends to seek a revised rating in 1998, although there can be no assurance
that a revised rating will be obtained or as to the level of any such rating.
A.M. Best bases its ratings on factors that concern policyholders and agents and
not upon factors concerning investor protection. Such ratings are subject to
change and are not recommendations to buy, sell or hold securities. One factor
in an insurer's ability to compete effectively is its A.M. Best rating. The A.M.
Best ratings for the Company's rated Insurers are lower than for many of the
Company's competitors. There can be no assurance that such ratings or future
changes therein will not affect the Company's competitive position.
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Indiana, Missouri and Virginia;
consequently the Company will be significantly affected by changes in the
regulatory and business climate in those states. The Company's crop insurance
business is concentrated in the states of Iowa, Texas, Illinois, Kansas and
Minnesota and the Company will be significantly affected by weather conditions,
natural perils and other factors affecting the crop insurance business in those
states.
Future Growth and Continued Operations Dependent on Access to Capital
Property and casualty insurance is a capital intensive business. The
Company must maintain minimum levels of surplus in the Insurers in order to
continue to write business, meet the other related standards established by
insurance regulatory authorities and insurance rating bureaus and satisfy
financial ratio covenants in loan agreements.
Historically, the Company has achieved premium growth as a result of
both acquisitions and internal growth. It intends to continue to pursue
acquisition and new internal growth opportunities. Among the factors which may
restrict the Company's future growth is the availability of capital. Such
capital will likely have to be obtained through debt or equity financing or
retained earnings. There can be no assurance that the Company's insurance
subsidiaries will have access to sufficient capital to support future growth and
also satisfy the capital requirements of rating agencies, regulators and
creditors. In addition, the Company will require additional capital to finance
future acquisitions.
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves for unpaid losses and LAE established by the Company are
estimates of amounts needed to pay reported and unreported claims and related
LAE based on facts and circumstances then known. These reserves are based on
estimates of trends in claims severity, judicial theories of liability and other
factors.
Although the nature of the Company's insurance business is primarily
short-tail, the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating these amounts, it has been
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necessary, and may over time continue to be necessary, to revise estimates of
the Company's reserves for losses and LAE. The historic development of reserves
for losses and LAE may not necessarily reflect future trends in the development
of these amounts. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on historical information.
Reliance Upon Reinsurance
In order to reduce risk and to increase its underwriting capacity, the
Company purchases reinsurance. Reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers, including the FCIC,
which the Company generally believes to be financially stable, a significant
reinsurer's insolvency or inability to make payments under the terms of a
reinsurance treaty could have a material adverse effect on the Company's
financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing
in property and casualty insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity,
no assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may need
to reduce the levels of its underwriting commitments.
Risks Associated with Investments
The Company's results of operations depend in part on the performance
of its invested assets. Certain risks are inherent in connection with fixed
maturity securities including loss upon default and price volatility in reaction
to changes in interest rates and general market factors. Equity securities
involve risks arising from the financial performance of, or other developments
affecting, particular issuers as well as price volatility arising from general
stock market conditions.
Comprehensive State Regulation
The Company's insurance subsidiaries are subject to comprehensive
regulation by government agencies in the states in which they operate. The
nature and extent of that regulation vary from jurisdiction to jurisdiction but
typically involve prior approval of the acquisition of control of an insurance
company or of any company controlling an insurance company, regulation of
certain transactions entered into by an insurance company with any of its
affiliates, limitations on dividends, approval or filing of premium rates and
policy forms for many lines of insurance, solvency standards, minimum amounts of
capital and surplus which must be maintained, limitations on types and amounts
of investments, restrictions on the size of risks which may be insured by a
single company, limitation of the right to cancel or non-renew policies in ome
lines, regulation of the right to withdraw from markets or agencies,
requirements to participate in residual markets, licensing of insurers and
agents, deposits of securities for the benefit of policyholders, reporting with
respect to financial condition, and other matters. In addition, state insurance
department examiners perform periodic financial and market conduct examinations
of insurance companies. Such regulation is generally intended for the protection
of policyholders rather than security holders. No assurance can be given that
future legislative or regulatory changes will not adversely affect the Company.
Holding Company Structure; Dividend And Other Restrictions; Management Fees
Holding Company Structure. The Company is a holding company whose
principal asset is the capital stock of the subsidiaries. The Company relies
primarily on dividends and other payments from its subsidiaries, including
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the its insurance subsidiaries, to meet its obligations to creditors and to pay
corporate expenses. The Insurers are domiciled in the states of Indiana and
Florida and each of these states limits the payment of dividends and other
distributions by insurance companies.
Dividend and Other Restrictions. Indiana law defines as "extraordinary"
any dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the end
of the preceding year, or (ii) the prior year's net income. Dividends which are
not "extraordinary" may be paid ten days after the Indiana Department of
Insurance ("Indiana Department") receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without the prior
approval of the Indiana Commissioner of Insurance (the "Indiana Commissioner")
or until the Indiana Commissioner has been given thirty days' prior notice and
has not disapproved within that period. The Indiana Department must receive
notice of all dividends, whether "extraordinary" or not, within five business
days after they are declared. Notwithstanding the foregoing limit, a domestic
insurer may not declare or pay a dividend from any source of funds other than
"Earned Surplus" without the prior approval of the Indiana Department. "Earned
Surplus" is defined as the amount of unassigned funds set forth in the insurer's
most recent annual statement, less surplus attributable to unrealized capital
gain or re-evaluation of assets. Further, no Indiana domiciled insurer may make
payments in the form of dividends or otherwise to its shareholders unless it
possesses assets in the amount of such payments in excess of the sum of its
liabilities and the aggregate amount of the par value of all shares of capital
stock; provided, that in no instance shall such dividend reduce the total of (I)
gross paid-in and contributed surplus, plus (ii) special surplus funds, plus
(iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal
to 50% of the aggregate amount of the par value of all shares of the insurer's
capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department of Insurance ("Florida
Department") if the dividend or distribution does not exceed the larger of: (i)
the lesser of (a) 10% of surplus or (b) net investment income, not including
realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with
dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net investment
income plus a 3-year carryforward with dividends payable constrained to
unassigned funds minus 25% of unrealized capital gains. Alternatively, a Florida
domestic insurer may pay a dividend or distribution without the prior written
approval of the Florida Department if (1) the dividend is equal to or less than
the greater of (i) 10% of the insurer's surplus as regards policyholders derived
from net operating profits on its business and net realized capital gains, or
(ii) the insurer's entire net operating profits (including unrealized gains or
losses) and realized net capital gains derived during the immediately preceding
calendar year; (2) the insurer will have policyholder surplus equal to or
exceeding 115% of the minimum required statutory surplus after the dividend or
distribution; (3) the insurer files a notice of the dividend or distribution
with the Florida Department at least ten business days prior to the dividend
payment or distribution; and (4) the notice includes a certification by an
officer of the insurer attesting that, after the payment of the dividend or
distribution, the insurer will have at least 115% of required statutory surplus
as to policyholders. Except as provided above, a Florida domiciled insurer may
only pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department, or (ii) thirty days after the Florida Department has
received notice of such dividend or distribution and has not disapproved it
within such time. In the consent order approving the Acquisition (the "Consent
Order"), the Florida Department has prohibited Superior from paying any
dividends (whether extraordinary or not) for four years from date of acquisition
without the prior written approval of the Florida Department.
Although the Company believes that funds required for it to meet its
financial and operating obligations will be available, there can be no assurance
in this regard. Further, there can be no assurance that, if requested, the
Indiana Department will approve any request for extraordinary dividends from
Pafco or IGF or that the Florida Department will allow any dividends to be paid
by Superior during the four year period described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to
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pay dividends or other distributions to a parent company, which also may be
constrained by business and regulatory considerations, such as the impact of
dividends on surplus, which could affect an insurer's competitive position, the
amount of premiums that can be written and the ability to pay future dividends.
Further, state insurance laws and regulations require that the statutory surplus
of an insurance company following any dividend or distribution by such company
be reasonable in relation to its outstanding liabilities and adequate for its
financial needs.
Management Fees. The management agreement originally entered into
between the Company and Pafco was assigned as of April 30, 1996 by the Company
to GGS Management, a wholly-owned subsidiary of GGS Holdings. This agreement
provides for an annual management fee equal to 15% of gross premiums written. A
similar managements agreement with a management fee of 17% of gross premiums
written has been entered into between GGS Management and Superior. Employees of
the Company relating to the nonstandard automobile insurance business and all
Superior employees became employees of GGS Management effective April 30, 1996.
In the Consent Order approving the Acquisition, the Florida Department has
reserved, for a period of three years, the right to re-evaluate the
reasonableness of fees provided for in the Superior management agreement at the
end of each calendar year and to require Superior to make adjustments in the
management fees based on the Florida Department's consideration of the
performance and operating percentages of Superior and other pertinent data.
There can be no assurance that either the Indiana Department or the Florida
Department will not in the future require a reduction in these management fees.
Legal Proceedings
IGF instituted litigation against the FCIC on March 23, 1995 in the
United States District Court for the Southern District of Iowa seeking $4.3
Million as reimbursement for certain expenses. IGF alleges the FCIC wrongfully
sought to hold IGF responsible for those expenses. The FCIC counterclaimed for
approximately $1.2 Million in claims payments for which the FCIC contends IGF is
responsible for as successor to the run-off book of business. On October 27,
1997, IGF reached an agreement with the FCIC to settle the case, with both
parties dismissing all claims against one another which were subject to the
litigation. The FCIC has agreed to pay IGF a lump sum payment of $60,000.
ITEM 2 - PROPERTIES
The headquarters for the Company, GGS Holdings and Pafco are located at
4720 Kingsway Drive, Indianapolis, Indiana. The building is an 80,000 square
foot multilevel structure approximately 50% of which is utilized by the Company.
The remaining space is leased to third-parties at a price of approximately $10
per square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel building
leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in
Atlanta, Georgia; Tampa, Florida; and Orange, California. Under a lease term
which extends through February 2003, Superior leases office space at 280
Interstate North Circle, N.W., Suite 500, Atlanta, Georgia. Superior occupies
43,448 square feet at this location and subleases an additional 3,303 square
feet to third-party tenants. Superior also has an office located at 3030 W.
Rocky Pointe Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet
of space leased for a term extending through February, 2000. In addition,
Superior occupies an office at 1745 West Orangewood, Orange, California
consisting of 3,264 square feet under a lease extending through June 2000.
IGF owns a 17,500 square foot office building located at 2882 106th
Street, Des Moines, Iowa which serves as its corporate headquarters. The
building is fully occupied by IGF but is currently for sale. IGF also owns
certain improved commercial property which is adjacent to its corporate
headquarters.
IGF bought an office building in Des Moines, Iowa as its crop insurance
division home office. The sale of the old building is expected to close on
April 1, 1998 for $1.35 million.
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ITEM 3 - LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising in the
ordinary course of business. The Company believes that the ultimate resolution
of these lawsuits will not have a material adverse effect on its financial
condition or results of operations. The Company, through its claims reserves,
reserves for both the amount of estimated damages attributable to these lawsuits
and the estimated costs of litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during 1997 to a vote of security holders of the
Registrant, through the solicitation of proxies or otherwise.
SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officers of the
Company who are not also directors. Their respective ages and their respective
positions with the Company are listed as follows:
Name Age Position
David L. Bates 39 Vice President, General Counsel and
Secretary of the Company
Gary P. Hutchcraft 36 Vice President, Chief Financial Officer and
Treasurer of the Company
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and
Secretary of the Company since November, 1995 after having been named Vice
President and General Counsel of Goran in April, 1995. Mr. Bates served as a
member of the Fort Howard Corporation Legal Department from September, 1988
through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager with
Deloitte & Touche.
Mr. Hutchcraft, C.P.A., has served as Vice President, Chief Financial Officer
and Treasurer of the Company and Goran since July, 1996. Prior to that time, Mr.
Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP from July,
1988 to July, 1996.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's Common Shares, the
range of selling prices for each quarterly period since the Offering on November
4, 1996, with respect to the Common Shares and the approximate number of holders
of Common Shares as of December 31, 1997 and other matters is included under the
caption "Market and Dividend Information" on page 43 of the 1997 Annual Report,
included as Exhibit 13, which information is incorporated herein by reference.
The Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon earnings, capital requirements, any financing agreement
covenants and the financial condition of the Company. In addition, regulatory
restrictions and provisions of the Preferred Securities limit distributions to
shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
The data included on page 4 of the 1997 Annual Report, included as Exhibit 13,
under "Selected Financial Data" is incorporated herein by reference.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion entitled "Management Discussion and Analysis of Financial
Condition and Results of Operations" included in the 1997 Annual Report on pages
5 through 16 included as Exhibit 13 is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements in the 1997 Annual Report, included as
Exhibit 13, and listed in Item 14 of this Report are incorporated herein by
reference from the 1997 Annual Report.
ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement for
its 1997 annual meeting of common stockholders filed with the Commission
pursuant to Regulation 14A (the "1997 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Company's 1997 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Company's 1997 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Company's 1997 Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report except as
otherwise indicated:
1. Financial Statements. The following described consolidated financial
statements found on the pages of the 1997 Annual Report indicated below are
incorporated into Item 8 of this Report by reference.
Description of Financial Statement Item Location in 1997 Annual Report
Report of Independent Accountants Page 45
Consolidated Balance Sheets, December 31,
1997 and 1996 Page 17
Consolidated Statements of Earnings,
Years Ended December 31, 1997, 1996 and 1995 Page 18
-39-
<PAGE>
Consolidated Statements of Changes In
Shareholders' Equity, Years Ended
December 31, 1997, 1996 and 1995 Page 19
Consolidated Statements of Cash Flows,
Years Ended December 31, 1997, 1996 and 1995 Page 20
Notes to Consolidated Financial Statements,
Years Ended DePage 21 through 43996 and 1995
2. Financial Statement Schedules. The following financial statement schedules
are included beginning on Page 41.
Report of Independent Accountants
Schedule II - Condensed Financial Information of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
Schedule VI - Supplemental Information Concerning Property -
Casualty Insurance Operations
3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated
herein by reference.
4. Reports on Form 8-K. None
-40-
<PAGE>
Board of Directors and Stockholders of
Symons International Group, Inc. and Subsidiaries
Our report on the consolidated financial statements of Symons International
Group, Inc. and Subsidiaries has been incorporated by reference in this Form
10-K from page 49 of the 1997 Annual Report to Shareholders of Symons
International Group, Inc. and Subsidiaries. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedules listed in the index on page 40 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
February 27, 1998
-41-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As Of December 31, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1997
<S> <C> <C>
Assets:
Investments In And Advances To Related Parties $77,514 $173,348
Cash and Cash Equivalents 6,160 299
Federal Income Tax Receivable --- 223
Property and Equipment 8 15
Other 168 646
Intangible Assets 83 43,749
-- ------
Total Assets $83,933 $218,280
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to Affiliates 350 ---
Federal Income Tax Payable 81 ---
Accrued Distributions on Preferred Securities --- 4,801
Other 992 116
--- ---
Total Liabilities 1,423 4,917
Minority Interest:
Equity in Consolidated Subsidiary 21,610 ---
Preferred Securities --- 135,000
Stockholders' Equity:
Common Stock, No Par, 1,000,000 Shares Authorized,
10,450,000 Issued and Outstanding 38,969 39,019
Additional Paid-In Capital 5,905 5,925
Unrealized Gain On Investments (Net of Deferred
Taxes of $625 in 1996 and $1,008 in 1997 820 1,908
Retained Earnings 15,206 31,511
------ ------
Total Stockholders' Equity 60,900 78,363
------ ------
Total Liabilities and Stockholders' Equity $83,933 $218,280
====== =======
</TABLE>
-42-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 1995, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Fee Income $7,626 $5,353 $628
Net Investment Income 1,522 98 2,248
Net Realized Investment Losses (52) --- ---
--- --- ---
Total Revenue 9,096 5,451 2,876
----- ----- -----
Expenses:
Policy Acquisition and General and Administrative
Expenses 7,891 4,269 2,576
Interest Expense 621 613 ---
--- --- ---
Total Expenses 8,512 4,882 2,576
----- ----- -----
Income Before Taxes and Minority Interest 584 569 300
Provision for Income Taxes 293 228 328
--- --- ---
Net Income (Loss) Before Minority Interest 291 341 (28)
Minority Interest:
Equity in Consolidated Subsidiary 4,530 12,915 19,453
Distributions on Preferred Securities, Net of Tax --- --- (3,120)
--- --- ------
Net Income for the Period $4,821 $13,256 $16,305
===== ====== ======
</TABLE>
-43-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 1995, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Net Income $4,821 $13,256 $16,305
Cash Flows From Operating Activities:
Adjustments to Reconcile Net Cash Provided
by (Used In) Operations:
Equity In Net Income of Subsidiaries (4,530) (12,915) (19,453)
Depreciation of Property and Equity 37 52 5
Net Realized Capital Loss (52) --- ---
Amortization of Intangible Assets 88 3 858
Net Changes in Operating Assets and Liabilities:
Federal Income Taxes (176) 81 (304)
Other Assets 216 (145) (478)
Other Liabilities 518 163 (876)
--- --- ----
Net Cash Provided From (Used In) Operations 922 495 (3,943)
--- --- ------
Cash Flow Used In Investing Activities:
Purchase of Minority Interest --- --- (61,000)
Purchase of Property and Equipment (179) --- (12)
---- --- ---
Net Cash Used in Investing Activities: (179) --- (61,012)
---- --- ------
Cash Flows Provided by (Used In) Financing Activities
Proceeds From Preferred Securities --- --- 129,947
Proceeds From Common Stock Offering --- 37,969 ---
Repayment of Loans (1,250) --- (350)
Contributed Capital or Advances to Subsidiaries --- (20,475) (70,503)
Loans From Related Parties 507 (8,329) ---
Payment of Dividend to Parent --- (3,500) ---
--- ------ ---
Net Cash Provided By (Used In) Financing Activities (743) 5,665 59,094
---- ----- ------
Increase (Decrease) in Cash and Cash Equivalents --- 6,160 (5,861)
Cash and Cash Equivalents - Beginning of Year --- --- 6,160
--- --- -----
Cash and Cash Equivalents - End of Year $--- $6,160 $299
=== ===== ===
</TABLE>
-44-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 1995, 1996 and 1997
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Symons International Group, Inc. The
condensed financial information includes the accounts and activities of the
Parent Company which acts as the holding company for the insurance subsidiaries.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31, 1995, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Direct Amount $123,381 $298,596 $430,002
Assumed From Other Companies $1,253 $6,903 $30,598
Ceded to Other Companies ($71,187) ($95,907) ($183,059)
Net Amount $53,447 $209,592 $277,541
Percentage of Amount Assumed to Net 2.3% 3.3% 11.0%
</TABLE>
-45-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1995, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1995 1996 1997
Allowance for Allowance for Allowance for
Doubtful Accounts Doubtful Accounts Doubtful Accounts
<S> <C> <C> <C>
Additions:
Balance at Beginning of Period $1,209 $927 $1,480
Reserves Acquired in the
Superior Acquisition --- 500 ---
Charged to Costs and Expenses(1) 2,523 5,034 9,519
Charged to Other Accounts --- --- ---
Deductions from Reserves 2,805 (2) 4,981 9,006
----- ----- -----
Balance at End of Period $927 $1,480 $1,993
=== ===== =====
</TABLE>
(1) In 1993, the Company began to direct bill policyholders rather than agents
for premiums. During late 1994 and into 1995, the Company experienced an
increase in premiums written. During 1995, the Company further evaluated the
collectibility of this business and incurred a bad debt expense of approximately
$2.5 million. The Company continually monitors the adequacy of its allowance for
doubtful accounts and believes the balance of such allowance at December 31,
1995, 1996 and 1997 was adequate.
(2) Uncollectible accounts written off, net of recoveries.
-46-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31, 1995, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
Deferred Reserves Discount, Unearned Earned Net Claims and Amorti- Paid Premiums
Policy for if any, Premiums Premiums Invest- Adjustment zation of Claims Written
Acqui- Unpaid deducted ment Expenses Deferred and
sition Claims in Income Incurred Policy Claim
Costs and Column Related to: Acqui- Adjust-
Claim C sition ment
Adjust- Costs Expense
ment
Expense
Current Prior
Years Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 2,379 59,421 --- 17,497 49,641 1,173 35,184 787 7,150 31,075 124,634
1996 12,800 101,719 --- 87,285 191,759 6,733 138,618 (1,509) 25,161 130,895 305,499
1997 10,740 136,772 --- 114,635 271,814 11,447 201,118 10,967 59,215 198,677 460,600
</TABLE>
Note: All amounts in the above table are net of the effects of reinsurance and
related commission income, except for net investment income regarding which
reinsurance is not applicable, premiums written liabilities for losses and loss
adjustment expenses, and unearned premiums which are stated on a gross basis.
-47-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
SYMONS INTERNATIONAL GROUP, INC.
March 23, 1998 By: /s/ Alan G. Symons
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on March 23, 1998, on behalf of
the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial/Accounting Officer:
/s/ Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/ G. Gordon Symons /s/ David R. Doyle
Chairman of the Board Director
/s/ John K. McKeating /s/ James G. Torrance
Director Director
/s/ Robert C. Whiting /s/ Douglas H. Symons
Director Director
/s/ Jerome B. Gordon /s/ Alan G. Symons
Director Director
-48-
<PAGE>
EXHIBIT INDEX
Reference to Sequential
Regulation S-K Page
Exhibit No. Document Number
1 Final Draft of the Underwriting Agreement, dated
November 4, 1996, among Registrant, Goran Capital, Inc.,
Advest, Inc. and Mesirow Financial, Inc is incorporated
by reference to Exhibit 1 of the Registrant's 1996
Form 10-K.
2.1 The Strategic Alliance Agreement by and between
Continental Casualty Company and IGF Insurance Company,
IGF Holdings, Inc. and Symons International Group, Inc.
dated February 28, 1998.
2.2 The MPCI Quota Share Reinsurance Contract by and
between Continental Casualty Company and IGF Insurance
Company, IGF Holdings, Inc. and Symons International
Group, Inc. dated February 28, 1998.
2.3 The MPCI Quota Share Reinsurance Agreement by and
between Continental Casualty Company and IGF Insurance
Company, IGF Holdings, Inc. and Symons International
Group, Inc. dated February 28, 1998.
2.4 The Crop Hail Insurance Quota Share Contract by and
between Continental Casualty Company and IGF Insurance
Company, iGF Holdings, Inc. and Symons International
Group, Inc. dated February 28, 1998.
2.5 The Crop Hail Insurance Quota Share Agreement by and
between Continental Casualty Company and IGF Insurance
Company, IGF holdings, Inc. and Symons International
Group, Inc. dated February 28, 1998.
2.6 The Crop Hail Insurance Services and Indemnity Agreement
by and between Continental Casualty Company and IGF
Insurance company, IGF Holdings, Inc. and Symons
International Group, Inc. dated February 28, 1998.
2.7 The Multiple Peril Crop Insurance Service and
Indemnity Agreement by and between Continental Casualty
Company and IGF Insurance Company, IGF Holdings, Inc.
and Symons International Group, Inc. Dated February 28, 1998.
<PAGE>
2.8 The Stock Purchase Agreement between Symons International
Group, Inc. and GS Capital Partners II, L.P. dated
July 23, 1998.
3.1 The Registrant's Restated Articles of Incorporation
are incorporated by Reference to Exhibit 3.1 of the
Registrant's Registration Statement on form S-1,
Reg. No. 333-9129.
3.2 Registrant's Restated Code of Bylaws, as amended, is
incorporated by reference to Exhibit 1 of the Registrant's
1996 Form 10-K.
4.1 Article V - "Number, Terms and Voting Rights of Shares"
of the Registrant's Restated Articles of Incorporation
is Incorporated by reference to the Registrant's Restated
Articles of Incorporation incorporated by reference
hereunder as Exhibit 3.1.
4.2 Article I - "Shareholders" and Article VI -
"Stock Certificates, Transfer of Shares, Stock Records"
of the Registrant's Restated Code of Bylaws are
incorporated by reference to the Registrant's Restated Code
of Bylaws, as amended, filed hereunder as Exhibit 3.2.
4.3(1) The Senior Subordinated Indenture between Symons
International Group, Inc. as issuer and Wilmington Trust
Company as trustee for SIG Capital Trust I dated
August 12, 1997 is incorporated by reference in the
Registrant's Registration Statement on Form S-4,
Reg. No. 333-35713.
4.3(2) First Supplemental Senior Subordinated Indenture between
Symons International Group, Inc. and Wilmington Trust
Company Related to SIG Capital Trust I dated January 15, 1998.
10.1 The Stock Purchase Agreement among Goran Capital Inc.,
Registrant, Fortis, Inc. and Interfinancial, Inc. dated
January 31, 1996 is incorporated by reference to Exhibit 10.1
of the Registrant's Registration Statement on Form S-1, Reg.
No. 333-9129.
10.2 The Management Agreement among Superior Insurance
Company, Superior American Insurance Company,
Superior Guaranty Insurance Company and GGS
Management, Inc. dated April 30, 1996 is incorporated
by reference to Exhibit 10.5 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
<PAGE>
10.3 The Management Agreement between Pafco General
Insurance Company and Registrant dated May 1, 1987,
as assigned to GGS Management, Inc. effective April 30,
1996, is incorporated by reference to Exhibit 10.6
of the Registrant's Registration Statement on Form S-1,
Reg. No. 333-9129.
10.4 The Administration Agreement between IGF Insurance
Company and Registrant dated February 26, 1990, as amended,
is incorporated by reference to Exhibit 10.7 of the
Registrant's Registration Statement on Form S-1,
Reg. No. 333-9129.
10.5 The Agreement between IGF Insurance Company and
Registrant dated November 1, 1990 is incorporated by
reference to Exhibit 10.8 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.6 The Registration Rights Agreement between Goran Capital Inc.
and Registrant dated May 29, 1996 is incorporated by
reference to Exhibit 10.13 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.7(1) The Employment Agreement between GGS Management
Holdings, Inc. and Alan G. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(1) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.7(2) The Employment Agreement between GGS Management,
Holdings, Inc. and Douglas H. Symons dated January 31, 1996
is incorporated by reference to Exhibit 10.16(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.8(1) The Employment Agreement between IGF Insurance Company
And Dennis G. Daggett effective February 1, 1996 is
incorporated by reference to Exhibit 10.17(1) of the
Registrant's Registration Statement on Form S-1,
Reg. No. 333-9129.
10.8(2) The Employment Agreement between IGF Insurance Company and
Thomas F. Gowdy effective February 1, 1996 is incorporated by
reference to Exhibit 10.17(2) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.9 The Employment Agreement between Superior Insurance Company
and Roger C. Sullivan, Jr. effective April 23, 1997.
<PAGE>
10.10 The Employment Agreement between Goran Capital Inc. and
Gary P. Hutchcraft effective May 1, 1997.
10.11 The Employment Agreement between Goran Capital Inc. and
David L. Bates effective April 1, 1997.
10.12 The Goran Capital Inc. Stock Option Plan is incorporated by
reference to Exhibit 10.20 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.13 The GGS Management Holdings, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.21 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.14 The Registrant's 1996 Stock Option Plan is incorporated by
reference to Exhibit 10.22 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.15 The Registrant's Retirement Savings Plan is incorporated by
reference to Exhibit 10.24 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.16 The Insurance Service Agreement between Mutual Service
Casualty Company and IGF Insurance Company dated
May 20, 1996 is incorporated by reference to Exhibit
10.25 of the Registrant's Registration Statement
on Form S-1, Reg. No.333-9129.
10.17(1)The Automobile Third Party Liability and Physical
Damage Quota Share Reinsurance Contract between Pafco
General Insurance Company and Superior Insurance
Company is incorporated by reference to Exhibit 10.27(1)
of the Registrant's Registration Statement on
Form S-1, Reg. No. 333-9129.
10.17(2)The Crop Hail Quota Share Reinsurance Contract
and Crop Insurance Service Agreement between Pafco
General Insurance Company and IGF Insurance
Company is incorporated by reference to Exhibit 10.27(2)
of the Registrant's Registration Statement on Form S-1,
Reg. No. 333-9129.
10.17(3)The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance Contract between IGF Insurance
Company and Pafco General Insurance Company is incorporated
by reference to Exhibit 10.27(3) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.17(4)The Multiple Line Quota Share Reinsurance Contract between
IGF Insurance Company and Pafco General Insurance Company
is incorporated by reference to Exhibit 10.27(4)
of the Registrant's Registration Statement on Form S-1,
Reg. No. 333-9129.
10.17(5)The Standard Revenue Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(5) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.18 The Commitment Letter, effective October 24, 1996,
between Fifth Third Bank of Central Indiana and
Registrant is incorporated by reference to Exhibit 10.28
of the Registrant's Registration Statement on Form S-1,
Reg. No. 333-9129.
10.19(1)The SIG Capital Trust I 9 1/2% Trust Preferred Securities
Purchase Agreement dated August 7, 1997 is incorporated by
reference in the Registrant's Registration Statement on
Form S-4, Reg. No. 333-35713.
10.19(2)The Registration Rights Agreement among Symons
International Group, Inc., SIG Capital Trust I and
Donaldson, Lufkin & Jenrette Securities Corporation,
Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp.
and Mesirow Financial, Inc. dated August 12, 1997 is
incorporated by reference in the Registrant's Registration
Statement on Form S-4, Reg. No. 333-35713.
10.19(3)The Declaration of Trust of SIG Capital Trust 1 dated
August 4, 1997 is incorporated by reference in the
Registrant's Registration Statement on Form S-4,
Reg. No. 333-35713.
10.19(4)The Amended and Restated Declaration of Trust of
SIG Capital Trust I dated August 12, 1997 is incorporated
by reference in the Registrant's Registration Statement
on Form S-4, Reg. No. 333-35713.
13 Annual Report to Security Holders
21 The Subsidiaries of the Registrant are incorporated by
reference to Exhibit 21 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129
23 Consent of Independent Public Accountants
27 Financial Data Schedule
99 Proxy Statement with respect to 1998 Annual Meeting
of Shareholders of Registrant
Exhibit 2.1
STRATEGIC ALLIANCE AGREEMENT
By And Between
CONTINENTAL CASUALTY COMPANY
And
IGF INSURANCE COMPANY
IGF HOLDINGS, INC.
SYMONS INTERNATIONAL GROUP, INC.
February 28, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
DEFINITIONS..........................................................1
ARTICLE 2
CLOSING.............................................................15
2.1 Time of Closing...............................................15
2.2 Transfer of Employees and Assets..............................16
2.3 Transition Teams..............................................16
2.4 Acts of Closing...............................................16
2.5 Break-Up Fee..................................................16
ARTICLE 3
TRANSFER OF MANAGEMENT RESPONSIBILITY;
MPCI AND CROP HAIL BUSINESS.........................................16
3.1 Assumption of Management......................................16
3.2 Transfer of Supporting Policies, Data, and Assets.............17
3.3 Employment of Personnel.......................................17
3.4 Execution of Ancillary Agreements.............................17
3.5 No Assumption of Liabilities..................................17
3.6 Maintenance of SRAs...........................................18
3.7 Underwriting Committee........................................18
3.8 Special Sale and Purchase Rights..............................18
A. In General................................................18
B. CNA's Put Mechanisms......................................19
C. IGF Call Mechanisms.......................................20
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CNA...............................21
4.1 Existence and Good Standing...................................21
4.2 Due Authorization.............................................21
4.3 No Liens......................................................22
4.4 No Violation..................................................22
4.5 Foreign Status................................................22
4.6 No Broker Transactions........................................22
4.7 Litigation, Actions and Proceedings...........................22
4.8 Good Title....................................................23
4.9 Approvals.....................................................23
4.10 Software......................................................23
4.11 Licenses......................................................23
4.12 Leased Premises...............................................23
4.13 Environmental Matters.........................................23
i
<PAGE>
4.14 MPCI Premium Volume...........................................24
4.15 Crop Hail Premium Volume......................................24
4.16 Agency Contracts..............................................24
4.17 Production Costs..............................................24
4.18 Standard Reinsurance Agreements...............................24
4.19 Federal Crop Insurance Corporation............................24
4.20 Governmental Authority........................................24
4.21 Compliance with Laws..........................................25
4.22 Insurance Contracts...........................................25
4.23 Regulatory Filings............................................25
4.24 Reinsurance...................................................26
4.25 Conduct of Business...........................................26
4.26 Other Sale Arrangements.......................................26
4.27 Contracts.....................................................26
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF IGFH..............................26
5.1 Existence and Good Standing...................................26
5.2 Due Authorization.............................................26
5.3 No Violation..................................................27
5.4 No Broker Transactions........................................27
5.5 Litigation, Actions and Proceedings...........................27
5.6 Approvals.....................................................27
5.7 Reinsurance Agreements........................................27
5.8 Compliance With Laws..........................................28
5.9 Permits, Licenses and Franchises..............................28
ARTICLE 6
COVENANTS...........................................................28
6.1 Execution of Agreements.......................................28
6.2 Conduct of Business...........................................28
6.3 Certain Transactions..........................................29
6.4 Due Diligence.................................................29
6.5 Post-Closing Access...........................................30
6.6 Consents and Reasonable Efforts...............................30
6.7 Representation and Warranties.................................31
6.8 Further Assurances............................................31
6.9 Expenses......................................................31
6.10 Code Section 338(h)(10) Election..............................31
6.11 Exclusivity...................................................31
6.12 NACU..........................................................31
6.13 Non-Competition...............................................31
6.14 Replacement Ancillary Agreements..............................32
ii
<PAGE>
6.15 Confidentiality...............................................32
6.16 Intellectual Property and Trade Secrets.......................32
6.17 IGFH Employees................................................32
6.18 ERISA and Employment-Related Matters..........................32
6.19 Licenses......................................................32
6.20 Fronting......................................................32
6.21 Reinsurance Agreements........................................33
6.22 Leased Premises...............................................33
6.23 NACU..........................................................33
ARTICLE 7
CLOSING CONDITIONS..................................................33
7.1 Conditions to Obligations of the Parties......................33
A. Bring Down of Representations and Warranties...........33
B. Performance and Compliance.............................33
C. Opinion of Counsel.....................................33
D. Regulatory Approval....................................33
E. Required Consents......................................33
F. Litigation.............................................33
G. No Material Adverse Effect.............................34
H. Incumbency Certificate.................................34
I. Certificates of Existence and Licensure................34
J. Certified Copies of Resolutions........................34
K. Catastrophic Events....................................34
M. Ancillary Agreements...................................35
ARTICLE 8
EMPLOYEES AND EMPLOYMENT MATTERS....................................35
8.1 Employment Transfer...........................................35
8.2 No Liability for Prior Service................................35
8.3 Hold Harmless.................................................35
ARTICLE 9
TERM AND TERMINATION................................................35
9.1 Duration......................................................35
9.2 Termination Prior to Closing..................................35
9.3 Survival......................................................35
9.4 Put/Call Termination..........................................36
ARTICLE 10
INDEMNIFICATION.....................................................36
10.1 Indemnification by IGFH.......................................36
10.2 Indemnification by CNA........................................36
iii
<PAGE>
10.3 Indemnification by CNA for Employment Related Matters.........37
10.4 Indemnification Procedures....................................37
10.5 Stamford Financial............................................38
ARTICLE 11
MISCELLANEOUS.......................................................38
11.1 Further Actions...............................................38
11.2 Costs.........................................................38
11.3 Public Announcements..........................................38
11.4 Survival......................................................38
11.5 Amendment and Modification....................................38
11.6 Waiver........................................................39
11.7 Governing Law; Venue..........................................39
11.8 Notice........................................................39
11.9 Severability..................................................40
11.10 Successors and Assigns........................................40
11.11 Captions......................................................40
11.12 Gender and Tense..............................................41
11.13 Entire Agreement..............................................41
11.14 Negative Inference............................................41
11.15 Counterparts; Facsimile Signatures............................41
11.17 Recitals......................................................41
11.18 Future Cooperation............................................41
iv
<PAGE>
EXHIBITS....................................................................E-1
Exhibit A
MPCI Quota Share Reinsurance Contract.................................E-2
Exhibit B
MPCI Quota Share Reinsurance Agreement................................E-3
Exhibit C
Crop Hail Insurance Quota Share Contract..............................E-4
Exhibit D
Crop Hail Insurance Quota Share Agreement.............................E-5
Exhibit E
Crop Hail Insurances Services and Indemnity Agreement.................E-6
Exhibit F
Multiple Peril Crop Insurance Services and Indemnity Agreement........E-7
Exhibit G
Letter of Intent and Term Sheet Dated February 2, 1998................E-8
Exhibit H
LLC Operating Agreement...............................................E-9
Exhibit I
General Conveyance, Assignment and Bill of Sale......................E-10
Exhibit J
REAP Software License Agreement......................................E-11
Exhibit K
Assignment and Assumption Agreement..................................E-12
Exhibit 2.3
Transition Plan Master Schedule......................................E-13
Exhibit 7.1A
Form of Bring-Down Certificate.......................................E-14
Exhibit 7.1C
Opinion of Counsel...................................................E-15
Exhibit 7.1H
Form of Incumbency Certificate.......................................E-16
v
<PAGE>
SCHEDULES..................................................................E-17
Schedule 2.2
CNA Employees........................................................E-18
Schedule 3.2
CNA's Assets.........................................................E-19
Schedule 4.7
Outstanding Litigation, Actions and
Proceedings Relative to CNA MPCI Crop................................E-20
Schedule 4.10
CNA's Computer Software Programs and
Intellectual Property Re: Crop - Other than REAP.....................E-21
Schedule 4.11
CNA Licenses.........................................................E-22
Schedule 4.12
Schedule of Leases...................................................E-23
Schedule 4.14
CNA's MPCI Gross and Net Written
Premiums for 1995, 1996 and 1997.....................................E-24
Schedule 4.15
CNA's Crop Hail Gross and Net Premiums
Written for 1995, 1996 and 1997......................................E-25
Schedule 4.21
Schedule of Agency Contracts.........................................E-26
Schedule 4.22
Line Item Production Costs of CNA for MPCI
and Crop Hail Business for 1995, 1996 and 1997.......................E-27
Schedule 4.27
Forms of Insurance Contracts Available for Issuance..................E-28
Schedule 4.32
Other Contracts......................................................E-29
Schedule 5.9
Licenses.............................................................E-30
Schedule 7.1E
Schedule of Required Consents........................................E-31
Schedule 10.3
Schedule of Former Employee
Litigation Relative to CNA Crop......................................E-32
vi
<PAGE>
STRATEGIC ALLIANCE AGREEMENT
This Strategic Alliance Agreement ("Agreement") is entered into this
28th day of February, 1998 by and between Continental Casualty Company, an
Illinois insurance corporation, (including its Affiliates, "CNA") and IGF
Holdings, Inc., an Indiana corporation, IGF Insurance Company, an Indiana
insurance corporation and Symons International Group, Inc., an Indiana
corporation.
WITNESSETH:
WHEREAS, CNA and IGFH, through their respective Insurance Subsidiaries
provide crop insurance coverage to the agricultural community; and
WHEREAS, CNA and IGFH desire that IGFH manage the MPCI and Crop Hail
business of CNA and both parties have agreed to mechanisms for the buy-out of
such Business by IGFH; and
WHEREAS, both CNA and IGFH, either directly or through Insurance
Subsidiaries, have executed Standard Reinsurance Agreements with the Federal
Crop Insurance Corporation for Crop Years 1998 and before; and
WHEREAS, CNA and IGFH mutually desire to work together in the
development and marketing of new crop insurance coverages and risk management
products; and
WHEREAS, the parties hereto seek to maximize the management and
operational efficiencies of their respective crop insurance operations; and
WHEREAS, the parties hereto each recognize and acknowledge that the
other possesses unique strengths and resources necessary to the efficient
operational management of crop insurance operations.
NOW, THEREFORE, for and in consideration of the mutual representations,
warranties, covenants and agreements contained herein, and intending to be
legally bound hereby, and further in consideration of the execution of the
Closing Agreements by the parties hereto, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Unless otherwise defined herein, for purposes of this Agreement, all
defined terms used herein shall have the meaning assigned to them in this
Article 1 and, where appropriate, include the plural as well as the singular,
and the words "herein", "hereof", and "hereunder" and other words of similar
report refer to this Agreement as a whole and not to any particular Article,
Section or other Subsection.
1
<PAGE>
"90-Day T-Bill Rate" means the 90 Day Treasury Bill Interest Rate as published
in the Midwest Edition of "The Wall Street Journal".
"A & O Subsidy" means the subsidy for the administrative and operating expenses
authorized by the Act and paid by FCIC on behalf of a producer or insured to a
reinsured company holding an SRA with FCIC.
"Actual Production History" or "APH" means a plan of MPCI which provides the
yield component and yield forecast of an insured by utilizing the insured's
historic yield record. CRC plans use the policy terms and conditions of the APH
as its basic provisions of coverage.
"Act" means the Federal Crop Insurance Act, as amended (7 U.S.C. 1501 et seq).
"Additional Coverage" means a Multiple-Peril Crop Insurance Policy, including
revenue-based products, providing coverage in excess of that provided by CAT
Coverage or companion covers.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, the Company shall not be
deemed to include the Trust. For the purposes of this definition, "control" when
used with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"A.M. Best" means the A.M. Best Company, Inc., a rating agency and publisher for
the insurance industry.
"Ancillary Agreements" means the MPCI ISA, the Crop Hail ISA, the MPCI
Reinsurance Agreement, the MPCI Contract, the Crop Hail Agreement, the Crop Hail
Contract, the LLC Operating Agreement, the REAP Agreement, the Supplemental
Intellectual Property Transfer Agreement and the Assignment and Assumption
Agreement.
"Annual Settlement" means the settlement of accounts between an insurer holding
an FCIC SRA and the FCIC for the Reinsurance Year, beginning with the February
monthly transaction cut-off date following the Reinsurance Year and continuing
thereafter as necessary.
"Assignment and Assumption Agreement" means Exhibit K hereto.
"Assumed Obligations" means those obligations of CNA assumed by IGF pursuant to
the Ancillary Agreements.
2
<PAGE>
"Average Pre-Tax Income" for 1998 and future years means:
Crop Year Computation of Average Pre-Tax Income
1998: The Change of Control Average Pre-Tax Income.
1999: The Change of Control Average Pre-Tax Income.
2000: The Change of Control Average Pre-Tax Income.
2001: The four (4) year Olympic Average of the 1997 through
2000 Pre-Tax Incomes.
2002 and beyond: The five-year Olympic Average of Pre-Tax Incomes of
the five (5) years preceding the year in which the
computation is being made.
"Board of Directors" or "Board" means with respect to CNA, the Company or a
Subsidiary, or New Field, as the case may be, the board of directors of such
company (or other body performing functions similar to any of those performed by
a board of directors).
"Break-Up Fee" shall have the meaning ascribed in Section 2.6 hereof.
"Business" shall have the meaning ascribed in Section 3.1 hereof and shall refer
to the Business to be transferred to IGFH pursuant to this Agreement and the
Ancillary Agreements.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day
on which banking institutions in the City of New York are authorized or required
by law or executive order to remain closed.
"Buy-up Coverage" means Multiple-Peril Crop Insurance replaced by an Additional
Coverage policy providing coverage in excess of that provided by CAT Coverage.
Buy-up Coverage is offered only through private insurers.
"Call Right" or "Call Mechanism" means the right of IGFH to terminate, pursuant
to a Change of Control or otherwise, the MPCI Reinsurance Agreement and the Crop
Hail Agreement pursuant to the provisions of Article 3 as of the end of the most
recently completed Crop Year.
"Call Note" means the note payable through which SIG or IGFH may pay CNA if SIG
or IGFH exercises its rights under the Call Mechanism or the Change of Control
Call Mechanism.
"Canadian Hail" means Palliser Insurance Company, Saskatoon, Saskatchewan.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designed) equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into such equity.
"Casualty Insurance" means insurance which is primarily concerned with the
losses caused by injuries to third persons (i.e., not the policyholder) and the
legal liability imposed on the insured resulting therefrom. It includes, but is
not limited to, employers' liability, workers' compensation,
3
<PAGE>
public liability, automobile liability, personal liability and aviation
liability insurance. It excludes certain types of loss that by law or custom are
considered as being exclusively within the scope of other types of insurance,
such as fire or marine.
"Catastrophic Coverage" or "CAT Coverage" or "CAT" means the minimum available
level of Multiple-Peril Crop Insurance, providing coverage for fifty percent
(50%) of a farmer's historical yield for eligible crops at sixty percent (60%)
of the price per commodity unit for such crop set by the FCIC. CAT Coverage
currently is offered through private insurers and, in certain states prior to
Crop Year 1998, was offered by USDA field offices.
"CAT Administrative Fee" means the processing fee the policyholder must pay for
CAT Coverage in accordance with the Act and 7 C.F.R. Chapter IV. The CAT
Administrative Fee is the only payment an insured makes for such coverage; there
is no premium billing.
"CAT LAE Reimbursement Payment"means an LAE Reimbursement Payment made by the
FCIC to an insurer holding an SRA with the FCIC equal to four and seven-tenths
percent (4.7%) of the total net book premium for eligible CAT crop insurance
contracts computed at sixty-five percent (65%) of the recorded or appraised
average yield indemnified at one hundred percent (100%) of the projected market
price, or equivalent coverage or such other amount as may be contained in the
SRA governing the Crop Year.
"Cede" means (i) the method (or agreement) by which an insurance company
reinsures its risk with another insurance company, it "Cedes" business and is
referred to as the "Ceding Company" or (ii) to pass on to another insurer (the
reinsurer) all or part of the insurance written by an insurer (the Ceding
Company) with the object of reducing the possible liability of the latter.
"Ceding Company" means an insurance company that Cedes business to another
company or reinsurer.
"Change of Control" means any transaction or series of transactions in which any
Person or group (within the meaning of Rule 13d-5 under the Exchange Act and
Section 13(d) and 14(d) of the Exchange Act) other than G. Gordon Symons, Alan
G. Symons, Douglas H. Symons and members of the Symons family or entities
directly or indirectly controlled by them acquires all or substantially all of
the assets of the Company, IGFH or IGF, or becomes the direct or indirect
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), by way of
merger, consolidation, other business combination or otherwise, of greater than
fifty percent (50%) of the total voting power (on a fully diluted basis as if
all convertible securities had been converted and all options and warrants had
been exercised) entitled to vote in the election of Directors of the Company,
IGFH, IGF or the Surviving Person (if other than the Company, IGFH or IGF).
"Change of Control Average Pre-Tax Income" for 1998 and future years means the
Weighted Average of the Pre-Tax Incomes for 1997, 1998, and 1999 if the Change
of Control Put or Call Mechanisms are triggered before January 1, 2000 and the
Weighted Average of the Pre-Tax Incomes
4
<PAGE>
for 1997, 1998, 1999 and 2000 if those same Mechanisms are triggered after
January 1, 2000 but prior to June 30, 2000.
"Change of Control Call Mechanism" means a Call Mechanism triggered by a Change
of Control.
"Change of Control Put Mechanism" means a Put Mechanism triggered by a Change of
Control.
"Change of Control Triggering Event" means a Change of Control.
"Closing" means the date and event(s) at which this Agreement, if not already
executed, and all of the Ancillary Agreements are executed and the applicable
requirements outlined in Articles 2 and 7 are fulfilled.
"Closing Agreements" means this Agreement, the Reinsurance Agreements, the LLC
Operating Agreement, the REAP Agreement, the MPCI ISA, the Crop Hail ISA, the
Supplemental Intellectual Property Transfer Agreement, the General Conveyance
Assignment and Bill of Sale and Transfer of Assets, and the Assignment and
Assumption Agreement.
"Closing Date" shall have the meaning ascribed in Section 2.1 hereof.
"CNA" means Continental Casualty Company, an Illinois insurance corporation,
including but not limited to its Affiliates.
"CNA AgTech" means CNA Agriculture Technology and Services, Inc., an Illinois
corporation.
"CNA's Assets" means those Assets detailed on Schedule 3.2 hereto.
"CNA Crop Hail Gross Book Premium" means the gross premiums for Crop Hail
policies and related endorsements written (less any return premiums) on paper
excluding business fronted for IGF of CNA Affiliates for the 1998 Crop Year,
plus or minus the amount of premiums on such business Ceded to CNA by Producers
Lloyds and Canadian Hail Entity. For 1999 and future years, this term shall mean
the CNA Crop Hail Gross Book Premium as computed for the 1998 Crop Year
multiplied by one (1) plus the percentage change from 1998 to the future year in
Total Industry Crop Hail Writings as determined and reported by NCIS. Note that
the percentage change can be either positive or negative and thus a future year
CNA Crop Hail Gross book Premium may be more or less than the 1998 amount. This
definition may change if the reinsurance arrangement with Producers Lloyds
changes as outlined in that section.
"CNA Crop Hail Policies" means primary coverage Crop Hail insurance policies or
other Crop Hail risk management products written or sold by CNA or its
Affiliates.
"CNA Crop Hail Proportion" for a given year means the ratio of the CNA Crop Hail
Gross Book Premium for that year to Combined CNA/IGF Crop Hail Gross Book
Premium for that year.
5
<PAGE>
"CNA Employee" means those Persons listed on Schedule 2.2.
"CNA Field Offices" means the current office locations of CNA Agriculture which
offices are located in Spokane, Washington, Cary, North Carolina, Amarillo,
Texas, Springfield, Illinois and Overland Park, Kansas.
"CNA MPCI Net Book Premium" means for the 1998 Crop Year the MPCI Net Book
Premium written by CNA under its 1998 SRA as reported in the Operations Report
plus the MPCI Net Book Premium written by Producers Lloyds under its 1998 FCIC
SRA that is Ceded to CNA. For 1999 and future Crop Years, this term shall mean
the CNA MPCI Net Book Premium as computed for the 1998 Crop Year multiplied by
one (1) plus the percentage change from 1998 to the future year in Total
Industry MPCI Writings as determined and reported in the Summary of Business
Reports. The percentage change can be either positive or negative and thus a
future year CNA MPCI Net Book Premium may be more or less than the 1998 amount.
"CNA MPCI Policies" means all primary coverage insurance policies or other risk
management products written or sold by CNA or its Affiliates that are written,
designed, reinsured, and/or subsidized under the authority of the Act through an
SRA or other agreement with FCIC.
"CNA MPCI Proportion" for a particular Crop Year means the ratio of CNA MPCI Net
Book Premium for such year to Combined CNA/IGF MPCI Net Book Premium for that
year.
"CNA Policies" means CNA MPCI Policies and CNA Crop Hail Policies.
"CNA Producers Lloyds Reinsurance Agreement" means that certain MPCI Reinsurance
Agreement by and between CNA and Producers Lloyds dated August 29, 1997
(#0929-00-0017) and any successor thereto.
"Code" means the Internal Revenue Code of 1986, as amended, and effective as of
the date hereof.
"Combined CNA/IGF MPCI Net Book Premium" means the sum of MPCI Net Book Premium
from the SRA(s) held by each of IGF and CNA in the Crop Year in which a
computation is made.
"Combined CNA/IGF Crop Hail Gross Book Premium" means the sum of Crop Hail Gross
Book Premiums written by each of IGF and CNA in the Crop Year in which a
computation is made.
"Combined Net Underwriting Gain (Loss)" means the sum of (i) the underwriting
gain (loss) on the IGF FCIC SRA and CNA FCIC SRA, if any, as reported on the
Operations Report, and (ii) that amount of underwriting gain (loss) on the
Producers Lloyds FCIC SRA, if any, reported on the Operations Report that is
Ceded to CNA. This Combined Net Underwriting Gain (Loss) shall be reduced
(increased) by any gain (loss) shared under any third-party profit sharing
agreements such as with NACU but excluding the costs of third party reinsurance
agreements.
6
<PAGE>
"Company" or "SIG" means Symons International Group, Inc. and its Subsidiaries,
unless the context indicates otherwise.
"Confidential Information" shall have the meaning as is ascribed to such term in
Section 6.15 hereof.
"Crop Hail" means a policy of insurance indemnifying a crop producer for crop
damage caused by the perils of hail and fire, including perils recognized and
approved as Crop Hail by NCIS, all policy endorsements involving such perils,
HAILPLUS(TM) marketed by IGF, any and all non-NCIS approved basic policies
written by CNA covering the perils of hail and fire marketed as a substitute
policy for the NCIS approved basic policies, and nonstandard endorsements such
as IGF's Production Guarantee endorsement marketed by IGF or CNA as substitutes
for NCIS approved basic endorsements. Excluded from this definition is named
peril hail insurance or hail insurance written as a component of MPCI.
"Crop Hail Agreement" means the Crop Hail Insurance Quota Share Agreement,
attached hereto as Exhibit D.
"Crop Hail Contract" means the Crop Hail Insurance Quota Share Contract attached
hereto as Exhibit C.
"Crop Hail Crop Year" means the calendar year.
"Crop Hail Gross Book Premium" means the total of amount of Crop Hail and
related endorsement premiums written in a given year by an insurer that is
reported to NCIS for statistical purposes.
"Crop Hail ISA" or "Crop Hail Fronting Agreement" means that Crop Hail Insurance
Services and Indemnity Agreement attached hereto as Exhibit E.
"Crop Insurance Business" means MPCI and Crop Hail, but shall specifically
exclude named peril and speciality risks insured by IGF.
"Crop Revenue Coverage" or "CRC" means the revenue-based insurance policy by
this name approved by FCIC for reinsurance and subsidy and reinsured under the
SRA which provides an insured with a guaranteed revenue stream by combining both
yield and price variability protection.
"Crop Year" means, with respect MPCI, the MPCI Crop Year, and with respect to
Crop Hail, the Crop Hail Crop Year.
"Due Diligence Period" means that period which ends fifteen (15) business days
from February 3, 1998 or such other time as may be mutually agreed by the
parties.
"Effective Time" means 12:01 A.M. on March 17, 1998, or such other time as may
be mutually agreed to by the parties hereto.
7
<PAGE>
"Employment-Related Liability" means any and all loss, cost, damages, liability,
claim, obligation, judgment, payment, set-off, set-aside, remedial action,
defense cost (including, but not limited to, attorneys' fees), accommodation,
arrangement, accrual, annuity, or burden (financial or otherwise), resulting or
arising from or related to (i) any benefit, pension, vacation, welfare,
retirement, cafeteria, supplemental, compensation (including, but not limited
to, deferred compensation), savings, stock, option (including traditional stock
options and derivative-type plans such as stock appreciation rights and phantom
stock), investment or any other plan (whether qualified or non-qualified,
written or not), (ii) any written or oral contract of employment, or (iii) any
right, at law or equity as (i), (ii) or (iii) above pertains to any CNA
Employee.
"Environmental Laws" means any and all foreign, Federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements of Law
(including common law), regulating, relating to or imposing liability or
standards of conduct concerning protection of human health or the environment,
as now or may at any time hereafter be in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Federal Crop Insurance Corporation" or "FCIC" means the wholly-owned government
corporation within the USDA created by Section 503 of the Act (7 U.S.C. 1503)
and authorized to carry out all actions and programs authorized by the Act.
"Front" means a contractual arrangement whereby one licensed insurer issues a
policy on a risk for and at the request of one or more other insurers with the
intent of passing all or virtually all of risk by way of reinsurance to the
other insurer(s). The licensed insurer is considered the organization in front
of the insurance transaction.
"Fronting Company" means a licensed insurer that enters into an agreement with
an insurer to issue policies in a state on behalf of another insurer.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
(including, without limitation, the NAIC).
"Gross Premiums Written" means direct premiums written (less cancellations and
returns) plus premiums collected in respect of policies assumed, in whole or in
part.
"IGF" means IGF Insurance Company, an Indiana insurance corporation, and an
indirect, wholly-owned Subsidiary of the Company.
8
<PAGE>
"IGFH" or "IGF Holdings" means IGF Holdings, Inc., an Indiana corporation, and a
wholly-owned Subsidiary of the Company.
"IGF MPCI Policies" means all insurance policies or other risk management
products written, sold, or reinsured by IGF or its Affiliates that are written,
designed, reinsured and/or subsidized under the authority of the Act through an
SRA or other agreement with FCIC.
"Industry MPCI Gross Written Premium" means the total MPCI Premium reported by
FCIC on its Summary of Business Reports written by reinsured companies holding
SRAs with FCIC. This amount includes premiums from Additional Coverage plus CAT
Coverage and all premiums from revenue-based products, pilot projects, and other
products covered by the SRA or amendments thereto.
"Insurance Subsidiary" means any regulated insurance company which is a
wholly-owned Subsidiary of either CNA or IGF.
"Letter of Intent" means that Letter of Intent and Term Sheet dated February 2,
1998 and attached hereto as Exhibit G.
"LLC Operating Agreement" means the Limited Liability Company Agreement of [New
Field] LLC attached hereto as Exhibit H.
"Loss Adjustment Expenses" or "LAE" means external expenses incurred in the
settlement of claims, including outside adjustment expenses, (including, but not
limited to, part-time adjusters), legal fees and other costs associated with the
claims adjustment process, but not including general overhead expenses.
"Loss and LAE Reserves" means liabilities established by insurers to reflect the
ultimate estimated cost of claim payments as of a given date.
"Losses Paid and/or Reserved" means the sum total of claims payments made to
insureds plus those amounts reserved, according to standard underwriting
procedures and regulations, for the payment of pending or expected claims.
"Material Adverse Effect" means a material adverse effect on (i) the business,
assets, property, condition (financial or otherwise) or prospects of either of
the parties hereto (including, without limitation, their Affiliates and
Subsidiaries) taken as a whole, or (ii) the validity or enforceability of this
Agreement or any of the rights or remedies of the parties hereto arising from
this Agreement.
"Materials of Environmental Concern" means any gasoline or petroleum (including
crude oil or any fraction thereof) or petroleum products or any hazardous or
toxic substances, materials or wastes, defined or regulated as such in or under
any Environmental Law, including, without limitation, asbestos, polychlorinated
biphenyls and urea-formaldehyde insulation.
9
<PAGE>
"MPCI Contract" means the Multiple Peril Crop Insurance Quota Share Contract
attached hereto as Exhibit A.
"MPCI Crop Year" means the twelve (12) month period commencing on July 1 and
ending on June 30 of the following year. This definition is synonymous with the
Reinsurance Year established by FCIC in its SRA and any change in the FCIC SRA
definition of Reinsurance Year will control the definition of Crop Year herein.
For avoidance of doubt, the "2000 MPCI Crop Year" is the Crop Year that begins
July 1, 1999 and ends June 30, 2000.
"MPCI Excess Loss Adjustment Expense" or "XLAE" means an excess LAE payment made
by FCIC to an insurer holding an SRA with FCIC as reimbursement for LAE in
excess of normal LAE expenses that are otherwise covered in the Federal crop
insurance program by the A & O Subsidy and the CAT LAE provisions of the SRA.
This XLAE has historically been paid as a percent of premiums written on a per
state, per reinsurance fund basis to the extent loss ratios on a per state, per
reinsurance fund basis exceed specified levels. The 1998 FCIC SRA includes XLAE
provisions for both additional coverage and CAT Coverage. The 1999 FCIC SRA
includes provisions providing only for XLAE on CAT Coverage. Future SRAs may
include both or neither.
"MPCI Imputed Premium" means, for purposes of the profit/loss sharing formulas,
LAE and XLAE Reimbursement and other provisions in the FCIC SRA, that amount of
premium actuarially determined by FCIC to be appropriate for CAT Coverage
although no premium is charged to the insured. It is the amount of premium a
farmer would pay for the coverage if they were so charged.
"MPCI ISA" or "MPCI Fronting Agreement" means the Multiple Peril Crop Insurance
Services and Indemnity Agreement attached hereto as Exhibit F.
"MPCI Net Book Premium" means the total premium calculated for all eligible crop
insurance contracts, less A & O Subsidy, cancellations and adjustments that are
written under a FCIC SRA. This premium includes the Risk Premium Subsidy,
premiums paid by insureds, MPCI Imputed Premium, and insured-paid premiums and
Risk Premium Subsidy from all revenue-based or other nonstandard MPCI contracts
included within the SRA for reinsurance and subsidy.
"MPCI Policies" means, collectively, all IGF MPCI Policies, CNA MPCI Policies,
Producers Lloyds MPCI Policies, and any other MPCI Policies the risk on which is
assumed by IGF or CNA.
"MPCI Premium" means, for purposes of the profit/loss sharing arrangement with
the federal government, the amount of premiums for all Buy-up Coverage sold,
consisting of amounts paid by farmers plus the amount of any related federal
premium subsidies.
"MPCI Reinsurance Agreement" means the Multiple Peril Crop Insurance Quota Share
Agreement attached hereto as Exhibit B.
10
<PAGE>
"MPCI Retention" means the MPCI Net Book Premium reduced by premiums Ceded in
respect of liability reinsured by FCIC under the SRA. This is the MPCI Premium
on which the insurer bears, before third party reinsurance, one hundred percent
(100%) of the risk of loss.
"MPCI Underwriting Gain (Loss)" means (i) the CNA MPCI Proportion multiplied by
(ii) the Combined CNA/IGF Net Underwriting Gain (Loss).
"Multiple-Peril Crop Insurance" or "MPCI" means a federally-regulated,
subsidized and reinsured crop insurance program that provides producers of crops
with varying levels of insurance protection against substantially all natural
perils to growing crops.
"NAIC" means the National Association of Insurance Commissioners.
"NACU" means the North American Crop Underwriters, Inc.
"NCIS" means the National Crop Insurance Services, Inc., the actuarial data
facility for the commercial crop insurance industry.
"Net Premiums Earned" means Net Premiums Written less unearned premium.
"Net Premiums Written" means the total premiums for insurance written (less any
return premiums) during a given period, reduced by premiums Ceded in respect of
liability reinsured by other insurers or the FCIC.
"Net Retained Premiums" means the MPCI Net Book Premium reduced by premiums
Ceded in respect of liability reinsured by FCIC under the SRA. These are the
MPCI Premiums on which the insurer bears, before third party reinsurance, one
hundred percent (100%) if the risk of loss.
"New Field" means the joint venture project, to be organized as a limited
liability company ("LLC") between CNA and IGF.
"Olympic Average" means the average determined for a particular set of numbers
which is calculated after excluding the single highest number within the set and
the single lowest number within the set prior to ascertaining the average (i.e.,
a five- year Olympic Average would be the average of three (3) years of numbers
after the high and low years' numbers were excluded).
"Operations Report" means the official monthly accounting report and
reconciliation furnished to an SRA holder by FCIC.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency, instrumentality or political subdivision
thereof, or any other entity.
11
<PAGE>
"Plan of Operation" means that document and supporting documents submitted to
FCIC as described in and required by the SRA and Appendix 2 thereto.
"Policies-In-Force" means policies written and recorded on the books of an
insurer which are unexpired as of a given date.
"Pre-Tax Income" for each Crop Year, with the exception of 1997, means the sum
of the payments, on a pre-tax basis, received by CNA through the MPCI
Reinsurance Agreement and Crop Hail Agreement in such year, including recoveries
(net of costs) under any third party reinsurance agreement to which CNA is a
party and inures to the benefit of CNA and IGF. For 1997, Pre-Tax Income means
$5.4 million.
"Price Election" means the maximum per unit commodity price by crop to be used
in computing MPCI Premiums, determined annually by the FCIC.
"Producers Lloyds" means Producers Lloyds Insurance Company headquartered in
Amarillo, Texas which writes both MPCI and Crop Hail and, as of 1998, holds an
SRA with FCIC and a private reinsurance agreement with CNA.
"Producers Lloyds MPCI Policies" means all insurance policies or other risk
management products written, sold or reinsured by Producers Lloyds or its
Affiliates that are written, designed, reinsured and/or subsidized under the
authority of the Act through an SRA or other agreement with FCIC.
"Pure CNA Crop Hail Gross Book Premium" means the total amount of Crop Hail and
related endorsement premiums written in a given year on the paper of CNA
(excluding business fronted for IGF) which is reported to NCIS for statistical
purposes; it does not include any premiums assumed under any Reinsurance
Agreements nor does it include, beyond 1998, any premiums written on CNA paper
through the Insurance Services Agreement on behalf of IGF.
"Put Note" means the note payable through which SIG, IGFH or IGF may pay CNA if
CNA exercises its rights under the Put Mechanism or the Change of Control Put
Mechanism. The terms of the note for each such Mechanism are outlined in
subsections 3.8.B.i and 3.8.B.ii, respectively.
"Put Right" or "Put Mechanism" means the right of CNA to terminate, due to a
Change of Control or otherwise, the MPCI Reinsurance Agreement and Crop Hail
Agreement pursuant to the provisions of Article 3 as of the end of the most
recently completed Crop Year.
"Quota Share Reinsurance" means a form of reinsurance in which the reinsurer
shares a proportional part of both the original premiums and the losses of the
reinsured.
"REAP" means the software program developed by CNA or at its expense through
which its agents can electronically transmit MPCI, Crop Hail and other insurance
policy data to CNA.
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"REAP Agreement" means the Software License Agreement attached hereto as Exhibit
J.
"Reinsurance" means the practice whereby a company called the "reinsurer"
assumes, for a share of the premium, all or part of a risk originally undertaken
by a Ceding Company.
"Reinsurance Account" means an account maintained by FCIC in which a portion of
the underwriting gains earned under the terms of the FCIC SRA are deposited and
held, in the insurer's name, for future distribution under the terms of the SRA.
"Reinsurance Agreements" means the MPCI Reinsurance Agreement, the MPCI
Contract, the Crop Hail Agreement and the Crop Hail Contract and any successor
agreements thereto entered into pursuant to this Agreement. Reinsurance
Agreement does not include any third party reinsurance agreements, including but
not limited to, the CNA agreements with Producers Lloyds and Canadian Hail, the
Multi-year Stop Loss MPCI and Crop Hail Agreements held by IGF, and any Named
Peril Quota Share or Stop Loss Agreement(s) held by IGF at the time of Closing.
"Reinsurance Year" means the period so stated in the appropriate Reinsurance
Agreement.
"Related Business" means the business of providing property and casualty
insurance to individuals or farms and any business related, ancillary or
complementary to such business.
"Reporting Organization" means the term utilized by the FCIC to refer to those
entities that have entered into an SRA with the FCIC and, therefore, report
premiums and losses on MPCI to the FCIC.
"Requirements of Law" means, as to any Person, the certificate of incorporation
and bylaws or other organizational or governing documents of such Person, and
any law, treaty, rule or regulation or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is
subject.
"Retention" means the amount of liability, premiums or losses which an insurance
company retains for its own account after reinsurance.
"Risk Premium Subsidy" means the amount of subsidy paid by the FCIC, pursuant to
the Act, on the eligible insured's behalf to help make MPCI and other authorized
products more affordable. This subsidy is comprised and computed based solely on
premiums associated with the risk of loss as distinguished from premiums that
may be associated with any program administrative or operating (A&O) costs. FCIC
does provide an A&O Subsidy in addition to the Risk Premium Subsidy.
"Service Agreements" means the MPCI ISA and the Crop Hail ISA and any other
agreements entered into pursuant to this Agreement that involve the service and
management of policies written hereunder or written by CNA in previous years.
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"SIG" or "Company" means Symons International Group, Inc., an Indiana
corporation and its Subsidiaries, unless the context indicates otherwise.
"Standard Reinsurance Agreement", "SRA" or "FCIC SRA" means the agreement that
establishes the terms and conditions under which the FCIC will provide subsidy
and reinsurance on eligible crop insurance contracts written pursuant to plans
of insurance authorized by the Act and regulations promulgated thereunder and
sold or reinsured by private insurance companies. The term includes any
mandatory or optional amendments to the SRA.
"Statutory Accounting Practices" or "SAP" means the accounting practices which
consist of recording transactions and preparing financial statements in
accordance with the accounting rules and procedures prescribed or permitted by
state regulatory authorities.
"Subsidiary" means any corporation, association, partnership or other business
entity of which more than fifty percent (50%) of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by a corporation or by one or more its
subsidiaries, or by a corporation and one or more of its subsidiaries.
"Summary of Business Reports" means the weekly updated reports published by FCIC
indicating, among other things, MPCI Additional Coverage and CAT Premiums
Written along with associated liability levels, Risk Premium Subsidies,
indemnities paid, loss ratio, and acreage insured.
"Supplemental Intellectual Property Transfer Agreement" means that document to
be entered into to transfer the intellectual property (other than REAP) of the
CNA Assets.
"Surviving Person" means, with respect to any Person involved in any merger,
consolidation or other business combination or the sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of such
Person's assets, the Person formed by or surviving such transaction or the
Person to which such disposition is made.
"Term" means the term of this Agreement, as more fully set forth in Article 11.
"Territory(ies)" means all states of the United States and all provinces and
territories of the Dominion of Canada.
"Total Industry Crop Hail Writings" means the gross premiums on Crop Hail
policies and related endorsements written by all licensed insurers on crops
grown in the United States as reported to and published by NCIS on an annual
basis.
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"Total Industry MPCI Writings" means the gross premiums on MPCI policies and
related endorsements written by all licensed insurers on crops grown in the
United States as reported to and published by NCIS on an annual basis.
"Trade Secrets" shall the meaning ascribed in Section 6.16 hereof.
"Transition Plan" means that document jointly developed by IGF and CNA which is
attached as Exhibit 2.3 hereto.
"Trust" means SIG Capital Trust I.
"Underwriting" means the insurer's or reinsurer's process of reviewing
applications submitted for insurance coverage, accepting or denying all or part
of the coverage requested and determining the applicable premiums.
"Underwriting Committee" means the group of not less than four (4) people,
including one CNA representative, to be formed pursuant to Article 3 of this
Agreement that will have the responsibility of establishing underwriting
guidelines for the MPCI and Crop Hail written pursuant to this Agreement.
"USDA" means the United States Department of Agriculture.
"Voting Stock" of a Person means all classes of Capital Stock or other interests
(including partnership interests) of such Person then outstanding and normally
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof.
"Weighted Average" means the average of a set of numbers arrived at by
multiplying the highest and lowest numbers in the set by fifty percent (50%) and
adding those products with the other numbers in the set and then dividing the
entire sum by a number equal to the total number of numbers in the set less one.
For avoidance of doubt, the weighted average of the following set of numbers
would be as illustrated: Set: 10, 15, 8, 20; Formula: (20*.5) + (8*.5) + 10 + 15
= 39 all divided by 3 with the result being 13.
"Wholly-Owned Subsidiary" means a Subsidiary all the Capital Stock (other than
director's qualifying shares and shares held by other Persons, to the extent
such shares are required by applicable law to be held by a Person other than the
Company or a Subsidiary) of which is owned by the Company or by one or more
Wholly-Owned Subsidiaries.
ARTICLE 2
CLOSING
2.1 Time of Closing. Unless otherwise agreed by the parties hereto, the Closing
of the transactions contemplated by this Agreement will occur at the Effective
Time ("Closing Date"). If,
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however, at the Effective Time the parties hereto are working in good faith
towards finalizing all Ancillary Agreements and are preparing for Closing and
the parties hereto agree that it appears reasonably likely that the finalization
of such Ancillary Agreements will take place within thirty (30) days of the
Effective Time, the period for closing this transaction shall be extended to a
time mutually agreed by the parties.
2.2 Transfer of Employees and Assets. At the Effective Time the CNA
Employees will become employees of IGFH. Possession and right of use of CNA's
Assets will be transferred to IGFH at the Effective Time.
2.3 Transition Teams. As of the date hereof, the transition teams
outlined in the Transition Plan Master Schedule, Exhibit 2.3 hereto, will
immediately begin work in good faith to accomplish the objectives as are set
forth in Exhibit 2.3. IGF shall have access from the date hereof until the
Effective Time to CNA Employees and the physical facilities used by CNA to
manage the Business.
2.4 Acts of Closing. At the Closing, the parties hereto shall execute
and deliver the Closing Agreements and all other instruments required or
contemplated by this Agreement or shall be reasonably necessary to carry out the
purposes of this Agreement to be so executed and not theretofore executed and
delivered. All actions taken at Closing shall be deemed to have occurred
simultaneously.
2.5 Break-Up Fee. If at the conclusion of the Due Diligence Period this
Agreement is unexecuted and the parties hereto nonetheless mutually agree to go
forward with the transactions contemplated hereby, and thereafter this Agreement
is not executed within thirty (30) days of the conclusion of the Due Diligence
Period (or such other time as the parties hereto may mutually agree) through no
fault of CNA, then IGFH shall pay CNA the sum of five hundred thousand dollars
($500,000) ("Break-Up Fee") as full and complete compensation for IGFH's failure
to execute this Agreement. Notwithstanding the foregoing sentence, IGFH shall
not be responsible to pay the Break-Up Fee to CNA if this Agreement is not
executed due to strikes, acts of God, governmental restrictions, enemy action,
civil commotion, fire, unavoidable casualty or other similar causes beyond the
control of IGFH and its Affiliates.
ARTICLE 3
TRANSFER OF MANAGEMENT RESPONSIBILITY;
MPCI AND CROP HAIL BUSINESS
3.1 Assumption of Management. At the Effective Time, CNA shall transfer
to IGF and IGF shall assume the management responsibilities of the entire MPCI
and Crop Hail books of business of CNA (the "Business"). Management
responsibilities shall include, but are not limited to, sales, underwriting,
loss adjustment, claims processing, agent (representative) relations and
contracting, policy generation, policy, form and rate development and filing and
all other activities incidental to and necessary for the management of the
Business as is contemplated hereby. Subject
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to the Service Agreements, at the Effective Time CNA shall cease management
responsibility and control of management decisions relating to the Business.
3.2 Transfer of Supporting Policies, Data, and Assets. At the Effective
Time, CNA shall transfer to IGF and IGF shall receive from CNA all policy forms,
insurance data and supporting capital assets used by CNA in the Business. The
supporting capital assets include, but are not limited to those outlined in
Schedule 3.2 ("CNA's Assets"). It is expressly understood that IGF shall receive
from CNA, among other things, licenses (at no cost to IGF) to use all software
and hardware currently used by CNA in the Business, including the REAP system.
It is expressly agreed and understood that the REAP system may be used by IGF at
no cost to IGF, only to process CNA Policies until June 30, 1999. All other
software transferred to IGF as part of CNA's Assets may be utilized by IGF, at
no cost, until June 30, 199 9.
3.3 Employment of Personnel. Unless otherwise agreed by the parties,
the CNA Employees will become employees of IGFH at the Effective Time, and shall
have available all employee benefits available to all current IGFH employees. No
third party beneficiary rights are hereby created in any CNA Employee.
3.4 Execution of Ancillary Agreements. CNA and IGFH will execute the
Ancillary Agreements.
3.5 No Assumption of Liabilities. Except for the Assumed Obligations
IGF does not and shall not assume, nor does or shall it take subject to or
become or be liable, obligated or responsible for, any debts, liabilities or
obligations of CNA of any kind or nature whatsoever, known or unknown, whether
by the execution, delivery or the performance of this Agreement, by the receipt
of CNA's Assets, by employment of the CNA Employees, by the exercise of any
rights or possession with respect to CNA's Assets or otherwise, and whether now
or hereafter arising or whether contingent or liquidated in amount, and whether
relating to or arising out of the ownership or operation by CNA of the Business
or CNA's Assets, including, without limitation, any debts, liabilities or
obligations of CNA for wages, salaries, commissions, Employment-Related
Liabilities, unemployment compensation or other compensation or benefits of any
kind, or any debts, liabilities or obligations arising out of any accounts
payable, tax liabilities, product liabilities, errors and omissions liabilities,
contracts, agreements, liabilities of CNA arising under any reinsurance
agreements with third parties (including the FCIC), any policies of insurance
issued by CNA, any products written under the Excess Lines, any pending or
future investigations by the Compliance Division of Risk Management Agency or
its successor, the USDA, the U.S. Department of Justice, or any Governmental
Authority related to the Business or the Ancillary Agreements for Crop Years
prior to 1998 and for business written in Crop Year 1998 prior to the date of
Closing where the liability is unrelated to any action taken by IGFH with
respect to such Business after the date of Closing, any Service or Managing
General Agency Agreement related to any Business.
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3.6 Maintenance of SRAs.
A. CNA will use its commercially reasonable best efforts to
remain an SRA holder and will cooperate to such extent requested by IGF
and will amend its 1998 Plan of Operations with FCIC as shall be
necessary to fulfill the terms of this Agreement and the Ancillary
Agreements and to satisfy the FCIC with the objective that CNA remains
an SRA holder for the entire 1998 Reinsurance Year.
B. CNA will consult with IGF and will cooperate in the
administration of the CNA SRA in accordance with the Reinsurance
Agreements and the Service Agreements.
C. In the event the FCIC will permit CNA to retain its SRA
beyond the 1998 Crop Year, CNA may do so only upon the express written
consent of IGF.
D. Unless the option to maintain two SRAs is available and
exercised by IGF, then for 1999 and future Reinsurance Years, IGF shall
hold the SRA through which all of the Business is written with the
exception of the portion of the Business Ceded to CNA written under the
Producers Lloyds SRA.
E. In the event that Producers Lloyds decides not to maintain
its SRA CNA will use its commercially reasonable best efforts to assist
IGF in persuading Producers Lloyds to accept IGF as its insurance
carrier thereby maintaining the Producers Lloyds MPCI Premium within
the Combined CNA/IGF MPCI Net Book Premium.
3.7 Underwriting Committee. IGF shall form the Underwriting Committee
of four (4) individuals which shall establish underwriting guidelines for the
Business. CNA shall have the right to select one (1) member of the Underwriting
Committee. IGF shall have the exclusive right to approve, disapprove, or modify
the guidelines established by the Underwriting Committee.
3.8 Special Sale and Purchase Rights.
A. In General. The following provisions shall apply to all
Put and Call Mechanisms and Change of Control Put and Change of Control
Call Mechanisms described in this Article:
i. Termination of Certain Ancillary Agreements. The
exercise of a Put or Call Mechanism or Change of Control Put
or Change of Control Call Mechanism (collectively
"Mechanisms") authorized under this Section shall terminate
the MPCI Reinsurance Agreement and Crop Hail Agreement as of
the end of the most recently completed Crop Year. For purposes
of this Agreement, the last Crop Year included for purposes of
calculating Average Pre-Tax Income in the case of a Put or
Call Mechanism other than a Change of Control Put or Call
Mechanism shall be the Crop Year ending immediately prior to
the date of exercise of such Put or Call Right. This
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termination shall not terminate any obligations that may
survive the termination of this Agreement and the Ancillary
Agreements.
ii. Effective Period.
a. Any Put or Call Mechanism shall only be
effective for the 2001 Crop Year and subsequent Crop
Years.
b. Any Change of Control Put or Change of
Control Call Mechanism shall only be effective if
exercised prior to the 2001 Crop Year.
iii. Estimate of Amounts Due; Notice. In computing
any of the amounts due and any of the figures (i.e., Pre-Tax
Income and Average Pre-Tax Income) necessary to compute such
amounts under any of the Mechanisms outlined in this Article,
the parties may, upon mutual agreement, estimate any and all
necessary amounts subject to adjustment as the parties may
mutually agree. IGF shall receive written notice from CNA
forty-five days (45) days in advance of any exercise of a Put
Right.
iv. Non-competition Period. The payment of funds
pursuant to the Mechanisms outlined in this Section by any
party shall give rise to and begin to toll the periods of
non-competition outlined in Article 6 of this Agreement, which
shall survive such termination.
B. CNA's Put Mechanisms.
i. Put Mechanism. From the 2001 Crop Year and
forward, CNA will have the ability to terminate the MPCI
Reinsurance Agreement and the Crop Hail Agreement and receive
from IGF the compensation provided for in subsection
3.8.B.i.a.
a. Sales Price. In the event CNA shall
exercise the Put Mechanism, IGFH shall be obligated
to pay CNA an amount equal to 5.85 times the Average
Pre-Tax Income as computed pursuant to this Section.
b. Sales Terms. Within thirty (30) days
notice of exercise of the Put Mechanism by CNA, IGF
will execute a promissory note payable to CNA in the
principal amount equal to the amount owed to CNA as
specified in this subsection, which shall be dated as
of the date exercise of the Put Mechanism. The
principal and accrued interest under the note, if
any, thereon shall be due and payable if not sooner
paid, on the date which is six (6) months from the
date of the note. The note shall not bear interest
for the first ninety (90) days thereof. Thereafter
the note shall bear simple interest
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at the rate which is equal to the 90 Day T-Bill rate
in effect on the date which is ninety-one (91) days
subsequent to the date of the note.
ii. Change of Control Put Mechanism. Upon the
occurrence of a Change of Control prior to the 2001 MPCI Crop
Year, CNA will have the ability to terminate the MPCI
Reinsurance Agreement and the Crop Hail Agreement and receive
from IGF compensation as provided for in this Article.
a. Sales Price. In the event CNA shall
exercise a Change of Control Put Mechanism, IGF shall
be obligated to pay CNA an amount equal to 5.85 times
the Average Pre-Tax Income as computed pursuant to
this Section.
b. Sales Terms. Upon the exercise of a
Change of Control Put Mechanism by CNA, IGF will
execute a promissory note payable to CNA in the
principal amount equal to the amount owed to CNA as
specified in this subsection, which shall be dated as
of the date of exercise of the Change of Control Put
Mechanism. The principal shall be due and payable if
not sooner paid, on the date which is six (6) months
from the date of the note. The note shall not bear
any interest for the full term thereof.
C. IGF Call Mechanisms.
i. Call Mechanism. From the 2001 Crop Year and
forward, IGF will have the ability to terminate the MPCI
Reinsurance Agreement and the Crop Hail Agreement and shall
pay CNA compensation as is provided for in subsection
3.8.C.i.a.
a. Sales Price. In the event SIG or IGF
shall exercise the Call Mechanism, SIG or IGF shall
pay CNA an amount equal to 6.70 times the Average
Pre-Tax Income as computed pursuant to this Section.
b. Sales Terms. Upon the exercise of the
Call Mechanism by SIG or IGF, SIG or IGF will execute
a promissory note payable to CNA in the principal
amount equal to the amount owed to CNA as specified
in this subsection, which shall be dated as of the
date of the exercise of the Call Mechanism. The
principal shall be due and payable if not sooner
paid, on the date which is thirty (30) days from the
date of the note. The note shall not bear any
interest for the full term thereof.
ii. Change of Control Call Mechanism. Upon the
occurrence of a Change of Control prior to the 2001 MPCI Crop
Year, IGF shall have the ability to
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terminate the MPCI Reinsurance Agreement and the Crop Hail
Agreement and shall pay to CNA the compensation as is provided
for in subsection 3.8.C.ii.a.
a. Sales Price. In the event SIG or IGF
shall exercise a Change of Control Call Mechanism,
SIG or IGF shall be obligated to pay CNA an amount
equal to 6.70 times the Average Pre-Tax Income as
computed pursuant to this Section; provided, however,
that if SIG or IGFH exercises its the Call Mechanism
in Crop Years 1998, 1999 or 2000, the amount paid to
CNA shall not be less than fifteen million dollars
($15,000,000).
b. Sales Terms. Upon the exercise of a
Change of Control Call Mechanism by SIG or IGF, SIG
or IGF may either pay the amount owed to CNA as
specified in this subsection with the proceeds from
the Change of Control event (to the extent relevant)
or SIG or IGF may execute a promissory note payable
to CNA in the principal amount equal to the amount
owed to CNA as specified in this subsection, which
shall be dated as of the date of the exercise of the
Change of Control Call Mechanism. The principal and
any accrued interest, thereon shall be due and
payable if not sooner paid, on the date which is six
(6) months from the date of the note. The note shall
not bear interest for the first ninety (90) days
thereof. Thereafter the note shall bear interest at
the rate which is equal to the 90 Day T-Bill rate in
effect on the date which is ninety-one (91) days
subsequent to the date of the note.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CNA
CNA and its Affiliates, jointly and severally, represent and warrant to
IGFH as follows:
4.1 Existence and Good Standing. CNA is duly organized, validly
existing and in good standing under the laws of their respective states of
incorporation and CNA has all requisite power and authority to carry on its
operations as they are now being conducted, except where the failure to have
such authority would not, individually, or in the aggregate, have a Material
Adverse Effect on the business to be transferred pursuant to this Agreement. CNA
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where such qualification is necessary, except for
those jurisdictions where the failure to be so qualified would not,
individually, or in the aggregate, have a Material Adverse Effect on the
business to be transferred pursuant to this Agreement.
4.2 Due Authorization. CNA has the requisite corporate power and
authority to execute and deliver this Agreement and the Ancillary Agreements to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the Ancillary Agreements the performance by CNA of its
obligations under this Agreement and the Ancillary Agreements have been duly and
validly authorized by all necessary corporate action on the part of CNA. No
other
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corporate or shareholder approval on the part of CNA is necessary for CNA to
enter into this Agreement and the Ancillary Agreements or to consummate the
transactions contemplated hereby. This Agreement (and when executed, the
Ancillary Agreements) has been duly and validly executed and delivered by CNA
and constitutes its valid and binding obligations, enforceable against them in
accordance with its terms, subject to the affect of any applicable bankruptcy,
reorganization, insolvency, moratorium, or similar law affecting creditors'
rights generally and subject to the affect of general principles of equity.
4.3 No Liens. Except as may be set forth in the Reinsurance Agreements
the rights transferred by CNA to IGFH pursuant to this Agreement shall be free
and clear of all liens, claims, demands and encumbrances whatsoever.
4.4 No Violation. The execution and delivery of this Agreement or the
Ancillary Agreements by CNA will not, and the consummation of the transactions
contemplated by this Agreement or the Ancillary Agreements and the compliance
with the terms, conditions and provisions of this Agreement or the Ancillary
Agreements by CNA and its Affiliates will not:
A. violate or conflict with any provision of the articles of
incorporation, bylaws, articles of organization or other organizing
documents of CNA; or
B. conflict with or result in the breach or termination of, or
otherwise give any contracting party the right to change the terms of
or to terminate or accelerate the maturity of, or constitute a default
under the terms of any indenture, mortgage, loan or credit agreement or
any other material agreement or instrument to which CNA is a party or
by which it or any of its assets may be bound or affected, except to
the extent that any of the foregoing would not have a Material Adverse
Effect on CNA or its ability to perform its obligations hereunder.
4.5 Foreign Status. CNA is not a "foreign person" within the
meaning of Section 1445 of the Code.
4.6 No Broker Transactions. CNA has not made any agreement or taken any
action which might cause any person or entity to become entitled to a broker's
fee or commission as a result of the transactions contemplated by this
Agreement.
4.7 Litigation, Actions and Proceedings. Except as disclosed on
Schedule 4.7 hereto, there are no outstanding orders, decrees or judgments by or
with any court or Governmental Authority before which CNA was a party that,
individually and or in the aggregate, have a Material Adverse Effect on the
Business. Except as disclosed on Schedule 4.7 hereto, there are no actions,
suits, arbitrations or legal, administrative or other proceedings pending or, to
the knowledge of CNA, threatened against CNA, at law or in equity, or before any
Governmental Authority which, if adversely determined, would individually or in
the aggregate, have a Material Adverse Effect on the Business.
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4.8 Good Title. With the exception of those applicable provisions of
the Reinsurance Agreements and those provisions contained in Article 3
pertaining to the Put Mechanism and Call Mechanism, CNA will deliver good and
clear title to CNA's Assets and the Business including, but not limited to,
policyholder lists, extant leases, miscellaneous fixed assets and any and all
other assets and/or business contemplated hereby, all free and clear of all
claims, liens, demands and encumbrances whatsoever.
4.9 Approvals. The transfer by CNA of the Business and CNA's Assets
pursuant to this Agreement does not require any consent, approval or
authorization of any Governmental Authority.
4.10 Software. CNA has set forth on Schedule 4.10 hereto a true and
complete listing, to the best knowledge of CNA, of all computer software
programs used principally in the conduct of the Business. Schedule 4.10 hereto
also sets forth whether each such computer software program is owned by CNA or
licensed by CNA from a third party. CNA has either ownership of or the right to
use all software listed on Schedule 4.10, free and clear of any royalty or other
similar payment or obligations, claims of infringement or alleged infringement
or other lien, charge, claim or other encumbrance of any kind (other than
applicable license agreements). CNA is not in conflict with or in violation or
infringement of, nor, to the knowledge of CNA, has CNA received any notice of
any such conflict with or violation or infringement of, any asserted rights of
any other Person with respect to the software and other intellectual property
listed on Schedule 4.10.
4.11 Licenses. CNA has the requisite licenses and other necessary
approvals of Governmental Authority to engage in the Business in the
jurisdictions as set forth on Schedule 4.11 to this Agreement. CNA has been duly
authorized by the relevant Governmental Authority in each jurisdiction listed on
Schedule 4.11 to issue the contracts of insurance that it is currently writing
and which are the subject of the Business, and CNA was duly authorized to issue
such contracts in the respective jurisdictions in which it conducts the
Business. Except as set forth on Schedule 4.11, CNA has all other permits and
approvals from relevant Governmental Authority to conduct the Business in the
manner and in the areas in which the Business is presently being conducted and
all such permits and authorizations are valid and in full force and effect.
4.12 Leased Premises. CNA has the right pursuant to each and every
lease for the office location set forth on Schedule 4.12 to assign the benefits
and burdens (excluding overhead) of such lease to IGFH and pursuant to such
assignment, IGFH shall be entitled to take possession of such premises at a
rental rate which is not in excess of that paid by CNA.
4.13 Environmental Matters. CNA has not in the course of its occupancy
of the CNA Field Offices committed any act that would give rise to liability
under any Environmental Law and CNA has no knowledge of any act of any Person
concerning the CNA Field Offices that could give rise to liability under any
Environmental Law. No judicial proceeding or governmental or administrative
action is pending, or, to the best of CNA's knowledge, threatened, under any
Environmental Law to which CNA is or will be named as a party with respect to
the CNA Field Offices, nor are there any consent decrees or other decrees,
consent orders, administrative orders or
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other orders or other administrative or judicial requirements outstanding under
any Environmental Law with respect to any CNA Field Office that affect CNA's
occupancy thereof. CNA's obligation to indemnify IGF with respect to the
foregoing representation under Article 10 of this Agreement shall be limited to
claims arising (i) from acts or omissions of CNA that occurred during CNA's
occupancy of the premises, and (ii) claims arising from acts or omissions of
third persons, liability for which is attributed under applicable law to IGF or
IGFH as tenant of the premises and which are asserted against IGF or IGFH or
discovered by IGF or IGFH within the initial ninety (90) day period of IGF's or
IGFH's occupancy of the premises.
4.14 MPCI Premium Volume. CNA's MPCI Gross Premiums Written and CNA's
MPCI Net Premiums Written for Crop Years 1995, 1996 and 1997 are as listed on
Schedule 4.14.
4.15 Crop Hail Premium Volume. CNA's Crop Hail Gross Premiums Written
and CNA's Crop Hail Net Premiums Written for Crop Years 1995, 1996 and 1997 are
as listed on Schedule 4.15.
4.16 Agency Contracts. Schedule 4.16 contains an accurate and complete
listing of all agreements (including the party and date of such agreement) that
CNA has with agents, managing general agents or others who produce business for
CNA (including, but not limited to, Producers Lloyds, NACU and Canadian Hail)
that is the subject of this Agreement. CNA will use its commercially reasonably
best efforts to cause such agreements to be assigned to IGFH.
4.17 Production Costs. Schedule 4.17 accurately and completely sets
forth all costs, by line item (in accordance with CNA's management reporting
procedures) incurred by CNA in producing and servicing its Crop Hail and MPCI
business for Crop Years 1996 and 1997.
4.18 Standard Reinsurance Agreements. CNA's MPCI Standard Reinsurance
Agreement is in full force and effect with the FCIC for Crop Year 1998 and CNA
is unaware of any issue, notice or other event or matter that would limit,
prohibit or otherwise frustrate the transactions contemplated herein as respects
and as is effected by CNA's 1998 Standard Reinsurance Agreement. CNA also has no
notice, knowledge, information or other data (other than the normal application
and approval process) to indicate that its Standard Reinsurance Agreement for
the 1999 Crop Year will not be approved.
4.19 Federal Crop Insurance Corporation. The FCIC is not conducting,
nor has during the last five (5) years conducted, any investigation, inquiry,
audit or proceeding concerning CNA's compliance with the rules and regulations
of the FCIC which would, in the aggregate constitute a Material Adverse Effect.
4.20 Governmental Authority. There is no investigation, audit, inquiry
or demand for information of CNA by any Governmental Authority (including, but
not limited to, the United States Department of Justice) of CNA during the last
five (5) years which has, or CNA believes will have, in the aggregate, a
Material Adverse Effect.
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4.21 Compliance with Laws. Except with respect to those violations, if
any, which would not, individually or in the aggregate, have a Material Adverse
Effect on the Business, (i) CNA is not in violation of any Federal, state, local
or foreign law, ordinance or regulation or any other requirement of Governmental
Authority, court or arbitrator applicable to the Business, nor to the knowledge
of CNA, has CNA received any written notice that such violation is being
alleged, and (ii) without limiting the generality of the foregoing, in
connection with CNA's most recently completed or any on-going examination or
audit of any Governmental Authority, CNA has not, to its best knowledge,
received any notice nor is CNA aware of the intention of any Governmental
Authority to send any notice alleging any violation of any such law, ordinance
or regulation or directing CNA to take any remedial action with respect to any
such law, ordinance or regulation as such may pertain to the Business.
4.22 Insurance Contracts. The forms of insurance contracts available
for issuance which relate to the Business, and the states in which such forms
are authorized for issuance on the date hereof are listed on Schedule 4.22. All
such insurance contract forms have been approved by all applicable Governmental
Authority and such forms comply in all material respects with the insurance
statutes, regulations and rules applicable thereto. To the knowledge of CNA, at
any time wherein CNA paid commissions to any broker or agent within the past
thirty-six (36) months in connection with the sale of any insurance contract
which is the subject of the Business, each such broker or agent was duly
licensed as an insurance broker or agent in the particular jurisdiction in which
such broker or agent sold such business for CNA and was licensed or otherwise
authorized to sell, on behalf of CNA, the type of insurance contract which is
the subject of the Business. Further, no such broker or agent violated (or with
or without notice or lapse of time or both would have violated) any federal,
state, local or foreign law, ordinance or regulation or other requirement of any
Governmental Authority, court or arbitrator applicable to the Business, except
where such failure would not, individually or in the aggregate, have a Material
Adverse Effect on the Business. Neither the manner in which CNA compensates any
Person involved in the sale or servicing of such insurance contracts that is not
registered as a broker-dealer or insurance agent, as applicable, nor, to the
knowledge of CNA, the conduct of any such Person, renders such Person a
broker-dealer or insurance agent under any applicable Federal or state law, and
the manner in which CNA compensates each Person involved in the sale or
servicing of such insurance contracts is in compliance with all applicable
Federal or state laws except where such manner of compensation or conduct having
such effect or the failure to be so in compliance would not, individually or in
the aggregate, have a Material Adverse Effect on the Business.
4.23 Regulatory Filings. CNA has filed all reports, statements,
documents, registrations, filings or submissions (including, without limitation,
any sales material) required to be filed by CNA with any Governmental Authority
to the extent they relate to the Business, except where the failure to make such
filings would not, individually or in the aggregate, have a Material Adverse
Effect on the Business. All such registrations, filings and submissions were in
compliance in all material respects with applicable law when filed or as amended
or supplemented, and CNA knows of no material deficiencies have been asserted by
any Governmental Authority with respect to such registrations, filings or
submissions that have not been satisfied.
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4.24 Reinsurance. To the best knowledge of CNA, there are no
agreements, written or oral, pursuant to which CNA Cedes or retro-Cedes risks
assumed under any insurance contracts which are the subject of the Business.
4.25 Conduct of Business. Since December 31, 1997, CNA has generally
conducted the Business only in the ordinary course consistent with past
practices, and there has not been any material change in the underwriting,
pricing, actuarial, reserving, investment, sales, marketing or agency practices
or policies of the Business.
4.26 Other Sale Arrangements. CNA is not obligated or liable,
contingently or otherwise, for or with respect to negotiations, letters of
intent or commitments for the sale or transfer of all or any part of the
Business, whether directly or indirectly.
4.27 Contracts. Schedule 4.27 lists and briefly describes, each and
every written contract, agreement, lease, license, commitment or arrangements,
including the parties to and the date and subject matter of, and each and every
oral contract, agreement, commitment or arrangement to which CNA is a party or
which is binding upon CNA that is material to the Business excluding those
agreements and documents which are disclosed in other Schedules to this
Agreement. Each of the contracts listed on Schedule 4.27 is in full force and
effect, and constitutes a legal, valid and binding obligation of CNA, as the
case may be, of each other Person that is a party thereto. Except as is set
forth on Schedule 4.27, CNA, to its best knowledge, nor any other party to such
contract, is in violation, breach or default of any such contract or, with or
without notice or lapse of time or both, would be in violation, breach or
default of any such contract, except for such violations, breaches or defaults
that would not, individually or in the aggregate, have a Material Adverse Effect
on the Business. Except as set forth on Schedule 4.27, to the best knowledge of
CNA, no such contract contains any provision providing that any party thereto,
other than CNA, may terminate such contract by reason of the execution of this
Agreement or the Ancillary Agreements or the transactions contemplated thereby.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF IGFH
IGF and its Affiliates, jointly and severally, represent and warrant to
CNA as follows:
5.1 Existence and Good Standing. IGFH is a corporation duly organized
and validly existing under the laws of the State of Indiana and has all
requisite power and authority to own, lease and operate its assets, properties
and business and to carry on the operations of its business as they are now
being conducted, except where such authority is not material to such operations.
5.2 Due Authorization. IGFH has the requisite corporate power and
authority to execute and deliver this Agreement (and, when executed, the
Ancillary Agreements) and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the Ancillary Agreements and
the performance by IGFH of its obligations under this Agreement and the
Ancillary
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Agreements, has been duly and validly authorized by all necessary corporate
action on the part of IGFH. No other corporate or shareholder approval on the
part of IGFH is necessary for IGFH to enter into this Agreement or to consummate
the transactions contemplated thereby. This Agreement (and, when executed, the
Ancillary Agreements) has been duly and validly executed and delivered by IGFH
and constitutes its valid and binding obligations, enforceable against them in
accordance with its terms, subject to the affect of any applicable bankruptcy,
reorganization, insolvency, moratorium, or similar law affecting creditors'
rights generally and subject to the affect of general principles of equity.
5.3 No Violation. The execution and delivery of this Agreement or the
Ancillary Agreements by IGFH will not, and the consummation of the transactions
contemplated by this Agreement or the Ancillary Agreements and the compliance
with the terms, conditions and provisions of this Agreement or the Ancillary
Agreements by IGFH and its Affiliates will not:
A. violate or conflict with any provision of the articles of
incorporation, bylaws, articles of organization or other organizing
documents of IGFH; or
B. conflict with or result in the breach or termination of, or
otherwise give any contracting party the right to change the terms of
or to terminate or accelerate the maturity of, or constitute a default
under the terms of any indenture, mortgage, loan or credit agreement or
any other material agreement or instrument to which IGFH is a party or
by which it or any of its assets may be bound or affected, except to
the extent that any of the foregoing would not have a Material Adverse
Effect on IGFH or its ability to perform its obligations hereunder.
5.4 No Broker Transactions. Other than with Donaldson, Lufkin &
Jenrette for which IGFH is responsible, IGFH has not made any agreement or taken
any action which might cause any person or entity to become entitled to a
broker's fee or commission as a result of the transactions contemplated by this
Agreement.
5.5 Litigation, Actions and Proceedings. There are no outstanding
orders, decrees or judgments by or with any court, Governmental Authority or
arbitration tribunal before which IGFH was a party that, individually or in the
aggregate, have a Material Adverse Effect on the operations of IGFH. There are
no actions, suits, arbitrations or legal, administrative or other proceedings
pending or, to the best knowledge of IGFH, threatened against IGFH at law or in
equity or before any Governmental Authority or before any arbitrator of any kind
which, if adversely determined, would individually or in the aggregate, have a
Material Adverse Effect on the operations of IGFH.
5.6 Approvals. The execution of this Agreement by IGFH does not require
any consent, approval or authorization of any Governmental Authority.
5.7 Reinsurance Agreements. IGF will execute the Reinsurance
Agreements.
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5.8 Compliance With Laws. Except with respect to those violations, if
any, that will be cured by IGFH prior to, or by the act of, the Closing of this
transaction or which individually or in the aggregate would not have a Material
Adverse Effect on the operation of IGFH, IGFH is not in violation of any
Federal, state, local or foreign law, ordinance or regulation or any other
requirement of any Governmental Authority, court or arbitrator and IGFH has not
received any written notice that any such violation is being alleged.
5.9 Permits, Licenses and Franchises. IGFH has been duly authorized by
the relevant state Governmental Authority to transact each of the lines of
insurance business in each of the jurisdictions as set forth on Schedule 5.9
hereto. Except as listed on Schedule 5.9 hereto, IGFH has all permits and
licenses necessary to conduct its business in the manner and in the areas in
which such business is presently being conducted, and all such permits and
licenses are valid and in full force and effect, except where the failure to
have such a permit or license would not, individually or in the aggregate, have
a Material Adverse Effect on the operations of IGFH. Except as listed on
Schedule 5.9 hereto, IGFH has not engaged in any activity which would cause
revocation or suspension of any such permit or license and no action or
proceeding looking to or contemplating the revocation or suspension of any such
permit or license is pending or threatened.
5.10 Additional License and Permits. In those states or jurisdictions
in which IGFH is not licensed as an insurance company, IGFH will comply with all
relevant Governmental Authority with respect to its status as a third party
administrator or claims adjuster or other licensing laws in connection with the
administration of the Business pursuant to this Agreement.
ARTICLE 6
COVENANTS
6.1 Execution of Agreements. The parties hereto will execute the
Ancillary Agreements (including, but not limited to, the Reinsurance
Agreements).
6.2 Conduct of Business. Prior to the Closing, CNA shall in all
material respects operate the Business as presently operated and only in the
ordinary course and consistent with past practice (including, but not limited
to, past underwriting standards), and CNA further covenants to use commercially
reasonable best efforts to preserve the value of the Business (including, but
not limited to, its relationships with and the good will of CNA's agents,
brokers, customers, suppliers, CNA Employees and other Persons having business
dealings with CNA in connection with the Business). Without limiting the
generality of the foregoing and except as otherwise expressly provided in this
Agreement, CNA will not, without the prior written consent of IGFH:
A. enter into any contract or other agreement other than in
the ordinary course of business (which is consistent with past practice
of CNA) with respect to the Business;
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B. acquire or dispose of CNA's Assets that would otherwise be
transferred to IGFH in the transactions contemplated hereby (excepting
those acquisitions or dispositions of CNA's Assets which are in the
ordinary course of the Business);
C. enter into, adopt or terminate any plan, arrangement or
contract affecting CNA Employees which could give rise to an
Employment-Related Liability (except to the extent that IGFH is fully
and completely indemnified by CNA therefore);
D. pay, discharge or satisfy any material claims, liabilities
or obligations associated with the Business (absolute, asserted or
unasserted, contingent or otherwise) other than the payment, discharge
or satisfaction in the ordinary course of business which is consistent
with CNA's past practice; and
E. enter into any contract of reinsurance for the Business.
6.3 Certain Transactions. From the date of this Agreement through
Closing, neither CNA, nor any of its officers, Employees, representatives or
agents will, directly or indirectly, solicit, encourage or initiate any
negotiations or discussions with, or provide any information to or otherwise
cooperate in any other manner with, any Person concerning any direct or indirect
sale or other disposition of the Business (whether by stock or asset transfer or
otherwise).
6.4 Due Diligence. Prior to the execution of this Agreement, IGFH shall
have been entitled, through its employees and representatives, to make such
investigations of the Business and operation of the Business, as IGFH may
reasonably request. CNA and its Employees and representatives (including,
without limitation, its counsel, investment bankers and independent public
accountants) shall have cooperated with such reasonable requests of IGFH in
connection with such review and examination. CNA shall have provided IGFH with
full and complete access to every aspect of the Business, subject only to any
applicable legal limitations. Without limiting the generality of the foregoing,
CNA shall have provided IGFH
A. with access to individuals reasonably specified by IGFH to
plan the transition of the Business;
B. the names of certain individuals (subject to IGFH's
reasonable approval) to serve as members of transition teams and cause
such individuals to devote reasonable time to transition matters;
C. reasonable resources to transition matters (such resources
to include, without limitation, office accommodations and related
facilities for substantial and continuing presence of IGFH's transition
team members on CNA's premises);
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D. cooperation in connection with IGFH's filing of policy and
contract forms to enable IGFH to issue policies and contracts
substantially similar to those included in the Business; and
E. full cooperation in carrying out of the Transition Plan.
In conjunction with the foregoing, CNA hereby acknowledges that the
Transition Plan is critical to the success of the transactions contemplated by
this Agreement and the Ancillary Agreements.
6.5 Post-Closing Access. Following the Closing, CNA shall allow IGFH,
upon reasonable prior notice and during regular business hours, to examine and
make copies of any books and records retained by CNA to the extent that such
relate to the Business, for any reasonable business purpose, including, without
limitation, the preparation or examination of IGFH's tax returns, regulatory
filings and financial statements and the conduct of any litigation or regulatory
dispute resolution, whether pending or threatened, concerning the conduct of the
Business prior to the Closing Date. CNA will further maintain such books and
records for IGFH's examination and copying. Access to such books and records
shall be at IGFH's expense and may not unreasonably interfere with CNA's
business operations.
Following the Closing, IGFH shall allow CNA, upon reasonable and prior
notice and during regular business hours, the right, at CNA's expense, to
examine and make copies of any books and records transferred to IGFH after
Closing, for any reasonable business purpose, including, without limitation, the
preparation or examination of tax returns, regulatory filings and financial
statements and the conduct of any litigation or the conduct of any regulatory,
contract holder, participant or other dispute resolution whether pending or
threatened, and IGFH will maintain such books and records for CNA's examination
and copying. Access to such books and records shall be at CNA's expense and may
not unreasonably interfere with IGFH's business operations.
6.6 Consents and Reasonable Efforts. CNA and IGFH shall cooperate fully
with one another and use commercially reasonable best efforts to obtain all
necessary consents, approvals and agreements of, and to give and make all
notices and filings with, any applicable Governmental Authority which may be
necessary to authorize, approve or permit the consummation of the transactions
contemplated by this Agreement and the Ancillary Agreements (including, but not
limited to, any such consents, approvals and agreements which may be necessary
from Governmental Authority at the exercise of either the Put or Call Right
provided for herein). CNA shall use commercially reasonable best efforts to
obtain, and IGFH will cooperate with CNA in obtaining, all other approvals and
consents to the transactions contemplated by this Agreement and the Ancillary
Agreements respecting the consents, approvals and transfers necessary from third
parties under contracts to be assigned. In the event third party consents under
contracts to be assigned cannot be obtained, CNA agrees to use commercially
reasonable best efforts, in cooperating with IGFH, to obtain comparable benefits
for IGFH for the period of this Agreement.
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6.7 Representation and Warranties. From the date hereof through the
Closing Date, CNA and IGFH will use commercially reasonable best efforts to
conduct their affairs in such a manner so that, except as otherwise contemplated
or permitted by this Agreement or the Ancillary Agreements, the representations
and warranties of the respective parties contained herein shall continue to be
true, complete and correct in all material respects on and as of the Closing
Date as if made on and of the Closing Date. Further, CNA and IGF shall promptly
notify the other of any event, condition or circumstance known to them occurring
from the date hereof through the Closing Date that would constitute a violation
or breach of this Agreement. Prior to Closing, the parties hereto shall provide
the other with updates of the Schedules to this Agreement so that such Schedules
shall be complete and accurate, to the best of knowledge of such party, as of
the date of Closing.
6.8 Further Assurances. The parties hereto shall use all commercially
reasonable best efforts to take, or cause to be taken, all actions or to do, or
cause to be done, all things or to execute any documents necessary, proper or
advisable under applicable laws and regulations, to consummate and make
effective the transactions contemplated by this Agreement and the Ancillary
Agreements, irrespective of whether such actions are necessary on or after the
Closing Date.
6.9 Expenses. Except as otherwise specifically provided in this
Agreement, each party shall bear their own respective expenses incurred in
connection with the preparation, execution and performance of this Agreement and
the Ancillary Agreements and the transactions contemplated hereby.
6.10 Code Section 338(h)(10) Election. Should IGFH, in its sole and
absolute discretion, decide that it is to its benefit to make a Section
338(h)(10) election with respect to the transactions contemplated by this
Agreement and the Ancillary Agreements, CNA shall cooperate fully with IGFH in
making such election.
6.11 Exclusivity. During the pendency of this Agreement, IGFH will
engage in the Crop Insurance Business only through the procedures and mechanisms
called for and contemplated in this Agreement and the Ancillary Agreements.
Notwithstanding any other provision of this Agreement to the contrary, violation
of this covenant by IGFH shall entitle CNA to the right to immediately exercise
its Put Right.
6.12 NACU. Until the parties hereto shall mutually agree to the
contrary, from and after the Effective Time, CNA shall use its commercially
reasonable best efforts to cause (i) all MPCI and Crop Hail business of NACU to
be placed with IGF; and (ii) the underwriting of such NACU business to be in
accordance with CNA underwriting guidelines.
6.13 Non-Competition. From and after the Effective Time, CNA shall not
compete with IGFH in any MPCI or Crop Hail business, or in the Business, or
either of them for a period which shall be either (i) twenty-four (24) months
from the exercise of the Put Right by CNA; or (ii) thirty-six (36) months from
the exercise of the Call Right by IGFH.
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6.14 Replacement Ancillary Agreements. The parties agree that, as is
necessary during the Term of this Agreement to give effect to the provisions
contained herein, the parties shall execute any and all agreements as may be
necessary to amend or replace (due to changed circumstances, the passage of time
or otherwise) Ancillary Agreements.
6.15 Confidentiality. CNA will not disclose or reveal to any individual
(other than to officers, directors, and employees of CNA), corporation,
partnership, association, entity or business, any proprietary or confidential
technology, trade secret, confidential information, data, processes, strategies,
techniques, philosophies, software, other proprietary intellectual property or
other proprietary or confidential information ("Confidential Information") used
by IGFH or IGF in any of its businesses, and CNA hereby agrees that the
Confidential Information is the exclusive property of IGFH.
6.16 Intellectual Property and Trade Secrets. CNA will allow IGFH, at
no cost to IGFH, to utilize all Trade Secrets, proprietary information, software
and other formula, data, processes, strategies, techniques, philosophies, other
proprietary intellectual property or other proprietary or confidential
information (including, but not limited to, the REAP system) (collectively,
"Trade Secrets") utilized by CNA in the management and operation of the
Business. Further, IGFH is the only business, corporation, partnership,
association, or entity which is or will be allowed to utilize the Trade Secrets.
At the Closing, CNA will transfer all such rights it has in and to the computer
software and intellectual property listed on Schedule 4.10 to IGFH.
6.17 IGFH Employees. CNA has not, and for a period of two (2) years
from the date hereof, will not directly (for themselves or others) employ, offer
employment to, or solicit the service of any current or future employee of IGFH.
6.18 ERISA and Employment-Related Matters. CNA shall remain solely
responsible, on a first-dollar basis and in accordance with Article 10
(Indemnification) hereof, for Employment-Related Liabilities whereby any CNA
Employee, has or claims any right to current or future payments by virtue of
their status as an employee (including that of a former employee) of CNA.
6.19 Licenses. CNA will, at no charge or cost to IGFH, allow IGFH to
utilize the licenses of CNA in the jurisdictions set forth on Schedule 4.11 so
that IGF may continue the Business in the jurisdictions set forth on Schedule
4.11. As a consequence of the transfer of the Business, CNA shall allow IGFH to
file rates on its behalf and to otherwise establish the pricing for the products
and coverages which are to be written through CNA's licenses.
6.20 Fronting. CNA will front for IGF in all Territories and CNA will
further keep in effect during the pendency of this Agreement all necessary
licenses so that CNA may act as a fronting company for IGFH in the types of
business contemplated by this Agreement. CNA will use its best efforts to keep
such licenses in place during the pendency of this Agreement. In the event of
the exercise of a Put or Call Right, the Fronting arrangement shall cease as of
the last day of the current Crop Year in which the Put or Call Right is
exercised.
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6.21 Reinsurance Agreements. CNA will execute the Reinsurance
Agreements.
6.22 Leased Premises. CNA will assign all its right, title and interest
to its leaseholds for the office locations currently utilized (excluding
Overland Park, Kansas) in the Business and as set forth in Schedule 4.12.
6.23 NACU. CNA will use its commercially reasonable best efforts to
cause one or more IGF Executives to be named to the NACU Underwriting Committee
at the earliest time (in CNA judgment) which is practicable.
ARTICLE 7
CLOSING CONDITIONS
7.1 Conditions to Obligations of the Parties. The obligations of the
parties hereto to proceed with Closing pursuant to this Agreement are subject to
the fulfillment prior to or at Closing of the following conditions (any one or
more of which may be waived in whole or in part by the party benefitting from
such Closing condition):
A. Bring Down of Representations and Warranties. The
representations and warranties of the parties hereto contained in this
Agreement shall be true and correct in all material respects on and as
of the time of Closing, with the same force and effect as such
representations and warranties had been made on, as of and with
reference to such time and each party shall have received a certificate
to such effect signed by an authorized officer of the other, in form
and substance similar to Exhibit 7.1A.
B. Performance and Compliance. The parties hereto shall have
performed in all material respects all of the covenants and complied
with all of the provisions required by this Agreement to be performed
or complied with by them on or before Closing and each shall have
received a certificate to such effect signed by an authorized officer
of the other.
C. Opinion of Counsel. Each party hereto shall have received
an opinion of counsel from counsel to the other, dated as of the
Closing Date, in substantially the form of Exhibit 7.1C hereto.
D. Regulatory Approval. All applicable approvals and/or
waivers, if any, from all pertinent Governmental Authority for the
transactions contemplated by this Agreement shall have been received.
E. Required Consents. All consents listed on Schedule 7.1E
shall have been obtained.
F. Litigation. No order of any court or any Governmental
Authority shall be in effect which enjoins or prohibits the
transactions contemplated hereby or which would have
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a Material Adverse Effect, and there shall have not been threatened,
nor shall there be pending, any action or proceeding by or before any
court or Governmental Authority.
i. reasonably likely to enjoin or prohibit any of
the transactions contemplated by this Agreement or seeking
significant monetary relief by reason of the consummation of
such transaction, or
ii. which might have a Material Adverse Effect on the
future conduct of the business and transactions contemplated
herein.
G. No Material Adverse Effect. There shall not have occurred
any Material Adverse Effect.
H. Incumbency Certificate. Each of the parties hereto shall
have delivered to the other an incumbency certificate (in form and
substance substantially similar to Exhibit 7.1H) dated as of the
Closing Date certifying the incumbency of all officers of such party
who have executed this Agreement or any of the Ancillary Agreements,
documents or other instruments required to be delivered hereunder.
These certificates shall contain specimens of the signatures of each of
such officers and shall be executed by the Secretary of the party
proffering such certificate.
I. Certificates of Existence and Licensure. Each party hereto
shall have delivered to the other a certificate of the Secretary of
State of the state in which each such party is incorporated, dated not
more than fifteen (15) days before the Closing Date, stating that such
party is a corporation in existence under the laws of such state and
has paid all applicable taxes due to such state. In addition, CNA shall
have delivered to IGFH a certificate of licensure, dated not more than
thirty (30) days before the Closing Date, issued by the insurance
regulatory authority in each state in which the business proposed to be
transferred pursuant to this Agreement is currently conducted by CNA,
with such certificate stating that CNA is authorized to conduct the
type of business transferred pursuant to this Agreement in such state.
J. Certified Copies of Resolutions. Each party hereto shall
have delivered to the other copies, certified by the duly qualified and
acting secretary or assistant secretary of such other party, of
resolutions adopted by the Board of Directors of such party approving
this Agreement and the consummation of the transactions contemplated
hereby (including, but not limited to, execution of the Ancillary
Agreements).
K. Catastrophic Events. There shall not have occurred any
outbreak of war or any banking moratorium.
L. Transfer of Assets. CNA shall have delivered to IGFH at the
Effective Time possession of all of CNA's Assets to be transferred
pursuant to this Agreement and the
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Ancillary Agreements, reflecting a transfer of all of CNA's right,
title and interest in and to CNA's Assets as provided in this Agreement
and the Ancillary Agreements.
M. Ancillary Agreements. The parties hereto shall have
executed the Ancillary Agreements.
ARTICLE 8
EMPLOYEES AND EMPLOYMENT MATTERS
8.1 Employment Transfer. Unless otherwise agreed by the parties, CNA
will cease the employment of all CNA Employees and IGFH shall commence
employment of all such individuals on March 17, 1998. Upon employment by IGFH
all CNA Employees shall become eligible to receive and participate in all plans,
programs and benefits applicable to employees of IGFH.
8.2 No Liability for Prior Service. IGFH shall have no liability or
responsibility for any Employment-Related Liability (and CNA shall retain all
such liability), which is or may become owing to any CNA Employee which is a
result of such person's prior employment or service with CNA. CNA will indemnify
IGFH, on a first-dollar basis, for any Employment-Related Liability.
8.3 Hold Harmless. As more fully set forth in Article 10, and not
limited by this Section 8.3, CNA will indemnify and hold harmless, on a
first-dollar basis, IGFH from and against any and all liability whatsoever
(including, but not limited to IGFH's internal cost and its cost of all retained
advisors and experts in defending such matter) arising from any
Employment-Related Liability, including, but not limited to, any suit, case,
claim or administrative proceeding, whether pre-existing or hereafter commenced,
which in any way relates to such person's employment with CNA or the terms,
conditions or method of such person's termination from CNA and employment by
IGFH.
ARTICLE 9
TERM AND TERMINATION
9.1 Duration. Unless otherwise terminated as provided for herein, the
term of this Agreement shall be perpetual (the "Term').
9.2 Termination Prior to Closing. Unless the parties shall mutually
agree in writing to the contrary, this Agreement shall automatically terminate
at such time which is thirty (30) days from the Effective Time; provided,
however, that the provisions of this Section 9.2 shall be invalid upon the
execution of the Ancillary Agreements.
9.3 Survival. If this Agreement shall be terminated as provided for
herein, this Agreement shall become null and void and of no further force and
effect except for provisions relating to (i) non-competition, (ii)
indemnification, (iii) expenses, (iv) public announcements and the provisions of
this Section.
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9.4 Put/Call Termination. This Agreement shall terminate upon the
exercise of any Put Right, Change of Control Put Mechanism or Change of Control
Call Mechanism.
ARTICLE 10
INDEMNIFICATION
10.1 Indemnification by IGFH. IGFH hereby agrees to indemnify, defend
and hold harmless CNA from and against any loss, liability, claim, obligation,
damages or deficiency arising out of or resulting from any misrepresentation,
breach of warranty or nonfulfillment of any covenant or agreement on the part of
IGFH contained in this Agreement. Such indemnification shall include, but not be
limited to, judgments, costs and expenses (including reasonable attorneys' fees
and all other expenses incurred in investigating, preparing or defending any
litigation or proceeding, commenced or threatened) incident to the foregoing
sentence, provided, however, that the provisions of this Section shall not apply
to any loss, liability, claim, obligation, damage or deficiency or any judgment,
costs, and expenses (including reasonable attorneys' fees and all other expenses
incurred in investigating, preparing or defending any litigation or proceeding,
commenced or threatened) incident thereto that arise from the breach of any
misrepresentation, warranty or the nonfulfillment of any covenant or agreement
if, at the time of Closing, CNA was aware of the breach or other noncompliance
of such representation, warranty, covenant or other agreement and the
transactions contemplated hereby closed while CNA was in possession of such
knowledge and had waived such compliance. The indemnity granted by this Section
hereby does not apply until the aggregate of all loss, liability, claim,
obligation, damage or deficiency (including judgments and other costs related
thereto) exceeds three hundred thousand dollars ($300,000) and then the said
indemnity applies only to indemnified amounts that exceed the aggregate three
hundred thousand dollars ($300,000). Further, no action or claim for indemnity
pursuant to this Section shall be brought or made after February 15, 2000.
10.2 Indemnification by CNA. CNA hereby agrees to indemnify, defend and
hold harmless IGFH from and against any loss, liability, claim, obligation,
damages or deficiency arising out of or resulting from any misrepresentation,
breach of warranty or nonfulfillment of any covenant or agreement on the part of
CNA contained in this Agreement. Such indemnification shall include, but not be
limited to, judgments, costs and expenses (including reasonable attorneys' fees
and all other expenses incurred in investigating, preparing or defending any
litigation or proceeding, commenced or threatened) incident to the foregoing
sentence, provided, however, that the provisions of this Section shall not apply
to any loss, liability, claim, obligation, damage or deficiency or any judgment,
costs, and expenses (including reasonable attorneys' fees and all other expenses
incurred in investigating, preparing or defending any litigation or proceeding,
commenced or threatened) incident thereto that arise from the breach of any
misrepresentation, warranty or the nonfulfillment of any covenant or agreement
if, at the time of Closing, IGFH was aware of the breach or other noncompliance
of such representation, warranty, covenant or other agreement and the
transactions contemplated hereby closed while IGFH was in possession of such
knowledge and had waived such compliance. The indemnity granted by this Section
does not apply until the aggregate of all loss, liability, claim, obligation,
damage or deficiency (including judgments and other costs related
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thereto) exceeds three hundred thousand dollars ($300,000) and then the said
indemnity applies only to indemnified amounts that exceed the aggregate three
hundred thousand dollars ($300,000). Further, no action or claim for indemnity
pursuant to this Section shall be brought or made after February 15, 2000.
10.3 Indemnification by CNA for Employment Related Matters.
Notwithstanding any other provision of this Agreement, CNA agrees to indemnify,
defend and hold harmless, on a first-dollar basis, IGFH from and against any and
all loss, liability, claims, obligation, damage or deficiency, including any
judgments, costs and expenses (including reasonable attorneys' fees and all
other expenses incurred in investigating, preparing or defending any litigation
or proceeding, commenced or threatened) arising out of or related to any
litigation, suit, cause of action or proceeding (whether administrative or
judicial) before any court or Governmental Authority brought by any former
employee of CNA listed on Schedule 10.3 hereto. Additionally, and not in
limitation of any foregoing provision of this Section, CNA hereby agrees to
indemnify, defend and hold harmless IGFH from and against any and all loss,
liability, claim, obligation, damage or deficiency and any judgments, costs and
expenses (including reasonable attorneys' fees and all other expenses incurred
in investigating, preparing or defending any litigation or proceeding, commenced
or threatened) which arise from or pertain to any alleged benefit, payment,
inurement, pension, benefit plan, pension plan, vacation pay plan or any other
employee benefit of any type or kind sought by any former employee of CNA listed
on Schedule 10.3.
10.4 Indemnification Procedures. In the event that either party hereto
wishes to assert a claim for indemnification pursuant to this Article, such
party seeking indemnification shall deliver a written notice to the other party
no later than ten (10) business days after such claim becomes known to such
party seeking indemnification, specifying the facts constituting the basis for,
and the amount (if known) of the claim asserted. Failure to deliver such a
notice as is provided for in the preceding sentence in a timely manner shall not
be deemed a waiver of right to indemnification hereunder in connection with such
claim, but the amount of reimbursement to which such party may be entitled shall
be reduced by the amount, if any, by which such amount could have been mitigated
had such notice been delivered in a timely manner. If a party seeking
indemnification pursuant to this Article because of a claim or demand made, or
an action, proceeding or investigation instituted by any Person that is not a
party to this Agreement, and such claim, demand, action, proceeding or
investigation may result in indemnification pursuant to this Article, the party
seeking indemnification shall deliver to the other party hereto a notice with
respect thereto, with such notice specifying the claimant or other third party,
the facts surrounding such potential claim for indemnification and the best
estimate (which is non-binding of the party seeking indemnification) of the
amount of such potential claim by such third party. Such notice as is provided
for in the preceding sentence shall be delivered to the party from whom
indemnification is sought within twenty (20) business days of the actual
knowledge of such party seeking indemnification of such claim. The party from
whom indemnification is sought shall have the right, upon written notice to the
other, to investigate, contest, defend or settle any matter to which a notice
for indemnification due to a claim by a third party has been made.
Notwithstanding the foregoing sentence, the party seeking indemnification may,
at its option and at its own expense, participate in the investigation,
contesting, defense or
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settlement of any such claim through representatives and counsel of its own
choosing; provided, however, that the party from whom indemnification is sought
shall have the sole and exclusive right to investigate, contest, defend or
settle any such claim from a third party on terms, and in the manner, it shall,
in its sole discretion, determine. Notwithstanding the foregoing, the party
seeking indemnification has the unilateral right to investigate, contest, defend
or settle any claim by a third party, but if such party seeking indemnification
shall exercise the right provided for in this sentence, it expressly shall
forfeit any right of indemnification provided for in this Article.
10.5 Stamford Financial. CNA and IGFH hereby agree that if either of
them shall have entered into any agreement with Stamford Financial, by virtue of
which Stamford Financial claims a fee for the transactions contemplated in this
Agreement and the Ancillary Agreements, the party entering into such agreement
with Stamford Financial will indemnify, defend and hold harmless the other from
and against any and all monetary costs (including, without limitation, legal
fees) which may be incurred by the party which did not so enter into such
agreement with Stamford Financial.
ARTICLE 11
MISCELLANEOUS
11.1 Further Actions. Each of the parties hereto agrees to use all
reasonable effort to take, or cause to be taken, all reasonable actions and to
do, or cause to be done, all reasonable things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement. None of the parties
hereto will take or permit to be taken any action that would be in breach of the
terms or provisions of this Agreement or that would cause any of the
representations contained herein to be or to become untrue.
11.2 Costs. Irrespective of whether Closing occurs, except as otherwise
stated or hereinafter agreed, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense.
11.3 Public Announcements. Excepting comments in filings required by
the SEC, or Governmental Authority, the content and timing of any press release
or other public announcement proposed to be made concerning the transactions
contemplated by this Agreement must be consented to in advance by each party
prior to the public dissemination of such press release or public announcement,
with such consent not being unreasonably withheld or delayed.
11.4 Survival. The representations, warranties, covenants and
agreements of the parties hereto contained in this Agreement shall survive the
Closing and shall not merge in the performance of any obligation by any party
hereto.
11.5 Amendment and Modification. This Agreement may not be amended or
modified without the prior written consent of all parties hereto.
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11.6 Waiver. The failure to insist upon strict compliance with any of
the terms and conditions to this Agreement at any one time shall not be deemed a
waiver of such term or condition at any other time, nor shall any waiver or
relinquishment of any right or power granted herein at any time be deemed a
waiver or relinquishment of the same or any other right or power at any other
time.
11.7 Governing Law; Venue. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana without giving
effect to the principles of conflicts of laws. Each of the parties hereto
irrevocably and unconditionally consent to submit to the exclusive jurisdiction
of the courts of the United States of America located in Marion County, Indiana
(and if such courts do not have appropriate jurisdiction, the courts of the
State of Indiana), for any action, proceeding or investigation in any court or
before any Governmental Authority arising out of or relating to this Agreement
and the transactions contemplated hereby. The parties further agree that service
of any process, summons, notice or document by United States Registered Mail to
its respective address as set forth in this Agreement shall be effective service
of process for any litigation brought against it in any such court. Each of the
parties hereto hereby irrevocably and unconditionally waives any objection to
the laying of venue in any matter arising out of this Agreement or the
transactions contemplated hereby in the courts of the United States of America
located in Marion County, Indiana (and if such courts do not have appropriate
jurisdiction, the courts of the State of Indiana), and the parties hereto hereby
further irrevocably and unconditionally waive and agree not to plead or claim in
any such court that any such litigation brought in any such court has been
brought in an inconvenient forum.
11.8 Notice. Any notice or other communication to be given hereunder
shall be in writing and shall be deemed sufficient when it is:
A. mailed by United States Certified Mail, Return Receipt
Requested;
B. mailed by overnight express mail or other airborne courier;
C. sent by facsimile or telecopy machine, followed by
confirmation mailed by First Class mail or overnight express mail or
airborne courier; or
D. delivered in person, at the address set forth below or such
other address as a party hereto may provide to the other in writing.
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Notices pursuant to this Agreement shall be sent to:
If to IGFH:
Dennis G. Daggett
President and Chief Operating Officer
IGF Holdings, Inc.
6000 Grand Avenue
Des Moines, Iowa 50312
With a copy to:
David L. Bates, Esq.
Vice President, General Counsel and Secretary
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
If to CNA:
Lyle W. Marschand
President and Chief Operating Officer
CNA Agriculture
CNA Plaza, 40 South
Chicago, Illinois 60685
With a copy to:
Secretary
Continental Casualty Company
CNA Plaza, 43 South
Chicago, Illinois 60685
11.9 Severability. If any provision of this Agreement shall be
determined to be invalid or unenforceable, this Agreement shall be deemed to
amended to delete such provision and the remainder of this Agreement shall be
enforceable by its terms.
11.10 Successors and Assigns. This Agreement shall be binding and inure
to the benefit of the parties hereto and their respective permitted successors
and assigns.
11.11 Captions. Headings and captions contained in this Agreement are
inserted only as a matter of convenience and for reference, and in no way
define, limit, extend or prescribe the scope of this Agreement or the intent of
any provision.
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11.12 Gender and Tense. The masculine gender shall include the feminine
and neuter genders and the singular shall include the plural.
11.13 Entire Agreement. This Agreement and the Ancillary Agreements,
taken as a whole, constitute the entire agreement of the parties with respect to
the matters set forth herein and supersedes any and all prior understandings or
agreements, oral or written, with respect to such matters.
11.14 Negative Inference. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party hereto,
whether under any rule of construction or otherwise. No party shall be
considered the draftsman of this Agreement. On the contrary, this Agreement has
been reviewed, negotiated and accepted by all parties hereto and their
respective counsel and shall be construed and interpreted according to the
ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of all parties hereto.
11.15 Counterparts; Facsimile Signatures. This Agreement may be
executed in any number of counterparts, each of which shall be an original, and
all such counterparts shall constitute one in the same Agreement, binding on all
the parties notwithstanding that all the parties are not signatories to the same
counterparts. The execution of this Agreement may be accomplished by signature
transmitted via facsimile.
11.16 Certain Definitions. Certain defined terms outlined in Article 1
hereof are not used herein but have application to certain Ancillary Agreements.
In the event that a conflict exists between any term defined herein and also in
any Ancillary Agreement, the definition and meaning contained herein shall be
controlling.
11.17 Recitals. The recitals contained hereinabove are incorporated by
reference as those repeated verbatim.
11.18 Future Cooperation. The parties agree to work together in good
faith from the date hereof through the Closing Date to correct or amend any
provisions herein or in the Ancillary Agreements which are inconsistent with the
parties intent.
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Strategic Alliance Agreement
Signature Pages
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
SYMONS INTERNATIONAL GROUP, INC.
By:___________________________________
Its:___________________________________
42
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Strategic Alliance Agreement
Signature Pages [continued]
IGF HOLDINGS, INC.
By:___________________________________
Its:___________________________________
43
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Strategic Alliance Agreement
Signature Pages [continued]
IGF INSURANCE COMPANY
By:___________________________________
Its:___________________________________
44
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Strategic Alliance Agreement
Signature Pages [continued]
CONTINENTAL CASUALTY COMPANY
By:___________________________________
Its:___________________________________
45
Exhibit 2.2
MULTIPLE PERIL CROP INSURANCE (MPCI)
QUOTA SHARE CONTRACT
(hereinafter referred to as "Contract")
Effective: July 1, 1997
issued to
Continental Casualty Company
(hereinafter referred to as the "Company")
by
IGF Insurance Company
and its Affiliated Companies
(hereinafter collectively referred to as "Reinsurer")
ARTICLE 1 - TERM
This Contract shall cover losses occurring on crops insured during the MPCI crop
year commencing at 12:01 a.m., Central Standard Time, July 1, 1997, including
such policies written or renewed for the 1998 crop year as defined in the
Standard Reinsurance Agreement (SRA) of the Federal Crop Insurance Corporation
(FCIC) and each succeeding crop year beginning at July 1, until terminated.
This Contract shall terminate automatically upon the exercise of a Put Right or
Call Right (as such term is defined under the Strategic Alliance Agreement,
hereinafter "SAA", to which this Contract is attached) with termination becoming
effective at the end of the Crop Year in which such Put Right or Call Right is
exercised, and no policies written after the effective time of termination shall
be covered hereunder.
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ARTICLE 2 - BUSINESS COVERED
The Company agrees to cede and the Reinsurer agrees to accept a 100% quota share
of the Company's liability on the following business covered hereunder
(hereinafter referred to as "policies"), subject to this Contract's terms and
conditions.
The Company's business subject hereto after application of the FCIC SRA,
including cessions made to the various risk funds provided thereunder for the
1998 crop year (as defined by the FCIC and covered under the terms and
conditions of the FCIC's SRA) and succeeding crop years so long as the Company
is a holder of an SRA.
The Company's net underwriting gain (loss), for the 1998 crop year and
succeeding crop years, assumed by the Company through it's participation in the
Producers Lloyds Insurance Company Multiple Peril Crop Insurance (MPCI) Quota
Share Reinsurance Contract No. 0929-00-0017, net of any reinsurance brokerage
paid by the Company in the assumption of the business, so long as the Company is
a participant in said Contract.
The Company's liability developed through any and all fronting agreements
with IGF Insurance Company and its Affiliated Companies (IGF) subject hereto
after application of the FCIC SRA, including cessions made to the various risk
funds provided thereunder for the 1999 crop year (as defined by the FCIC and
covered under the terms and conditions of the FCIC's SRA) and succeeding crop
years so long as the IGF Insurance Company is a holder of an SRA.
ARTICLE 3 - TERRITORY
This Contract applies to the territory of the Company's business covered
hereunder.
ARTICLE 4- ORIGINAL CONDITIONS
All amounts ceded hereunder shall be subject to the same gross rating and to the
same clauses, conditions, exclusions and modifications of the policies reinsured
hereunder, subject to the limits, terms and conditions of this Contract.
Except as specifically and expressly provided for in the Insolvency Article, the
provisions of this Contract are intended solely for the benefit of the parties
to and executing this
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Contract, and nothing in this Contract shall in any manner create, or be
construed to create, any obligations to or establish any rights against any
party to this Contract in favor of any third parties or other persons not
parties to and executing this Contract.
ARTICLE 5 - LOSSES
The Company alone and at its full discretion shall adjust, settle or compromise
all claims and losses. All such adjustments, settlements and compromises,
including ex-gratia payments, shall be binding on the Reinsurer in proportion to
its participation. The Company shall likewise at its sole discretion commence,
continue, defend, compromise, settle or withdraw from actions, suits or
proceedings and generally do all such matters and things relating to any claim
or loss as in its judgment may be beneficial or expedient; and all loss payments
made shall be shared by the Reinsurer proportionately. Reinsurer shall, on the
other hand, benefit proportionately from all reductions of losses by salvage,
compromise or otherwise.
ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS
This Contract shall protect the Company as provided in Article 2 - Business
Covered in connection with loss in excess of the limit of the original policy.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS
This Contract shall protect the Company as provided in Article 2 - Business
Covered where the loss includes any extra contractual obligations.
The term "Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of this Contract and which arise from the
handling of any claim on
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business covered hereunder, such liabilities arising because of, but not limited
to, the following: failure by the Company to settle within the policy limit, or
by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in preparation of the defense or in trial of any action
against its insured or reinsured or in the preparation or prosecution of an
appeal consequent upon such action.
The date on which any Extra Contractual Obligation loss is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
occurrence, or the date the original claim is first made, whichever is
applicable.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any loss covered hereunder.
ARTICLE 8 - CURRENCY
Where the word "dollars" and/or the sign "$" appear in this Contract, they shall
mean United States dollars.
For purposes of this Contract, where the Company receives premiums or pays
losses in currencies other than United States currency, such premiums or losses
shall be converted in to United States dollars at the actual rates of exchange
at which these premiums or losses are entered in the Company's books.
ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS
As soon as practicable after the end of each month, for each Agreement Year for
which coverage applies under this Contract, the Company shall furnish to the
Reinsurer the FCIC reinsurance accounting report (RoRecap) which shall include
but not be limited to the following:
Gross liability, premiums and losses paid, by state, before deducting the
amount of reinsurance ceded to the FCIC SRA.
Net premiums and losses paid, after recoveries from the FCIC SRA and deduction
of the allowable Expense Reimbursement under the FCIC SRA.
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Calculation of gain or loss between the Company and the FCIC after recoveries
from the SRA and deduction of the allowable Expense Reimbursement under the FCIC
SRA.
Any balance due one party from the other shall be payable upon receipt of the
above report.
As soon as practicable after the first February following each Agreement Year,
the Company shall furnish to the Reinsurer the FCIC reinsurance accounting
report (RoRecap) which shall include but not be limited to the following:
Gross liability, premiums and losses paid, by state, before deducting the
amount of reinsurance ceded to the FCIC SRA.
Net premiums and losses paid, after recoveries from the FCIC SRA and deduction
of the allowable Expense Reimbursement under the FCIC SRA.
Calculation of gain or loss between the Company and the FCIC after recoveries
from the SRA and deduction of the allowable Expense Reimbursement under the FCIC
SRA.
Any balance due one party from the other shall be payable upon receipt of the
above report. However, if at any time during the term of this Contract the
Company is required to reimburse the FCIC for a net underwriting loss after
recoveries from the SRA for the Agreement Year under consideration, the
Reinsurer shall pay its proportional share of the net underwriting loss amount
to the Company by the date due to the FCIC. Adjustments shall continue until
final settlement is reached with the FCIC on all policies reinsured for each
Agreement Year unless such earlier definitive date is agreed to by the parties
to this Contract.
As soon as possible after the conclusion of each calendar quarter and Agreement
Year the Company will provide any other information the Reinsurer may require
for its Convention Statement which may be reasonably available to the Company.
ARTICLE 10 - DEFINITIONS
The term "Standard Reinsurance Agreement (SRA) of the FCIC" as used herein shall
mean the Reinsurance Agreement between the Federal Crop Insurance Corporation
and the
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Company including all amendments applicable to the agreement during the term of
this Contract.
ARTICLE 11 - OFFSET
The Company or the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right at any time whether
the balances due are on account of premiums or losses.
ARTICLE 12 - WARRANTY
For business covered hereunder, it is agreed that all terms and agreements of
the FCIC are applied.
ARTICLE 13 - ACCESS TO RECORDS
Upon reasonable notice, the Reinsurer, or its designated representative, shall
have access at any reasonable time to inspect and audit the books and records of
the Company which pertain in any way to this reinsurance and it may make copies
of any records pertaining thereto. This right of inspection, audit and
information shall survive termination of this Contract and shall run to the
natural expiry of all liabilities under the policies reinsured.
ARTICLE 14 - TAXES
In consideration of the terms under which this Contract is issued, the Company
undertakes not to claim any deduction of the premium hereon when making tax
returns, other than Income or Profits Tax returns, to any state or territory of
the United States of America or to the District of Columbia.
ARTICLE 15 - ERRORS AND OMISSIONS
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Contract shall not be held to relieve either party hereto
from any liability which would attach
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to it hereunder if such error, omission or delay had not been made, provided
such error, omission or delay is rectified immediately upon discovery.
ARTICLE 16 - AMENDMENTS
This Contract may be altered or amended in any of its terms and conditions by
mutual consent of the Company and the Reinsurer by an Endorsement hereto. Such
Endorsement will then constitute a part of this Contract.
ARTICLE 17 - LOSS FUNDING
This Article is only applicable to those Reinsurers who cannot qualify for
credit by the State, meaning the state, province or Federal authority having
jurisdiction over the Company's loss reserves.
As regards policies issue by the Company coming within the scope of this
Contract, the Company agrees that when it shall file with the insurance
department or set up on its books reserves for losses covered hereunder which it
shall be required to set up by law it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to them.
The Reinsurer hereby agrees that it will apply for and secure delivery to the
Company a clean irrevocable and unconditional Letter of Credit issued by a bank
chosen by the Reinsurer and acceptable to the appropriate insurance authorities,
in an amount equal to the Reinsurer's proportion of the loss reserves in respect
of known outstanding losses that have been reported to the Reinsurer and
allocated loss expenses relating thereto as shown in the statement prepared by
the Company. Under no circumstances shall any amount relating to reserves in
respect of losses or loss expenses Incurred But Not Reported be included in the
amount of the Letter of Credit.
The Letter of Credit shall be "Evergreen" and shall be issued for a period of
not less than one year, and shall be automatically extended for one year from
its date of expiration or any future expiration date unless thirty (30) days
prior to any expiration date, the bank shall notify the Company by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
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The Company, or its successors in interest, undertakes to use and apply any
amounts which it may draw upon such Credit pursuant to the terms of the Contract
under which the Letter of Credit is held, and for the following purposes only:
To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any liability for loss reinsured by this Contract, the
payment of which has been agreed by the Reinsurer and which has not otherwise
been paid.
To make refund of any sum which is in excess of the actual amount required
to pay the Reinsurer's share of any liability reinsured by this Contract.
In the event of expiration of the Letter of Credit as provided for above,
to establish deposit of the Reinsurer's share of known and reported outstanding
losses and allocated loss expenses relating thereto under this Contract. Such
cash deposit shall be held in an interest bearing account separate from the
Company's other assets, and interest thereon shall accrue to the benefit of the
Reinsurer. It is understood and agreed that this procedure will be implemented
only in exceptional circumstances and that, if it is implemented, the Company
will ensure that a rate of interest is obtained for the Reinsurer on such a
deposit account that is at least equal to the rate which would have been paid by
Citibank N.A. in New York, and further that the Company will account to the
Reinsurer on an annual basis for all interest accruing on the cash deposit
account for the benefit of the Reinsurer.
The bank chosen for the issuance of the Letter of Credit shall have no
responsibility whatsoever in connection with the propriety of withdrawals made
by the Company or the disposition of funds withdrawn, except to ensure that
withdrawals are made only upon the order of properly authorized representatives
of the Company.
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated loss expenses relating thereto. If the
statement shows that the Reinsurer's share of such losses and allocated loss
expenses exceeds the balance of credit as of the statement date, the Reinsurer
shall, within thirty (30) days after receipt of notice of such excess, secure
delivery to the Company of an amendment of the Letter of Credit increasing the
amount of credit by the amount of such difference. If, however, the statement
shows that the Reinsurer's share of known and reported outstanding losses plus
allocated loss expenses relating thereto is less than the balance of credit as
of the statement date, the Company shall, within thirty (30) days after receipt
of written request
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from the Reinsurer, release such excess credit by agreeing to secure an
amendment to the Letter of Credit reducing the amount of credit available by the
amount of such excess credit.
ARTICLE 18 - INSOLVENCY
This reinsurance shall be payable by the Reinsurer on the basis of the liability
of the Company under Policy or Policies reinsured without diminution, because of
the insolvency of the Company, to the Company or its liquidator, receiver, or
statutory successor.
In the event of insolvency of the Company, the liquidator or receiver or
statutory successor of the Company shall give written notice to the Reinsurer of
the pendency of a claim filed against the Company on the Policy or Policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of such claim the Reinsurer may investigate such
claim and interpose, at its own expense, in the proceeding where such claim is
to be adjudicated, any defense or defenses which it may deem available to the
Company or its liquidator or receiver or statutory successor. The expenses thus
incurred by the Reinsurer shall be chargeable, subject to court approval,
against the Company as part of the expense of liquidation to the extent of a
proportionate share of the benefits which may accrue to the Company solely as a
result of the defense so undertaken by the Reinsurer.
Should the Company go into liquidation or should a receiver be appointed, the
Reinsurer shall be entitled to deduct from any sums which may be or may become
due to the Company under this reinsurance Contract, any sums which are due to
the Reinsurer by the Company under this Contract and which are payable at a
fixed or stated date, as well as any other sums due to the Reinsurer which are
permitted to be offset under applicable law.
It is further understood and agreed that, in the event of the insolvency of the
Company, the reinsurance under this Contract shall be payable directly by the
Reinsurer to the Company or to its liquidator, receiver or statutory successor,
except a) where this Contract specifically provides another payee of such
reinsurance in the event of the insolvency of the Company and b) where the
Reinsurer with the consent of the direct insured or insureds has assumed such
policy obligations of the Company as direct obligations of the Reinsurer to the
payees under such policies and in substitution for the obligations of the
Company to such payees.
In no event shall anyone other than the parties to this Contract or, in the
event of the Company's insolvency, its liquidator, receiver, or statutory
successor, have any rights under this Contract.
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<PAGE>
ARTICLE 19 - ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of the interpretation, performance or breach of this Contract, including the
formation or validity thereof, shall be submitted for decision to a panel of
three arbitrators. Notice requesting arbitration will be in writing and sent
certified mail, return receipt requested.
One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified mail of its intention to do so, may
appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, each of them shall name two, of whom the
other shall decline one and the decision shall be made by drawing lots. All
arbitrators shall be disinterested active or retired executive officers of
insurance or reinsurance companies, Underwriters at Lloyd's London not under the
control of either party to this Contract, or a qualified arbitrator supplied by
the AAA..
Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
The panel shall be relieved of all judicial formality and shall not be bound by
the strict rules of procedure and evidence. Arbitration shall take place in
Chicago, Illinois. Insofar as the arbitration panel looks to substantive law, it
shall consider the law of the State of Illinois. The decision of any two
arbitrators when rendered in writing shall be final and binding. The panel is
empowered to grant interim relief as it may deem appropriate.
The panel shall make its decision considering the custom and practice of the
applicable insurance and reinsurance business as promptly as possible following
the termination of the hearings. Judgment upon the award may be entered in any
court having jurisdiction thereof.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs
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<PAGE>
and expenses as it considers appropriate, including but not limited to attorneys
fees, to the extent permitted by law. The panel is prohibited from awarding
punitive, exemplary or treble damages, of whatever nature, in connection with
any arbitration proceeding concerning this Contract.
ARTICLE 20 - CHOICE OF LAW
This Contract, including all matters relating to formation, validity and
performance thereof, shall be interpreted in accordance with the law of the
State of Illinois.
ARTICLE 21 - INTER-COMPANY POOLING
It is understood and agreed that the Company has entered into the CNA
Reinsurance Pooling Agreement whereby it assumes 100% (one hundred percent) of
the liability of the other participants in the CNA Reinsurance Pooling
Agreement. This present Contract protects such assumed liability and attaches
prior to redistribution, if any, within the participating companies. Such
redistribution shall be disregarded for all purposes of this present Contract.
For all purposes of this present Contract, other member companies of the CNA
Reinsurance Pooling Agreement are: National Fire Insurance Company of Hartford,
American Casualty Company of Reading Pennsylvania, Transportation Insurance
Company, Transcontinental Insurance Company, Valley Forge Insurance Company, CNA
Casualty of California, CNA Lloyd's of Texas and Columbia Casualty Company.
It is also understood and agreed that the Company shall include the insurance
companies of the Continental Corporation which are affiliated with, controlled
by or under common management of CNA.
ARTICLE 22- ENTIRE CONTRACT
This Contract and that certain Strategic Alliance Agreement, the Ancillary
Agreements, Crop Hail Insurance Services and Indemnity Agreement, MPCI Insurance
Services and Indemnity Agreement, Multiple Peril Crop Insurance Quota Share
Agreement - effective July 1, 1997, Crop Hail Quota Share Reinsurance Contract -
effective January 1, 1998, and the Crop Hail Quota Share Agreement - effective
January 1, 1998, between the parties, represent the entire agreement and
understanding among the parties. No other oral or written agreements or
contracts relating to the risks reinsured hereunder currently exist and/or are
contemplated between the parties.
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<PAGE>
ARTICLE 23 - SEVERABILITY
If any law or regulation of any Federal, State, or Local Government of the
United States of America or the provinces of Canada or the ruling officials of
any supervision over insurance companies, should render illegal this Contract,
or any portion thereof, as to risks or properties located in the jurisdiction of
such authority, either the Company or the Reinsurer may upon written notice to
the other suspend, abrogate, or amend this Contract insofar as it relates to
risks or properties located within such jurisdiction to such extent as may be
necessary to comply with such law, regulations or ruling.
Such illegality, suspension, abrogation, or amendment of a portion of this
Contract shall in no way affect any other portion thereof.
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<PAGE>
IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Contract:
on this day of 1998
CONTINENTAL CASUALTY COMPANY
By: ________________________________________________
Attested by: _________________________________________
and on this day of 1998
IGF INSURANCE COMPANY
and its AFFILIATED COMPANIES
By: ________________________________________________
Attested by:__________________________________________
MULTIPLE PERIL CROP INSURANCE (MPCI)
QUOTA SHARE CONTRACT
(referred to as the "Contract")
Effective: July 1, 1997
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<PAGE>
issued to
Continental Casualty Company
(referred to as the "Company")
by
IGF Insurance Company
and its Affiliated Companies
(referred to as the "Reinsurer")
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CCC / IGF
Exhibit 2.3
MULTIPLE PERIL CROP INSURANCE (MPCI)
QUOTA SHARE AGREEMENT
(hereinafter referred to as "Agreement")
Effective: July 1, 1997
issued to
IGF Insurance Company
and its Affiliated Companies
(hereinafter referred to as "IGF")
by
Continental Casualty Company
Chicago, Illinois
(hereinafter referred to as "CNA")
ARTICLE 1 - TERM
This Agreement shall cover losses occurring on crops insured during the MPCI
crop year commencing at 12:01 a.m., Central Standard Time, July 1, 1997,
including such policies written or renewed for the 1998 crop year as defined in
the Standard Reinsurance Agreement (SRA) of the Federal Crop Insurance
Corporation (FCIC) and each succeeding crop year beginning at July 1, until
terminated as provided below.
Termination shall take place immediately and automatically upon the exercise of
a Put Right or Call Right as defined under the Strategic Alliance Agreement
(hereinafter "SAA") between Continental Casualty Company and IGF Holdings, Inc.
and its Affiliated Companies, to which this Agreement is attached and made a
part of. Upon termination, a full commutation and release of all CNA liability
shall be provided to CNA for the then current Crop Year with no amounts due or
owing for such year. IGF shall have the right to 100% of the premiums associated
with the liability so released. If any payments have been made by CNA to IGF for
its share of loss payments required by FCIC prior to the date of exercise, such
payments shall be reimbursed to CNA. As an example, if a Call Right is exercised
on March 2, 2002, said termination shall cause no balance to be due hereunder
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<PAGE>
for the 2002 Crop Year (July 1, 2001 - June 30, 2002) and any share of losses
paid to FCIC on 2002 Crop Year Policies by CNA shall be reimbursed to CNA; all
balances and adjustments under the 2001 Crop Year shall be due and payable and
settled in due course. If a Put Right or Call Right is exercised the result
shall be the same.
ARTICLE 2 - BUSINESS COVERED
The IGF agrees to cede and the CNA agrees to accept by way of reinsurance, for
each Agreement Year covered hereunder, as follows:
All of CNA's and IGF's MPCI business shall be pooled for 1998 and thereafter,
whether written under the CNA's SRA, the IGF's SRA, or Producers Lloyds
Insurance Company's ( hereinafter Producers Lloyds) SRA. CNA will then receive
as its share (as defined in items 4 through 7 [inclusive]), an annual
reinsurance cession equal to 70% of the MPCI Underwriting Gain (Loss) (as
defined). The annual reinsurance cession will be payable in perpetuity, unless
the Put Right or Call Right is triggered.
If Producers Lloyds elects to terminate its relationship with CNA or not to
enter into a relationship with IGF or to terminate such relationship after the
closing date of the transaction between IGF and CNA, then if such relationship
terminates prior to July 1, 2000, all of the Producers Lloyds' business will be
removed from reimbursement and profit-sharing formulas in calculating any
payments to be made under this Agreement after such termination. If Producers
Lloyds elects to terminate its relationship with CNA or IGF, as the case may be,
on or after July 1, 2000, then the dollar amount of CNA's line for Producers
Lloyds shall be the same in the crop year in which Producers Lloyds terminates
its relationship as it was in the immediate crop year prior to the termination
and there shall be no adjustment to reimbursement and profit-sharing formulas
under this Agreement with respect to any crop years prior to such termination.
MPCI Underwriting Gain (Loss) shall be defined as (i) the CNA MPCI Proportion
(as defined) multiplied by (ii) the combined net underwriting gain (loss) on the
MPCI business of CNA and IGF plus the net gain (loss) from assumed Producers
Lloyd MPCI business. This combined net underwriting gain (loss) shall be reduced
(increased) by any gain (loss) shared under any third party profit sharing
agreements such as with NACU and other producers but excluding third party
reinsurance agreements.
For 1998, the CNA MPCI Proportion shall be equal to (i) the amount of
business written by the CNA SRA and Producers Lloyds' SRA for 1998, divided by
(ii) the combined amount of business written by the CNA's, IGF's and Producers
Lloyds' SRA for 1998.
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<PAGE>
For 1999, the CNA MPCI Proportion shall be equal to (i) the amount of
business written by the CNA SRA for 1998 multiplied by one plus the percentage
growth or reduction in industry MPCI gross premiums from 1998 to 1999 as
acknowledged by the FCIC plus (ii) the amount of business assumed under the
Producers Lloyds reinsurance agreement for 1999, subject to item 2 above, with
the resulting product of (i) and (ii) then divided by (iii) the combined amount
of business written by the CNA, assumed from Producer Lloyds and IGF SRA for
1999.
For 2000, the CNA MPCI Proportion shall be equal to (i) the amount of
business written by the CNA SRA for 1998 multiplied by one plus the percentage
growth or reduction in industry MPCI gross premiums from 1998 to 2000 as
acknowledged by the FCIC plus (ii) the amount of business assumed under the
Producers Lloyds reinsurance agreement for 2000, subject to item 2 above, with
the resulting product of(i) and (ii) then divided by (iii) the combined amount
of business written by CNA, assumed from Producers Lloyds and IGF SRA for 2000.
The CNA MPCI Proportion shall continue to adjust for years 2001 and beyond in
a manner consistent with the formula for 1999 and 2000.
Any and all funds held and/or carried forward by FCIC/RMA for the 1997 Crop
Year and all previous crop years shall be the exclusive property of CNA and will
not be considered part of the underwriting gain for purposes of this Agreement.
Beginning with the 1998 Crop Year, any payout offset against losses by the
FCIC/RMA of previously retained CNA funds shall be wired to CNA within five days
of receipt based on its proportional share under this Agreement.
MPCI premiums will include premiums from all products falling within the
Standard Reinsurance Agreement.
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<PAGE>
ARTICLE 3 - TERRITORY
This Agreement applies to the territory of the business covered hereunder.
ARTICLE 4- ORIGINAL CONDITIONS
All amounts ceded hereunder shall be subject to the same gross rating and to the
same clauses, conditions, exclusions and modifications of the policies reinsured
hereunder, subject to the limits, terms and conditions of this Agreement.
Except as specifically and expressly provided for in the Insolvency Article, the
provisions of this Agreement are intended solely for the benefit of the parties
to and executing this Agreement, and nothing in this Agreement shall in any
manner create, or be construed to create, any obligations to or establish any
rights against any party to this Agreement in favor of any third parties or
other persons not parties to and executing this Agreement.
ARTICLE 5 - LOSSES
The IGF alone and at its full discretion shall adjust, settle or compromise all
claims and losses. All such adjustments, settlements and compromises, including
ex-gratia payments, shall be binding on the CNA in proportion to its
participation. The IGF shall likewise at its sole discretion commence, continue,
defend, compromise, settle or withdraw from actions, suits or proceedings and
generally do all such matters and things relating to any claim or loss as in its
judgment may be beneficial or expedient; and all loss payments made shall be
shared by the CNA proportionately. CNA shall, on the other hand, benefit
proportionately from all reductions of losses by salvage, compromise or
otherwise.
ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS
This Agreement shall protect the IGF as provided in Article 2 - Business Covered
in connection with loss in excess of the limit of the original policy.
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<PAGE>
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the IGF
acting individually or collectively or in collusion with any individual or
corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the IGF would have been contractually liable to pay had it not been for
the limit of the original policy.
ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the IGF as provided in Article 2 - Business Covered
where the loss includes any extra contractual obligations.
The term "Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of this Agreement and which arise from the
handling of any claim on business covered hereunder, such liabilities arising
because of, but not limited to, the following: failure by the IGF to settle
within the policy limit, or by reason of alleged or actual negligence, fraud or
bad faith in rejecting an offer of settlement or in preparation of the defense
or in trial of any action against its insured or reinsured or in the preparation
or prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation loss is incurred by the IGF
shall be deemed, in all circumstances, to be the date of the original
occurrence, or the date the original claim is first made, whichever is
applicable.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the IGF
acting individually or collectively or in collusion with any individual or
corporation or any other organization or party involved in the presentation,
defense or settlement of any loss covered hereunder.
ARTICLE 8 - CURRENCY
Where the word "dollars" and/or the sign "$" appear in this Agreement, they
shall mean United States dollars.
For purposes of this Agreement, where the IGF receives premiums or pays losses
in currencies other than United States currency, such premiums or losses shall
be converted
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<PAGE>
in to United States dollars at the actual rates of exchange at which these
premiums or losses are entered in the IGF's books.
ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS
As soon as practicable after the end of each month, for each Agreement Year for
which coverage applies under this Agreement, the IGF shall furnish to the CNA
the FCIC reinsurance accounting report (RoRecap) which shall include but not be
limited to the following:
Gross liability, premiums and losses paid, by state, before deducting the
amount of reinsurance ceded to the FCIC SRA.
Net premiums and losses paid, after recoveries from the FCIC SRA.
Calculation of gain or loss between the IGF and the FCIC as set out by the FCIC
and after recoveries from the SRA
As soon as practicable after the first February following each Agreement Year,
the IGF shall furnish to the CNA the FCIC reinsurance accounting report
(RoRecap) which shall include but not be limited to the following:
Gross liability, premiums and losses paid, by state, before deducting the
amount of reinsurance ceded to the FCIC SRA.
Net premiums and losses paid, after recoveries from the FCIC SRA.
Calculation of underwriting gain or loss between the IGF and the FCIC after
recoveries from the SRA underwriting gain as stated by the FCIC each year for
final accounting of the crop year.
Any balance due one party from the other shall be payable upon receipt of the
above report. However, if at any time during the term of this Agreement the IGF
is required to reimburse the FCIC for a net underwriting loss after recoveries
from the SRA for the Agreement Year under consideration, the CNA shall pay its
proportional share of the net underwriting loss amount to the IGF by the date
due to the FCIC. Adjustments shall continue until final settlement is reached
with the FCIC on all policies reinsured for each Agreement Year unless such
earlier definitive date is agreed to be the parties to this Agreement.
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<PAGE>
As soon as possible after the conclusion of each calendar quarter and Agreement
Year the IGF will provide any other information the CNA may require for its
Convention Statement which may be reasonably available to the IGF.
ARTICLE 10 - DEFINITIONS
The term "Standard Reinsurance Agreement (SRA) of the FCIC" as used herein shall
mean the Reinsurance Agreement between the Federal Crop Insurance Corporation
and the entity so named including all amendments applicable to the agreement
during the term of this Agreement.
ARTICLE 11 - OFFSET
The IGF or the CNA shall have the right to offset any balance or amounts due
from one party to the other under the terms of this Agreement. The party
asserting the right of offset may exercise such right at any time whether the
balances due are on account of premiums or losses.
ARTICLE 12 - WARRANTY
For business covered hereunder it is agreed that all terms and agreements of the
FCIC are applied.
ARTICLE 13 - ACCESS TO RECORDS
Upon reasonable notice, the CNA, or its designated representative, shall have
access at any reasonable time to inspect and audit the books and records of the
IGF which pertain in any way to this reinsurance and it may make copies of any
records pertaining thereto.
This right of inspection, audit and information shall survive termination of
this Agreement and shall run to the natural expiry of all liabilities under the
policies reinsured.
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<PAGE>
ARTICLE 14 - TAXES
In consideration of the terms under which this Agreement is issued, IGF
undertakes not to claim any deduction of the premium hereon when making tax
returns, other than Income or Profits Tax returns, to any state or territory of
the United States of America or to the District of Columbia.
ARTICLE 15 - ERRORS AND OMISSIONS
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Agreement shall not be held to relieve either party hereto
from any liability which would attach to it hereunder if such error, omission or
delay had not been made, provided such error, omission or delay is rectified
immediately upon discovery.
ARTICLE 16 - AMENDMENTS
This Agreement may be altered or amended in any of its terms and conditions by
mutual consent of the IGF and the CNA by an Endorsement hereto. Such Endorsement
will then constitute a part of this Agreement.
ARTICLE 17 - LOSS FUNDING
This Article is only applicable to CNA if it cannot qualify for credit by the
State, meaning the state, province or Federal authority having jurisdiction over
IGF's loss reserves.
As regards policies issued by the IGF coming within the scope of this Agreement,
the IGF agrees that when it shall file with the insurance department or set up
on its books reserves for losses covered hereunder which it shall be required to
set up by law it will forward to the CNA a statement showing the proportion of
such loss reserves which is applicable to them.
The CNA hereby agrees that it will apply for and secure delivery to the IGF a
clean irrevocable and unconditional Letter of Credit issued by a bank chosen by
the CNA and acceptable to the appropriate insurance authorities, in an amount
equal to the CNA's proportion of the loss reserves in respect of known
outstanding losses that have been reported to the CNA and allocated loss
expenses relating thereto as shown in the statement prepared by the IGF. Under
no circumstances shall any amount relating to reserves in
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<PAGE>
respect of losses or loss expenses Incurred But Not Reported be included in the
amount of the Letter of Credit.
The Letter of Credit shall be "Evergreen" and shall be issued for a period of
not less than one year, and shall be automatically extended for one year from
its date of expiration or any future expiration date unless thirty (30) days
prior to any expiration date, the bank shall notify the IGF by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
The IGF, or its successors in interest, undertakes to use and apply any amounts
which it may draw upon such Credit pursuant to the terms of the Agreement under
which the Letter of Credit is held, and for the following purposes only:
To pay CNA's share or to reimburse IGF for CNA's share of any liability for
loss reinsured by this Agreement, the payment of which has been agreed by CNA
and which has not otherwise been paid.
To make refund of any sum which is in excess of the actual amount required
to pay CNA's share of any liability reinsured by this Agreement.
In the event of expiration of the Letter of Credit as provided for above,
to establish deposit of CNA's share of known and reported outstanding losses and
allocated loss expenses relating thereto under this Agreement. Such cash deposit
shall be held in an interest bearing account separate from IGF's other assets,
and interest thereon shall accrue to the benefit of CNA. It is understood and
agreed that this procedure will be implemented only in exceptional circumstances
and that, if it is implemented, IGF will ensure that a rate of interest is
obtained for CNA on such a deposit account that is at least equal to the rate
which would have been paid by Citibank N.A. in New York, and further that IGF
will account to CNA on an annual basis for all interest accruing on the cash
deposit account for the benefit of CNA.
The bank chosen for the issuance of the Letter of Credit shall have no
responsibility whatsoever in connection with the propriety of withdrawals made
by IGF or the disposition of funds withdrawn, except to ensure that withdrawals
are made only upon the order of properly authorized representatives of IGF.
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, IGF shall prepare a specific statement, for the sole purpose of
amending the Letter of Credit, of CNA's share of known and reported outstanding
losses and allocated loss expenses relating thereto. If the statement shows that
CNA's share of such losses and allocated loss expenses exceeds the balance of
credit as of the statement date, CNA shall,
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<PAGE>
within thirty (30) days after receipt of notice of such excess, secure delivery
to IGF of an amendment of the Letter of Credit increasing the amount of credit
by the amount of such difference. If, however, the statement shows that CNA's
share of known and reported outstanding losses plus allocated loss expenses
relating thereto is less than the balance of credit as of the statement date,
IGF shall, within thirty (30) days after receipt of written request from CNA,
release such excess credit by agreeing to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount of such excess
credit.
ARTICLE 18 - INSOLVENCY
This reinsurance shall be payable by CNA on the basis of the liability of IGF
under Policy or Policies reinsured without diminution, because of the insolvency
of IGF, to IGF or its liquidator, receiver, or statutory successor.
In the event of insolvency of IGF, the liquidator or receiver or statutory
successor of the IGF shall give written notice to CNA of the pendency of a claim
filed against IGF on the Policy or Policies reinsured within a reasonable time
after such claim is filed in the insolvency proceeding. During the pendency of
such claim CNA may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or defenses
which it may deem available to IGF or its liquidator or receiver or statutory
successor. The expenses thus incurred by CNA shall be chargeable, subject to
court approval, against IGF as part of the expense of liquidation to the extent
of a proportionate share of the benefits which may accrue to IGF solely as a
result of the defense so undertaken by CNA.
Should IGF go into liquidation or should a receiver be appointed, CNA shall be
entitled to deduct from any sums which may be or may become due to IGF under
this reinsurance Agreement, any sums which are due to CNA by IGF under this
Agreement and which are payable at a fixed or stated date, as well as any other
sums due to CNA which are permitted to be offset under applicable law.
It is further understood and agreed that, in the event of the insolvency of IGF,
the reinsurance under this Agreement shall be payable directly by CNA to IGF or
to its liquidator, receiver or statutory successor, except a) where this
Agreement specifically provides another payee of such reinsurance in the event
of the insolvency of IGF and b) where CNA with the consent of the direct insured
or insureds has assumed such policy obligations of IGF as direct obligations of
CNA to the payees under such policies and in substitution for the obligations of
IGF to such payees.
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<PAGE>
In no event shall anyone other than the parties to this Agreement or, in the
event of IGF's insolvency, its liquidator, receiver, or statutory successor,
have any rights under this Agreement.
ARTICLE 19 - ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of the interpretation, performance or breach of this Agreement, including
the formation or validity thereof, shall be submitted for decision to a panel of
three arbitrators. Notice requesting arbitration will be in writing and sent
certified mail, return receipt requested.
One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified mail of its intention to do so, may
appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, each of them shall name two, of whom the
other shall decline one and the decision shall be made by drawing lots. All
arbitrators shall be disinterested active or retired executive officers of
insurance or reinsurance companies s, Underwriters at Lloyd's London not under
the control of either party to this Contract, or a qualified arbitrator supplied
by the AAA..
Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
The panel shall be relieved of all judicial formality and shall not be bound by
the strict rules of procedure and evidence. Arbitration shall take place in Des
Moines, Iowa. Insofar as the arbitration panel looks to substantive law, it
shall consider the law of the State of Illinois. The decision of any two
arbitrators when rendered in writing shall be final and binding. The panel is
empowered to grant interim relief as it may deem appropriate.
The panel shall make its decision considering the custom and practice of the
applicable insurance and reinsurance business as promptly as possible following
the termination of the hearings. Judgment upon the award may be entered in any
court having jurisdiction thereof.
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<PAGE>
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law. The panel is prohibited from awarding punitive, exemplary or
treble damages, of whatever nature, in connection with any arbitration
proceeding concerning this Agreement.
ARTICLE 20 - CHOICE OF LAW
This Agreement, including all matters relating to formation, validity and
performance thereof, shall be interpreted in accordance with the law of the
State of Illinois.
ARTICLE 21 - ENTIRE CONTRACT
This Agreement and that certain Strategic Alliance Agreement, the Ancillary
Agreements, Crop Hail Insurance Services and Indemnity Agreement, MPCI Insurance
Services and Indemnity Agreement, Multiple Peril Crop Insurance Quota Share
Contract - effective July 1, 1997, Crop Hail Quota Share Reinsurance Contract -
effective January 1, 1998, and the Crop Hail Quota Share Agreement - effective
January 1, 1998, between the parties, represent the entire agreement and
understanding among the parties. No other oral or written agreements or
contracts relating to the risks reinsured hereunder currently exist and/or are
contemplated between the parties.
ARTICLE 22 - SEVERABILITY
If any law or regulation of any Federal, State, or Local Government of the
United States of America or the provinces of Canada or the ruling officials of
any supervision over insurance companies, should render illegal this Agreement,
or any portion thereof, as to risks or properties located in the jurisdiction of
such authority, either the IGF or the CNA may upon written notice to the other
suspend, abrogate, or amend this Agreement insofar as it relates to risks or
properties located within such jurisdiction to such extent as may be necessary
to comply with such law, regulations or ruling.
Such illegality, suspension, abrogation, or amendment of a portion of this
Agreement shall in no way affect any other portion thereof.
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IGF / CCC
<PAGE>
ARTICLE 22 - ILLUSTRATION
IGF and CNA have agreed to append Schedule 1 as an attachment hereto to
illustrate their understanding of the operation of this Agreement.
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IGF / CCC
<PAGE>
IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Agreement:
on this day of 1998
IGF INSURANCE COMPANY
and its AFFILIATED COMPANIES
By: ________________________________________________
Attested by: _________________________________________
and on this day of 1998
CONTINENTAL CASUALTY COMPANY
By: ________________________________________________
Attested by:__________________________________________
MULTIPLE PERIL CROP INSURANCE (MPCI)
QUOTA SHARE AGREEMENT
(referred to as the "Agreement")
Effective: July 1, 1997
issued to
IGF Insurance Company
and its Affiliated Companies
(referred to as "IGF")
by
Continental Casualty Company
(referred to as "CNA")
Page 14 of 11
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IGF / CCC
Exhibit 2.4
CROP HAIL INSURANCE
QUOTA SHARE CONTRACT
(hereinafter referred to as "Contract")
Effective: January 1, 1998
issued to
Continental Casualty Company
(hereinafter referred to as the "Company")
by
IGF Insurance Company
and its Affiliated Companies
(hereinafter collectively referred to as "Reinsurer")
ARTICLE 1 - TERM
This Contract shall apply to losses occurring on and after 12:01 a.m. Central
Standard Time, January 1, 1998 as respects new and renewal policies on business
covered by this Contract, becoming effective on and after said date and shall
continue in full force and effect until terminated as provided below.
This Contract shall terminate automatically upon the exercise of a Put Right or
Call Right as defined under the Strategic Alliance Agreement (hereinafter "SAA")
between Continental Casualty Company and IGF Holdings, Inc. and its Affiliated
Companies, to which this Contract is attached, with termination becoming
effective at the end of the Crop Year in which such Put Right or Call Right is
exercised, and no policies written after the effective time of termination shall
be covered hereunder.
ARTICLE 2 - BUSINESS COVERED
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<PAGE>
The Company agrees to cede and the Reinsurer agrees to accept a 100% quota share
of the liabilities of the Company under all policies of Crop Hail insurance,
meaning all policies, binders, certificates, endorsements, contracts, coverage
written by Producers Lloyds Insurance Company and Pallisers Insurance Company
and reinsured by the Company, or other evidences of liability, written or
renewed by or on behalf of the Company during the term of this Contract and
classified by the Company as crop hail, including allied coverages as described
under the Company's policies (hereinafter "policies" as used in this Contract).
ARTICLE 3 - TERRITORY
This Contract applies to the territory of the Company's business covered
hereunder.
ARTICLE 4- ORIGINAL CONDITIONS
All amounts ceded hereunder shall be subject to the same gross rating and to the
same clauses, conditions, exclusions and modifications of the policies reinsured
hereunder, subject to the limits, terms and conditions of this Contract.
Except as specifically and expressly provided for in the Insolvency Article, the
provisions of this Contract are intended solely for the benefit of the parties
to and executing this Contract, and nothing in this Contract shall in any manner
create, or be construed to create, any obligations to or establish any rights
against any party to this Contract in favor of any third parties or other
persons not parties to and executing this Contract.
ARTICLE 5 - LOSSES
The Company alone and at its full discretion shall adjust, settle or compromise
all claims and losses. All such adjustments, settlements and compromises,
including ex-gratia payments, and loss expenses shall be binding on the
Reinsurer in proportion to its' participation. The Company shall likewise at its
sole discretion commence, continue, defend, compromise, settle or withdraw from
actions, suits or proceedings and generally do all such matters and things
relating to any claim or loss as in its judgment may be beneficial or expedient;
and all loss payments made shall be shared by the Reinsurer proportionately. The
Reinsurer shall, on the other hand, benefit proportionately from all reductions
of losses by salvage, compromise or otherwise.
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<PAGE>
In the event the Company's paid losses and loss expenses exceed the Net Earned
Premium Income less ceding commission, the Reinsurer agrees to advance the
amount by which the losses exceed the Net Earned Premium Income less ceding
commission within 30 days of receipt of a written report substantiating such a
request.
ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS
This Contract shall protect the Company as provided in Article 2 - Business
Covered in connection with loss in excess of the limit of the original policy.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original policy.
ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS
This Contract shall protect the Company as provided in Article 2 - Business
Covered where the loss includes any extra contractual obligations.
The term "Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of this Contract and which arise from the
handling of any claim on business covered hereunder, such liabilities arising
because of, but not limited to, the following: failure by the Company to settle
within the policy limit, or by reason of alleged or actual negligence, fraud or
bad faith in rejecting an offer of settlement or in preparation of the defense
or in trial of any action against its insured, or reinsured as provided for in
Article 2, or in the preparation or prosecution of an appeal consequent upon
such action.
The date on which any Extra Contractual Obligation loss is incurred by the
Company shall be deemed, in all circumstances, to be the date of the original
occurrence, or the date the original claim is first made, whichever is
applicable.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually
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<PAGE>
or collectively or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or settlement of any
loss covered hereunder.
ARTICLE 8 - CURRENCY
Where the word "dollars" and/or the sign "$" appear in this Contract, they shall
mean United States dollars.
For purposes of this Contract, where the Company receives premiums or pays
losses in currencies other than United States currency, such premiums or losses
shall be converted in to United States dollars at the actual rates of exchange
at which these premiums or losses are entered in the Company's books.
ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS
As soon as possible after the end of the season, but no later than December 15th
of each Agreement Year, with Agreement Year meaning any January 1st through
December 31st for which coverage applies under this Contract, the Company shall
provide the Reinsurer with a complete account, to include but not be limited to
the following:
Net Earned Premium income accounted for during the Agreement Year, meaning
gross earned premium income on business accounted for during that Agreement Year
less any returned premium and earned income paid for reinsurances, recoveries
under which inure to the benefit of this Contract; less
The ceding commission as provided for in this Contract: less;
Losses and loss adjustment expense paid during the Agreement Year, with loss
adjustment expense for external adjusters including part time loss adjusters
capped at 4%, except for the reinsurance agreement with Producers Lloyds
Insurance Company wherein the loss adjustment expense shall be capped at 4.5%
and as incurred under the reinsurance agreement with Pallisers Insurance
Company, of gross written premium accounted for during the Agreement Year; plus
Subrogation, salvage, or other recoveries on losses occurring during the term
of the Agreement Year being accounted for.
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<PAGE>
Within 15 days of receipt of the Company's report, the Reinsurer shall remit any
balance due to the Company as respects such report.
As soon as possible after the conclusion of each calendar quarter and Agreement
Year the Company will provide any other information the Reinsurer may require
for its Convention Statement which may be reasonably available to the Company.
ARTICLE 10 - CEDING COMMISSION
The Reinsurer will allow the Company a ceding commission under the reinsurance
agreement with Producers Lloyds Insurance Company of 27.5% provisional and
increasing to 31.5% at a loss ratio of 48%, plus intermediary fees and under the
reinsurance agreement with Palliser Insurance Company (of 26% provisional and
increasing to 29% at 54% loss ratio, plus intermediary fees.
Return commission shall be allowed on return premiums at the same rate.
ARTICLE 11 - OFFSET
The Company or the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right at any time whether
the balances due are on account of premiums or losses.
ARTICLE 12 - ACCESS TO RECORDS
Upon reasonable notice, the Reinsurer, or its designated representative, shall
have access at any reasonable time to inspect and audit the books and records of
the Company which pertain in any way to this reinsurance and it may make copies
of any records pertaining thereto. This right of inspection, audit and
information shall survive termination of this Contract and shall run to the
natural expiry of all liabilities under the policies reinsured.
ARTICLE 13 - TAXES
In consideration of the terms under which this Contract is issued, the Company
undertakes not to claim any deduction of the premium hereon when making tax
returns, other than
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<PAGE>
Income or Profits Tax returns, to any state or territory of the United States of
America or to the District of Columbia.
ARTICLE 14 - ERRORS AND OMISSIONS
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Contract shall not be held to relieve either party hereto
from any liability which would attach to it hereunder if such error, omission or
delay had not been made, provided such error, omission or delay is rectified
immediately upon discovery.
ARTICLE 15 - AMENDMENTS
This Contract may be altered or amended in any of its terms and conditions by
mutual consent of the Company and the Reinsurer by an Endorsement hereto. Such
Endorsement will then constitute a part of this Contract.
ARTICLE 16 - LOSS FUNDING
This Article is only applicable to those Reinsurers who cannot qualify for
credit by the State, meaning the state, province or Federal authority having
jurisdiction over the Company's loss reserves.
As regards policies issue by the Company coming within the scope of this
Contract, the Company agrees that when it shall file with the insurance
department or set up on its books reserves for losses covered hereunder which it
shall be required to set up by law it will forward to the Reinsurer a statement
showing the proportion of such loss reserves which is applicable to them.
The Reinsurer hereby agrees that it will apply for and secure delivery to the
Company a clean irrevocable and unconditional Letter of Credit issued by a bank
chosen by the Reinsurer and acceptable to the appropriate insurance authorities,
in an amount equal to the Reinsurer's proportion of the loss reserves in respect
of known outstanding losses that have been reported to the Reinsurer and
allocated loss expenses relating thereto as shown in the statement prepared by
the Company. Under no circumstances shall any amount relating to reserves in
respect of losses or loss expenses Incurred But Not Reported be included in the
amount of the Letter of Credit.
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<PAGE>
The Letter of Credit shall be "Evergreen" and shall be issued for a period of
not less than one year, and shall be automatically extended for one year from
its date of expiration or any future expiration date unless thirty (30) days
prior to any expiration date, the bank shall notify the Company by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
The Company, or its successors in interest, undertakes to use and apply any
amounts which it may draw upon such Credit pursuant to the terms of the Contract
under which the Letter of Credit is held, and for the following purposes only:
To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any liability for loss reinsured by this Contract, the
payment of which has been agreed by the Reinsurer and which has not otherwise
been paid.
To make refund of any sum which is in excess of the actual amount required
to pay the Reinsurer's share of any liability reinsured by this Contract.
In the event of expiration of the Letter of Credit as provided for above,
to establish deposit of the Reinsurer's share of known and reported outstanding
losses and allocated loss expenses relating thereto under this Contract. Such
cash deposit shall be held in an interest bearing account separate from the
Company's other assets, and interest thereon shall accrue to the benefit of the
Reinsurer. It is understood and agreed that this procedure will be implemented
only in exceptional circumstances and that, if it is implemented, the Company
will ensure that a rate of interest is obtained for the Reinsurer on such a
deposit account that is at least equal to the rate which would have been paid by
Citibank N.A. in New York, and further that the Company will account to the
Reinsurer on an annual basis for all interest accruing on the cash deposit
account for the benefit of the Reinsurer.
The bank chosen for the issuance of the Letter of Credit shall have no
responsibility whatsoever in connection with the propriety of withdrawals made
by the Company or the disposition of funds withdrawn, except to ensure that
withdrawals are made only upon the order of properly authorized representatives
of the Company.
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, the Company shall prepare a specific statement, for the sole
purpose of amending the Letter of Credit, of the Reinsurer's share of known and
reported outstanding losses and allocated loss expenses relating thereto. If the
statement shows that the Reinsurer's share of such losses and allocated loss
expenses exceeds the balance of credit as of the statement date, the Reinsurer
shall, within thirty (30) days after receipt of notice
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<PAGE>
of such excess, secure delivery to the Company of an amendment of the Letter of
Credit increasing the amount of credit by the amount of such difference. If,
however, the statement shows that the Reinsurer's share of known and reported
outstanding losses plus allocated loss expenses relating thereto is less than
the balance of credit as of the statement date, the Company shall, within thirty
(30) days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess credit.
ARTICLE 17 - INSOLVENCY
This reinsurance shall be payable by the Reinsurer on the basis of the liability
of the Company under Policy or Policies reinsured without diminution, because of
the insolvency of the Company, to the Company or its liquidator, receiver, or
statutory successor.
In the event of insolvency of the Company, the liquidator or receiver or
statutory successor of the Company shall give written notice to the Reinsurer of
the pendency of a claim filed against the Company on the Policy or Policies
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of such claim the Reinsurer may investigate such
claim and interpose, at its own expense, in the proceeding where such claim is
to be adjudicated, any defense or defenses which it may deem available to the
Company or its liquidator or receiver or statutory successor. The expenses thus
incurred by the Reinsurer shall be chargeable, subject to court approval,
against the Company as part of the expense of liquidation to the extent of a
proportionate share of the benefits which may accrue to the Company solely as a
result of the defense so undertaken by the Reinsurer.
Should the Company go into liquidation or should a receiver be appointed, the
Reinsurer shall be entitled to deduct from any sums which may be or may become
due to the Company under this reinsurance Contract, any sums which are due to
the Reinsurer by the Company under this Contract and which are payable at a
fixed or stated date, as well as any other sums due to the Reinsurer which are
permitted to be offset under applicable law.
It is further understood and agreed that, in the event of the insolvency of the
Company, the reinsurance under this Contract shall be payable directly by the
Reinsurer to the Company or to its liquidator, receiver or statutory successor,
except a) where this Contract specifically provides another payee of such
reinsurance in the event of the insolvency of the Company and b) where the
Reinsurer with the consent of the direct insured or insureds has assumed
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<PAGE>
such policy obligations of the Company as direct obligations of the Reinsurer to
the payees under such policies and in substitution for the obligations of the
Company to such payees.
In no event shall anyone other than the parties to this Contract or, in the
event of the Company's insolvency, its liquidator, receiver, or statutory
successor, have any rights under this Contract.
ARTICLE 18 - ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of the interpretation, performance or breach of this Contract, including the
formation or validity thereof, shall be submitted for decision to a panel of
three arbitrators. Notice requesting arbitration will be in writing and sent
certified mail, return receipt requested.
One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified mail of its intention to do so, may
appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, each of them shall name two, of whom the
other shall decline one and the decision shall be made by drawing lots. All
arbitrators shall be disinterested active or retired executive officers of
insurance or reinsurance companies, Underwriters at Lloyd's London not under the
control of either party to this Contract, or a qualified arbitrator supplied by
the AAA.
Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
The panel shall be relieved of all judicial formality and shall not be bound by
the strict rules of procedure and evidence. Arbitration shall take place in
Chicago, Illinois. Insofar as the arbitration panel looks to substantive law, it
shall consider the law of the State of Illinois. The decision of any two
arbitrators when rendered in writing shall be final and binding. The panel is
empowered to grant interim relief as it may deem appropriate.
The panel shall make its decision considering the custom and practice of the
applicable insurance and reinsurance business as promptly as possible following
the termination of the hearings. Judgment upon the award may be entered in any
court having jurisdiction thereof.
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<PAGE>
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law. The panel is prohibited from awarding punitive, exemplary or
treble damages, of whatever nature, in connection with any arbitration
proceeding concerning this Contract.
ARTICLE 19 - CHOICE OF LAW
This Contract, including all matters relating to formation, validity and
performance thereof, shall be interpreted in accordance with the law of the
State of Illinois.
ARTICLE 20 - INTER-COMPANY POOLING
It is understood and agreed that the Company has entered into the CNA
Reinsurance Pooling Agreement whereby it assumes 100% (one hundred percent) of
the liability of the other participants in the CNA Reinsurance Pooling
Agreement. This present Contract protects such assumed liability and attaches
prior to redistribution, if any, within the participating companies. Such
redistribution shall be disregarded for all purposes of this present Contract.
For all purposes of this present Contract, other member companies of the CNA
Reinsurance Pooling Agreement are: National Fire Insurance Company of Hartford,
American Casualty Company of Reading Pennsylvania, Transportation Insurance
Company, Transcontinental Insurance Company, Valley Forge Insurance Company, CNA
Casualty of California, CNA Lloyd's of Texas and Columbia Casualty Company.
It is also understood and agreed that the Company shall include the insurance
companies of the Continental Corporation which are affiliated with, controlled
by or under common management of CNA.
ARTICLE 21 - ENTIRE CONTRACT
This Contract and that certain Strategic Alliance Agreement, the Ancillary
Agreements, Crop Hail Insurance Services and Indemnity Agreement, MPCI Insurance
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<PAGE>
Services and Indemnity, Multiple Peril Crop Insurance Quota Share Agreement
effective July 1, 1997, Multiple Peril Crop Insurance Quota Share Reinsurance
Contract effective July 1, 1997, and the Crop Hail Quota Share Agreement -
effective January 1, 1998, between the parties, represent the entire agreement
and understanding among the parties. No other oral or written agreements or
contracts relating to the risks reinsured hereunder currently exist and/or are
contemplated between the parties.
ARTICLE 22 - SEVERABILITY
If any law or regulation of any Federal, State, or Local Government of the
United States of America or the provinces of Canada or the ruling officials of
any supervision over insurance companies, should render illegal this Contract,
or any portion thereof, as to risks or properties located in the jurisdiction of
such authority, either the Company or the Reinsurer may upon written notice to
the other suspend, abrogate, or amend this Contract insofar as it relates to
risks or properties located within such jurisdiction to such extent as may be
necessary to comply with such law, regulations or ruling.
Such illegality, suspension, abrogation, or amendment of a portion of this
Contract shall in no way affect any other portion thereof.
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<PAGE>
IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Contract:
on this day of 1998
CONTINENTAL CASUALTY COMPANY
By: ________________________________________________
Attested by: _________________________________________
and on this day of 1998
IGF INSURANCE COMPANY
and its AFFILIATED COMPANIES
By: ________________________________________________
Attested by:__________________________________________
CROP HAIL INSURANCE
QUOTA SHARE CONTRACT
(referred to as the "Contract")
Effective: January 1, 1998
issued to
Continental Casualty Company
(referred to as the "Company")
by
IGF Insurance Company
and its Affiliated Companies
(referred to as the "Reinsurer")
Exhibit 2.5
CROP HAIL INSURANCE
QUOTA SHARE AGREEMENT
(hereinafter referred to as "Agreement")
Effective: January 1, 1998
issued to
IGF Insurance Company
and its Affiliated Companies
(hereinafter referred to as "IGF")
by
Continental Casualty Company
(hereinafter collectively referred to as "CNA")
ARTICLE 1 - TERM
This Agreement shall apply to losses occurring on and after 12:01 a.m. Central
Standard Time, January 1, 1998 as respects new and renewal policies on business
covered by this Agreement, becoming effective on and after said date and shall
continue in full force and effect until terminated as provided below.
Termination shall take place immediately and automatically upon the exercise of
a Put Right or Call Right(as defined under the Strategic Alliance Agreement
andhereinafter referred to "SAA") between Continental Casualty Company and IGF
Holdings, Inc. and its Affiliated Companies, to which this Agreement is attached
and made a part of. Upon termination, a full commutation and release of all CNA
liability shall be provided to CNA for the then current Crop Year with no
amounts due or owing for such year. IGF shall have the right to 100% of the
premiums associated with the liability so released. If any payments have been
made by CNA to IGF for its share of loss payments incurred prior to the date of
exercise, such payments shall be reimbursed to CNA. As an example, if a Call
Right is exercised on June 1, 2002, CNA shall not bear any risk on any of the
policies bound to that date for the 2002 Crop Year nor have a right to any
premiums collected or due thereon. If a Put Right or Call Right is exercised
the result shall be the same.
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<PAGE>
ARTICLE 2 - BUSINESS COVERED
IGF agrees to cede and CNA agrees to accept by way of reinsurance, for each
Agreement Year covered hereunder, with Agreement Year meaning any January 1st
through December 31st, 30% of the CNA Crop Hail Proportion (as defined) as
follows. Such annual reinsurance cession shall be made in perpetuity unless the
Put Right or Call Right is triggered.
The CNA Crop Hail business produced by CNA in 1998 shall include Crop Hail
business written on a CNA company's paper and the business assumed by CNA under
the Producers Lloyds Insurance Company and Palliser Insurance Company
reinsurance
agreements.
CNA's share of gains (losses) in relation to any third party reinsurance
agreements and any co-share or other sharing arrangements shall be as negotiated
by mutual agreement of the parties hereto.
For 1998, the CNA Crop Hail Proportion shall be equal to (i) the amount of
Crop Hail business produced by CNA for 1998 excepting business developed through
any and all fronting agreements with IGF divided by (ii) the combined amount of
Crop Hail business produced by IGF and CNA for 1998.
For 1999, the CNA Crop Hail Proportion shall be equal to (i) the amount of
Crop Hail business written on a CNA company paper in 1998 multiplied by one plus
the percentage growth in industry Crop Hail gross premium from 1998 to 1999 as
acknowledged by the NCIS, plus (ii) the amount of Crop Hail business assumed by
CNA under the Producers Lloyds Insurance Company and Palliser Insurance Company
reinsurance agreements in 1999, subject to items 7 and 8 below, with the
resulting sum then divided by (iii) the sum of (i), (ii) and the amount of Crop
Hail business produced by IGF for 1999.
For 2000, the CNA Crop Hail Proportion shall be equal to (i) the amount of
Crop Hail business written on a CNA company paper in 1998 multiplied by one plus
the percentage growth in industry Crop Hail gross premium from 1998 to 2000 as
acknowledged by the NCIS, plus (ii) the amount of Crop Hail business assumed by
CNA under the Producers Lloyds Insurance Company and Palliser Insurance Company
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<PAGE>
reinsurance agreements in 2000, subject to items 7 and 8 below, with the
resulting sum then divided by (iii) the sum of (I), (ii) and the amount of Crop
Hail business produced by IGF for 2000.
The CNA Crop Hail Proportion shall continue to adjust for years 2001 and
beyond in a manner consistent with the formula for 1999 and 2000.
If Producers Lloyds Insurance Company elects to terminate its relationship
with CNA or not to enter into a relationship with IGF or to terminate such
relationship after the closing date of the transaction between IGF and CNA, then
if such relationship terminates prior to July 1, 2000, all of the Producers
Lloyds Insurance Company's business will be removed from reimbursement and
profit-sharing formulas in calculating any payments to be made under this
Agreement after such termination. If Producers Lloyds Insurance Company elects
to terminate its relationship with CNA or IGF, as the case may be, on or after
July 1, 2000, then the dollar amount of CNA's line for Producers Lloyds
Insurance Company shall be the same in the crop year in which Producers Lloyds
Insurance Company terminates its relationship as it was in the immediate crop
year prior to the termination and there shall be no adjustment to reimbursement
and profit-sharing formulas under this Agreement with respect to any crop years
prior to such termination.
If Palliser Insurance Company elects to terminate its relationship with CNA
or not to enter into a relationship with IGF or to terminate such relationship
after the closing date of the transaction between IGF and CNA, then the dollar
amount of CNA's line for Palliser Insurance Company shall be the same in the
crop year in which Palliser Insurance Company terminates its relationship as it
was in the immediate crop year prior to the termination.
Crop Hail Business and Policies as used in this Agreement shall mean all
insurances and reinsurances written and assumed and classified as crop hail as
defined per the NCIS, including allied coverages.
ARTICLE 3 - TERRITORY
This Agreement applies to the territory of the business covered hereunder.
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<PAGE>
ARTICLE 4- ORIGINAL CONDITIONS
All amounts ceded hereunder shall be subject to the same gross rating and to the
same clauses, conditions, exclusions and modifications of the policies reinsured
hereunder, subject to the limits, terms and conditions of this Agreement.
Except as specifically and expressly provided for in the Insolvency Article, the
provisions of this Agreement are intended solely for the benefit of the parties
to and executing this Agreement, and nothing in this Agreement shall in any
manner create, or be construed to create, any obligations to or establish any
rights against any party to this Agreement in favor of any third parties or
other persons not parties to and executing this Agreement.
ARTICLE 5 - LOSSES
The IGF alone and at its full discretion shall adjust, settle or compromise all
claims and losses. All such adjustments, settlements and compromises, including
ex-gratia payments, and loss expenses shall be binding on the CNA in proportion
to its' participation. The IGF shall likewise at its sole discretion commence,
continue, defend, compromise, settle or withdraw from actions, suits or
proceedings and generally do all such matters and things relating to any claim
or loss as in its judgment may be beneficial or expedient; and all loss payments
made shall be shared by the CNA proportionately. The CNA shall, on the other
hand, benefit proportionately from all reductions of losses by salvage,
compromise or otherwise.
In the event the IGF's paid losses and loss expenses exceed the Net Earned
Premium Income less ceding commission, the CNA agrees to advance the amount by
which the losses exceed the Net Earned Premium Income less ceding commission
within 30 days of receipt of a written report substantiating such a request.
ARTICLE 6 - EXCESS OF ORIGINAL POLICY LIMITS
This Agreement shall protect the IGF as provided in Article 2 - Business Covered
in connection with loss in excess of the limit of the original policy.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the IGF
acting individually or collectively or in collusion with any individual or
corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
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For the purpose of this Article, the word "loss" shall mean any amounts for
which the IGF would have been contractually liable to pay had it not been for
the limit of the original policy.
ARTICLE 7 - EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the IGF as provided in Article 2 - Business Covered
where the loss includes any extra contractual obligations.
The term "Extra Contractual Obligations" is defined as those liabilities not
covered under any other provision of this Agreement and which arise from the
handling of any claim on business covered hereunder, such liabilities arising
because of, but not limited to, the following: failure by the IGF to settle
within the policy limit, or by reason of alleged or actual negligence, fraud or
bad faith in rejecting an offer of settlement or in preparation of the defense
or in trial of any action against its insured or reinsured or in the preparation
or prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation loss is incurred by the IGF
shall be deemed, in all circumstances, to be the date of the original
occurrence, or the date the original claim is first made, whichever is
applicable.
However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the IGF
acting individually or collectively or in collusion with any individual or
corporation or any other organization or party involved in the presentation,
defense or settlement of any loss covered hereunder.
ARTICLE 8 - CURRENCY
Where the word "dollars" and/or the sign "$" appear in this Agreement, they
shall mean United States dollars.
For purposes of this Agreement, where the IGF receives premiums or pays losses
in currencies other than United States currency, such premiums or losses shall
be converted in to United States dollars at the actual rates of exchange at
which these premiums or losses are entered in the IGF's books.
ARTICLE 9 - ACCOUNTS, REPORTS AND PAYMENTS
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<PAGE>
As soon as possible after the end of the season, but no later than December 15th
of each Agreement Year, with Agreement Year meaning any January 1st through
December 31st for which coverage applies under this Agreement, the IGF shall
provide the CNA with a complete account, to include the following:
Net Earned Premium income accounted for during the Agreement Year, meaning
gross earned premium income on business accounted for during that Agreement Year
less returned premiums and earned income paid for reinsurances, recoveries under
which inure to the benefit of this Agreement; less
The ceding commission as provided for in this Agreement: less;
Losses and loss adjustment expense paid during the Agreement Year, with loss
adjustment expense for external adjusters including part time loss adjusters
capped at 4%, except for the reinsurance agreement with Producers Lloyds
Insurance Company wherein the loss adjustment expense shall be capped at 4.5%
and as incurred under the reinsurance agreement with Pallisers Insurance
Company, of gross written premium accounted for during the Agreement Year; plus
Subrogation, salvage, or other recoveries on losses occurring during the term
of the Agreement Year being accounted for.
Within 15 days of receipt of IGF's report, CNA shall remit any balance due to
IGF as respects such report.
As soon as possible after the conclusion of each calendar quarter and Agreement
Year the IGF will provide any other information the CNA may require for its
Convention Statement which may be reasonably available to the IGF.
ARTICLE 10 - COMMISSION
CNA will allow IGF a 32.5% ceding commission on the business covered as defined
in Article 2 except that under the reinsurance agreement with Producers Lloyds
Insurance Company the commission will be 27.5% provisional and increasing to
31.5% at a loss ratio of 48%, plus intermediary fees and under the reinsurance
agreement with Palliser Insurance Company the commission will be 26% provisional
and increasing to 29% at 54% loss ratio, plus intermediary fees.
Return commission shall be allowed on return premiums at the same rate.
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<PAGE>
ARTICLE 11 - OFFSET
The IGF or the CNA shall have the right to offset any balance or amounts due
from one party to the other under the terms of this Agreement. The party
asserting the right of offset may exercise such right at any time whether the
balances due are on account of premiums or losses.
ARTICLE 12 - ACCESS TO RECORDS
Upon reasonable notice, the CNA, or its designated representative, shall have
access at any reasonable time to inspect and audit the books and records of the
IGF which pertain in any way to this reinsurance and it may make copies of any
records pertaining thereto.
This right of inspection, audit and information shall survive termination of
this Agreement and shall run to the natural expiry of all liabilities under the
policies reinsured.
ARTICLE 13 - TAXES
In consideration of the terms under which this Agreement is issued, IGF
undertakes not to claim any deduction of the premium hereon when making tax
returns, other than Income or Profits Tax returns, to any state or territory of
the United States of America or to the District of Columbia.
ARTICLE 14 - ERRORS AND OMISSIONS
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Agreement shall not be held to relieve either party hereto
from any liability which would attach to it hereunder if such error, omission or
delay had not been made, provided such error, omission or delay is rectified
immediately upon discovery.
ARTICLE 15 - AMENDMENTS
This Agreement may be altered or amended in any of its terms and conditions by
mutual consent of the IGF and the CNA by an Endorsement hereto. Such Endorsement
will then constitute a part of this Agreement.
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<PAGE>
ARTICLE 16 - LOSS FUNDING
This Article is only applicable to CNA if it cannot qualify for credit by the
State, meaning the state, province or Federal authority having jurisdiction over
IGF's loss reserves.
As regards policies issued by the IGF coming within the scope of this Agreement,
the IGF agrees that when it shall file with the insurance department or set up
on its books reserves for losses covered hereunder which it shall be required to
set up by law it will forward to the CNA a statement showing the proportion of
such loss reserves which is applicable to them.
The CNA hereby agrees that it will apply for and secure delivery to the IGF a
clean irrevocable and unconditional Letter of Credit issued by a bank chosen by
the CNA and acceptable to the appropriate insurance authorities, in an amount
equal to the CNA's proportion of the loss reserves in respect of known
outstanding losses that have been reported to the CNA and allocated loss
expenses relating thereto as shown in the statement prepared by the IGF. Under
no circumstances shall any amount relating to reserves in respect of losses or
loss expenses Incurred But Not Reported be included in the amount of the Letter
of Credit.
The Letter of Credit shall be "Evergreen" and shall be issued for a period of
not less than one year, and shall be automatically extended for one year from
its date of expiration or any future expiration date unless thirty (30) days
prior to any expiration date, the bank shall notify the IGF by certified or
registered mail that it elects not to consider the Letter of Credit extended for
any additional period.
The IGF, or its successors in interest, undertakes to use and apply any amounts
which it may draw upon such Credit pursuant to the terms of the Agreement under
which the Letter of Credit is held, and for the following purposes only:
To pay CNA's share or to reimburse IGF for CNA's share of any liability for
loss reinsured by this Agreement, the payment of which has been agreed by CNA
and which has not otherwise been paid.
To make refund of any sum which is in excess of the actual amount required
to pay CNA's share of any liability reinsured by this Agreement.
In the event of expiration of the Letter of Credit as provided for above,
to establish deposit of CNA's share of known and reported outstanding losses and
allocated loss expenses relating thereto under this Agreement. Such cash deposit
shall be held in an interest bearing account separate from IGF's other assets,
and interest thereon shall accrue to the benefit of CNA. It is understood and
agreed that this procedure will be
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<PAGE>
implemented only in exceptional circumstances and that, if it is implemented,
IGF will ensure that a rate of interest is obtained for CNA on such a deposit
account that is at least equal to the rate which would have been paid by
Citibank N.A. in New York, and further that IGF will account to CNA on an annual
basis for all interest accruing on the cash deposit account for the benefit of
CNA.
The bank chosen for the issuance of the Letter of Credit shall have no
responsibility whatsoever in connection with the propriety of withdrawals made
by IGF or the disposition of funds withdrawn, except to ensure that withdrawals
are made only upon the order of properly authorized representatives of IGF.
At annual intervals, or more frequently as agreed but never more frequently than
semiannually, IGF shall prepare a specific statement, for the sole purpose of
amending the Letter of Credit, of CNA's share of known and reported outstanding
losses and allocated loss expenses relating thereto. If the statement shows that
CNA's share of such losses and allocated loss expenses exceeds the balance of
credit as of the statement date, CNA shall, within thirty (30) days after
receipt of notice of such excess, secure delivery to IGF of an amendment of the
Letter of Credit increasing the amount of credit by the amount of such
difference. If, however, the statement shows that CNA's share of known and
reported outstanding losses plus allocated loss expenses relating thereto is
less than the balance of credit as of the statement date, IGF shall, within
thirty (30) days after receipt of written request from CNA, release such excess
credit by agreeing to secure an amendment to the Letter of Credit reducing the
amount of credit available by the amount of such excess credit.
ARTICLE 17 - INSOLVENCY
This reinsurance shall be payable by CNA on the basis of the liability of IGF
under Policy or Policies reinsured without diminution, because of the insolvency
of IGF, to IGF or its liquidator, receiver, or statutory successor.
In the event of insolvency of IGF, the liquidator or receiver or statutory
successor of the IGF shall give written notice to CNA of the pendency of a claim
filed against IGF on the Policy or Policies reinsured within a reasonable time
after such claim is filed in the insolvency proceeding. During the pendency of
such claim CNA may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or defenses
which it may deem available to IGF or its liquidator or receiver or statutory
successor. The expenses thus incurred by CNA shall be chargeable, subject to
court approval, against IGF as part of the expense of liquidation to the extent
of a proportionate share of the benefits which may accrue to IGF solely as a
result of the defense so undertaken by CNA.
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<PAGE>
Should IGF go into liquidation or should a receiver be appointed, CNA shall be
entitled to deduct from any sums which may be or may become due to IGF under
this reinsurance Agreement, any sums which are due to CNA by IGF under this
Agreement and which are payable at a fixed or stated date, as well as any other
sums due to CNA which are permitted to be offset under applicable law.
It is further understood and agreed that, in the event of the insolvency of IGF,
the reinsurance under this Agreement shall be payable directly by CNA to IGF or
to its liquidator, receiver or statutory successor, except a) where this
Agreement specifically provides another payee of such reinsurance in the event
of the insolvency of IGF and b) where CNA with the consent of the direct insured
or insureds has assumed such policy obligations of IGF as direct obligations of
CNA to the payees under such policies and in substitution for the obligations of
IGF to such payees.
In no event shall anyone other than the parties to this Agreement or, in the
event of IGF's insolvency, its liquidator, receiver, or statutory successor,
have any rights under this Agreement.
ARTICLE 18 - ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of the interpretation, performance or breach of this Agreement, including
the formation or validity thereof, shall be submitted for decision to a panel of
three arbitrators. Notice requesting arbitration will be in writing and sent
certified mail, return receipt requested.
One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified mail of its intention to do so, may
appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, each of them shall name two, of whom the
other shall decline one and the decision shall be made by drawing lots. All
arbitrators shall be disinterested active or retired executive officers of
insurance or reinsurance companies, Underwriters at Lloyd's London not under the
control of either party to this Agreement, or a qualified arbitrator supplied
by the AAA.
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<PAGE>
Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
The panel shall be relieved of all judicial formality and shall not be bound by
the strict rules of procedure and evidence. Arbitration shall take place in Des
Moines, Iowa. Insofar as the arbitration panel looks to substantive law, it
shall consider the law of the State of Illinois. The decision of any two
arbitrators when rendered in writing shall be final and binding. The panel is
empowered to grant interim relief as it may deem appropriate.
The panel shall make its decision considering the custom and practice of the
applicable insurance and reinsurance business as promptly as possible following
the termination of the hearings. Judgment upon the award may be entered in any
court having jurisdiction thereof.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law. The panel is prohibited from awarding punitive, exemplary or
treble damages, of whatever nature, in connection with any arbitration
proceeding concerning this Agreement.
ARTICLE 19 - CHOICE OF LAW
This Agreement, including all matters relating to formation, validity and
performance thereof, shall be interpreted in accordance with the law of the
State of Illinois.
ARTICLE 20 - ENTIRE CONTRACT
This Agreement and that certain Strategic Alliance Agreement, Insurance Services
Agreement, Multiple Peril Crop Insurance Quota Share Contract - effective July
1, 1997 Multiple Peril Crop Insurance Quota Share Agreement - effective July 1,
1997, and the Crop Hail Quota Share Reinsurance Contract - effective January 1,
1998, between the parties, represent the entire agreement and understanding
among the parties. No other oral or
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<PAGE>
written agreements or contracts relating to the risks reinsured hereunder
currently exist and/or are contemplated between the parties.
ARTICLE 21 - SEVERABILITY
If any law or regulation of any Federal, State, or Local Government of the
United States of America or the provinces of Canada or the ruling officials of
any supervision over insurance companies, should render illegal this Agreement,
or any portion thereof, as to risks or properties located in the jurisdiction of
such authority, either the IGF or the CNA may upon written notice to the other
suspend, abrogate, or amend this Agreement insofar as it relates to risks or
properties located within such jurisdiction to such extent as may be necessary
to comply with such law, regulations or ruling.
Such illegality, suspension, abrogation, or amendment of a portion of this
Agreement shall in no way affect any other portion thereof.
ARTICLE 22 - ILLUSTRATION
IGF and CNA have agreed to append Schedule 1 as an attachment hereto to
illustrate their understanding of the operation of this Agreement.
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IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Agreement:
on this day of 1998
IGF INSURANCE COMPANY
and its AFFILIATED COMPANIES
By: ________________________________________________
Attested by: _________________________________________
and on this day of 1998
CONTINENTAL CASUALTY COMPANY
By: ________________________________________________
Attested by:__________________________________________
CROP HAIL INSURANCE
QUOTA SHARE AGREEMENT
(referred to as the "Agreement")
Effective: January 1, 1998
issued to
IGF Insurance Company
and its Affiliated Companies
(referred to as "IGF")
by
Continental Casualty Company
(referred to as "CNA")
Exhibit 2.6
CROP HAIL
INSURANCE SERVICES AND INDEMNITY AGREEMENT
This Insurance Services and Indemnity Agreement, (hereinafter referred to as the
"Agreement") is made and entered into by and between IGF Insurance Company
(hereinafter referred to as "IGF"), an Indiana domiciled property and casualty
insurer with principal offices located at 6000 Grand, Des Moines, Iowa 50312 and
Continental Casualty Company, (hereinafter referred to as "CCC"), an Illinois
domiciled property and casualty insurer with principal offices located at CNA
Plaza, Chicago, Illinois, effective January 1, 1998 for the benefit of IGF and
CCC.
WHEREAS, CCC and IGF, IGF Holdings, Inc. and Symons International Group, Inc.
have entered into a Strategic Alliance Agreement (hereinafter referred to as the
"SAA"), and pursuant to Article 6 thereof have agreed to execute certain
Ancillary Agreements;
WHEREAS, among the Ancillary Agreements CCC and IGF have entered into is a Crop
Hail Quota Share Contract (hereinafter referred to as the "Reinsurance
Contract") effective January 1,1998 for certain policies issued by CCC and
reinsured 100% by IGF (as defined in the Reinsurance Contract, and hereinafter
referred to as the "Policy (ies) "), pursuant to the terms of such Reinsurance
Contract;
WHEREAS, in connection therewith CCC and IGF wish to enter into an agreement for
the provision of insurance services and indemnity;
WHEREAS, IGF possesses the staff and expertise to administer the Policies and
agrees to assume certain duties and responsibilities to administer such
Policies; and
WHEREAS, CCC'S offer to write such business is based on IGF'S acceptance of such
duties and responsibilities as described herein;
NOW, THEREFORE, the parties, in consideration of the mutual agreements,
covenants, and provisions herein contained, agree as follows:
I. TERM
Crop Hail Insurance Services
& Indemnity Agreement
Page 1 of 11
<PAGE>
This Agreement shall take effect with the Reinsurance Contract and shall have
the same term and cancellation provisions in their entirety as provided in the
Reinsurance Contract, except as specified in Sections 4.5 and 4.7 of Article IV
and Sections 12.1 through 12. 6 of Article XII of this Agreement. If this
Agreement is terminated or expires for any reason, the Reinsurance Contract
shall simultaneously terminate or expire.
II. APPOINTMENTS
Section 2.1: IGF shall serve as CCC'S marketing, production, and underwriting
agent for the Policies and shall adjust any claims made under the Policies.
Section 2.2: IGF warrants that it has and shall maintain throughout the term of
this Agreement any and all licenses required to perform and provide the services
specified in this Agreement in CCC's state of domicile and in all other states
or provinces in which IGF is performing services on behalf of CCC. IGF also
warrants that it shall abide by all rules and regulations as required by
insurance department, bureau of insurance, or other appropriate regulatory
agency of the states or provinces in which Policies are written, including any
rate, form, or other filings as required by each state insurance department,
bureau of insurance, or other appropriate regulatory agency.
Section 2.3: Payment of all commissions due on Policies produced by producers
shall be made directly by IGF to the producers.
Section 2.4: In consideration for these appointments, IGF and CCC agree to
exercise all authority and perform all duties required by this Agreement.
III. UNDERWRITING AUTHORITY AND RELATED DUTIES
Section 3.1: IGF is authorized, and agrees on behalf of CCC, to accept and
decline insurance risks, underwrite, price, bind, issue, and cancel or nonrenew
the Policies, make customary endorsements, changes, assignments, transfers and
modifications of existing Policies, subject to limitations provided herein. IGF
warrants that it shall accept and decline insurance risks, underwrite, price,
issue, and cancel or nonrenew the Policies, make customary endorsements,
changes, assignments, transfers and modifications of existing Policies in a
timely and professional manner through qualified persons, fully familiar with
generally accepted standards in the United States and Canada, as appropriate,
and for the 1998 Crop Year according to CCC's formal written guidelines as may
be provided from time to time to IGF, and for the 1999 Crop Year and subsequent
Crop Years according to formal written guidelines of the Underwriting Committee
(as defined in the SAA) as may be provided from time to time to IGF.
Crop Hail Insurance Services
& Indemnity Agreement
Page 2 of 11
<PAGE>
Section 3.2: Nothing stated anywhere in this Agreement shall impair IGF'S right
to cancel or nonrenew any Policy, providing such action is in full compliance
with applicable law and CCC receives advance notice of IGF'S intent. CCC has the
right to cancel or nonrenew any Policy upon the prior approval of IGF unless
this Agreement expires or is terminated, whereupon CCC may do so without prior
approval but shall provide ten (10) days prior written notice to IGF.
Section 3.3: CCC agrees that it shall, upon written request from IGF, promptly
appoint such persons as agents of CCC or grant such persons a power of attorney
as requested by IGF. CCC also agrees that it shall, upon written request from
IGF promptly file with appropriate regulatory authorities such forms and rates
as requested by IGF. IGF's staff shall perform the administrative functions
necessary for CCC to make such appointment and grant such powers.
IV. CLAIMS AUTHORITY AND RELATED DUTIES
Section 4.1: IGF is authorized and agrees on behalf of CCC to adjust,
compromise, process and pay all claims arising under the Policies issued under
this Agreement, including the right to litigate claims in CCC's name, except as
provided in Section 4.5 of Article IV herein. IGF warrants that any claims
arising under the Policies will be handled in a timely and professional manner
by qualified persons, fully familiar with generally accepted claims handling
standards in the United States and Canada, as appropriate, and for the 1998 Crop
Year according to CCC's formal written guidelines as may be provided from time
to time to IGF. IGF is authorized and agrees to investigate, monitor, and handle
any claims under any of the Policies issued under this Agreement and reinsured
pursuant to the Reinsurance Contract on CCC'S behalf or retain any independent
claims consultant or adjuster as may be required.
Section 4.2: CCC and IGF shall provide the other with prompt notification of any
losses or claims, or any information that makes a loss or claim reasonably
likely under the Policies and as provided elsewhere in this Agreement.
Section 4.3: In recognition of statutory, regulatory and legal duties to handle
claims in a prompt and fair manner, CCC and IGF agree to exercise their
commercially reasonable best efforts and cooperate fully with the other to
handle claims in said manner and in full compliance with all such requirements.
Section 4.4: Within 15 days after the end of each calendar month while this
Agreement is in effect, IGF shall promptly report to CCC on all open and closed
claims handled by it during such month in the reporting format as mutually
agreed to between CCC and IGF.
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& Indemnity Agreement
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<PAGE>
Such reports shall include information on all claims and allocated claims
expenses reserved, paid and outstanding. IGF shall report within thirty (30)
days of any such developments, significant developments on claims, including but
not limited to, major reserve increases or decreases, settlements, or new
information changing the liability assessment or valuation previously reported
to CCC by IGF. IGF shall send CCC a copy of any claim file upon request by CCC.
All claim files will be the joint property of CCC and IGF during the period this
Agreement is in effect.
Section 4.5: Upon termination of this Agreement, or in the event of an order of
liquidation of CCC during the period this Agreement is in effect, such files
shall become the sole property of CCC or its estate. IGF shall have reasonable
access to, and the right to copy, any such claim files in CCC'S possession on a
timely basis, if requested.
Section 4.6: IGF shall pursue salvage or subrogation on behalf of CCC in all
appropriate cases, on any claims arising under the Policies.
Section 4.7: In the event this Agreement is terminated and unless otherwise
mutually agreed to between CCC and IGF, IGF shall have the right and duty to
settle and handle all subsequent claims and losses until such time as all
Policies issued, underwritten or serviced by IGF pursuant to this Agreement have
expired and the Reinsurance Contract has expired, and all known claims
thereunder have been paid or settled, have runoff or otherwise have been
disposed of in the judgment of CCC, and all incurred but not reported loss
reserves have been reduced to zero, and any amounts owed to CCC by others or
under the Reinsurance Contract in regard to any claims have been collected by
CCC. Reinsurance indemnity for any claim or loss discussed herein shall be
provided in accordance with the terms and conditions of the Reinsurance
Contract.
Section 4.8: All claims and/or losses handled by IGF pursuant to Section 4.7
herein shall be reported to CCC by IGF within forty-five (45) days after the end
of each calendar quarter in such reporting format as requested by CCC.
Section 4.9: IGF agrees to notify CCC immediately upon notice of any allegations
of bad faith as respects any Policy covered under the Reinsurance Contract, and,
of the receipt of any notice that a lawsuit has been filed against IGF, any of
its employees or agents, and/or CCC by an insured on a Policy covered under the
Reinsurance Contract. IGF shall furnish CCC, upon CCC's request, with copies of
all pleadings and related file material pertaining thereto in a prompt and
timely fashion.
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& Indemnity Agreement
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<PAGE>
V. ACCOUNTING AUTHORITY AND RELATED DUTIES
Section 5.1: The parties agree that IGF shall bill its customers directly for
the Policies and collect all premiums due and owing for such Policies. IGF shall
reimburse CCC for all premium taxes due under such Policies at such times as
requested by CCC to fulfill its filing and payment obligations.
Section 5.2: Within fifteen (15) days after the end of each month while this
Agreement is in effect, IGF shall provide CCC with an accounting report
containing the following information (on an Agreement Year [meaning each
January 1 - December 31 for which coverage applies under the Reinsurance
Contract], to date, on a state by state, basis): 1) limits of liability exposed
and number of policies written; 2) gross written premium; 3) paid losses and
number of losses paid; 3) reserves for outstanding losses and number of
outstanding losses; 4) unearned premium reserve; 5) amount of ceding commission
allowed under the Reinsurance Contract; and 6) loss adjustment expenses
(collectively, the information contained in 1- 6 is hereinafter referred to as
the "accounting information") and any other information mutually agreed to
between the parties in writing.
Section 5.3: On or before December 15th of each Agreement Year for which
coverage applies under the Reinsurance Contract, IGF shall forward to CCC a
"provisional final" accounting report of the accounting information for the
Agreement Year. If the net premiums due CCC exceeds the ceding commission and
losses paid (including loss adjustment expense), IGF shall pay the balance due
as soon as possible to CCC, not later than December 31st of each Agreement Year.
If the ceding commission and losses paid (including loss adjustment expense) due
IGF exceeds the net premiums, CCC shall pay the balance due as soon as possible
to IGF, not later than December 31st of each Agreement Year. Thereafter, a final
accounting shall be made when all cessions have expired or terminated, all
losses have been settled and all liability has been discharged for each
Agreement Year to which coverage applies under the Reinsurance Contract. If the
parties dispute the amount of premiums owed, IGF shall remit the undisputed
portions of the premium owed CCC.
Section 5.4: As soon as possible after the conclusion of each calender quarter
and Agreement Year the IGF will provide any other information CCC may require
for its Convention Statement which may be reasonably available to IGF. It is
understood and agreed that IGF and CCC shall each provide to the other any other
information mutually agreed to between the parties in writing.
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& Indemnity Agreement
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<PAGE>
VI. REGULATORY COMPLIANCE AND RELATED DUTIES
Section 6.1: CCC and IGF agree to use their commercially reasonable best efforts
to achieve full compliance with all applicable statutory, regulatory and legal
requirements.
Section 6.2: CCC and IGF agree that IGF is authorized to file rules, rates and
forms on behalf of CCC within a state or province to include two (2) separate
company filings per jurisdiction. IGF will provide CCC with copies of all rule,
rate and form filings at least five (5) business days prior to filing. CCC will
have the right to approve such filing, but CCC's approval will not be
unreasonably withheld. CCC will have the opportunity to review all data relevant
to its rule, rate and form filing.
Section 6.3: IGF agrees to advise CCC of any complaints and/or inquiries
concerning rule, rate or form filings, and to provide CCC with the opportunity
to respond to regulators or consumers. CCC and IGF agree to provide the other,
promptly upon request, with all information and support required for any
regulatory compliance obligation and for any reports, statements or other
filings required by regulatory authorities.
Section 6.4: IGF agrees to monitor all legal, statutory and regulatory
developments affecting the Policies hereunder and promptly report same to CCC.
Should any such changes affect the Policies hereunder, the parties agree to
ensure full compliance with such changes. IGF agrees to prepare any
documentation necessary to assure such compliance. In the event that CCC becomes
aware of any such development, it shall report it promptly to IGF.
Section 6.5: In the event that any State, by statute, regulation or otherwise,
prohibits or restricts IGF'S authority hereunder, the parties agree that IGF's
authority to act on behalf of CCC shall be so restricted in that State.
VII. COMPENSATION
The parties agree that compensation for the performance of the mutual duties
specified hereunder shall be as follows: (i) for Agreement Year 1998 CCC shall
receive reimbursement, in such amount as the parties agree by April 1, 1998, for
its direct overhead expenses/fixed costs of operating and maintaining its crop
insurance program, including but not limited to, office rent, staffing, premium
processing, accounting and billing, claim handling, commissions, filing of 1998
crop hail forms, rules and rates, development and filing of hail endorsements,
marketing, advertising, licensing, and other expenses incurred for business
already issued prior to the closing date of the transaction between IGF and CCC,
in the manner that the parties agree by April 1, 1998; (ii) and in addition for
Agreement Year 1998 and subsequent Agreement Years, IGF agrees to reimburse CCC
for all its reasonable fronting costs, including its costs and expenses related
to the production of Policies pursuant to this Agreement, related to rule,
rate and form filings under this Agreement and related to the performance
of its obligations under this Agreement.
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VIII. INDEMNIFICATION
Section 8.1: In addition to the obligations of IGF pursuant to the terms of the
Reinsurance Contract, IGF shall indemnify CCC as follows in Sections 8.2 and
8.3. However, Sections 8.2 and 8.3 shall not apply to any liability, claim,
suit, demand, damages (including punitive and exemplary damages), judgment,
cost, interest and expense (including but not limited to attorneys' fees and
disbursements) or regulatory fines or administrative penalties caused by the
action of or the failure to take action by any employee of CCC. Nor shall
Sections 8.2 and 8.3 prevent the application of any available reinsurance
proceeds.
Section 8.2: IGF shall indemnify, defend and hold harmless CCC, its agents,
employees, subsidiaries and affiliates from and against all liability, claims,
suits, demands, damages (including punitive and exemplary damages), judgments,
costs, interest and expense (including but not limited to attorneys' fees and
disbursements) arising out of, or in connection with, any Policy issued under
this Agreement and reinsured under the Reinsurance Contract, including but not
limited to production activities (such as claims made by producers against CCC
for commissions allegedly due them on Policies under the Agreement), failure of
producers to be properly licenced, producers, underwriting activities, policy
issuance, claim handling and the resolution of coverage issues; provided
however, that notwithstanding any other provisions of this Agreement, such
indemnification of IGF shall not extend to any matter subject to the obligations
of CCC or its affiliates under the Reinsurance Contract or the Crop Hail Quota
Share Agreement.
Section 8.3: IGF agrees to indemnify, defend and hold CCC harmless and make full
and prompt reimbursement for any regulatory fines or administrative penalties
levied against CCC relating to IGF'S failure to fulfill any policy, rate, claim
payment or other filing or obligations required by or to regulatory authorities.
CCC shall use its commercially reasonable best efforts to advise IGF as soon as
possible of any such fine or penalty, or any information indicating that a fine
or penalty may be levied.
Section 8.4: Any inadvertent delay, omission or error shall not be held to
relieve either party hereto from any liability which would attach to it
hereunder if such delay, omission or error had not been made.
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Section 8.5: CCC agrees to save, indemnify, and hold IGF harmless against any
and all loss, liability or damage resulting from any misrepresentation or breach
of warranty by CCC under the terms of this Agreement.
Section 8.6: The indemnities provided in Sections 8.1, 8.2, 8.3, and 8.5 herein
shall survive any termination of this Agreement.
IX. ARBITRATION
In the event of an irreconcilable dispute between the parties to this Agreement,
such dispute shall be submitted for decision to the process of arbitration in
the manner and pursuant to the procedure set forth in the ARBITRATION Article of
the Reinsurance Contract.
X. MODIFICATION
There will be no modification of or change in the terms of this Agreement
without the written approval of the parties to this Agreement.
XI. BINDING EFFECT OF AGREEMENT
This Agreement will be binding upon and inure to the benefit of the parties,
their successors and assigns.
XII. TERMINATION
Section 12.1: This Agreement and IGF'S obligations, except as specified in
Article I, Sections 4.5 and 4.7 of Article IV, and Section 8.6 of Article VIII
hereunder, shall terminate automatically and without notice upon the occurrence
of any one or more of the following events: (a) termination of the Reinsurance
Contract; or (b) termination or modification of IGF'S participation in the
Reinsurance Contract.
Section 12.2: Any termination of this Agreement shall be subject always to IGF'S
duty to satisfy, fulfill, fully perform and discharge all of its obligations
pursuant to this Agreement.
Section 12.3: This Agreement, except as specified in Article I, Sections 4.5 and
4.7 of Article IV, and Section 8.6 of Article VIII, may be terminated at any
time by mutual written agreement.
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Section 12.4: Notwithstanding anything herein to the contrary, should the Put
Right or Call Right be triggered, then IGF must stop using CCC front at the end
of the crop year in which the Put or Call right was exercised.
Section 12.5: Immediately, following receipt of written notice from CCC, on
account of IGF's failure to comply with a condition or provision of this
Agreement within thirty (30) days after such failure is brought the IGF's
attention in writing this Agreement shall terminate.
Section 12.6: Unless otherwise directed by CCC in writing, in the event this
Agreement is terminated, IGF shall continue to perform the duties necessary to
service all Policies, at its own expense, until all liability underlying the
Policies shall have been terminated. Such services shall consist of, but shall
not necessarily be limited to, cancellations, return premiums, endorsements,
account current reporting and claim settlements. IGF shall also issue, for and
on behalf of CCC, an effective notice of non-renewal to all policyholders
terminating their coverage upon the expiration of their Policy term next
following the termination of this Agreement. Should good cause exist for CCC to
assume such duties, IGF shall reimburse CCC for the expenses it shall incur in
performing such duties. IGF shall also provide CCC, at IGF's expense, with a
copy of all insurance records on unexpired Policies and all insurance claim
files.
XIII. CONTRIBUTION
IGF, upon any payment hereunder, shall fully share in the subrogation,
contribution and salvage rights of CCC, as applicable, to the extent of IGF'S
payment to CCC.
XIV. RESOLUTION OF CONFLICTING TERMS
In the event of any conflict or inconsistency between this Agreement and the
Reinsurance Contract, this Agreement shall prevail and be controlling.
Notwithstanding anything to the contrary contained in Article IX herein, any
irreconcilable dispute between the parties to this Agreement shall be resolved
by arbitration, in the manner and pursuant to the procedure set forth in the
Reinsurance Contract, as more fully set forth in Article IX of this Agreement.
XV. SEVERABILITY
In the event any provision of this Agreement shall be declared invalid or
unenforceable by any regulatory body or court having jurisdiction, such validity
or enforceability shall not affect the validity or enforceability of the
remaining portions of this Agreement.
XVI. ASSIGNMENT
IGF and CCC agree that this Agreement is non-assignable, in whole or in part,
without the written consent of the other party.
XVII. RECORDS
Section 17.1: Upon reasonable notice, IGF or its designated representative, or
CCC and its designated representative, shall have access at any reasonable time
to inspect and audit the books and records which pertain in any way to this
Agreement and may make copies of any records pertaining thereto. This right of
inspection, audit and information shall survive termination of this Agreement
and shall run to the natural expiry of all liabilities under the policies
covered under the Reinsurance Contract.
Section 17.2: Subject to provisions regarding ownership of policies and claims
files, the records for the Policies shall be the property of IGF and be left in
IGF's possession, provided IGF has then rendered and continues to render timely
accounts and payments of all monies due CCC. Otherwise, the records, and the use
and control of expirations, shall be the property of CCC and IGF shall
immediately thereafter forward all such records to CCC.
XVIII. ENTIRE AGREEMENT
This Agreement, the Strategic Alliance Agreement, the MPCI Insurance Services
and Indemnity Agreement, the Ancillary Agreements, the Reinsurance Contract, the
Crop Hail Quota Share Agreement, the Multiple Peril Crop Insurance Quota Share
Contract, and the Multiple Peril Crop Insurance Quota Share Agreement between
the parties hereto, represent the entire agreement and understanding among the
parties signatory to this Agreement. No other oral or written agreements or
contracts relating to the risks reinsured hereunder currently exist and/or are
contemplated between the parties.
XIX. ADDITIONAL SERVICES
Section 19.1: IGF is willing to assist CNA:
A. In administering insurance products marketed or developed by CNA
outside the agreements listed in Article XVIII;
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B. In performing services, including but not limited to regulatory
compliance, processing, debt collection, accounting, or other activities related
to CNA's Business in years prior to the 1998 Crop Year;
C. In performing loss adjustment and claims processing related to any
insurance or other products of CNA outside the agreements listed in Article
XVIII; and
D. Any other services outside the the agreements listed in Article
XVIII that utilize the staff and expertise of IGF that it is willing to perform
on behalf of CNA.
Any services provided under this Section shall be based on terms included in a
separate agreement or agreements or an amendment or amendments to this Agreement
outlining the terms, conditions, and compensation for the performance of such
services. In general, the fees for services performed shall be those outlined in
Section 19.2.
Section 19.2: Subject to specific provisions to the contrary in any separate
agreements or amendments to this Agreement regarding services to be performed by
IGF on behalf of CNA under Section 19.1, the following schedule of fees shall
apply to all such separate agreements or amendments to this Agreement:
ADMINISTRATOR EMPLOYEE PROVIDING SERVICE RATE PER
HOUR
Executive - President, Executive Vice President $205.00
Internal Legal Staff - Indianapolis and Des Moines $150.00
Corporate Manager - I.e., Accounting, National Claims Mgt. Staff $85.00
Field Manager Rate - Service Office Director, Regional Claims Mgt. $60.00
Field Service Rate - Claims Adjuster $40.00
After April 1, 1999, the rates contained in this fee schedule shall be
recalculated annually for a five (5) year period thereafter by multiplying the
effective rate for the prior year by a factor of 1.05. IGF shall provide the CNA
with a report that provides an accounting of functions performed and expenses
incurred and the related fees and costs associated production of Policies
pursuant to this Agreement, related to rule, rate and form filings under this
Agreement and related to the performance of its obligations under this
Agreement.
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Section 19.3: Subject to specific provisions to the contrary in any separate
agreements or amendments to this Agreement regarding services to be performed by
IGF on behalf of CNA under Section 19.1, CNA shall reimburse IGF for all actual
transportation, communication, meals, lodging, outside legal, and administrative
expenses related to the functions performed on behalf of CNA including actual
computer service costs for processing data.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their duly authorized representatives.
CONTINENTAL CASUALTY COMPANY:
By: _______________________________________________________________
Name: _______________________________________________________________
Title: _______________________________________________________________
Date: _______________________________________________________________
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IGF INSURANCE COMPANY
and its AFFILIATED COMPANIES
By: _______________________________________________________________
Name: _______________________________________________________________
Title: _______________________________________________________________
Date: _______________________________________________________________
Exhibit 2.7
MULTIPLE PERIL CROP INSURANCE
INSURANCE SERVICES AND INDEMNITY AGREEMENT
This Insurance Services and Indemnity Agreement, (hereinafter referred to as the
"Agreement") is made and entered into by and between IGF Insurance Company
(hereinafter referred to as "IGF"), an Indiana domiciled property and casualty
insurer with principal offices located at 6000 Grand, Des Moines, Iowa 50312 and
Continental Casualty Company, (hereinafter referred to as "CCC"), an Illinois
domiciled property and casualty insurer with principal offices located at CNA
Plaza, Chicago, Illinois, effective July 1, 1997 for the benefit of IGF and CCC.
WHEREAS, CCC and IGF, IGF Holdings, Inc. and Symons International Group, Inc.
have entered into a Strategic Alliance Agreement(hereinafter referred to as the
"SAA"), and pursuant to Article 6 thereof have agreed to execute certain
Ancillary Agreements;
WHEREAS, among the Ancillary Agreements CCC and IGF have entered into is a
Multiple Peril Crop Insurance Quota Share Contract (hereinafter referred to as
the "Reinsurance Contract") effective July 1,1997 for certain policies issued by
CCC and reinsured 100% by IGF (as defined in the Reinsurance Contract, and
hereinafter referred to as the "Policy (ies)"), pursuant to the terms of such
Reinsurance Contract;
WHEREAS, in connection therewith CCC and IGF wish to enter into an agreement for
the provision of insurance services and indemnity;
WHEREAS, IGF possesses the staff and expertise to administer the Policies and
agrees to assume certain duties and responsibilities to administer such
Policies; and
WHEREAS, CCC'S offer to write such business is based on IGF'S acceptance of such
duties and responsibilities as described herein;
NOW, THEREFORE, the parties, in consideration of the mutual agreements,
covenants, and provisions herein contained, agree as follows:
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I. TERM
This Agreement shall take effect with the Reinsurance Contract and shall have
the same term and cancellation provisions in their entirety as provided in the
Reinsurance Contract, except as specified in Sections 4.5 and 4.7 of Article IV
and Sections 12.1 through 12.6 of Article XII of this Agreement. If this
Agreement is terminated or expires for any reason, the Reinsurance Contract
shall simultaneously terminate or expire.
II. APPOINTMENTS
Section 2.1: IGF shall serve as CCC'S marketing, production, and underwriting
agent for the Policies and shall adjust any claims made under the Policies.
Section 2.2: IGF warrants that it has and shall maintain throughout the term of
this Agreement any and all licenses required to perform and provide the services
specified in this Agreement in CCC's state of domicile and in all other states
in which IGF is performing services on behalf of CCC. IGF also warrants that it
shall abide by all rules and regulations as required by insurance department,
bureau of insurance, the FCIC/Risk Management Agency (hereinafter referred to as
"FCIC") or other appropriate regulatory agency of the states in which Policies
are written, including any filings as required by the appropriate regulatory
agency.
Section 2.3: Payment of all commissions due on Policies produced by producers
shall be made directly by IGF to the producers.
Section 2.4: In consideration for these appointments, IGF and CCC agree to
exercise all authority and perform all duties required by this Agreement.
III. UNDERWRITING AUTHORITY AND RELATED DUTIES
Section 3.1: IGF is authorized, and agrees on behalf of CCC, to accept and
decline insurance risks, underwrite, price, bind, issue, and cancel or nonrenew
the Policies, make customary endorsements, changes, assignments, transfers and
modifications of existing Policies, subject to limitations provided herein. IGF
warrants that it shall accept and decline insurance risks, underwrite, price,
issue, and cancel or nonrenew the Policies, make customary endorsements,
changes, assignments, transfers and modifications of existing Policies in a
timely and professional manner through qualified persons, fully familiar with
generally accepted standards in the United States, and for the 1998 Crop Year
according to CCC's formal written guidelines as may be provided from time to
time to IGF, and for the 1999 Crop Year and subsequent Crop Years according to
formal written guidelines of the Underwriting Committee (as defined in the SAA)
as may be provided from time to time to IGF.
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Section 3.2: Nothing stated anywhere in this Agreement shall impair IGF'S right
to cancel or nonrenew any Policy, providing such action is in full compliance
with applicable law and CCC receives advance notice of IGF'S intent. CCC has the
right to cancel or nonrenew any Policy upon the prior approval of IGF unless
this Agreement expires or is terminated, whereupon CCC may do so without prior
approval but shall provide ten (10) days prior written notice to IGF.
Section 3.3: CCC agrees that it shall, upon written request from IGF, promptly
appoint such persons as agents of CCC or grant such persons a power of attorney
as requested by IGF. CCC also agrees that it shall, upon written request from
IGF promptly file with appropriate regulatory authorities such forms and rates
as requested by IGF. IGF's staff shall perform the administrative functions
necessary for CCC to make such appointment and grant such powers.
IV. CLAIMS AUTHORITY AND RELATED DUTIES
Section 4.1: IGF is authorized, and agrees on behalf of CCC, to adjust,
compromise, process and pay all claims arising under the Policies issued under
this Agreement, including the right to litigate claims in CCC's name, except as
provided in Section 4.5 of Article IV herein. IGF warrants that any claims
arising under the Policies will be handled in a timely and professional manner
by qualified persons, fully familiar with generally accepted claims handling
standards in the United States, and for the 1998 Crop Year according to CCC's
formal written guidelines as may be provided from time to time to IGF. IGF is
authorized and agrees to investigate, monitor, and handle any claims under any
of the Policies issued under this Agreement and reinsured pursuant to the
Reinsurance Contract on CCC'S behalf or retain any independent claims consultant
or adjuster as may be required.
Section 4.2: CCC and IGF shall provide the other with prompt notification of any
losses or claims, or any information that makes a loss or claim reasonably
likely under the Policies and as provided elsewhere in this Agreement.
Section 4.3: In recognition of statutory, regulatory and legal duties to handle
claims in a prompt and fair manner, CCC and IGF agree to exercise their
commercially reasonable best efforts and cooperate fully with the other to
handle claims in said manner and in full compliance with all such requirements.
Section 4.4: Within 15 days after the end of each calendar month while this
Agreement is in effect, IGF shall promptly report to CCC on all open and closed
claims handled by it during such month in the reporting format as mutually
agreed to between CCC and IGF. Such reports shall include information on all
claims and allocated claims expenses
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reserved, paid and outstanding. IGF shall report within thirty (30) days of any
such developments, significant developments on claims, including but not limited
to, major reserve increases or decreases, settlements, or new information
changing the liability assessment or valuation previously reported to CCC by
IGF. IGF shall send CCC a copy of any claim file upon request by CCC. All claim
files will be the joint property of CCC and IGF during the period this Agreement
is in effect.
Section 4.5: Upon termination of this Agreement, or in the event of an order of
liquidation of CCC during the period this Agreement is in effect, such files
shall become the sole property of CCC or its estate. IGF shall have reasonable
access to, and the right to copy, any such claim files in CCC'S possession on a
timely basis, if requested.
Section 4.6: IGF shall pursue salvage or subrogation on behalf of CCC in all
appropriate cases, on any claims arising under the Policies.
Section 4.7: In the event this Agreement is terminated and unless otherwise
mutually agreed to between CCC and IGF, IGF shall have the right and duty to
settle and handle all subsequent claims and losses until such time as all
Policies issued, underwritten or serviced by IGF pursuant to this Agreement have
expired and the Reinsurance Contract has expired, and all known claims
thereunder have been paid or settled, have runoff or otherwise have been
disposed of in the judgment of CCC, and all incurred but not reported loss
reserves have been reduced to zero, and any amounts owed to CCC by others or
under the Reinsurance Contract in regard to any claims have been collected by
CCC. Reinsurance indemnity for any claim or loss discussed herein shall be
provided in accordance with the terms and conditions of the Reinsurance
Contract.
Section 4.8: All claims and/or losses handled by IGF pursuant to Section 4.7
herein shall be reported to CCC by IGF within forty-five (45) days after the end
of each calendar quarter in such reporting format as requested by CCC.
Section 4.9: IGF agrees to notify CCC immediately upon notice of any allegations
of bad faith as respects any Policy covered under the Reinsurance Contract, and,
of the receipt of any notice that a lawsuit has been filed against IGF, any of
its employees or agents, and/or CCC by an insured on a Policy covered under the
Reinsurance Contract. IGF shall furnish CCC, upon CCC's request, with copies of
all pleadings and related file material pertaining thereto in a prompt and
timely fashion.
V. ACCOUNTING AUTHORITY AND RELATED DUTIES
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Section 5.1: The parties agree that IGF shall bill its customers directly for
the Policies and collect all premiums due and owing for such Policies. IGF shall
reimburse CCC for all premium taxes due under such Policies at such times as
requested by CCC to fulfill its filing and payment obligations.
Section 5.2: Within fifteen (15) days after the end of each month while this
Agreement is in effect, IGF shall provide CCC, for each Agreement Year for which
coverage applies under the Reinsurance Contract, the following report:
Gross liability, premiums and losses paid, by state, before deducting the
amount of reinsurance ceded to the FCIC SRA.
Net premiums and losses paid, after recoveries from the FCIC SRA and deduction
of the allowable Expense Reimbursement under the FCIC SRA.
Calculation of gain or loss between the Company and the FCIC after recoveries
from the SRA and deduction of the allowable Expense Reimbursement under the FCIC
SRA.
Any balance due one party from the other shall be payable upon receipt of the
above report.
Section 5.3: As soon as practicable after the first February following each
Agreement Year, the IGF shall furnish to CCC the following report:
Gross liability, premiums and losses paid, by state, before deducting the
amount of reinsurance ceded to the FCIC SRA.
Net premiums and losses paid, after recoveries from the FCIC SRA and deduction
of the allowable Expense Reimbursement under the FCIC SRA.
Calculation of gain or loss between the Company and the FCIC after recoveries
from the SRA and deduction of the allowable Expense Reimbursement under the FCIC
SRA.
Any balance due one party from the other shall be payable upon receipt of the
above report.
Section 5.4: As soon as possible after the conclusion of each calender quarter
and Agreement Year the IGF will provide any other information CCC may require
for its Convention Statement which may be reasonably available to IGF. It is
understood and agreed that IGF and CCC shall each provide to the other any
other information mutually agreed to between the parties in writing.
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Section 5.5: The parties agree to apply commercially reasonable best efforts to
coordinate the flow of funds among the escrow accounts maintained by each party
under their respective FCIC SRAs including the exploration of establishing a new
account at a bank of convenience to IGF over which IGF shall have administrative
control.
Section 5.6: Except for the actions of the FCIC that are of generic and equal
application to insurers holding SRAs (i.e., nonpayment or rationed payment of A
& O Subsidies due to the lack of appropriated funds) that result in the
nonpayment of amounts otherwise due to such insurers, the failure of the FCIC to
remit funds to either CCC or IGF under their respective SRAs for any Reinsurance
Year due to an offset or an outright refusal to remit such funds whether they be
for administrative and operating expenses or underwriting gain or loss (with the
exception of Withheld Funds as defined below) shall not excuse either CCC or IGF
from making remittances of its obligations under this Agreement and the Multiple
Peril Crop Insurance Quota Share Agreement. Furthermore, should FCIC offset
funds from a Reinsurance Account of either party for losses in which each party
would have a share under the Multiple Peril Crop Insurance Quota Share
Agreement, then the party whose Reinsurance Agreement was offset shall be
considered to have paid its respective obligation to the extent of the offset.
Should such offset be greater than the obligation of the party subject to such
offset under the Multiple Peril Crop Insurance Quota Share Agreement, then the
other party shall remit such funds or such excess shall be an account payable
due from the other party.
Section 5.7: For any applicable Reinsurance Year, any gains withheld by FCIC in
a Reinsurance Account of IGF or CCC ("Withheld Funds") that would otherwise be
due and payable to one or the other parties shall be treated as an account
payable to the party to which such funds are owing. Such accounts payable shall
be due upon the receipt of such Withheld Funds by the party holding the account
payable.
VI. REGULATORY COMPLIANCE AND RELATED DUTIES
Section 6.1: CCC and IGF agree to use their commercially reasonable best efforts
to achieve full compliance with all applicable statutory, regulatory and legal
requirements.
Section 6.2: CCC and IGF agree that IGF is authorized to make such filings with
the FCIC, as are required by applicable law, on CCC's behalf. IGF will provide
CCC with copies of all filings at least five (5) business days prior to filing.
CCC will have the right to approve such filing, but CCC's approval will not be
unreasonably withheld. CCC will have the opportunity to review all data relevant
to such filings.
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Section 6.3: IGF agrees to advise CCC of any complaints and/or inquiries and to
provide CCC with the opportunity to respond to regulators or consumers. CCC and
IGF agree to provide the other, promptly upon request, with all information and
support required for any regulatory compliance obligation and for any reports,
statements or other filings required by regulatory authorities.
Section 6.4: IGF agrees to monitor all legal, statutory and regulatory
developments affecting the Policies hereunder and promptly report same to CCC.
Should any such changes affect the Policies hereunder, the parties agree to
ensure full compliance with such changes. IGF agrees to prepare any
documentation necessary to assure such compliance. In the event that CCC becomes
aware of any such development, it shall report it promptly to IGF.
Section 6.5: In the event that the FCIC or any State, by statute, regulation or
otherwise, prohibits or restricts IGF'S authority hereunder, the parties agree
that IGF's authority to act on behalf of CCC pursuant to this Agreement shall be
so restricted in that State.
VII. COMPENSATION
The parties agree that compensation for the performance of the mutual duties
specified hereunder shall be as follows:
Section 7.1: For the 1998 crop year, CCC shall pay to IGF the entire A & O
Subsidies, CAT LAE Reimbursement and XLAE received by CCC through its 1998 FCIC
Standard Reinsurance Agreement (hereinafter "SRA") net of the following
expenses: (i) reimbursements for any commissions on 1998 MPCI business paid
prior to Closing; (ii) a percentage of 1998 premiums written on policies with
sales closing dates prior to January 1, 1998 equal to the FCIC SRA A & O Subsidy
rate for the products marketed (i.e., twenty-seven percent (27%) for regular
MPCI; twenty-three and one-quarter percent (23.25%) for CRC) less the average
commission rate paid or due to be paid on such business less XXXX percent (X%)
for LAE; (iii) YYY percent (Y%) of premium on 1998 or 1999 premiums written on
policies with sales closing dates after January 1, 1998 and before June 30,
1998; and (iv) direct overhead expenses of CCC's participation in the Multiple
Peril Crop insurance program, including, but not limited to, office rent,
staffing, product development, marketing, advertising, licensing, and all other
direct overhead expenses/fixed costs, and with respect to the foregoing in the
manner of the payments described in this paragraph and in the amount (which
insofar as it is undetermined in this paragraph, then as the parties agree
by April 1, 1998) of the payments described in this paragraph.
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Section 7.2: For any other year beyond the 1998 crop year that CCC has an SRA:
(i) CCC shall transmit one hundred percent (100%) of the A & O Subsidies, CAT
LAE Reimbursement and XLAE received by CCC under the SRA to IGF immediately upon
receipt, or instruct FCIC to transmit them directly to IGF, or authorize the
opening of a specific account under IGF's control for the purposes of receiving
such funds, or assign such proceeds directly to IGF, or otherwise facilitate the
receipt by IGF of such funds; and (ii) IGF agrees to reimburse CCC for all its
reasonable fronting costs, including its costs and expenses related to the
production of Policies pursuant to this Agreement, related to filings under this
Agreement and related to the performance of its obligations under this
Agreement.
Section 7.3: For any year in which CCC does not have an SRA, IGF agrees to
reimburse CCC for all its reasonable fronting costs, including its costs and
expenses related to the production of Policies pursuant to this Agreement,
related to filings under this Agreement and related to the performance of its
obligations under this Agreement.
VIII. INDEMNIFICATION
Section 8.1: In addition to the obligations of IGF pursuant to the terms of the
Reinsurance Contract, IGF shall indemnify CCC as follows in Sections 8.2 and
8.3. However, Sections 8.2 and 8.3 shall not apply to any liability, claim,
suit, demand, damages (including punitive and exemplary damages), judgment,
cost, interest and expense (including but not limited to attorneys' fees and
disbursements) or regulatory fines or administrative penalties caused by the
action of or the failure to take action by any employee of CCC. Nor shall
Sections 8.2 and 8.3 prevent the application of any available reinsurance
proceeds.
Section 8.2: IGF shall indemnify, defend and hold harmless CCC, its agents,
employees, subsidiaries and affiliates from and against all liability, claims,
suits, demands, damages (including punitive and exemplary damages), judgments,
costs, interest and expense (including but not limited to attorneys' fees and
disbursements) arising out of, or in connection with, any Policy issued under
this Agreement and reinsured under the Reinsurance Contract, including but not
limited to production activities (such as claims made by producers against CCC
for commissions allegedly due them on Policies under the Agreement), failure of
producers to be properly licenced, underwriting activities, policy issuance,
claim handling and the resolution of coverage issues; provided however, that
notwithstanding any other provisions of this Agreement, such indemnification of
IGF shall not extend to any matter subject to the obligations of CCC or its
affiliates under the Multiple Peril Crop Insurance Quota Share Agreement.
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Section 8.3: IGF agrees to indemnify, defend and hold CCC harmless and make full
and prompt reimbursement for any regulatory fines, administrative penalties, or
civil forfeiture levied against CCC by the FCIC/RMA or other department or
agency, relating to IGF'S failure to fulfill any of its obligations under this
Agreement to administer the 1998 Crop Year MPCI book of business until the
expiration of the liabilities associated therewith. CCC shall use its
commercially reasonable best efforts to advise IGF as soon as possible of any
such fine or penalty, or any information indicating that a fine or penalty may
be levied.
Section 8.4: Any inadvertent delay, omission or error shall not be held to
relieve either party hereto from any liability which would attach to it
hereunder if such delay, omission or error had not been made.
Section 8.5: CCC agrees to save, indemnify, and hold IGF harmless against any
and all loss, liability or damage resulting from any misrepresentation or breach
of warranty by CCC under the terms of this Agreement.
Section 8.6: The indemnities provided in Sections 8.1, 8.2, 8.3, and 8.5 herein
shall survive any termination of this Agreement.
IX. ARBITRATION
In the event of an irreconcilable dispute between the parties to this Agreement,
such dispute shall be submitted for decision to the process of arbitration in
the manner and pursuant to the procedure set forth in the ARBITRATION Article of
the Reinsurance Contract.
X. MODIFICATION
There will be no modification of or change in the terms of this Agreement
without the written approval of the parties to this Agreement.
XI. BINDING EFFECT OF AGREEMENT
This Agreement will be binding upon and inure to the benefit of the parties,
their successors and assigns.
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Insurance Services & Indemnity Agreement
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<PAGE>
XII. TERMINATION
Section 12.1: This Agreement and IGF'S obligations, except as specified in
Article I, Sections 4.5 and 4.7 of Article IV, and Section 8.6 of Article VIII
hereunder, shall terminate automatically and without notice upon the occurrence
of any one or more of the following events: (a) termination of the Reinsurance
Contract; or (b) termination or modification of IGF'S participation in the
Reinsurance Contract.
Section 12.2: Any termination of this Agreement shall be subject always to IGF'S
duty to satisfy, fulfill, fully perform and discharge all of its obligations
pursuant to this Agreement.
Section 12.3: This Agreement, except as specified in Article I, Sections 4.5 and
4.7 of Article IV, and Section 8.6 of Article VIII, may be terminated at any
time by mutual written agreement.
Section 12.4: Notwithstanding anything herein to the contrary, should the Put
Right or Call Right be triggered, then IGF must stop using the CCC front at the
end of the current crop year in which the Put or Call right is exercised.
Section 12.5: Immediately, following receipt of written notice from CCC, on
account of IGF's failure to comply with a condition or provision of this
Agreement within thirty (30) days after such failure is brought the IGF's
attention in writing, this Agreement shall terminate.
Section 12.6: Unless otherwise directed by CCC in writing, in the event this
Agreement is terminated, IGF shall continue to perform the duties necessary to
service all Policies, at its own expense, until all liability underlying the
Policies shall have been terminated. Such services shall consist of, but shall
not necessarily be limited to, cancellations, return premiums, endorsements,
account current reporting and claim settlements. IGF shall also issue, for and
on behalf of CCC, an effective notice of non-renewal to all policyholders
terminating their coverage upon the expiration of their Policy term next
following the termination of this Agreement. Should good cause exist for CCC to
assume such duties, IGF shall reimburse CCC for the expenses it shall incur in
performing such duties. IGF shall also provide CCC, at IGF's expense, with a
copy of all insurance records on unexpired Policies and all insurance claim
files.
XIII. CONTRIBUTION
IGF, upon any payment hereunder, shall fully share in the subrogation,
contribution and salvage rights of CCC, as applicable, to the extent of IGF'S
payment to CCC.
XIV. RESOLUTION OF CONFLICTING TERMS
In the event of any conflict or inconsistency between this Agreement and the
Reinsurance Contract, this Agreement shall prevail and be controlling.
Notwithstanding anything to the contrary contained in Article IX herein, any
irreconcilable dispute between the parties to this Agreement shall be resolved
by arbitration, in the manner and pursuant to the procedure set forth in the
Reinsurance Contract, as more fully set forth in Article IX of this Agreement.
Multiple Peril Crop Insurance
Insurance Services & Indemnity Agreement
Page 10 of 11
<PAGE>
XV. SEVERABILITY
In the event any provision of this Agreement shall be declared invalid or
unenforceable by any regulatory body or court having jurisdiction, such validity
or enforceability shall not affect the validity or enforceability of the
remaining portions of this Agreement.
XVI. ASSIGNMENT
IGF and CCC agree that this Agreement is non-assignable, in whole or in part,
without the written consent of the other party.
XVII. RECORDS
Section 17.1: Upon reasonable notice, IGF or its designated representative, or
CCC and its designated representative, shall have access at any reasonable time
to inspect and audit the books and records which pertain in any way to this
Agreement and may make copies of any records pertaining thereto. This right of
inspection, audit and information shall survive termination of this Agreement
and shall run to the natural expiry of all liabilities under the policies
covered under the Reinsurance Contract.
Section 17.2: Subject to provisions regarding ownership of policies and claims
files, the records for the Policies shall be the property of IGF and be left in
IGF's possession, provided IGF has then rendered and continues to render timely
accounts and payments of all monies due CCC. Otherwise, the records, and the use
and control of expirations, shall be the property of CCC and IGF shall
immediately thereafter forward all such records to CCC.
XVIII. ENTIRE AGREEMENT
This Agreement, the Strategic Alliance Agreement, the Crop Hail Insurance
Services and Indemnity Agreement, the Ancillary Agreements, the Reinsurance
Contract, the Multiple Peril Crop Insurance Quota Share Agreement, the Crop Hail
Quota Share Contract, and the Crop Hail Quota Share Agreement, between the
parties hereto, represent the entire agreement and understanding among the
parties signatory to this Agreement. No other oral or written agreements or
contracts relating to the risks reinsured hereunder currently exist and/or are
contemplated between the parties.
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Insurance Services & Indemnity Agreement
Page 11 of 11
<PAGE>
XIX. ADDITIONAL SERVICES
Section 19.1: IGF is willing to assist CNA:
A. In administering insurance products marketed or developed by CNA
outside the agreements listed in Article XVIII;
B. In performing services, including but not limited to regulatory
compliance, processing, debt collection, accounting, or other activities related
to CNA's Business in years prior to the 1998 Crop Year;
C. In performing loss adjustment and claims processing related to any
insurance or other products of CNA outside the agreements listed in Article
XVIII; and
D. Any other services outside the the agreements listed in Article
XVIII that utilize the staff and expertise of IGF that it is willing to perform
on behalf of CNA.
Any services provided under this Section shall be based on terms included in a
separate agreement or agreements or an amendment or amendments to this Agreement
outlining the terms, conditions, and compensation for the performance of such
services. In general, the fees for services performed shall be those outlined in
Section 19.2.
Section 19.2: Subject to specific provisions to the contrary in any separate
agreements or amendments to this Agreement regarding services to be performed by
IGF on behalf of CNA under Section 19.1, the following schedule of fees shall
apply to all such separate agreements or amendments to this Agreement:
ADMINISTRATOR EMPLOYEE PROVIDING SERVICE RATE PER HOUR
Executive - President, Executive Vice President $205.00
Internal Legal Staff - Indianapolis and Des Moines $150.00
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Insurance Services & Indemnity Agreement
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<PAGE>
Corporate Manager - I.e., Accounting, National Claims Mgt. Staff $85.00
Field Manager Rate - Service Office Director, Regional Claims Mgt. $60.00
Field Service Rate - Claims Adjuster $40.00
After April 1, 1999, the rates contained in this fee schedule shall be
recalculated annually for a five (5) year period thereafter by multiplying the
effective rate for the prior year by a factor of 1.05. IGF shall provide the CNA
with a report that provides an accounting of functions performed and expenses
incurred and the related fees and costs associated therewith on a monthly basis.
The timing of the payment for such fees and costs shall be according to the
terms of the separate agreement or amendment to this Agreement related to the
services performed.
Section 19.3: Subject to specific provisions to the contrary in any separate
agreements or amendments to this Agreement regarding services to be performed by
IGF on behalf of CNA under Section 19.1, CNA shall reimburse IGF for all actual
transportation, communication, meals, lodging, outside legal, and administrative
expenses related to the functions performed on behalf of CNA including actual
computer service costs for processing data.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their duly authorized representatives.
CONTINENTAL CASUALTY COMPANY:
By: _______________________________________________________________
Name: _______________________________________________________________
Title: _______________________________________________________________
Date: _______________________________________________________________
IGF INSURANCE COMPANY
and its AFFILIATED COMPANIES
Multiple Peril Crop Insurance
Insurance Services & Indemnity Agreement
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<PAGE>
By: _______________________________________________________________
Name: _______________________________________________________________
Title: _______________________________________________________________
Date: _______________________________________________________________
Multiple Peril Crop Insurance
Insurance Services & Indemnity Agreement
Page 14 of 11
Exhibit 2.8
Execution Copy Original
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is entered into this _____
day of July, 1997 by and among Symons International Group, Inc., an Indiana
corporation ("SIG"), and GS Capital Partners II, L.P., a Delaware limited
partnership ("GSCP"), GS Capital Partners Offshore, L.P., a Cayman Island
limited partnership ("Offshore"), Goldman, Sachs & Co. VerWaltung GmbH
("VerWaltung"), Stone Street Funds 1996, L.P., a Delaware limited partnership
("Stone Street", and Bridge Street Funds 1996, L.P., a Delaware limited
partnership ("Bridge Street") (Offshore, VerWaltung, Stone Street and Bridge
Street are collectively referred to as the "Affiliates").
WITNESSETH:
There are currently issued and outstanding 1,106,625 common shares
("Shares") of GGS Management Holdings, Inc., a Delaware corporation ("GGSM");
and
WHEREAS, SIG owns 575,445 Shares; and
WHEREAS, GSCP and the Affiliates own in the aggregate 531,180 Shares,
which are owned as follows:
<TABLE>
<CAPTION>
Company Shares
<S> <C>
GS Capital Partners II, L.P. 333,277.8
GS Capital Partners Offshore, L.P. 132,491.7
Goldman Sachs & Co VerWaltung GmbH 12,292.6
Stone Street Funds 1996, L.P. 31,652.4
Bridge Street Funds 1996, L.P. 21,465.5
</TABLE>
and;
WHEREAS, SIG desires to purchase, and GSCP and the Affiliates desire to
sell, the 531,180 Shares of GGSM currently owned in the aggregate by GSCP and
Affiliates; and
WHEREAS, the parties hereto have agreed that the aggregate purchase
price for such Shares shall be Sixty-One Million Dollars ($61,000,000.00) (the
"Purchase Price"); and
WHEREAS, GSCP understands and agrees that SIG intends to finance the
Purchase Price from the proceeds received by SIG from an issuance of notes (the
"Note Financing"); and
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WHEREAS, the parties hereby agree that upon the completion of the
purchase of such Shares, the parties hereto shall relinquish all rights to any
and all prior agreements and understandings executed by the parties prior to the
date hereof.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and subject to the terms and conditions hereof, the
parties hereto agree as follows:
Section 1
Purchase of Shares
1.1 GSCP and the Affiliates hereby agree to sell, and SIG hereby agrees
to purchase, in the aggregate, Five Hundred Thirty-One Thousand, One Hundred
Eighty (531,180) Shares of GGSM ("The Stock") for the aggregate purchase price
of Sixty-One Million Dollars ($61,000,000.00).
1.2 Subject to Section 6 hereof, the closing of the purchase
contemplated herein (the "Closing") shall occur simultaneously with the closing
of the Note Financing; provided, however, that, should the Note Financing not
occur, SIG may, at its option, schedule the Closing at any time prior to
September 30, 1997 upon ten (10) days' advance written notice.
Section 2
Closing
2.1 At the Closing, SIG shall pay the Purchase Price to the account or
accounts which shall be designated by GSCP at least ten (10) days prior to the
Closing. GSCP and the Affiliates shall deliver The Stock at the Closing, duly
endorsed by GSCP or an Affiliate, as appropriate, transferring The Stock to SIG,
free and clear of all liens, encumbrances, pledges, voting agreements,
contractual rights or other claims of any nature whatsoever with respect to The
Stock.
Section 3
Representations and Warranties of GSCP
GSCP and the Affiliates, jointly and severally, represent and warrant
to SIG as follows:
3.1 GSCP and the Affiliates are duly organized, validly existing and in
good standing under the applicable laws of their jurisdiction of formation. GSCP
and the Affiliates have the requisite partnership or corporate power and
authority, as appropriate, to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of,
and the performance by each of GSCP and the Affiliates of its obligations under
this Agreement have been duly and validly authorized by all necessary
partnership or corporate action, as appropriate, on the part of each of GSCP and
the Affiliates. No other corporate, shareholder or partnership approval on the
part of any of GSCP or the Affiliates is necessary for any of GSCP or the
Affiliates to enter into this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by each of GSCP and the
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Affiliates and constitutes its valid and binding obligations, enforceable
against them in accordance with its terms, subject to the effect of any
applicable bankruptcy, reorganization, insolvency, moratorium or similar law
affecting creditors' rights generally and subject to the effect of general
principles of equity.
3.2 At the Closing, GSCP and the Affiliates will deliver The Stock free
and clear of all liens, claims, demands and encumbrances whatsoever with respect
to the stock.
3.3 The execution and delivery of this Agreement by GSCP and the
Affiliates will not, and the consummation of the transactions contemplated by
this Agreement and the compliance with the terms, conditions and provisions of
this Agreement by GSCP and the Affiliates will not, (i) violate or conflict with
any provision of the articles of incorporation, bylaws, partnership agreements
or other organizing documents of GSCP or the Affiliates; or (ii) conflict with
or result in the breach or termination of, or otherwise give any contracting
party the right to change the terms of, or to terminate or accelerate the
maturity of, or constitute a default under the terms of, any indenture,
mortgage, loan or credit agreement or any other material agreement or instrument
to which any of GSCP and/or the Affiliates is a party or by which any of them or
any of their assets may be bound or affected, except to the extent that any of
the foregoing would not materially impact GSCP and its Affiliates' ability to
perform their obligations hereunder. Further, GSCP and the Affiliates represent
and warrant that the execution and delivery of this Agreement by GSCP and the
Affiliates will not result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of the Shares or give to others
(other than SIG) any interest or rights therein.
3.4 GSCP and the Affiliates have not made any agreement or taken any
other action which might cause any person or entity to become entitled to a
broker's fee or commission as a result of the transactions contemplated in this
Agreement.
3.5 There are no actions, suits, investigations or proceedings of any
nature pending or, to the knowledge of GSCP and the Affiliates, threatened,
against GSCP or the Affiliates (x) affecting The Stock, or (y) that would be
reasonably likely to impair GSCP and the Affiliates' ability to consummate the
obligations hereunder, at law or in equity, by or before any court or
governmental department, agency or instrumentality.
3.6 GSCP and the Affiliates will deliver to SIG at the Closing good
title to The Stock. GSCP and the Affiliates will transfer The Stock to SIG at
the Closing free and clear of all claims, liens, demands and encumbrances
whatsoever with respect to the Stock.
3.7 GSCP and the Affiliates hereby agree that they will not, disclose
or reveal to any individual (other than to officers, directors, and employees of
GSCP and its affiliates), corporation, partnership, association, entity or
business, any proprietary or confidential technology, trade secret, confidential
information, data, processes, strategies, techniques, philosophies or software,
other proprietary intellectual property or other proprietary or confidential
information (collectively, "Confidential Information") used by SIG in any of its
businesses and GSCP and the Affiliates hereby agree that the Confidential
Information is the exclusive property of SIG and/or its subsidiaries.
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3.8 GSCP and the Affiliates have not, and hereby agree that, for three
years from the date hereof, they will not, directly (for themselves or others),
employ, offer employment to, or solicit the services of any current or future
employee of SIG or any subsidiary of SIG while such individual is in the employ
of SIG or any subsidiary of SIG.
Section 4
Representations and Warranties of SIG
SIG hereby represents and warrants to GSCP and the Affiliates as
follows:
4.1 SIG is a corporation duly organized, validly existing and in good
standing under the laws of the State of Indiana, and SIG has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of,
and the performance by SIG of its obligations under, this Agreement have been
duly and validly authorized by all necessary corporate action on the part of
SIG. No other corporate or shareholder proceedings on the part of SIG are
necessary to approve this Agreement or consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by SIG
and constitutes SIG's valid and binding obligation, enforceable against SIG in
accordance with its terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar law affecting creditors'
rights generally and subject to the effect of general principles of equity.
4.2 The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated by this Agreement and the
compliance with the terms, conditions and provisions of this Agreement by SIG
will not, (i) violate or conflict with any provision of SIG's charter, articles
of incorporation, bylaws or other governing documents; or (ii) conflict with or
result in a breach or termination of, or otherwise give any contracting party
the right to change the terms of, or to terminate or accelerate the maturity of,
or constitute a default under the terms of, any indenture, mortgage, loan or
credit agreement or any other material agreement or instrument to which SIG or
any of its affiliates is a party or by which any of them or their assets are
bound, except to the extent that any of the foregoing would not materially
impact SIG's ability to perform its obligations hereunder.
4.3 The purchase by SIG of The Stock pursuant to this Agreement does
not require any consent, approval or authorization of, any governmental or
regulatory authority.
4.4 SIG has not made any agreement or taken any other action which
might cause anyone to become entitled to a broker's fee or commission as a
result of the transactions contemplated hereby.
4.5 There are no actions, suits, proceedings or investigations of any
nature pending, or to the knowledge of SIG, threatened, against SIG or any of
its affiliates and no other events have occurred or are reasonably likely to
occur, in each case which would be reasonably likely to
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<PAGE>
materially impair SIG's ability to consummate the Note Offering or perform its
obligations hereunder.
4.6 Neither SIG, nor any of its affiliates, has attempted to contact,
contacted, held discussions with, conducted negotiations with, or entered into
any agreement or undertaking (whether oral or written) with, any party
concerning the sale, transfer or other disposal, or potential sale, transfer or
other disposal, of any of the shares of capital stock (whether by way of merger,
consolidation or otherwise) of GGSM, GGS Management, Inc., Superior Insurance
Company or Pafco General Insurance Company. Notwithstanding any other provision
of this Agreement, SIG shall only be responsible for the accuracy of this
representation up through and including the Closing.
Section 5
Cancellation of Agreements
5.1 The parties hereto agree that, if the Closing occurs, all
Shareholder Agreements (as hereinafter defined) entered into between the parties
hereto prior to the date hereof shall become null, void and of no effect as of
the date of Closing. Such agreements include, but are not limited to, a Stock
Purchase Agreement dated as of January 31, 1996 and the three amendments
thereto, the Amended and Restated Stockholder Agreement dated as of November 8,
1996 including any and all amendments thereto, the Registration Rights Agreement
dated as of April 30, 1996 and any and all letter agreements between the parties
executed prior to the date hereof ("Shareholder Agreements").
Section 6
Conditions To Closing
6.1 The obligations of SIG to proceed with the Closing under this
Agreement are subject to the fulfillment prior to or at Closing of the following
conditions (any one or more of which may be waived in whole or in part by SIG at
SIG's option):
a. The representations and warranties of GSCP and the
Affiliates contained in this Agreement shall be true
and correct in all material respects on and as of the
date of Closing with the same force and effect as if
those representations and warranties had been made
on, or as of, such date and SIG shall have received a
certificate to such effect signed by an authorized
officer, partner or other authorized signatory of
GSCP and the Affiliates.
b. GSCP and the Affiliates shall have performed in all
material respects all of their covenants and complied
with all of the provisions required by this Agreement
to be performed or complied with by them on or before
the Closing, and SIG shall have received a
certificate to such effect signed by an authorized
officer, partner or other authorized signatory of
GSCP and/or the Affiliates.
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c. No order of any court or administrative agency shall
be in effect with enjoins or prohibits the
transactions contemplated hereby.
d. GSCP and the Affiliates shall have delivered to SIG
copies, certified by the duly qualified and acting
Secretary, Assistant Secretary, partner or other
authorized signatory of GSCP and/or the Affiliates,
of resolutions adopted by the appropriate governing
body of GSCP and the Affiliates approving this
Agreement and the consummation of the transactions
contemplated hereby.
e. SIG shall have completed the Note Financing.
f. GSCP and the Affiliates shall execute such further
instruments of conveyance and transfer as SIG may
reasonably request to convey and transfer The Stock
to SIG.
g. GSCP and the Affiliates shall execute at Closing the
mutual general release in the form attached hereto as
Exhibit A and made a part hereof by reference.
6.2 The obligations of GSCP and the Affiliates to proceed with the
Closing under this Agreement are subject to the fulfillment prior to or at
Closing of the following conditions (any one or more of which may be waived in
whole or in part by GSCP at its option):
a. The representations and warranties of SIG contained
in this Agreement shall be true and correct in all
material respects (except that the representation
contained in Section 4.6 shall be true in all
respects) on and as of the date of Closing with the
same force and effect as those such representations
and warranties had been made on, as of, and with
reference to, such date, and GSCP and the Affiliates
shall have received a certificate to such effect
signed by an authorized officer of SIG.
b. SIG shall have performed in all material respects all
of the covenants and complied with all of the
provisions required by this Agreement to be performed
or complied by them on or before the Closing, and
GSCP and the Affiliates shall have received a
certificate to such effect signed by an authorized
officer of SIG.
c. SIG shall execute at Closing the mutual general
release in the form attached hereto as Exhibit A and
made a part hereof by reference (the "Release").
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Section 7
Indemnification
7.1 a. The parties hereto hereby each agree to indemnify, defend and hold
harmless the other from and against any loss, liability, claim, action,
obligation, damage, deficiency, judgment, costs and expenses (including
reasonable attorneys' fees and expenses incurred in the investigating,
preparing or defending any litigation or proceeding commenced or
threatened)("Damage") arising out of or resulting from any
misrepresentation, breach of warranty or non-fulfillment of any covenant
on the part of such party as shall be contained in this Agreement
b. Following the Closing, SIG shall indemnify and hold harmless GSCP and the
Affiliates and each of the officers, directors, employees, representatives
and agents of GSCP and the Affiliates, including the present directors
(each as "Indemnified Director") of GGSM and its subsidiaries designated
by GSCP and/or the Affiliates (each of the foregoing, including the
Indemnified Directors, an "Indemnified Party"), against all Damages
suffered by an Indemnified Party arising out of, relating to, or
resulting from, any claim, action, suit, proceeding or investigation
arising out of, relating to, or resulting from, the fact that such
Indemnified Party or any of its affiliates, or any entity of or for which
he or she is a director, officer, employee, representative agent,
was a shareholder or director of GGSM and/or any of its subsidiaries.
Without limiting SIG's and its subsidiaries' obligations pursuant to the
prior sentence, SIG agrees that it will cause GGSM to maintain in effect
for a period of three years following the Closing all rights to
indemnification and all limitations of liability existing as of the date
hereof in favor of the Indemnified Directors in GGSM's and its direct or
indirect subsidiaries' Certificates of Incorporation and Bylaws. SIG
shall use its best efforts to cause the Indemnified Directors to be
covered for a period of three years after the Closing by the directors'
and officers' insurance policy currently maintained by GGSM (provided
that SIG may permit GGSM to substitute therefor policies of at lease the
same coverage and amount containing terms and conditions which are not
less advantageous to the Indemnified Directors than the terms and
conditions of such existing policy) with respect to acts or omissions
which are or were committed by the Indemnified Directors in their
capacity as directors of GGSM.
7.2 Notwithstanding anything contained herein, no action or claim for
Damage resulting from any breach of the representations and warranties contained
herein shall be brought or made after December 31, 1998.
7.3 Any indemnification payment made pursuant to this Agreement shall
be increased by any federal, state, local or foreign tax liability actually
incurred, or expected with reasonable certainty to be incurred.
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7.4 In addition to the rights otherwise granted by this Section 7, GSCP
and the Affiliates, on the one hand, and SIG, on the other hand, agree that the
Damage caused by the breach by it of any of the provisions hereof will be
difficult to determine and monetary damages may not afford the other party a
full and adequate remedy for such breach, and therefore, each of the parties
agrees that the other party shall be entitled to an immediate injunction and
restraining order (without the necessity of a bond) to prevent any breach or any
threatened or continued breach by such party without the other party having to
prove Damages, in addition to any other remedies to which the other party may be
entitled at law or in equity.
Section 8
Termination
8.1 This Agreement may be terminated or extended at any time by mutual
written consent of the parties hereto prior to September 30, 1997.
8.2 Unless earlier terminated in accordance with Section 8.1, this
Agreement will terminate on September 30, 1997 if the Closing has not yet
occurred.
8.3 In the event of termination of this Agreement as provided in this
Section 8, this Agreement shall forthwith terminate and there shall be no
liability on the part of any party or any party's officers or directors, expect
for liabilities arising from a breach of this Agreement prior to such
termination.
Section 9
Post-Closing Price Adjustment
9.1 In the event that, within one (1) year following the Closing, SIG
or any of its affiliates shall, in any transaction or series of related
transactions, directly or indirectly, sell, transfer or otherwise dispose of
(each a "Sale") GGSM, GGS Management, Inc. ("GGS") or Pafco General Insurance
Company ("Pafco") and Superior Insurance Company ("Superior"), or shall enter
into any agreement for the Sale of GGSM, GGS or Pafco and Superior (whether any
such Sale or contemplated Sale is by means of a merger, consolidation, or sale
of all or substantially all of the assets or shares of capital stock of GGSM,
GGS or Pafco and Superior, or otherwise), that, upon the consummation of any
such Sale, SIG shall pay to GSCP an amount of cash equal to (such amount, the
"Price Adjustment Amount") (a) 48% of the total value of the highest amount of
consideration received or to be received by SIG or any of its affiliates in
connection with such Sale, less (b)(i) $61,000,000 plus (ii), if the Note
Financing is consummated, the Daily Interest Amount (as defined below)
multiplied by the number of days that elapse from the Closing through the date
upon which SIG or any of its affiliates enters into any agreement for any Sale
subject to this Section 9.1. "Daily Interest Amount" shall equal (x)
$61,000,000, multiplied by (y) (a) the annual interest payable by SIG in respect
of the notes issued pursuant to the Note Financing (or in respect of any notes
issued in exchange for such notes) divided by, (b) 365.
9.2 Notwithstanding the provisions of Section 9.1 hereof, if the Price
Adjustment Amount
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is negative, SIG shall not be required to make any payment to GSCP pursuant to
this Section 9.
9.3 Notwithstanding any other provision of this Agreement, in no event
shall SIG be required to pay to GSCP pursuant to this Section 9 an amount in
excess of $5,000,000.
Section 10
Miscellaneous
10.1 Each of the parties hereto agrees to use all commercially
reasonable efforts to take, or cause to be taken, all reasonable actions and to
do, or cause to be done, all reasonable things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement. None of the parties
hereto will take or permit to be taken (by any entity that they control) any
action that would be in breach of the terms or provisions of this Agreement or
that would cause any of the representations contained herein to be or become
untrue. In addition, SIG shall use commercially reasonable efforts to cause the
Note Financing to be consummated prior to September 30, 1997.
10.2 Whether or not the Closing occurs, subject to Section 7, except as
otherwise stated or hereinafter agreed, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expense. It is specifically agreed that,
subject to Section 7, SIG shall not be responsible for the legal, accounting or
other professional fees incurred by GSCP relating to this Agreement, its
execution or the Closing.
10.3 At Closing, GSCP will deliver written resignations of Sanjay H.
Patel and Michael A. Pruzan (or any designated successor thereto) from the Board
of Directors of GGSM, GGS Management, Inc., Superior Insurance Company, Superior
American Insurance Company, Superior Guaranty Insurance Company, Standard Plan,
Inc. and Pafco General Insurance Company.
10.4 The content and timing of any press release or other public
announcement proposed to be made concerning the transactions contemplated by
this Agreement must be consented to in advance by each party, which consents
shall not be unreasonably withheld or delayed. Except in connection with any
press release or other public announcement made pursuant to the prior sentence,
SIG shall not, and shall not permit any of its affiliates to, issue any press
release or make any other public statement which makes any reference to GSCP,
its affiliates, or "Goldman Sachs," without the prior consent of GSCP
10.5 Subject to Section 7.2 hereof, the representations, warranties,
covenants and agreements of the purchasers and sellers contained in this
Agreement shall survive the Closing and shall not merge in the performance of
any obligation by any party hereto.
10.6 This Agreement may not be amended or modified without the prior
written consent of all parties.
10.7 Failure to insist upon strict compliance with any of the terms or
conditions to this
-9-
<PAGE>
Agreement at any one time shall not be deemed a waiver of such term or condition
at any other time, nor shall any waiver or relinquishment of any right or power
granted herein at any time be deemed a waiver or relinquishment of the same or
any other right or power at any other time.
-10-
10.8 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to the principles
of conflicts of laws. Each of the parties hereto irrevocably and unconditional
consents to submit to the exclusive jurisdiction of the courts of the United
States of America located in the County of New York (and if such courts do not
have appropriate jurisdiction, the court of the State of New York), for any
action, proceeding or investigation in any court or before any governmental
authority ("Litigation") arising out of or relating to this Agreement or the
Release and the transactions contemplated hereby and thereby (and agrees not to
commence any Litigation relating thereto except in such courts), and further
agrees that service of any process, summons, notice or document by U.S.
registered mail to its respective address set forth in this Agreement shall be
effective service of process for any Litigation brought against it in any such
court. Each of the parties hereto hereby irrevocably and unconditional waives
any objection to the laying of venue of any Litigation arising out of this
Agreement or the transactions contemplated hereby in the courts of the United
States of America located in the County of New York (and if such courts do not
have appropriate jurisdiction, the courts of the State of New York), and hereby
further irrevocably and unconditional waives and agrees not to plead or claim in
any such court that any such Litigation brought in any such court has been
brought in an inconvenient forum.
10.9 Any notice or other communication to be given hereunder shall be
in writing and shall be deemed sufficient when:
a. mailed by United States Certified Mail, Return Receipt Requested;
b. mailed by overnight express mail;
c. sent by facsimile or telecopy machine, followed by
confirmation mailed by First Class Mail or overnight
express mail; or
d. delivered in person, at the address set forth below,
or such other address as a party may provide to the
other in accordance with the procedure for notice as
set forth in this Section.
If to: Symons International Group, Inc.:
David L. Bates, Esq.
Vice President, General Counsel and Secretary
4720 Kingsway Drive
Indianapolis, Indiana 46205
Telephone317 259-6384
Facsimile317 259-6395
-11-
<PAGE>
If to: GSCP
Michael A. Pruzan
Goldman Sachs & Co.
85 Broad Street
New York, New York 10004
Telephone212 902-9123
Facsimile212 357-0926
Copy to:
Gail Weinstein, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telephone212 859-8000
Facsimile212 859-8585
10.10 If any provision of this Agreement shall be determined to be
invalid or unenforceable, this Agreement shall be deemed amended to delete such
provision and the remainder of this Agreement shall be enforceable by this
terms.
10.11 This Agreement may not be assigned or delegated by any party
without the prior written consent of all other parties.
10.12 This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective permitted successors and assigns.
10.13 Each party agrees to execute and deliver all such documents and
agreements and to take all further acts as may be reasonably necessary or
appropriate to effectuate this Agreement.
10.14 Headings and captions contained in this Agreement are inserted
only as a matter of convenience and for reference and in no way define, limit,
extend or prescribe the scope of this Agreement or the intent of any provision.
10.15 The masculine gender shall include the feminine and neuter
genders and the singular shall include the plural.
10.16 This Agreement constitutes the entire agreement of the parties
with respect to the matters set forth herein and supersedes any and all prior
understandings or agreements, oral or written, with respect to such matters.
-12-
<PAGE>
10.17 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against any party hereto, whether under any rule
of construction or otherwise. No party shall be considered the draftsman. On the
contrary, this Agreement has been reviewed, negotiated and accepted by all
parties and their lawyers and shall be construed and interpreted according to
the ordinary meaning of the words used so as to fairly accomplish the purposes
and intentions of all parties hereto.
10.18 This Agreement may be executed in any number of counterparts,
each of which shall be an original, and all such counterparts shall constitute
one in the same Agreement, binding on all the parties notwithstanding that all
the parties are not signatories to the same counterpart.
10.19 This Agreement is for the sole benefit of the parties hereto and
shall be construed to grant legal or equitable rights only to the parties
hereto.
10.20 The preambles contained herein above are incorporated herein by
reference as though repeated verbatim.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
SYMONS INTERNATIONAL GROUP, INC.
By:___________________________________
Name:
Title:
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P.
Its general partner
By: GS Advisors, Inc.
Its general partner
By:____________________________________
Name:
Title:
-13-
<PAGE>
Stock Purchase Agreement cont. . . . . .
GS CAPITAL PARTNERS OFFSHORE, L.P.
By: GS Advisors II (Cayman), L.P.
Its general partner
By: GS Advisors II, Inc.
Its general partner
By:____________________________________
Name:
Title:
GOLDMAN SACHS & CO. VerWaltung GmbH
By:____________________________________
Name:
Title:
and
By:____________________________________
Name:
Title:
STONE STREET FUNDS 1996, L.P.
By: Stone Street Empire, Corp.,
Its general partner
By:____________________________________
Name:
Title:
BRIDGE STREET FUNDS 1996, L.P.
By: Stone Street Empire, Corp.,
Its general partner
By:____________________________________
Name:
Title:
-14-
<PAGE>
Execution Copy Original
MUTUAL GENERAL RELEASE
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Goran Capital Inc. and SIG, jointly and
severally, on the one hand, and GSCP and the Affiliates, jointly and severally,
on the other hand, for themselves and their respective successors and assigns,
hereby fully release and discharge each other and all entities and persons
related to or affiliated with them, from all liabilities, contingent or
otherwise, which Goran Capital Inc., SIG, its direct and indirect subsidiaries,
or GSCP and the Affiliates, or any related or affiliated entities, have against
the other party with respect to any and all claims, demands, liabilities or
costs or other expenses or liabilities incurred pursuant to the Shareholder
Agreements, including any and all other expenses or liabilities of a
non-recurring nature incurred pursuant to the Shareholder Agreements.
None of the terms or provisions of this Mutual General release may be
waived, amended, supplemented or otherwise modified except by a written
instrument executed by the parties hereto. This Mutual General Release shall be
binding upon the undersigned and their respective parties hereto. This Mutual
General Release shall be governed by and shall be construed and interpreted in
accordance with, the internal laws of the State of New York, without reference
to principles of conflict of laws.
All defined terms used herein shall have the same meaning as is
ascribed in the Stock Purchase Agreement to which this Mutual General Release is
an Exhibit.
IN WITNESS WHEREOF, the undersigned have executed this Mutual General
Release effective this _____ day of _______________, 1997.
SYMONS INTERNATIONAL GROUP, INC.
By:___________________________________
Name:
Title:
GORAN CAPITAL INC.
By:___________________________________
Name:
Title:
<PAGE>
Mutual General Release cont. . . . . .
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P.
Its general partner
By: GS Advisors, Inc.
Its general partner
By:____________________________________
Name:
Title:
GS CAPITAL PARTNERS OFFSHORE, L.P.
By: GS Advisors II (Cayman), L.P.
Its general partner
By: GS Advisors II, Inc.
Its general partner
By:____________________________________
Name:
Title:
<PAGE>
Mutual General Release cont. . . . . .
GOLDMAN SACHS & CO. VerWaltung GmbH
By:____________________________________
Name:
Title:
and
By:____________________________________
Name:
Title:
STONE STREET FUNDS 1996, L.P.
By: Stone Street Empire, Corp.,
Its general partner
By:____________________________________
Name:
Title:
BRIDGE STREET FUNDS 1996, L.P.
By: Stone Street Empire, Corp.,
Its general partner
By:____________________________________
Name:
Title:
Exhibit 4.3(2)
FIRST SUPPLEMENTAL INDENTURE, dated as of January 15, 1998
between SYMONS INTERNATIONAL GROUP, INC., a corporation organized under the laws
of the State of Indiana (the "Company"), having its principal office at 4720
Kingsway Drive, Indianapolis, Indiana 46205, and WILMINGTON TRUST COMPANY, a
Delaware banking corporation duly organized and existing under the laws of the
State of Delaware, as Trustee (hereinafter called the "Trustee").
RECITALS OF THE COMPANY
WHEREAS, the Company has heretofore executed and delivered to
the Trustee a certain indenture, dated as of August 12, 1997 (the "Indenture"),
pursuant to which one series of senior subordinated notes of the Company (the
"Securities") were issued. All terms used in this First Supplemental Indenture
that are defined in the Indenture shall have the meanings assigned to them in
the Indenture;
WHEREAS, Section 9.1 of the Indenture provides that without
the consent of the Holders of the Securities, the Company, when authorized by a
resolution of its Board of Directors, and the Trustee may enter into an
indenture supplemental to the Indenture for certain purposes;
WHEREAS, the Company pursuant to the foregoing authority,
proposes in and by this First Supplemental Indenture to amend the Indenture in
certain respects with respect to the Securities of any series created before the
date hereof; and
WHEREAS, all things necessary to make this First Supplemental
Indenture a valid agreement of the Company and the Trustee and a valid amendment
of and supplement to the Indenture have been done.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE
WITNESSETH:
For and in consideration of the premises and the purchase of
the Securities by the Holders thereof, it is mutually covenanted and agreed, for
the equal and proportionate benefit of all Holders of the Securities, as
follows:
<PAGE>
2
ARTICLE I
PROVISIONS OF
GENERAL APPLICATION
SECTION Definitions
(a) The following definitions in Section 1.1 of the Indenture
are hereby amended as follows:
"Board of Directors" means, with respect to the Company or a
Subsidiary, as the case may be, the Board of Directors (or other body performing
functions similar to any of those performed by a Board of Directors).
"Change of Control" means any transaction or series of
transactions in which any Person or group (within the meaning of Rule 13d-5
under the Exchange Act and Section 13(d) and 14(d) of the Exchange Act) other
than the Company and its Subsidiaries acquires all or substantially all of the
Company's assets or becomes the direct or indirect "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), by way of merger, consolidation,
other business combination or otherwise, of greater than 50% of the total voting
power (on a fully diluted basis as if all convertible securities had been
converted and all options and warrants had been exercised) entitled to vote in
the election of directors of the Company or the Surviving Person (if other than
the Company).
"Marketable Securities" means securities listed on a national
securities exchange which have a minimum weekly trading volume of at least
100,000 shares.
"Permitted Investment" means an Investment by the Company or
any Subsidiary in (i) a Person that will, upon the making of such Investment, be
or become a Subsidiary; provided that the primary business of such Subsidiary is
a Related Business; (ii) a Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Subsidiary; provided that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) any demand deposit account with an Approved Lender; (v)
receivables owing to the Company or any Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; provided that such trade terms may include such
concessionary trade terms as the Company or any such Subsidiary deems reasonable
under the circumstances; (vi) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vii) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Subsidiary;
(viii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Subsidiary or
in satisfaction of judgments; (ix) any Person to the extent such Investment
represents the non-cash portion of the consideration
<PAGE>
3
received for an Asset Disposition as permitted pursuant to Section 10.13; and
(x) any Affiliate (the primary business of which is a Related Business) that is
not a Subsidiary, provided that the aggregate of all such Investments
outstanding at any one time under this clause (x) shall not exceed $1,000,000;
(xi) Investments by the Subsidiaries in Investment Grade Securities; and (xii)
Investments by the Subsidiaries in Non-Investment Grade Securities; provided
that on the date such Investment is made, the fair market value of such
Investment when taken with all other such Investments shall not exceed in the
aggregate 15% of the total Invested Assets of the Subsidiaries taken as a whole;
provided further that such Investment in other Investment-Grade Securities and
Non-Investment Grade Securities in any single issuer, together with all other
investments in the same issuer, as determined at the date such Investment is
made and after giving effect thereto, shall not exceed in the aggregate those
percentages of the total Invested Assets of the Subsidiaries permitted by state
law or regulations (as they may be amended from time to time) determined as of
the end of the preceding calendar quarter; and provided further that this clause
(xii) shall not prohibit an Investment that qualifies as a Permitted Investment
under clauses (i) or (ii) above.
"Related Business" means the business of providing property
and casualty insurance to individuals or farms and any business related,
ancillary or complementary to such business of the Company.
"Temporary Cash Investments" means any of the following: (a)
securities issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof (provided that the
full faith and credit of the United States of America is pledged in support
thereof), (b) time deposits and certificates of deposit, eurodollar time
deposits and eurodollar certificates of deposit of (i) any lender under the
Credit Agreement, or (ii) any United States commercial bank of recognized
standing (y) having capital and surplus in excess of $500,000,000 and (z) whose
short-term commercial paper rating from S&P is at least A-1 or the equivalent
thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank
being an "Approved Lender"), in each case with maturities of not more than 270
days from the date of acquisition, (c) commercial paper and variable or fixed
rate notes issued by an Approved Lender (or by the parent company thereof) and
maturing within six months of the date of acquisition, (d) repurchase agreements
entered into by a Person with a bank or trust company (including any of the
lenders under the Credit Agreement) or recognized securities dealer having
capital and surplus in excess of $500,000,000 for (i) direct obligations issued
by or fully guaranteed by the United States of America, (ii) time deposits or
certificates of deposit described under subsection (b) above, or (iii)
commercial paper or other notes described under subsection (c) above, in which,
in each such case, such bank, trust company or dealer shall have a perfected
first priority security interest (subject to no other Liens) and having, on the
date of purchase thereof, a fair market value of at least 100% of the amount of
the repurchase obligations, (e) obligations of any State of the United States or
any political subdivision thereof, the interest with respect to which is exempt
from federal income taxation under Section 103 of the U.S. Internal Revenue
Code, having a long term rating of at least AA- or Aa-3 by S&P or Moody's,
respectively, and maturing within three years from the date of acquisition
thereof, (f) Investments in municipal auction preferred stock (i) rated AAA (or
the equivalent thereof) or better by S&P or Aaa (or the
<PAGE>
4
equivalent thereof) or better by Moody's and (ii) with dividends that reset at
least once every 365 days and (g) Investments, classified in accordance with
GAAP as current assets, in money market investment programs registered under the
Investment Company Act of 1940, as amended, which are administered by reputable
financial institutions having capital of at least $100,000,000 and the
portfolios of which are limited to Investments of the character described in
clauses (a), (b), (c), (e) and (f) above.
(b) The following definitions are hereby added to Section 1.1
of the Indenture:
"Invested Assets" means the amount on a consolidated basis of
a Person's Investments as reflected on such Person's most recent quarterly
balance sheet prepared in accordance with GAAP.
"Investment Grade Securities" means: (i) U.S. Government
Obligations; (ii) any certificate of deposit, maturing not more than 270 days
after the date of acquisition, issued by, or time deposit of, a commercial
banking institution that has combined capital and surplus of not less than
$100.0 millon or its equivalent in foreign currency, whose debt is rated at the
time as of which any investment therein is made, "A" (or higher) according to
S&P or Moody's, or if neither S&P nor Moody's shall then exist or if the debt of
such bank has not been rated by S&P or Moody's, the equivalent of such rating by
any other internationally recognized securities rating agency; (iii) commercial
paper, maturing not more than 270 days after the date of acquisition, issued by
a corporation (other than an Affiliate or Subsidiary of the Issuer) with a
rating, at the time as of which any investment therein is made, of "A-1" (or
higher) according to S&P or "P-1," (or higher) according to Moody's, or if
neither S&P nor Moody's shall then exist, the equivalent of such rating by any
other internationally recognized securities rating agency; (iv) any banking
acceptances, any private loans or any money market deposit accounts, in each
case, issued or offered by any commercial bank having capital and surplus in
excess of $100.0 million or its equivalent in foreign currency, whose debt or
credit paying ability is rated at the time as of which any investment therein is
made, "A" (or higher) according to S&P or Moody's, or if neither S&P nor Moody's
shall then exist or if the debt or credit paying ability of such bank has not
been rated by S&P or Moody's, the equivalent of such rating by any other
internationally recognized securities rating agency; (v) any other debt
securities or debt instruments with a rating of "BBB-1" or higher by S&P,
"Baa-3," or higher by Moody's, Class "2" or higher by the NAIC or the equivalent
of such rating by S&P, Moody's or the NAIC, or if none of S&P, Moody's and the
NAIC shall then exist or if such security has not been rated by S&P, Moody's or
the NAIC, the equivalent of such rating by any other internationally recognized
securities rating agency; (vi) any fund investing exclusively in investments of
the types described in clauses (i) through (v) above.
"NAIC" means the National Association of Insurance Commissioners.
"Non-Investment Grade Securities" means any Investment
(including, without limitation, debt securities, equity securities, real estate
investments and real estate loans) other than Investment Grade Securities.
<PAGE>
5
"U.S. Government Obligations" means securities that are (i)
direct obligations of the United States of America the timely payment of which
its full faith and credit is pledged or (ii) obligations of a Person controlled
and supervised by and acting as an agency or instrumentality of the United
States of America the timely payment of which is unconditionally guaranteed as a
full faith obligation by the United States of America, and shall also include a
depositary receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act of 1933, as amended), as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depositary receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depositary receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depositary receipt.
ARTICLE II
MISCELLANEOUS
SECTION Incorporation of Indenture. All the provisions of this
First Supplemental Indenture shall be deemed to be incorporated in, and made a
part of, the Indenture; and the Indenture, as supplemented and amended by this
First Supplemental Indenture, shall be read, taken and construed as one and the
same instrument.
SECTION Application of First Supplemental Indenture. The
provisions and benefit of this First Supplemental Indenture shall be effective
with respect to Outstanding Securities prior to and after the execution hereof.
SECTION Headings. The headings of the Articles and Sections of
the First Supplemental Indenture are inserted for convenience of reference and
shall not be deemed to be a part thereof.
SECTION Counterparts. This First Supplemental Indenture may be
executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
SECTION Conflict with Trust Indenture Act. If any provision
hereof limits, qualifies or conflicts with another provision hereof which is
required to be included in this First Supplemental Indenture by any of the
provisions of the Trust Indenture Act, such required provision shall control.
SECTION Successors and Assigns. All covenants and agreements
in this First Supplemental Indenture by the Company shall bind its successors
and assigns, whether so expressed or not.
<PAGE>
6
SECTION Separability Clause. In case any provision in this
First Supplemental Indenture shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
[rest of page intentionally left blank]
<PAGE>
7
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
SYMONS INTERNATIONAL GROUP, INC.,
as Issuer
By:
Name: Alan G. Symons
Title: Chief Executive Officer
By:
Name: Gary P. Hutchcraft
Title: Vice President
WILMINGTON TRUST COMPANY,
as Trustee
By:
Name:
Title:
<PAGE>
STATE OF )
: ss.:
COUNTY OF )
On the day of January __, 1998, before me personally came
______________, to me known, who, being by me duly sworn, did depose and say
that he is _______________ of Symons International Group, Inc., one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal is affixed to said instrument
is such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
-------------------------
Notary Public
[NOTARIAL SEAL]
My Commission Expires:
<PAGE>
STATE OF )
: ss.:
COUNTY OF )
On the day of January, 1998, before me personally came , to me
known, who, being by me duly sworn, did depose and say that he is of Wilmington
Trust Company, one of the corporations described in and which executed the
foregoing instrument; that he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation; and that he signed his
name thereto by like authority.
-------------------------
Notary Public
[NOTARIAL SEAL]
My Commission Expires:
<PAGE>
-----------------------------------------------------------------------
SYMONS INTERNATIONAL GROUP, INC.
As Issuer
WILMINGTON TRUST COMPANY
As Trustee
------------------
FIRST SUPPLEMENTAL
SENIOR SUBORDINATED INDENTURE
Dated as of January 15, 1998
-----------------------------------------------------------------------
Exhibit 10.9
EMPLOYMENT AGREEMENT
WHEREAS, GGS Management, Inc. and its subsidiaries (collectively, the
"Company") considers it essential to its best interests and the best interests
of its stockholders to foster the continuous employment of its key management
personnel and, accordingly, the Company desires to employ Roger C. Sullivan
("You", "Your"or "Executive"), upon the terms and conditions hereinafter set
forth; and
WHEREAS, the Executive desires to continue to be employed by the
Company, upon the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth below, the parties agree as follows:
1. Employment
1.1 Term of Agreement. The Company agrees to employ Executive as
Executive Vice President of Superior Insurance Company (including its
subsidiaries, "Superior"), effective as of April 23, 1997 and continuing until
March 31, 2002 ("Initial Term"), unless such employment is terminated pursuant
to Section 3 below; provided, however, that the term of this Agreement shall
automatically be extended without further action of either party for additional
one (1) year periods thereafter unless, not later than twelve (12) months prior
to the end of the then effective term, either the Company or the Executive shall
have given written notice that such party does not intend to extend this
Agreement. (the Initial Term and any extension thereof, the "Term"). If Company
gives Executive such a notice of non-renewal, Executive's employment shall
terminate as of the expiration date of this Agreement. It is expressly
understood and agreed that a notice of non-renewal issued by the Company shall
not extinguish the Executive's non-competition obligations pursuant to Section 4
herein.
1.2 Terms of Employment. During the Term, You agree to be a full-time
employee of the Company serving in the position of Executive Vice President of
Superior or other positions as the Chief Executive Officer or the Board of
Directors so direct and further agree to devote substantially all of Your
working time and attention to the business and affairs of Superior and, to the
extent necessary to discharge the responsibilities associated with Your position
as Executive Vice President of Superior and to use Your best efforts to perform
faithfully and efficiently such responsibilities. Executive shall perform such
duties and responsibilities as may be determined from time to time by the
Chairman and/or Chief Executive Officer of Superior and the Board of Directors
of Superior, which duties shall be consistent with the position of Executive
Vice President of Superior, which shall grant Executive authority,
responsibility, title and standing comparable to that of the executive vice
president and of a stock insurance company of similar standing and which will
not require Executive to relocate his principal place of residence from the
metropolitan Atlanta, Georgia area. Nothing herein shall prohibit You from
devoting Your time to civic and community activities or managing personal
investments, as long as the foregoing do not interfere with the performance of
Your duties hereunder.
-1-
<PAGE>
1.3 Appointment and Responsibility. The Board of Directors of Superior
shall, following the effective date of this Agreement, elect and appoint
Executive as Executive Vice President of Superior and Executive shall also be
elected to the Board of Directors of Superior. The parties hereby agree that the
failure to elect Executive to the Board of Directors of Superior shall, for
purposes of this Agreement, be a Termination of Executive without cause.
2. Compensation, Benefits and Prerequisites
2.1 Salary. Company shall pay Executive a salary, in equal bi-weekly
installments, equal to an annualized salary rate of $185,000. Executive's salary
as payable pursuant to this Agreement may be increased from time to time as
mutually agreed upon by Executive and the Company. Notwithstanding any other
provision of this Agreement, Executive's salary paid by Company for any year
covered by this Agreement shall not be less than such salary paid to Executive
for the immediately preceding calendar year. All salary and bonus amounts paid
to Executive pursuant to this Agreement shall be in U.S. dollars.
2.2 Bonus. The Company and Executive understand and agree that the
Company expects to achieve significant growth during the term of this Agreement
and that Executive will make a material contribution to that growth which will
require certain personal and familial sacrifices on the part of Executive.
Accordingly, it is the desire and intention of the Company to reward Executive
for the attainment of that growth through bonus and other means (including, but
not limited to, stock options, stock appreciation rights and other forms of
incentive compensation). Therefore, the Company will pay Executive a lump-sum
bonus (subject to normal withholdings) within thirty (30) business days from
receipt by Company of its consolidated, annual audited financial statements in
an amount which shall be determined in accordance with the following Bonus
Table. All amounts used for calculation purposes in this section shall be based
on the audited, consolidated financial statements of Superior (or any successor
thereto), with such financial statements having been prepared in accordance with
applicable Generally Accepted Accounting Principles, applied on a consistent
basis with that of prior years. It is agreed that Executive's minimum bonus for
the first year of this Agreement shall not be less than 35% of Executive's
salary.
<TABLE>
<CAPTION>
BONUS TABLE
<S> <C>
If Audited Net % of Annual Salary
Income (as a % of Payable to Executive
Budgeted Net Income Is As Bonus
Less Than 75% -0-
75% or more, but less than 90% 12.5%
90% or more, but less than 100% 25.0%
100% or more, but less than 115% 37.5%
115% or more 50.0%
</TABLE>
-2-
<PAGE>
2.3 Employee Benefits. Executive shall be entitled to receive all
benefits and prerequisites which are provided to other Executives of Company
under the applicable Company plans and policies, and to future benefits and
prerequisites made generally available to executive employees of the Company
with duties and compensation comparable to that of Executive upon the same terms
and conditions as other Company participants in such plans.
2.4 Additional Prerequisites. During the term of this Agreement,
Company shall provide Executive with:
(a) Not less than four (4) weeks paid vacation during each calendar
year.
(b) A vehicle commensurate with Executive's position or, at
Executive's option, a vehicle allowance of at least $600.00
per month.
2.5 Expenses. During the period of his employment hereunder, Executive
shall be entitled to receive reimbursement from the Company (in accordance with
the policies and procedures in effect for the Company's employees) for all
reasonable travel, entertainment and other business expenses incurred by him in
connection with his services hereunder.
2.6 Stock Options. Within sixty (60) days of the execution of this
Agreement, Executive will receive options to purchase 5,000 shares of Symons
International Group, Inc. which vest in accordance with the Symons International
Group 1996 Stock Option Plan and 5,000 shares of GGS Management Holdings, Inc.
which vest in accordance with the GGS Management Holdings, Inc. Stock Option
Plan. These options shall be in addition to any options granted to the Executive
prior to the commencement of this Agreement. Further, Executive shall be
eligible to be awarded stock options, in the discretion of the Board of
Directors of GGS Management Holdings, Inc. and Symons International Group, Inc.
3. Termination of Executive's Employment
3.1 Change of Control. Notwithstanding any other provisions of this
Agreement, if (i) a Change of Control shall occur; and (ii) within six (6)
months of any such Change of Control, Executive (a) receives a Notice of
Non-Renewal, (b) is terminated for any reason other than for cause, (c) is not
employed elsewhere in the Goran Group on terms consistent with this Agreement,
or (d) Company (including its successors, if any) is in breach of this
Agreement, then Executive shall continue to receive his current salary (in
bi-weekly payments) until the earlier to occur of:
(a) Executive shall commence employment with a firm or entity
other than the Company or any of its Affiliates, such that his
base salary is at or greater than existing base salary
pursuant to this Agreement; or
(b) The expiration of the Term.
-3-
<PAGE>
The receipt by Executive of payment pursuant to this Section 3.1 is specifically
conditioned, and no payments pursuant to this Section 3.1 shall be made to
Executive if he is, at the time of his Termination, in breach of any provision
(specifically including, but not limited to, the provisions of this Agreement
pertaining to non-competition and confidentiality) of this Agreement and,
further, if such payments have already begun, the continuation of payments to
Executive pursuant to this Section 3.1 shall cease at the time Executive shall
fail to comply with the non-competition and confidentiality provisions of
Article 4 herein. It is expressly understood and agreed that the amount of any
payment to Executive required pursuant to this Section 3.1 shall be reduced (but
not below zero) by any compensation received by Executive during the period
called for in this Section 3.1.
A Change of Control shall mean the failure of Symons International
Group, Inc. (including any of its Affiliates) to own a majority of the
outstanding common stock of either GGS Management Holdings, Inc. or Superior
Insurance Company.
3.2 Termination of Employment and Severance Pay. Executive's employment
under this Agreement may be terminated by either party at any time for any
reason; provided, however, that if Executive's employment is terminated for any
reason other than for cause or poor performance, he shall receive, as severance
pay salary continuation, at the salary rate in effect at the time of
termination, until the end of the Term, (the "Severance Payments"). Further, if
Executive shall be terminated without cause, receipt of severance payments
described in the preceding sentence are conditioned upon execution by Executive
and the Company of that mutual Waiver and Release attached hereto as Exhibit A.
Further, Executive shall receive severance pay in accordance with this Section
3.2 if Executive shall terminate this Agreement due to a breach thereof by the
Company or if Executive is directed by the Company (including, if applicable,
any successor) to engage in any act or action constituting fraud or any unlawful
conduct relating to the Company or its business as may be determined by
application of applicable law. Should Executive fail to adequately perform his
duties as Executive Vice President of Superior, Executive shall receive written
notification of such performance issues and shall have ninety (90) days to
rectify such problem. Notwithstanding any other provision of this Agreement, if
Executive (a) shall be terminated for poor performance (which shall be
determined by the Chief Executive Officer of the Company and concurred in by a
majority of the Board of Directors of Superior); or (b) provided a Notice of
Non-Renewal, then Executive shall receive, as severance pay, salary continuation
until the earlier to occur of: (a) one (1) year from the date of Executive's
termination, or (b) Executive shall commence employment with a firm or entity
other than the Company or its Affiliates such that his base salary is at or
greater than the existing base salary pursuant to this Agreement. It is
expressly understood and agreed that the amount of any payment to Executive
required pursuant to this Section 3.2 shall be reduced (but not below zero) by
any compensation received by Executive during the period called for in this
Section 3.2.
-4-
<PAGE>
3.3 Cause. For purposes of this Section 3, "cause" shall mean:
(a) the Executive being convicted in the United States of America,
any State therein, or the District of Columbia, or in Canada
or any Province therein (each, a "Relevant Jurisdiction"), of
a crime for which the maximum penalty may include imprisonment
for one year or longer (a "felony") or the Executive having
entered against him or consenting to any judgment, decree or
order (whether criminal or otherwise) based upon fraudulent
conduct or violation of securities laws;
(b) the Executive's being indicted for, charged with or otherwise
the subject of any formal proceeding (criminal or otherwise)
in connection with any felony, fraudulent conduct or violation
of securities laws, in a case brought by a law enforcement or
securities regulatory official, agency or authority in a
Relevant Jurisdiction;
(c) the Executive engaging in fraud, or engaging in any unlawful
conduct relating to the Company or its business, in either
case as determined under the laws of any Relevant
Jurisdiction;
(d) the Executive breaching any provision of this Agreement; or
(e) gross negligence or willful misconduct by the Executive in the
performance of his duties hereunder.
3.4 Disability. So long as otherwise permitted by law, if Executive has
become permanently disabled from performing his duties under this Agreement, the
Company's Chairman of the Board, may, in his discretion, determine that
Executive will not return to work and terminate his employment as provided
below. Upon any such termination for disability, Executive shall be entitled to
such disability, medical, life insurance, and other benefits as may be provided
generally for disabled employees of Company during the period he remains
disabled, as well as a continuation of a portion of Executive's salary
("Supplemental Payments") necessary to make Executive's total remuneration for
the period beginning on the date of Executive's disability and ending six (6)
months thereafter at least equal to Executive's Base Salary at the time of Your
disability. Permanent disability shall be determined pursuant to the terms of
Executive's long term disability insurance policy provided by the Company.
Should Executive decease during the Term, the Company will continue to pay
Executive's salary, in regular bi-weekly payments, for the lesser of (a) six (6)
months, or (b) the remaining period of the Term of this Agreement.
3.5 Indemnification. Executive shall be indemnified by Company (and,
where applicable, its subsidiaries) to the maximum extent permitted by
applicable law for actions undertaken for, or on behalf of, the Company and its
subsidiaries.
-5-
<PAGE>
4. Non-Competition, Confidentiality and Trade Secrets
4.1 Noncompetition. In consideration of the Company's entering into
this Agreement and the compensation and benefits to be provided by the Company
to You hereunder, and further in consideration of Your exposure to proprietary
information of the Company, You agree as follows:
(a) Until the date of termination or expiration of this Agreement
for any reason (the "Date of Termination") You agree not to
enter into competitive endeavors and not to undertake any
commercial activity which is contrary to the best interests of
the Company or its Affiliates, including, directly or
indirectly, becoming an employee, consultant, owner (except
for passive investments of not more than one percent (1%) of
the outstanding shares of, or any other equity interest in,
any company or entity listed or traded on a national
securities exchange or in an over-the-counter securities
market), officer, agent or director of, or otherwise
participating in the management, operation, control or profits
of (a) any firm or person engaged in the operation of a
business engaged in the acquisition of insurance businesses or
(b) any firm or person which either directly competes with a
line or lines of business of the Company accounting for five
percent (5%) or more of the Company's gross sales, revenues or
earnings before taxes or derives five percent (5%) or more
of such firm's or person's gross sales, revenues or earnings
before taxes from a line or lines of business which directly
compete with the Company.
Notwithstanding any provision of this Agreement to the contrary, You
agree that Your breach of the provisions of this Section 4.1(a) shall permit the
Company to terminate Your employment for cause.
(b) If Your employment is terminated by You, or by reason of Your
Disability, by the Company for cause, or pursuant to a notice
of non-renewal as outlined in Section 1.1, then, during the
period you receive payments pursuant to Article 3 hereof, but
in no event for a period of less than one (1) year after the
Date of Termination, You agree not to become, directly or
indirectly, an employee, consultant, owner (except for
passive investments of not more than one percent (1%) of the
outstanding shares of, or any other equity interest in, any
company or entity listed or traded on a national securities
exchange or in an over-the-counter securities market),
officer, agent or director of, or otherwise to participate in
the management, operation, control or profits of, any firm or
person which directly competes with a business of the
Company which at the Date of Termination produced any class of
products or business accounting for five percent (5%) or more
of the Company's gross sales, revenues or earnings before
taxes at which the Date of Termination derived five percent
(5%) or more of such firm's or person's gross sales, revenues
or earnings before taxes.
-6-
<PAGE>
(c) You acknowledge and agree that damages for breach of the
covenant not to compete in this Section 4.1 will be difficult
to determine and will not afford a full and adequate remedy,
and therefore agree that the Company shall be entitled to an
immediate injunction and restraining order (without the
necessity of a bond) to prevent such breach or threatened or
continued breach by You and any persons or entities acting for
or with You, without having to prove damages, and to all costs
and expenses (if a court or arbitrator determines that the
Executive has breached the covenant not to compete in this
Section 4.1, including reasonable attorneys' fees and costs,
in addition to any other remedies to which the Company may be
entitled at law or in equity. You and the Company agree that
the provisions of this covenant not to compete are reasonable
and necessary for the operation of the Company and its
subsidiaries. However, should any court or arbitrator
determine that any provision of this covenant not to compete
is unreasonable, either in period of time, geographical area,
or otherwise, the parties agree that this covenant not to
compete should be interpreted and enforced to the maximum
extent which such court or arbitrator deems reasonable.
4.2 Confidentiality. You shall not knowingly disclose or reveal to any
unauthorized person, during or after the Term, any trade secret or other
confidential information (as outlined in the Uniform Trade Secrets Act) relating
to the Company or any of its Affiliates, or any of their respective businesses
or principals, and You confirm that such information is the exclusive property
of the Company and its Affiliates. You agree to hold as the Company's property
all memoranda, books, papers, letters and other data, and all copies thereof or
therefrom, in any way relating to the business of the Company and its
Affiliates, whether made by You or otherwise coming into Your possession and, on
termination of Your employment, or on demand of the Company at any time, to
deliver the same to the Company.
Any ideas, processes, characters, productions, schemes, titles, names,
formats, policies, adaptations, plots, slogans, catchwords, incidents,
treatment, and dialogue which You may conceive, create, organize, prepare or
produce during the period of Your employment and which ideas, processes, etc.
relate to any of the businesses of the Company, shall be owned by the Company
and its Affiliates whether or not You should in fact execute an assignment
thereof to the Company, but You agree to execute any assignment thereof or other
instrument or document which may be reasonably necessary to protect and secure
such rights to the Company.
5. Miscellaneous
5.1 Amendment. This Agreement may be amended only in writing, signed by
both parties.
5.2 Entire Agreement. This Agreement contains the entire understanding
of the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard to the employment of Executive
-7-
<PAGE>
or the obligations of the Company or the Executive. This Agreement supersedes
all prior employment contracts and non-competition agreements between the
parties.
5.3 Notices. Any notice required to be given under this Agreement shall
be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested.
Any notice by mail shall be addressed as follows:
If to the Company, to:
Superior Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: President and Chief Executive Officer
If to Executive, to:
Roger C. Sullivan
280 Interstate Circle North, N.W.
Atlanta, Georgia 30339
or to such other addresses as one party may designate in writing to the other
party from time to time.
5.4 Waiver of Breach. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
5.5 Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
5.6 Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Indiana, without giving effect to
conflict of law principles.
5.7 Headings. The headings of articles and sections herein are included
solely for convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
5.8 Counterparts. This Agreement may be executed by either of the
parties in counterparts, each of which shall be deemed to be an original, but
all such counterparts shall constitute a single instrument.
5.9 Survival. Company's obligations under Section 3.1 and Executive's
obligations under Section 4 shall survive the termination and expiration of this
Agreement in accordance with the specific provisions of those Paragraphs and
Sections and this Agreement in its entirety shall be binding upon, and inure to
the benefit of, the successors and assigns of the parties hereto.
-8-
<PAGE>
5.10 Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by You and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior
subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.
GGS MANAGEMENT, INC.
("Company")
By:__________________________________
Title:________________________________
State of Indiana )
) SS:
County of __________)
Before me the undersigned, a Notary Public for _______________ County,
State of Indiana, personally appeared __________________________, and
acknowledged the execution of this instrument this _______ day of
___________________, 1997.
------------------------------
, Notary Public
State of Indiana
My Commission Expires:________________
-9-
<PAGE>
ROGER C. SULLIVAN
("Executive")
------------------------------
State of Indiana )
) SS:
County of __________)
Before me the undersigned, a Notary Public for _______________ County,
State of Indiana, personally appeared Roger C. Sullivan, and acknowledged the
execution of this instrument this _______ day of ___________________, 1997.
-------------------------------
, Notary Public
State of Indiana
My Commission Expires:_________________
-10-
Exhibit 10.10
EMPLOYMENT AGREEMENT
WHEREAS, Goran Capital Inc., and its subsidiaries (collectively, the
"Company") considers it essential to its best interests and the best interests
of its stockholders to foster the continuous employment of its key management
personnel and, accordingly, the Company desires to employ Gary P. Hutchcraft
("You", "Your"or "Executive"), upon the terms and conditions hereinafter set
forth; and
WHEREAS, the Executive desires to continue to be employed by the
Company, upon the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth below, the parties agree as follows:
1. Employment
1.1 Term of Agreement. The Company agrees to employ Executive as Vice
President and Chief Financial Officer, effective as of May 1, 1997 and
continuing until April 30, 1998, unless such employment is terminated pursuant
to Section 3 below; provided, however, that the term of this Agreement shall
automatically be extended without further action of either party for additional
one (1) year periods thereafter unless, not later than six (6) months prior to
the end of the then effective term, either the Company or the Executive shall
have given written notice that such party does not intend to extend this
Agreement. If Company gives Executive such a notice of non-renewal, Executive's
employment shall terminate as of the expiration date of this Agreement. It is
expressly understood and agreed that a notice of non-renewal issued by the
Company shall not extinguish the Executive's non-competition obligations
pursuant to Section 4 herein.
1.2 Terms of Employment. During the Term, You agree to be a full-time
employee of the Company serving in the position of Vice President and Chief
Financial Officer of the Company and further agree to devote substantially all
of Your working time and attention to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities associated with
Your position as Vice President and Chief Financial Officer of the Company and
to use Your best efforts to perform faithfully and efficiently such
responsibilities. Executive shall perform such duties and responsibilities as
may be determined from time to time by the Chairman and/or Chief Executive
Officer of the Company and the Board of Directors of the Company, which duties
shall be consistent with the position of Vice President and Chief Financial
Officer of the Company, which shall grant Executive authority, responsibility,
title and standing comparable to that of the vice president and chief financial
officer of a stock insurance holding company of similar standing and which will
not require Executive to relocate his principal place of residence from the
metropolitan Indianapolis, Indiana area. Nothing herein shall prohibit You from
devoting Your time to civic and community activities or managing personal
investments, as long as the foregoing do not interfere with the performance of
Your duties hereunder.
-1-
<PAGE>
1.3 Appointment and Responsibility. The Boards of Directors of the
Company shall, following the effective date of this Agreement, elect and appoint
Executive as Vice President and Chief Financial Officer. Consistent with Section
1.2 of this Agreement, Executive shall be primarily responsible for the
financial affairs of the Company.
2. Compensation, Benefits and Prerequisites
2.1 Salary. Company shall pay Executive a salary, in equal bi-weekly
installments, equal to an annualized salary rate of $132,000. Executive's salary
as payable pursuant to this Agreement may be increased from time to time as
mutually agreed upon by Executive and the Company. Notwithstanding any other
provision herein, the catch-up payment shall be paid to Executive by April 1 of
each year of this Agreement. For the calendar year beginning January 1, 1997 and
for each succeeding calendar year thereafter, Company shall pay Executive the
salary applicable to that calendar year in twenty-six (26) bi-weekly
installments. Notwithstanding any other provision of this Agreement, Executive's
salary paid by Company for any year covered by this Agreement shall not be less
than such salary paid to Executive for the immediately preceding calendar year.
All salary and bonus amounts paid to Executive pursuant to this Agreement shall
be in U.S. dollars.
2.2 Bonus. The Company and Executive understand and agree that the
Company expects to achieve significant growth during the term of this Agreement
and that Executive will make a material contribution to that growth which will
require certain personal and familial sacrifices on the part of Executive.
Accordingly, it is the desire and intention of the Company to reward Executive
for the attainment of that growth through bonus and other means (including, but
not limited to, stock options, stock appreciation rights and other forms of
incentive compensation). Therefore, the Company will pay Executive a lump-sum
bonus (subject to normal withholdings) within thirty (30) business days from
receipt by Company of its consolidated, annual audited financial statements in
an amount which shall be determined in accordance with the following Bonus
Table. All amounts used for calculation purposes in this section shall be based
on the audited, consolidated financial statements of Goran Capital Inc. (or any
successor thereto), with such financial statements having been prepared in
accordance with applicable Generally Accepted Accounting Principles, applied on
a consistent basis with that of prior years.
<TABLE>
BONUS TABLE
<CAPTION>
<S> <C>
If Audited Net % of Annual Salary
Income (as a % of Payable to Executive
Budgeted Net Income Is As Bonus
Less Than 75% -0-
75% or more, but less than 100% 10%
100% or more, but less than 125% 20%
125% or more 30%
</TABLE>
-2-
<PAGE>
It is understood and agreed that Goran Capital Inc.'s budgeted net
income for the year ending December 31, 1997 is $16,267,000 and that budgeted
net income for future years shall be set forth in Annual Addendums to this
Agreement.
2.3 Employee Benefits. Executive shall be entitled to receive all
benefits and prerequisites which are provided to other Executives of Company
under the applicable Company plans and policies, and to future benefits and
prerequisites made generally available to executive employees of the Company
with duties and compensation comparable to that of Executive upon the same terms
and conditions as other Company participants in such plans.
2.4 Additional Prerequisites. During the term of this Agreement,
Company shall provide Executive with:
(a) Not less than three (3) weeks paid vacation during each calendar
year.
(b) A vehicle commensurate with Executive's position.
2.7 Expenses. During the period of his employment hereunder, Executive
shall be entitled to receive reimbursement from the Company (in accordance with
the policies and procedures in effect for the Company's employees) for all
reasonable travel, entertainment and other business expenses incurred by him in
connection with his services hereunder.
3. Termination of Executive's Employment
3.1 Termination of Employment and Severance Pay. Executive's employment
under this Agreement may be terminated by either party at any time for any
reason; provided, however, that if Executive's employment is terminated for any
reason other than for cause, he shall receive, as severance pay, one (1) month's
current salary for each full and partial year of service. Further, if Executive
shall be terminated without cause, receipt of severance payments described in
the preceding sentence are conditioned upon execution by Executive and the
Company of that mutual Waiver and Release attached hereto as Exhibit A. Further,
Executive shall receive severance pay in accordance with this Section 3.1 if
Executive shall terminate this Agreement due to a breach thereof by the Company
or if Executive is directed by the Company (including, if applicable, any
successor) to engage in any act or action constituting fraud or any unlawful
conduct relating to the Company or its business as may be determined by
application of applicable law.
-3-
<PAGE>
3.2 Cause. For purposes of this Section 3, "cause" shall mean:
(a) the Executive being convicted in the United States of America,
any State therein, or the District of Columbia, or in Canada
or any Province therein (each, a "Relevant Jurisdiction"), of
a crime for which the maximum penalty may include imprisonment
for one year or longer (a "felony") or the Executive having
entered against him or consenting to any judgment, decree or
order (whether criminal or otherwise) based upon fraudulent
conduct or violation of securities laws;
(b) the Executive's being indicted for, charged with or otherwise
the subject of any formal proceeding (criminal or otherwise)
in connection with any felony, fraudulent conduct or violation
of securities laws, in a case brought by a law enforcement or
securities regulatory official, agency or authority in a
Relevant Jurisdiction;
(c) the Executive engaging in fraud, or engaging in any unlawful
conduct relating to the Company or its business, in either
case as determined under the laws of any Relevant
Jurisdiction;
(d) the Executive breaching any provision of this Agreement; or
(e) gross negligence or willful misconduct by the Executive in the
performance of his duties hereunder.
3.3 Change of Control. Notwithstanding any other provisions of this
Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12)
months of any such Change of Control, Executive (a) receives a Notice of
Non-Renewal, (b) is terminated for any reason other than for cause, or (c)
Company (including its successors, if any) is in breach of this Agreement, then
Executive shall continue to receive his current salary (in bi-weekly payments)
until the earlier to occur of:
(a) Executive shall commence employment with a firm or entity
other than the Company such that his base salary is at or
greater than existing base salary pursuant to this Agreement;
or
(b) The expiration of seventy-eight (78) weeks from Executive's Date of
Termination.
The receipt by Executive of payment pursuant to this Section 3.3 is specifically
conditioned, and no payments pursuant to this Section 3.3 shall be made to
Executive if he is, at the time of his Termination, in breach of any provision
(specifically including, but not limited to, the provisions of this Agreement
pertaining to non-competition and confidentiality) of this Agreement and,
further, if such payments have already begun, the continuation of payments to
Executive pursuant to this Section 3.3 shall cease at the time Executive shall
fail to comply with the non-competition and confidentiality provisions of
Article 4 herein. It is expressly understood and agreed that the amount
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<PAGE>
of any payment to Executive required pursuant to this Section 3.3 shall be
reduced (but not below zero) by any compensation received by Executive during
the period called for in this Section 3.3.
A Change of Control shall mean the inability of the Symons family to
cause the election of a majority of the members of the Board of Directors of
Goran Capital Inc., Symons International Group, Inc. or their respective
successors.
3.4 Disability. So long as otherwise permitted by law, if Executive has
become permanently disabled from performing his duties under this Agreement, the
Company's Chairman of the Board, may, in his discretion, determine that
Executive will not return to work and terminate his employment as provided
below. Upon any such termination for disability, Executive shall be entitled to
such disability, medical, life insurance, and other benefits as may be provided
generally for disabled employees of Company during the period he remains
disabled. Permanent disability shall be determined pursuant to the terms of
Executive's long term disability insurance policy provided by the Company. If
Company elects to terminate this Agreement based on such permanent disability,
such termination shall be for cause.
3.5 Indemnification. Executive shall be indemnified by Company (and,
where applicable, its subsidiaries) to the maximum extent permitted by
applicable law for actions undertaken for, or on behalf of, the Company and its
subsidiaries.
4. Non-Competition, Confidentiality and Trade Secrets
4.1 Noncompetition. In consideration of the Company's entering into
this Agreement and the compensation and benefits to be provided by the Company
to You hereunder, and further in consideration of Your exposure to proprietary
information of the Company, You agree as follows:
(a) Until the date of termination or expiration of this Agreement
for any reason (the "Date of Termination") You agree not to
enter into competitive endeavors and not to undertake any
commercial activity which is contrary to the best interests of
the Company or its affiliates, including, directly or
indirectly, becoming an employee, consultant, owner (except
for passive investments of not more than one percent (1%) of
the outstanding shares of, or any other equity interest in,
any company or entity listed or traded on a national
securities exchange or in an over-the-counter securities
market), officer, agent or director of, or otherwise
participating in the management, operation, control or profits
of (a) any firm or person engaged in the operation of a
business engaged in the acquisition of insurance businesses or
(b) any firm or person which either directly competes with a
line or lines of business of the Company accounting for five
percent (5%) or more of the Company's gross sales, revenues or
earnings before taxes or derives five percent (5%) or more of
such firm's or person's gross sales, revenues or earnings
before taxes from a line or lines of business which directly
compete with the Company.
-5-
<PAGE>
Notwithstanding any provision of this Agreement to the contrary, You
agree that Your breach of the provisions of this Section 4.1(a) shall permit the
Company to terminate Your employment for cause.
(b) If Your employment is terminated by You, or by reason of Your
Disability, by the Company for cause, or pursuant to a notice
of non-renewal as outlined in Section 1.1, then for two (2)
years after the Date of Termination, You agree not to become,
directly or indirectly, an employee, consultant, owner (except
for passive investments of not more than one percent (1%) of
the outstanding shares of, or any other equity interest in,
any company or entity listed or traded on a national
securities exchange or in an over-the-counter securities
market), officer, agent or director of, or otherwise to
participate in the management, operation, control or profits
of, any firm or person which directly competes with a business
of the Company which at the Date of Termination produced any
class of products or business accounting for five percent (5%)
or more of the Company's gross sales, revenues or earnings
before taxes at which the Date of Termination derived five
percent (5%) or more of such firm's or person's gross sales,
revenues or earnings before taxes. It is expressly agreed and
understood that this Section 4.1(b) shall not apply to a
public accounting or consulting firm.
(c) You acknowledge and agree that damages for breach of the
covenant not to compete in this Section 4.1 will be difficult
to determine and will not afford a full and adequate remedy,
and therefore agree that the Company shall be entitled to an
immediate injunction and restraining order (without the
necessity of a bond) to prevent such breach or threatened or
continued breach by You and any persons or entities acting for
or with You, without having to prove damages, and to all costs
and expenses (if a court or arbitrator determines that the
Executive has breached the covenant not to compete in this
Section 4.1, including reasonable attorneys' fees and costs,
in addition to any other remedies to which the Company may be
entitled at law or in equity. You and the Company agree that
the provisions of this covenant not to compete are reasonable
and necessary for the operation of the Company and its
subsidiaries. However, should any court or arbitrator
determine that any provision of this covenant not to compete
is unreasonable, either in period of time, geographical area,
or otherwise, the parties agree that this covenant not to
compete should be interpreted and enforced to the maximum
extent which such court or arbitrator deems reasonable.
4.2 Confidentiality. You shall not knowingly disclose or reveal to any
unauthorized person, during or after the Term, any trade secret or other
confidential information (as outlined in the Indiana Uniform Trade Secrets Act)
relating to the Company or any of its affiliates, or any of their respective
businesses or principals, and You confirm that such information is the exclusive
property of the Company and its affiliates. You agree to hold as the Company's
property all memoranda, books, papers, letters and other data, and all copies
thereof or therefrom, in any way
-6-
<PAGE>
relating to the business of the Company and its affiliates, whether made by You
or otherwise coming into Your possession and, on termination of Your employment,
or on demand of the Company at any time, to deliver the same to the Company.
Any ideas, processes, characters, productions, schemes, titles, names,
formats, policies, adaptations, plots, slogans, catchwords, incidents,
treatment, and dialogue which You may conceive, create, organize, prepare or
produce during the period of Your employment and which ideas, processes, etc.
relate to any of the businesses of the Company, shall be owned by the Company
and its affiliates whether or not You should in fact execute an assignment
thereof to the Company, but You agree to execute any assignment thereof or other
instrument or document which may be reasonably necessary to protect and secure
such rights to the Company.
5. Miscellaneous
5.1 Amendment. This Agreement may be amended only in writing, signed by
both parties.
5.2 Entire Agreement. This Agreement contains the entire understanding
of the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard to the employment of Executive or the obligations of the
Company or the Executive. This Agreement supersedes all prior employment
contracts and non-competition agreements between the parties.
5.3 Notices. Any notice required to be given under this Agreement shall
be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested.
Any notice by mail shall be addressed as follows:
If to the Company, to:
Goran Capital, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: President and Chief Executive Officer
If to Executive, to:
Gary P. Hutchcraft
4720 Kingsway Drive
Indianapolis, Indiana 46205
or to such other addresses as one party may designate in writing to the other
party from time to time.
-7-
<PAGE>
5.4 Waiver of Breach. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
5.5 Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
5.6 Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Indiana, without giving effect to
conflict of law principles.
5.7 Headings. The headings of articles and sections herein are included
solely for convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
5.8 Counterparts. This Agreement may be executed by either of the
parties in counterparts, each of which shall be deemed to be an original, but
all such counterparts shall constitute a single instrument.
5.9 Survival. Company's obligations under Section 3.1 and Executive's
obligations under Section 4 shall survive the termination and expiration of this
Agreement in accordance with the specific provisions of those Paragraphs and
Sections and this Agreement in its entirety shall be binding upon, and inure to
the benefit of, the successors and assigns of the parties hereto.
5.10 Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by You and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior
subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.
GORAN CAPITAL INC. AND SUBSIDIARIES
("Company")
By:_______________________________________
Title:______________________________________
-8-
<PAGE>
State of Indiana )
) SS:
County of __________)
Before me the undersigned, a Notary Public for _______________ County,
State of Indiana, personally appeared ___________________________________, and
acknowledged the execution of this instrument this _______ day of
___________________, 1997.
------------------------------
, Notary Public
State of Indiana
My Commission Expires:_________________
GARY P. HUTCHCRAFT
("Executive")
-----------------------------------
State of Indiana )
) SS:
County of __________)
Before me the undersigned, a Notary Public for _______________ County,
State of Indiana, personally appeared Gary P. Hutchcraft, and acknowledged the
execution of this instrument this _______ day of ___________________, 1996.
-------------------------------
, Notary Public
State of Indiana, County of _______________
My Commission Expires:_________________
-9-
Exhibit 10.11
EMPLOYMENT AGREEMENT
WHEREAS, Goran Capital Inc., and its subsidiaries (collectively, the
"Company") considers it essential to its best interests and the best interests
of its stockholders to foster the continuous employment of its key management
personnel and, accordingly, the Company desires to employ David L. Bates ("You",
"Your"or "Executive"), upon the terms and conditions hereinafter set forth; and
WHEREAS, the Executive desires to continue to be employed by the
Company, upon the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth below, the parties agree as follows:
1. Employment
1.1 Term of Agreement. The Company agrees to employ Executive as Vice
President and General Counsel, effective as of April 1, 1997 and continuing
until March 31, 1998, unless such employment is terminated pursuant to Section 3
below; provided, however, that the term of this Agreement shall automatically be
extended without further action of either party for additional one (1) year
periods thereafter unless, not later than six (6) months prior to the end of the
then effective term, either the Company or the Executive shall have given
written notice that such party does not intend to extend this Agreement. If
Company gives Executive such a notice of non-renewal, Executive's employment
shall terminate as of the expiration date of this Agreement. It is expressly
understood and agreed that a notice of non-renewal issued by the Company shall
not extinguish the Executive's non-competition obligations pursuant to Section 4
herein.
1.2 Terms of Employment. During the Term, You agree to be a full-time
employee of the Company serving in the position of Vice President and General
Counsel of the Company and further agree to devote substantially all of Your
working time and attention to the business and affairs of the Company and, to
the extent necessary to discharge the responsibilities associated with Your
position as Vice President and General Counsel of the Company and to use Your
best efforts to perform faithfully and efficiently such responsibilities.
Executive shall perform such duties and responsibilities as may be determined
from time to time by the Chairman and/or Chief Executive Officer of the Company
and the Board of Directors of the Company, which duties shall be consistent with
the position of Vice President and General Counsel of the Company, which shall
grant Executive authority, responsibility, title and standing comparable to that
of the vice president and general counsel of a stock insurance holding company
of similar standing. Your primary place of work will be at the company's U.S.
headquarters in Indianapolis, Indiana, but it is understood and agreed that your
duties may require travel. In the event you are relocated to another Company
location, the Company agrees to pay for the cost of your move (including
temporary lodging expenses) and to facilitate the sale of your Indianapolis home
so that you will be enabled to purchase
<PAGE>
a new home in your new location that is comparable in price to your existing
home and have your family join you at such new location within two (2) months of
your transfer or such other period as is reasonable considering market and
location. Nothing herein shall prohibit You from devoting Your time to civic and
community activities or managing personal investments, as long as the foregoing
do not interfere with the performance of Your duties hereunder.
1.3 Appointment and Responsibility. The Boards of Directors of the
Company shall, following the effective date of this Agreement, elect and appoint
Executive as Vice President and General Counsel. Consistent with Section 1.2 of
this Agreement, Executive shall be primarily responsible for the legal affairs
of the Company.
2. Compensation, Benefits and Prerequisites
2.1 Salary. Company shall pay Executive a salary, in equal bi-weekly
installments, equal to an annualized salary rate of $110,000. Executive's salary
as payable pursuant to this Agreement may be increased from time to time as
mutually agreed upon by Executive and the Company. Notwithstanding any other
provision of this Agreement, Executive's salary paid by Company for any year
covered by this Agreement shall not be less than such salary paid to Executive
for the immediately preceding calendar year. All salary and bonus amounts paid
to Executive pursuant to this Agreement shall be in U.S. dollars.
2.2 Bonus. The Company and Executive understand and agree that the
Company expects to achieve significant growth during the term of this Agreement
and that Executive will make a material contribution to that growth which will
require certain personal and familial sacrifices on the part of Executive.
Accordingly, it is the desire and intention of the Company to reward Executive
for the attainment of that growth through bonus and other means (including, but
not limited to, stock options, stock appreciation rights and other forms of
incentive compensation). Therefore, the Company will pay Executive a lump-sum
bonus (subject to normal withholdings) within thirty (30) business days from
receipt by Company of its consolidated, annual audited financial statements in
an amount which shall be determined in accordance with the following Bonus
Table. All amounts used for calculation purposes in this section shall be based
on the audited, consolidated financial statements of Goran Capital Inc. (or any
successor thereto), with such financial statements having been prepared in
accordance with applicable Generally Accepted Accounting Principles, applied on
a consistent basis with that of prior years.
-2-
<PAGE>
<TABLE>
BONUS TABLE
<CAPTION>
If Audited Net % of Annual Salary
Income (as a % of Payable to Executive
Budgeted Net Income) Is As Bonus
<S> <C>
Less Than 75% -0-
75% or more, but less than 100% 10%
100% or more, but less than 125% 20%
125% or more 30%
</TABLE>
2.3 Employee Benefits. Executive shall be entitled to receive all
benefits and prerequisites which are provided to other Executives of Company
under the applicable Company plans and policies, and to future benefits and
prerequisites made generally available to executive employees of the Company
with duties and compensation comparable to that of Executive upon the same terms
and conditions as other Company participants in such plans.
2.4 Additional Prerequisites. During the term of this Agreement,
Company shall provide Executive with:
(a) Not less than three (3) weeks paid vacation during each calendar
year.
(b) A vehicle commensurate with Executive's position.
(c) A golfing membership at Hillcrest Country Club or other comparable
country club.
2.7 Expenses. During the period of his employment hereunder, Executive
shall be entitled to receive reimbursement from the Company (in accordance with
the policies and procedures in effect for the Company's employees) for all
reasonable travel, entertainment and other business expenses incurred by him in
connection with his services hereunder.
3. Termination of Executive's Employment
3.1 Termination of Employment and Severance Pay. Executive's employment
under this Agreement may be terminated by either party at any time for any
reason; provided, however, that if Executive's employment is terminated for any
reason other than for cause, he shall receive, as severance pay, one (1) month's
current salary for each full and partial year of service. Further, if Executive
shall be terminated without cause, receipt of severance payments described in
the preceding sentence are conditioned upon execution by Executive and the
Company of that mutual Waiver and Release attached hereto as Exhibit A. Further,
Executive shall receive severance pay
-3-
<PAGE>
in accordance with this Section 3.1 if Executive shall terminate this Agreement
due to a breach thereof by the Company or if Executive is directed by the
Company (including, if applicable, any successor) to engage in any act or action
constituting fraud or any unlawful conduct relating to the Company or its
business as may be determined by application of applicable law.
3.2 Cause. For purposes of this Section 3, "cause" shall mean:
(a) the Executive being convicted in the United States of America,
any State therein, or the District of Columbia, or in Canada
or any Province therein (each, a "Relevant Jurisdiction"), of
a crime for which the maximum penalty may include imprisonment
for one year or longer (a "felony") or the Executive having
entered against him or consenting to any judgment, decree or
order (whether criminal or otherwise) based upon fraudulent
conduct or violation of securities laws;
(b) the Executive's being indicted for, charged with or otherwise
the subject of any formal proceeding (criminal or otherwise)
in connection with any felony, fraudulent conduct or violation
of securities laws, in a case brought by a law enforcement or
securities regulatory official, agency or authority in a
Relevant Jurisdiction;
(c) the Executive engaging in fraud, or engaging in any unlawful
conduct relating to the Company or its business, in either
case as determined under the laws of any Relevant
Jurisdiction;
(d) the Executive breaching any provision of this Agreement; or
(e) gross negligence or willful misconduct by the Executive in the
performance of his duties hereunder.
3.3 Change of Control. Notwithstanding any other provisions of this
Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12)
months of any such Change of Control, Executive (a) receives a Notice of
Non-Renewal, (b) is terminated for any reason other than for cause, or (c)
Company (including its successors, if any) is in breach of this Agreement, then
Executive shall continue to receive his current salary (in bi-weekly payments)
until the earlier to occur of:
(a) Executive shall commence employment with a firm or entity
other than the Company such that his base salary is at or
greater than existing base salary pursuant to this Agreement;
or
(b) The expiration of seventy-eight (78) weeks from Executive's Date of
Termination.
-4-
<PAGE>
The receipt by Executive of payment pursuant to this Section 3.3 is specifically
conditioned, and no payments pursuant to this Section 3.3 shall be made to
Executive if he is, at the time of his Termination, in breach of any provision
(specifically including, but not limited to, the provisions of this Agreement
pertaining to non-competition and confidentiality) of this Agreement and,
further, if such payments have already begun, the continuation of payments to
Executive pursuant to this Section 3.3 shall cease at the time Executive shall
fail to comply with the non-competition and confidentiality provisions of
Article 4 herein. It is expressly understood and agreed that the amount of any
payment to Executive required pursuant to this Section 3.3 shall be reduced (but
not below zero) by any compensation received by Executive during the period
called for in this Section 3.3.
A Change of Control shall mean the inability of the Symons family to
cause the election of a majority of the members of the Board of Directors of
Goran Capital Inc., Symons International Group, Inc. or their respective
successors.
3.4 Disability. So long as otherwise permitted by law, if Executive has
become permanently disabled from performing his duties under this Agreement, the
Company's Chairman of the Board, may, in his discretion, determine that
Executive will not return to work and terminate his employment as provided
below. Upon any such termination for disability, Executive shall be entitled to
such disability, medical, life insurance, and other benefits as may be provided
generally for disabled employees of Company during the period he remains
disabled. Permanent disability shall be determined pursuant to the terms of
Executive's long term disability insurance policy provided by the Company. If
Company elects to terminate this Agreement based on such permanent disability,
such termination shall be for cause.
3.5 Indemnification. Executive shall be indemnified by Company (and,
where applicable, its subsidiaries) to the maximum extent permitted by
applicable law for actions undertaken for, or on behalf of, the Company and its
subsidiaries.
4. Non-Competition, Confidentiality and Trade Secrets
4.1 Noncompetition. In consideration of the Company's entering into
this Agreement and the compensation and benefits to be provided by the Company
to You hereunder, and further in consideration of Your exposure to proprietary
information of the Company, You agree as follows:
(a) Until the date of termination or expiration of this Agreement
for any reason (the "Date of Termination") You agree not to
enter into competitive endeavors and not to undertake any
commercial activity which is contrary to the best interests of
the Company or its affiliates, including, directly or
indirectly, becoming an employee, consultant, owner (except
for passive investments of not more than one percent (1%) of
the outstanding shares of, or any other equity interest in,
any company or entity listed or traded on a
-5-
<PAGE>
national securities exchange or in an over-the-counter
securities market), officer, agent or director of, or
otherwise participating in the management, operation, control
or profits of (a) any firm or person engaged in the operation
of a business engaged in the acquisition of insurance
businesses or (b) any firm or person which either directly
competes with a line or lines of business of the Company
accounting for five percent (5%) or more of the Company's
gross sales, revenues or earnings before taxes or derives five
percent (5%) or more of such firm's or person's gross sales,
revenues or earnings before taxes from a line or lines of
business which directly compete with the Company.
Notwithstanding any provision of this Agreement to the contrary, You
agree that Your breach of the provisions of this Section 4.1(a) shall permit the
Company to terminate Your employment for cause.
(b) If Your employment is terminated by You, or by reason of Your
Disability, by the Company for cause, or pursuant to a notice
of non-renewal as outlined in Section 1.1, then for two (2)
years after the Date of Termination, You agree not to become,
directly or indirectly, an employee, consultant, owner (except
for passive investments of not more than one percent (1%) of
the outstanding shares of, or any other equity interest in,
any company or entity listed or traded on a national
securities exchange or in an over-the-counter securities
market), officer, agent or director of, or otherwise to
participate in the management, operation, control or profits
of, any firm or person which directly competes with a business
of the Company which at the Date of Termination produced any
class of products or business accounting for five percent (5%)
or more of the Company's gross sales, revenues or earnings
before taxes at which the Date of Termination derived five
percent (5%) or more of such firm's or person's gross sales,
revenues or earnings before taxes. It is expressly agreed and
understood that this Section 4.1(b) shall not apply to a
public accounting or consulting firm.
(c) You acknowledge and agree that damages for breach of the
covenant not to compete in this Section 4.1 will be difficult
to determine and will not afford a full and adequate remedy,
and therefore agree that the Company shall be entitled to an
immediate injunction and restraining order (without the
necessity of a bond) to prevent such breach or threatened or
continued breach by You and any persons or entities acting for
or with You, without having to prove damages, and to all costs
and expenses (if a court or arbitrator determines that the
Executive has breached the covenant not to compete in this
Section 4.1, including reasonable attorneys' fees and costs,
in addition to any other remedies to which the Company may be
entitled at law or in equity. You and the Company agree that
the provisions of this covenant not to compete are reasonable
and necessary for the operation of the Company and its
-6-
<PAGE>
subsidiaries. However, should any court or arbitrator
determine that any provision of this covenant not to compete
is unreasonable, either in period of time, geographical area,
or otherwise, the parties agree that this covenant not to
compete should be interpreted and enforced to the maximum
extent which such court or arbitrator deems reasonable.
4.2 Confidentiality. You shall not knowingly disclose or reveal to any
unauthorized person, during or after the Term, any trade secret or other
confidential information (as outlined in the Indiana Uniform Trade Secrets Act)
relating to the Company or any of its affiliates, or any of their respective
businesses or principals, and You confirm that such information is the exclusive
property of the Company and its affiliates. You agree to hold as the Company's
property all memoranda, books, papers, letters and other data, and all copies
thereof or therefrom, in any way relating to the business of the Company and its
affiliates, whether made by You or otherwise coming into Your possession and, on
termination of Your employment, or on demand of the Company at any time, to
deliver the same to the Company.
Any ideas, processes, characters, productions, schemes, titles, names,
formats, policies, adaptations, plots, slogans, catchwords, incidents,
treatment, and dialogue which You may conceive, create, organize, prepare or
produce during the period of Your employment and which ideas, processes, etc.
relate to any of the businesses of the Company, shall be owned by the Company
and its affiliates whether or not You should in fact execute an assignment
thereof to the Company, but You agree to execute any assignment thereof or other
instrument or document which may be reasonably necessary to protect and secure
such rights to the Company.
5. Miscellaneous
5.1 Amendment. This Agreement may be amended only in writing, signed by
both parties.
5.2 Entire Agreement. This Agreement contains the entire understanding
of the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard to the employment of Executive or the obligations of the
Company or the Executive. This Agreement supersedes all prior employment
contracts and non-competition agreements between the parties.
5.3 Notices. Any notice required to be given under this Agreement shall
be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested.
Any notice by mail shall be addressed as follows:
-7-
<PAGE>
If to the Company, to:
Chief Executive Officer
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: President and Chief Executive Officer
If to Executive, to:
David L. Bates
9932 Springstone Road
McCordsville, Indiana 46055
or to such other addresses as one party may designate in writing to the other
party from time to time.
5.4 Waiver of Breach. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
5.5 Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
5.6 Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Indiana, without giving effect to
conflict of law principles.
5.7 Headings. The headings of articles and sections herein are included
solely for convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
5.8 Counterparts. This Agreement may be executed by either of the
parties in counterparts, each of which shall be deemed to be an original, but
all such counterparts shall constitute a single instrument.
5.9 Survival. Company's obligations under Section 3.1 and Executive's
obligations under Section 4 shall survive the termination and expiration of this
Agreement in accordance with the specific provisions of those Paragraphs and
Sections and this Agreement in its entirety shall be binding upon, and inure to
the benefit of, the successors and assigns of the parties hereto.
-8-
<PAGE>
5.10 Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by You and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior
subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.
GORAN CAPITAL INC. AND SUBSIDIARIES
("Company")
By:__________________________________
Title:_______________________________
State of Indiana )
) SS:
County of __________)
Before me the undersigned, a Notary Public for _______________ County,
State of Indiana, personally appeared ______________________________, and
acknowledged the execution of this instrument this _______ day of
___________________, 1997.
-------------------------------
,Notary Public
State of Indiana
My Commission Expires:______________
-9-
<PAGE>
DAVID L. BATES
("Executive")
---------------------------------------
State of Indiana )
) SS:
County of __________)
Before me the undersigned, a Notary Public for _______________ County,
State of Indiana, personally appeared ______________________________, and
acknowledged the execution of this instrument this _______ day of
___________________, 1997.
-------------------------------
, Notary Public
State of Indiana
My Commission Expires:_________________
-10-
Exhibit 13
1997 Symons International Group, Inc. Annual Report
SIG LOGO
1997 Annual Report
[Large SIG logo with three photos]
<PAGE>
[small SIG logo]
Corporate Profile
Symons International Group, Inc. owns niche insurance companies principally in
the crop and nonstandard automobile insurance markets. IGF Insurance Company of
Des Moines, Iowa is the fourth largest crop insurer in the United States. Pafco
General Insurance Company of Indianapolis, Indiana and Superior Insurance
Company of Tampa, Florida, combined are the tenth largest provider of
nonstandard automobile insurance in the United States. The crop segment markets
and sells crop insurance to farmers. This is the fastest growing sector of the
commercial insurance market. The nonstandard automobile division markets and
sells insurance through the independent agency system to drivers who are unable
to obtain coverage from insurers at standard or preferred rates. This market is
the fastest growing segment of the personal lines market.
The common stock of Symons International Group, Inc. was initially offered to
the public on November 5, 1996 and trades on The NASDAQ Stock Market's National
Market under the symbol "SIGC".
Table of Contents
Financial Highlights 1
Chairman's Report 2
Selected Financial Data 4
Management's Discussion and Analysis 5
Consolidated Financial Statements 17
Notes to Consolidated Financial Statements 21
Report of Independent Accountants 45
Stockholder Information 46
Board of Directors and Executive Officers 47
Subsidiary and Branch Offices IBC
GRAPH 1993 1994 1995 1996 1997
$88,936 $103,134 $124,634 $305,499 $460,600
Gross Premiums Written By Year
<PAGE>
[small SIG logo]
<TABLE>
Financial Highlights
(in thousands, except per share data)
For the years ended December 31,
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross premiums written $460,600 $305,499 $124,634 $103,134 $88,936
- ----------------------------------------------------------------------------------------------------------------------------
Net operating earnings (loss) (1) $11,845 $13,916 $5,048 $2,222 $(244)
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) (2) $16,305 $13,256 $4,821 $2,117 $(323)
- ----------------------------------------------------------------------------------------------------------------------------
Basic operating earnings (loss) per share (1) (2) $1.11 $1.85 $0.72 $0.32 $(0.03)
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $1.56 $1.76 $0.69 $0.30 $(0.05)
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity $78,363 $60,900 $9,535 $4,255 $2,219
- ----------------------------------------------------------------------------------------------------------------------------
Return on average equity 21.9% 61.4% 69.9% 65.4% (18.9%)
- ---------------------------------------------------------------------------------------------------------------------------
Book value per share $7.50 $5.83 $1.36 $0.61 $0.32
- ----------------------------------------------------------------------------------------------------------------------------
Market value per share (3) $19.22 $16.75 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average outstanding shares-basic 10,450 7,537 7,000 7,000 7,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating earnings and per share amounts exclude the after tax effects of
realized capital gains and losses.
(2) In 1993, the Company recognized an increase to net earnings as a result of a
cumulative effect of a change in accounting principle of $1,175. Earnings and
operating earnings per share excluding this effect were $(0.20).
(3) The Company's shares were first publicly traded on November 5, 1996.
CORPORATE STRUCTURE
[graphic omitted]
Symons International Group, Inc.
Indianapolis, Indiana
("SIG or the "Company")
Wholly-owned subsidiaries
|
----------------------------------
| |
IGF Holdings, Inc. GGS Management, Inc.
("IGFH") ("GGS Management")
| |
----------------------------
| | |
IGF Insurance Company PAFCO General Superior Insurance
("IGF") Insurance Company Company
("Pafco") ("Superior")
|
----------------------------
| |
Superior Guaranty Superior American
Insurance Company Insurance Company
-1-
<PAGE>
[small SIG logo]
Chairman's Report to Our Shareholders
SYMONS INTERNATIONAL GROUP, INC. MILESTONES
Greetings:
As has been my practice in the past, I have used "milestones" to provide a
comparison of our development. I have taken a broader approach this year and
carried the results into an appraisal of our efforts as I see it.
I am much encouraged with the future and I feel certain you will be too when you
digest the information assembled below.
<TABLE>
<CAPTION>
YEAR: No. of Employees Gross Revenue Pre-Tax Earnings Net Earnings
<S> <C> <C> <C> <C>
1994 240 $106,187 $1,375 $2,117
1995 315 $127,977 $7,440 $4,821
1996 665 $321,518 $23,703 $13,256
1997 764 $492,356 $33,94 $16,305
(1) 1998 800 $730,000 N/A N/A
</TABLE>
(1) 1998 information is an estimate based on stated corporate goals.
Revenue is gross premiums, interest and fee income.
While I don't always agree with analysts, generally they do a good job. But as a
person who has been in the business of insurance for more than fifty years, I
have an advantage in assessing the true value of an insurance enterprise over
those that do not have my experience. I have a better tuned antenna and feel
many analysts miss some important aspects of the true worth of an insurance
company.
Over the years I have been the instigator and closer in the sale and purchase of
many insurance entities. The true value of those businesses was somewhat more
than a mere multiplication of the Earnings Per Share, (EPS).
We believe that our companies are grossly undervalued in the market place in
that it does not appreciate the cost and value added for growth in gross
revenue. To help you understand what I mean, let's look at values paid by
knowing buyers for recent acquisitions in fields of insurance similar to our
companies.
Note that the price paid for these entities doesn't follow a straight
multiplication of EPS, in fact the most constant number that parallels the price
is the Gross Written Premium.
<TABLE>
<CAPTION>
Premium
Mean Purchase Trailing to Purchase
Premiums Price EPS Multiple Price Ratio
<S> <C> <C> <C> <C>
Omni Insurance $140M $185M 30 132%
(sold to Hartford)
10/16/97
Guaranty National $510M $469M 16 91%
(sold to Orion Capital
9/18/97
Titan $172M $240M 17 140%
(sold to U.S.F.&G.
8/8/97
Integon $783M $519M N/A 62%
(sold to G.M.A.C. ----- ----- --- ---
6/3/97
Average 21 88%
== ===
</TABLE>
-2-
<PAGE>
[small SIG logo]
In today's world, the value of an insurer is more closely linked to its gross
written premiums. Depending on the class of business, this value multiple should
be between 75% and 100% of the insurers premium volume. We have outperformed all
the above companies in every worthwhile category. Yet, I ponder why no value has
been attributed to our $150M of premium growth in 1997.
In the past several years we have acquired businesses in the industry sectors
that we felt had the most potential for growth: Crop insurance (the fastest
growing segment of the Commercial insurance industry) and Non-Standard
automobile insurance (the growth leader in the Personal line component). You
will note that our growth parallels this pattern and that we have consistently
demonstrated our ability to grow faster than our industry peer group.
Let me recall for you our two most recent acquisitions, Superior Insurance
Group, and CNA Crop Book. When we bought Superior Insurance Group on May 1,
1996, it was coming off a year in which it had produced $95M of Gross Written
Premiums and earned about $5M of pre-tax income. For 1997, Superior wrote $250M
of premiums and earned a pre-tax profit of $20M. This growth came through the
repositioning of Superior in its markets and changing the way it did business.
This rate of growth is continuing in 1998.
On March 2, 1998 we took over CNA's book of MPCI and Crop Hail insurance. In
return, CNA gets a share of our crop reinsurance business that would otherwise
be placed with other reinsurers. We feel we can use our marketing expertise and
varied products to grow this approximately $110M of business in the same way we
have grown our previous acquisition in the past, outpacing other crop insurers
in the process.
Over the last 5 years, we have seen our performance as follows:
annual gross revenue average compound growth: 43%
annual net income average compound growth: 148%
annual ROE average compound growth: 40%
This growth and performance is the result of attracting a competent work force,
excelling in niche markets and making acquisitions that others look at and say
are insightful purchases (oddly, only after we have turned these acquisitions
into great producers). We are continuing to look at growth and acquisitions with
enthusiasm.
During the second half of 1997, we retained Donaldson, Lufkin & Jenrette ("DLJ")
to lead a $135M, thirty-year issue of Trust Preferred Securities. As part of
this successful issue, we did a road show to tell the story of our company. DLJ
prepared the presentations for that road show and commented, among other
positive statements, that we have "a proven management team." This team has the
ability, experience and the tools to continue our growth and performance into
the future.
The commendations on the quality of our personnel by the firm of Donaldson,
Lufkin & Jenrette is self evident and anything I might add on the professional
standing of our managers and employees would be redundant. I would be remiss
however if I didn't thank them all for their efforts and professional interest
in the company's welfare and success.
It has been said that a business is, at its inception, "Desperate," then
"Honest" and finally "Respectable." We have worked hard to reach
"respectability" and it is this that motivates us. We have made profits for our
shareholders and have greatly enhanced the company's corporate governance
function. Our growth in the business of insurance, measured by premium income,
profits and professionalism has been outstanding. This has come about primarily
through the efforts and dedication of our personnel and I extend to all of them
the thanks of the Board of Directors.
We have two public companies, Goran Capital Inc. and Symons International Group
Inc., and as a public organization we must maintain larger and more diverse
Boards. As Chairman, I rely on these gentlemen for their help and advice. Our
meetings are often lengthy and diverse and we wrestle with many additional
factors because the company is growth oriented. I wish to thank each of these
gentlemen for their contribution over the past year and assure them that their
efforts are greatly appreciated.
Thanks Board, thanks employees.
-3-
<PAGE>
[small SIG logo]
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
- --------------------------------------------------------------------------
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
- --------------------------------------------------------------------------
OF SYMONS INTERNATIONAL GROUP, INC.
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company and its Subsidiaries and should
be read in conjunction with the consolidated financial statements of the Company
and the notes thereto, included elsewhere in this Report.
Consolidated Statement of Operations Data:
(in thousands, except per share amounts and ratios)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross Premiums Written $ 460,600 $ 305,499 $ 124,634 $ 103,134 $ 88,936
- ------------------------------------------------------------------------------------------------------------------------------
Net Premiums Earned 271,814 191,759 49,641 32,126 31,428
- ------------------------------------------------------------------------------------------------------------------------------
Fee Income 20,309 9,286 2,170 1,632 886
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 11,447 6,733 1,173 1,241 1,489
- ------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 16,305 $ 13,256 $ 4,821 $ 2,117 $ (323)
======= ======= ======= ======= =====
- ------------------------------------------------------------------------------------------------------------------------------
Per Common Share Data:
- ------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Before Extraordinary Item $ 1.63 $ 1.76 $ 0.69 $ 0.30 $ (0.05)
------- ------ ------ ----- -----
- ------------------------------------------------------------------------------------------------------------------------------
BASIC NET EARNINGS (LOSS) $ 1.56 $ 1.76 $ 0.69 $ 0.30 $ (0.05)
======= ====== ====== ===== ======
- ------------------------------------------------------------------------------------------------------------------------------
Basic Weighted Average Shares Outstanding 10,450 7,537 7,000 7,000 7,000
- ------------------------------------------------------------------------------------------------------------------------------
GAAP Ratios:
- ------------------------------------------------------------------------------------------------------------------------------
Loss and LAE Ratio 78.0% 71.5% 72.5% 82.4% 79.8%
- ------------------------------------------------------------------------------------------------------------------------------
Expense Ratio 23.0 24.0 18.6 21.7 31.5
---- ---- ---- ---- ---
- ------------------------------------------------------------------------------------------------------------------------------
COMBINED RATIO 101.0% 95.5% 91.1% 104.1% 111.3%
===== ==== ==== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
- ------------------------------------------------------------------------------------------------------------------------------
Investments $ 216,518 $ 168,137 $ 25,902 $ 18,572 $ 21,497
- ------------------------------------------------------------------------------------------------------------------------
Total Assets 529,875 344,679 110,516 66,628 81,540
- ------------------------------------------------------------------------------------------------------------------------
Losses and Loss Adjustment Expenses 136,772 101,719 59,421 29,269 54,143
- ------------------------------------------------------------------------------------------------------------------------
Total Debt or Preferred Securities 135,000 48,000 11,776 10,683 9,341
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity 78,363 60,900 9,535 4,255 2,219
- ------------------------------------------------------------------------------------------------------------------------
Book Value Per Share $ 7.50 $ 5.83 $ 1.36 $ 0.61 $ 0.32
- ------------------------------------------------------------------------------------------------------------------------
Statutory Capital and Surplus:
- ------------------------------------------------------------------------------------------------------------------------
Pafco $ 19,924 $ 18,112 $ 11,875 $ 7,848 $ 8,132
- ------------------------------------------------------------------------------------------------------------------------
IGF $ 42,809 $ 29,412 $ 9,219 $ 4,512 $ 2,789
- ------------------------------------------------------------------------------------------------------------------------
Superior $ 65,146 $ 57,121
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The statutory surplus of Pafco includes Pafco's share of IGF's statutory surplus
prior to April 30, 1996. Pafco owned the following percentages of IGF at
December 31, 1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF
to SIG. Prior to the transfer, IGF also paid a dividend in the form of cash of
$7,500,000 and a promissory note of $3,500,000 which have been repaid in full.
-4-
<PAGE>
[small SIG logo]
[photographs of automobiles on freeway down left margin]
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY
- ------------------------------------------------------------
Overview
Symons International Group, Inc. (the "Company" or "SIG") is a 67% subsidiary of
Goran Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering
(the "Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran.
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Acquisitions and Public Offerings
On April 30 ,1996 the Company purchased the operations of Superior
Insurance Company for $66.6 million in cash (the "Acquisition"). Funds for the
Acquisition were provided from funds affiliated with Goldman Sachs and a bank
term loan of $48 million. Both Goldman Sachs and the bank term loan were taken
out in August 1997.
On November 5, 1996 the Company issued 3,450,000 shares in an initial
public offering of 33% of its stock at $12.50 per share.
On November 12, 1997 the Company issued $135 million of Trust Preferred
Securities at 9.50%. The proceeds of this offering were used to purchase Goldman
Sachs minority interest share of the nonstandard automobile operations, repay
the term loan used to acquire Superior and provide capital to the nonstandard
automobile division for future growth. The Preferred Securities carry a 30 year
term with a noncallable period of 10 years. Distributions are payable
semiannually at 9.5% with all principal paid at maturity. The Company also has
the ability to forego distributions for periods of up to five years, although it
has no intention to do so, and the Preferred Securities have limited covenants.
The Company believed the time was proper to obtain the benefit of 100% of the
nonstandard automobile operations, provide longer term financing at favorable
terms and provide additional capital for future growth.
Nonstandard Automobile Insurance Operations
GGS Holdings, through its wholly-owned subsidiaries, Pafco and Superior,
is engaged in the writing of automobile insurance for "nonstandard risks."
Nonstandard insureds are those individuals who are unable to obtain insurance
through standard market carriers due to factors such as poor premium payment
history, driving experience, record of prior accidents or driving violations,
particular occupation or type of vehicle. Premium rates for nonstandard risks
are higher than for
-5-
<PAGE>
[small SIG logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
standard risks. Nonstandard policies have relatively short
policy periods and low limits of liability. Due to the low limits of coverage,
the period of time that elapses between the occurrence and settlement of losses
under nonstandard policies is shorter than many other types of insurance. The
nonstandard automobile market is the fastest growing sector of the personal
lines market.
Crop Insurance Operations
General
Crop insurance consists of three main products. Hail insurance, which is
controlled by the private insurance industry, receives no subsidy from the
government. Multi-Peril Crop Insurance ("MPCI"), is a government sponsored
product, administered through the Federal Crop Insurance Corporation ("FCIC").
Named perils insurance covers farmers for specific risks to specific crops.
Farmers who purchase insurance receive subsidies to reduce their cost and
provide protection for major catastrophic loss. When a farmer wants to borrow
money to buy his seed, the bank wants insurance on the harvest so the bank knows
the loan can be repaid either through normal harvest or through an insurance
policy covering the yield on the crop. There are many types of coverages and
percentages that farmers can purchase. The Company works with independent
agents to meet the insurable needs of the farmer which includes the best
coverage and premium for the farm. The government supports this effort through
commissions it pays the Company to do this work and through premium subsidy for
the farmer's insurance costs. The government also provides back-up risk
protection to the 18 or so crop insurance providers in the event of major loss
Based on the results for any given year, the Company and the government share
in the results of profit and loss. In order to protect IGF from the loss part
of this equation, IGF buys third party reinsurance to reduce the downside from a
loss year.
Certain Accounting Policies for Crop Insurance Operations
The majority of the Company's crop insurance business consists of MPCI.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from more traditional property and casualty insurance lines.
Farmers may purchase "CAT Coverage" (the minimum available level of MPCI
coverage) upon payment of a fixed administrative fee of $50 per policy (the "CAT
Coverage Fee") instead of a premium. This fee is included in other income.
Commissions paid to agents to write CAT policies are partially offset by the CAT
Coverage Fee. For purposes of the profit-sharing formula under the MPCI program
referred to below, the Company is credited with an imputed premium (its "MPCI
Imputed Premium") for all CAT Coverage policies it sells, determined in
accordance with the profit-sharing formula established by the FCIC. For income
statement purposes under GAAP, Gross Premiums Written consist of the aggregate
amount of premiums paid by farmers for "Buy-up Coverage" (MPCI coverage in
excess of CAT Coverage), and any related federal premium subsidies, but do not
include any MPCI Imputed Premium credited on CAT Coverage. By contrast, Net
Premiums Written and Net Premiums Earned do not include any MPCI Premiums or
premium subsidies, all of which are deemed to be ceded to the United States
Government as reinsurer. The Company's profit or loss from its MPCI business is
determined after the crop season ends on the basis of a profit-sharing formula
established by federal regulation and the FCIC. For GAAP income statement
purposes, any such profit or loss sharing earned or payable by the Company is
treated as an adjustment to commission expense and is included in policy
acquisition and general and administrative expenses. Amounts receivable from the
FCIC are reflected on the Company's consolidated balance sheet as reinsurance
recoverables.
The Company also receives from the FCIC (i) an expense reimbursement
payment equal to a percentage of Gross Premiums Written for each Buy-up Coverage
policy it writes (the "Buy-up Expense Reimbursement Payment"),
-6-
<PAGE>
[small SIG logo]
[photographs of crops down right margin]
(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 (0.02%) of MPCI Retention to the extent the Company's MPCI Loss Ratios
on a per state basis exceed certain levels (the "MPCI Excess LAE Reimbursement
Payment"). 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.
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI Gross Premiums Written for each of the first and second quarters,
(ii) commission expense on MPCI Gross Premiums Written at contractual rates and
(iii) Buy-up Expense Reimbursement at the contractual rate of MPCI Gross
Premiums Written along with normal operating expenses incurred in connection
with premium writings. In the third quarter, if a sufficient volume of
policyholder acreage reports have been received and processed by the Company,
the Company's policy is to recognize MPCI Gross Premiums Written for the first
nine months based on a re-estimate. If an insufficient volume of policies have
been processed, the Company's policy is to recognize 20% of its full year
estimate of MPCI Gross Premiums Written in the third quarter. The remaining
amount of MPCI Gross Premiums Written is recognized in the fourth quarter, when
all amounts are reconciled. In prior years, recognition of MPCI Gross Premiums
Written was 30%, 30%, 30% and 10%, for the first, second, third and fourth
quarters, respectively. Commencing with its June 30, 1995 financial statements,
the Company also began recognizing MPCI underwriting gain or loss during the
first, second and third quarters, reflecting the Company's best estimate of the
amount of such gain or loss to be recognized for the full year, based on, among
other things, historical results, plus a provision for adverse developments. In
the fourth quarter, a reconciliation amount is recognized for the underwriting
gain or loss based on final premium and loss information.
-7-
<PAGE>
[small SIG logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Segment Data of the Company
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate overhead, interest costs and
amortization of intangibles nor does it include the results of operations of
Superior prior to May 1, 1996.
<TABLE>
<CAPTION>
Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonstandard - Automobile Insurance Operations:
(in thousands, except ratios) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Gross premiums written $323,915 $187,176 $49,005
======= ======= ======
- -----------------------------------------------------------------------------------------------------------------------
Net premiums written $256,745 $186,579 $37,302
======= ======= ======
- -----------------------------------------------------------------------------------------------------------------------
Net premiums earned $251,020 $168,746 $34,460
- -----------------------------------------------------------------------------------------------------------------------
Fee income 15,515 7,578 1,787
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 10,969 6,489 624
- -----------------------------------------------------------------------------------------------------------------------
Net realized capital gain (loss) 9,462 (1,014) (508)
----- ------ ----
- -----------------------------------------------------------------------------------------------------------------------
Total Revenues 286,966 181,799 36,363
------- ------- ------
- -----------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 195,900 124,385 25,423
- -----------------------------------------------------------------------------------------------------------------------
Policy acquisition and general and administrative expenses 72,463 46,796 12,929
------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------
Total Expenses 268,363 171,181 38,352
------- ------- ------
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes $18,603 $10,618 $(1,989)
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------
GAAP RATIOS (Nonstandard Automobile Only)
- -----------------------------------------------------------------------------------------------------------------------
Loss ratio 70.2% 65.1% 65.8%
- -----------------------------------------------------------------------------------------------------------------------
LAE ratio 7.8% 8.6% 8.0%
- -----------------------------------------------------------------------------------------------------------------------
Expense ratio, net of billing fees 22.7% 23.2% 32.3%
---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------
Combined ratio 100.7% 96.9% 106.1%
===== ==== =====
- -----------------------------------------------------------------------------------------------------------------------
Crop Insurance Operations:
- -----------------------------------------------------------------------------------------------------------------------
Gross premiums written $126,401 $110,059 $70,374
======= ======= ======
- -----------------------------------------------------------------------------------------------------------------------
Net premiums written $20,796 $23,013 $11,608
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------
Net premiums earned $20,794 $23,013 $11,608
- -----------------------------------------------------------------------------------------------------------------------
Fee income 4,764 1,672 384
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 191 181 674
- -----------------------------------------------------------------------------------------------------------------------
Net realized capital gain (loss) (18) (1) 164
--- -- ---
- -----------------------------------------------------------------------------------------------------------------------
Total Revenues 25,731 24,865 12,830
------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 16,185 12,724 8,629
- -----------------------------------------------------------------------------------------------------------------------
Policy acquisition and general and administrative expenses(1) (11,551) (6,095) (7,466)
- -----------------------------------------------------------------------------------------------------------------------
Interest and amortization of intangibles 235 551 627
--- --- ---
- -----------------------------------------------------------------------------------------------------------------------
Total Expenses 4,869 7,180 1,790
----- ----- -----
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $20,862 $17,685 $11,040
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------
Statutory Capital and Surplus:
- -----------------------------------------------------------------------------------------------------------------------
Pafco $19,924 $18,112 $11,875
- -----------------------------------------------------------------------------------------------------------------------
IGF 42,809 29,412 9,219
- -----------------------------------------------------------------------------------------------------------------------
Superior 65,146 57,121 49,277
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense
reimbursements and underwriting gain
-8-
<PAGE>
[small SIG logo]
[photographs of cars on freeway down left margin]
Results of Operations
Overview
1997 Compared To 1996
The Company recorded net earnings of $16,305,000 or $1.56 per share (basic),
respectively in 1997. This is approximately a 23.0% increase in net earnings
from 1996 comparable amounts of $13,256,000 or $1.76 per share (basic). The
reduction in earnings per share reflects the increase in the weighted average
shares outstanding from the Company's IPO in November 1996. The nonstandard
automobile insurance segment demonstrated improved earnings due to continued
premium growth, improved expense ratios and higher realized gains from
investment sales. Premium growth in nonstandard automobile was generated from
increased pressure on uninsured motorists to obtain insurance, expansion into
new states and increased market share penetration. During 1997, the Company
increased reserves for both prior and current accident years at Pafco. The total
increase for prior accident years at Pafco was approximately $7.5 million. The
improvement in crop insurance earnings relates to growth in market share and
favorable underwriting results. Growth in market share occurred in all product
lines for crop and is the result of improved marketing and agent service
efforts. Record underwriting results are due to favorable crop conditions and
continued improvement in risk selection.
1996 Compared To 1995
Net earnings and earnings per share increased 175.0% to $13,256,000 and 155.1%
to $1.76 (basic) in 1996 from $4,821,000 and $0.69 (basic) in 1995. Improved
earnings in 1996 were attributable to both the nonstandard automobile and crop
segments. The nonstandard automobile segment benefitted from significant premium
growth from the acquisition of Superior, elimination of quota share reinsurance
and internal growth. The nonstandard automobile segment also benefitted from
lower loss and expense ratios due to improved claims management, introduction of
multi-tiered products and operating efficiencies through reengineering,
management changes and gains from technological advancements. The crop insurance
segment also benefitted from significant premium growth in both crop hail and
MPCI premiums. The crop insurance segment's profitability was enhanced by a
lower crop hail loss ratio and improved MPCI underwriting gains.
Years Ended December 31, 1997 and 1996
Gross Premiums Written
Consolidated Gross Premiums Written increased 50.8% in 1997 due to growth
in both the nonstandard auto and crop segments. Gross Premiums Written for the
nonstandard auto segment increased 73.1% in 1997. While a portion of this
increase relates to four additional months of premium in 1997 of Superior,
additional premium growth relates to internal growth due to improved service,
certain product improvements, tougher uninsured motorist laws in states such as
California and Florida and entrance into new states such as Nevada and Oregon.
Such increase was primarily due to volume rather than rate increases, although
-9-
<PAGE>
[small SIG logo]
the Company adjusts rates on an ongoing basis. Gross Premiums Written for the
crop segment increased 14.8% in 1997. Such increase was due to continued
industry privatization and aggressive marketing efforts, resulting in continued
increase in market share. Remaining gross written premiums represent commercial
business which is ceded 100% to an affiliate.
Net Premiums Written
Net Premiums Written increased in 1997 as compared to 1996 due to the
growth in Gross Premiums Written offset by quota share reinsurance.
In 1997, the Company ceded $67,170,000 of nonstandard automobile premiums
as part of a quota share treaty instituted January 1, 1997. For the first three
quarters of 1997 the Company ceded 20% of nonstandard automobile premiums and
ceded 25% of such premiums in the fourth quarter. In 1998 the Company plans to
cede 10% of nonstandard automobile premiums with adjustments as needed for
surplus leverage. No such treaty was in effect during 1996. In 1997, the Company
ceded $15,640,000 of crop hail premiums as part of a 40% quota share treaty
instituted January 1, 1997. In 1996, crop hail premiums were ceded at a rate of
10%.
Net Premiums Earned
Net Premiums Earned increased in 1997 as compared to 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 premiums
earned to net premiums written for the nonstandard automobile segment was 97.8%
in 1997 as compared to 90.4% in 1996. The increase in the earned ratio is due to
higher premium growth earlier in 1997.
Fee Income
Fee income increased $11,023,000 in 1997 compared to 1996. Such increase
was due to billing fee income on nonstandard automobile business from an
increase in in-force policy count. There was also an increase in the receipt of
CAT Coverage Fees and CAT LAE Reimbursement Payments due to higher premium
volume.
Net Investment Income
Net investment income increased $4,714,000 in 1997 compared to 1996. Such
increase was due partially to four additional months of investment income from
Superior but also due to greater invested assets resulting from premium growth
and higher profitability.
Net Realized Capital Gains (Loss)
Realized gains of $9,444,000 in 1997 were due to the significant strength
of the equity markets in 1997 and the Company's position to realize gains as
securities had reached targeted pricing levels.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 78.0%
for 1997 as compared to 73.7% for 1996. The Crop Hail Loss Ratio in 1997 was
77.8% compared to 55.3% in 1996. The increase in the Loss and LAE Ratio for the
nonstandard automobile segment reflects the recent growth in premium volume in
an effort to increase market share and improve economies of scale, increased
physical damage severity costs and certain pending rate increases. The Company
increased 1996 and prior nonstandard automobile reserves at Pafco by $6.0
million in the first two quarters and $1.5 million in the fourth quarter which
increased the Loss and LAE Ratio 3.0% in 1997. Deficient reserve development at
Superior was approximately $2.5 million in 1997. The increase in the crop hail
loss ratio is the result of storm damage in the third quarter in certain eastern
states on new business obtained in 1997. The Company continues to aggressively
address ways to decrease the nonstandard automobile loss ratios including
elimination of unprofitable agents, rate increases and improved claims
management and closure rates. The Company is also reviewing the pricing of the
crop hail business to improve future loss experience.
Policy Acquisition and General and Administrative Expenses
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 $62,631,000 or 23.0%
of Net Premiums Earned for 1997 compared to $42,013,000 or 21.9% of Net Premium
Earned in 1996. Such increase was due to a higher mix of nonstandard automobile
premiums in 1997 as compared to 1996. The Expense Ratio, net of billing fees,
for the nonstandard automobile segment improved to 22.7% for 1997 as compared to
23.2% for 1996.
Due to the accounting for the crop insurance
-10-
<PAGE>
[small SIG logo]
segment, operating expenses for 1997 includes a contribution to earnings of
$11,551,000 as compared to $6,095,000 for 1996. Such increase was due to
greater Buy-up Expense Reimbursement Payments and MPCI underwriting gain due to
increased premium volumes and more favorable underwriting results.
Amortization of Intangibles
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 1997 reflects the effects of the Preferred Securities
Offering and the purchase of the minority interest position in GGSH.
Interest Expense
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
Income tax expense was 35.3% of pre-tax income for 1997 as compared to
33.9% in 1996. The increased rate is due to the higher amount of nondeductible
goodwill amortization expense.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at a rate of 9.5% net
of federal income taxes from the offering date of August 12, 1997.
Years Ended December 31, 1996 and 1995
Gross Premiums Written
Gross Premiums Written in 1996 increased to $305,499,000 from $124,634,000
in 1995 reflecting a 282% increase in nonstandard automobile insurance and an
increase of 56.4% in crop insurance. Other Gross Premiums Written consist of
premiums on commercial business which were 100% ceded to Granite Re Insurance
Company Ltd. ("Granite Re") effective January 1, 1996. The increase in
nonstandard automobile Gross Premiums Written was due to the Acquisition, which
generated Gross Premiums Written of $118,661,000 subsequent to the Acquisition,
as well as a 21% increase in policies in-force issued by Pafco. The increase in
Pafco policies in-force primarily resulted from improved service and product
improvements. The increase in crop insurance Gross Premiums Written was
primarily due to (i) farmers electing higher percentage of crop price levels to
be insured under MPCI Buy-up Coverages, (ii) an increase in MPCI policies
in-force, and (iii) increase in the number of acres insured, together with an
increase of $10,990,000, or 64.8%, in crop hail premiums in 1996 compared to
1995.
Net Premiums Written
The Company's Net Premiums Written in 1996 increased 292.1% to
$209,592,000 from $53,447,000 in 1995 due to the Acquisition, which generated
Net Premiums Written for Superior of $118,298,000 subsequent to the Acquisition,
and the increase in Gross Premiums Written in Pafco's nonstandard automobile
insurance business. In addition, the increase in Net Premiums Written resulted
from the Company's election not to renew, as of January 1, 1996, its 25% quota
share reinsurance on its nonstandard automobile business. As a result of
increases over time in its statutory capital, the Company determined that it no
longer required the additional capacity provided by this coverage in order to
maintain acceptable premium to surplus ratios. Since all MPCI premiums are
reported as 100% ceded, MPCI Gross Premiums Written have no effect on Net
Premiums Written.
Net Premiums Earned
The Company's Net Premiums Earned in 1996 increased 286.3% reflecting the
increase in Net Premiums Written. The ratio of Net Premiums Earned to Net
Premiums Written in 1996 decreased to 90.4% from 92.4% in 1995 due to growth in
Net Premiums Written in 1996 exceeding growth in Net Premiums Written in 1995.
Fee Income
The Company's fee income in 1996 increased 327.9% due principally to (i)
billing fee revenue of $4,655,000 at Superior subsequent to the Acquisition,
(ii) increased billing fee revenue at Pafco of $998,000 from nonstandard
automobile insurance policies, resulting from the increase in the in-force
policy count described above, and an increase in fees charged per installment in
late 1995, and
-11-
<PAGE>
[small SIG logo]
(iii) increased CAT Coverage Fees and CAT LAE Reimbursement
Payments resulting from the introduction of CAT Coverages in the Federal Crop
Insurance Reform Act of 1994 (the "1994 Reform Act").
Net Investment Income
The Company's net investment income in 1996 increased 474.0%. This
increase was due primarily to the investment earnings of $4,996,000 at Superior
subsequent to the Acquisition. Also contributing to the increase in net
investment income is an increase in average invested assets (not including
Superior) to $30,911,000 in 1996 from $22,653,000 in 1995.
Net Realized Capital Gain (Loss)
The Company recorded a net realized capital loss from the sale of
investments of $1,015,000 in 1996 compared to a net realized capital loss from
the sale of investments of $344,000 in 1995. The net realized capital loss in
1996 was the result of sales of securities to shorten the portfolio's overall
maturity to provide a better duration match with claims payments.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment in 1996 was
73.7% as compared to 73.8% in 1995. The reduction in the Loss and LAE Ratio for
1996 was a function of rate increases and improved claim closure ratios. Crop
hail loss ratios decreased in 1996 to 55.3% from 74.3% in 1995 due to more
favorable weather conditions and a broader geographic expansion of premiums
which serves to reduce exposure.
Policy Acquisition and General and Administrative Expenses
The Expense Ratio for the nonstandard automobile segment decreased to
29.6% in 1996 from 37.5% in 1995. Excluding interest on the Acquisition debt and
amortization of goodwill and other intangibles associated with the Acquisition
would reduce this ratio to 27.7% in 1996. This decrease was due to several
factors including: (i) lower commission expense at Superior through utilization
of multi-tier products, (ii) lower staff expenses as a result of higher
utilization and work flow re-engineering, and (iii) technological advancements
in the underwriting, premium processing and claims areas. As a result of the
accounting for the crop insurance segment, such segment experienced a
contribution to income reflected in the policy acquisition and general and
administrative expense line item of $6,095,000 in 1996 compared to a
contribution to income of $7,466,000 in 1995. This decrease in contribution
resulted from a combination of several factors. The primary difference is the
decrease in ceding commission income of $2,036,000 which is due to only a 10%
quota share agreement for crop hail in 1996 versus a 25% quota share in 1995.
Other items include a commission expense increase of $6,217,000 due to higher
premium writings and an increase in other operating expenses of $4,153,000. This
net increase in expense of $10,370,000 was reduced by an increase of $8,490,000
in Buy-up Expense Reimbursement and an increase in the MPCI underwriting gain of
$2,624,000.
Interest Expense
The Company's interest expense in 1996 increased to $3,938,000 from
$1,248,000 in 1995 due primarily to interest of $2,774,000 on the $48 million
indebtedness incurred by a subsidiary of GGSH to partially fund the Acquisition
(the "GGS Senior Credit Facility").
Income Tax Expense
The effective tax rate in 1996 reflects a 33.9% provision compared to a
35.2% provision in 1995. The reduction in the effective tax rate is due to
higher tax-exempt interest and dividend income.
-12-
<PAGE>
[small SIG logo]
[photograph of wheat down left margin]
Liquidity and Capital Resources
The primary source of funds available to the Company are dividends from
its primary subsidiaries, IGF, IGF Holdings and GGS Management. 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.
GGS Management collects billing fees charged to policyholders of Pafco and
Superior who elect to make their premium payments in installments. GGS
Management also receives management fees under its management agreement with
Pafco and Superior. When the Florida Department of Insurance ("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. Extraordinary dividends, within the meaning of the Indiana Insurance
Code, cannot be paid by Pafco without the prior approval of the Indiana
Insurance Commissioner. The management fees charged to Pafco and Superior by GGS
Management are subject to review by the Indiana and Florida Departments of
Insurance.
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 maintains investment programs intended to provide
adequate funds to pay claims without forced sales of investments. As claim
payments tend to lag premium receipts and due to the growth in premium volume
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.
As of December 31, 1997, IGF has the ability to pay $13,404,000 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 in full to the FCIC by the
Company, with interest, if not paid by a specified date in each crop year.
During 1997, IGF continued the practice of borrowing funds under a
revolving line of credit to finance premium payables to the FCIC on amounts not
yet received from farmers (the "IGF Revolver"). The maximum borrowing amount
under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the
maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a
-13-
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[small SIG logo]
weighted average interest rate of 9.7%, 8.6%, and 8.75% in 1995, 1996 and 1997,
respectively. Payables to the FCIC accrue interest at a rate of 15%, as do the
receivables from farmers. By utilizing the IGF Revolver, which bears interest at
a floating rate equal to the prime rate plus .25%, IGF avoids incurring interest
expense at the rate of 15% on interest payable to the FCIC while continuing to
earn 15% interest on the receivables due from the farmer. Subsequent to December
31, 1997, IGF had reduced its contractual borrowing rate to prime minus .75%.
The IGF Revolver contains certain covenants which restrict IGF's ability to (i)
incur indebtedness or (ii) make loans to others, including affiliates. The IGF
Revolver also contains other customary covenants which, among other things,
restricts IGF's ability to participate in mergers, acquire another enterprise or
participate in the organization or creation of any other business entity. At
December 31, 1997, $2,918,000 remains available under the IGF Revolver.
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities (the "Preferred Securities Offering"). 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 and, pursuant to
the Registration Rights Agreement executed at closing, the Company filed a Form
S-4 Registration Statement with the SEC on September 16, 1997 to effect the
Exchange Offer. The S-4 Registration Statement was declared effective on
September 30, 1997 and the Exchange Offer successfully closed on October 31,
1997. The proceeds of the Preferred Securities Offering were used to repurchase
the remaining minority interest in GGSH for $61 million, repay the balance of
the GGS Senior Credit Facility of $44.9 million and the Company expects to
contribute the balance, after expenses, of approximately $24 million to the
nonstandard automobile insurers of which $10.5 million was contributed in 1997.
Expenses of the issue aggregated $5.1 million and will be amortized over the
term of the Preferred Securities (30 years). In the third quarter the Company
wrote off the remaining unamortized costs of the GGS Senior Credit Facility of
approximately $1.1 million pre-tax or approximately $0.07 per share (basic).
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1998. The Preferred Securities may be redeemed
in whole or in part after 10 years.
The Company shall not, and shall not permit any subsidiary, to incur
directly or indirectly, any indebtedness unless, on the date of such incurrence
( and after giving effect thereto), the consolidated coverage ratio exceeds 2.5
to 1. The coverage ratio is the aggregate of net earnings, plus interest
expense, income taxes, depreciation and amortization divided by interest expense
for the same period.
The Company plans to fund the distributions on the Preferred Securities
from the excess management and billing fees which are paid by the nonstandard
automobile insurers to their management company. The Company believes such funds
are adequate to pay the distributions on the Preferred Securities for the
foreseeable future. Additionally, the Company has available dividend capacity
from IGF to also meet this funding.
Net cash provided by operating activities in 1997 aggregated $15,945,000
compared to $10,003,000 in 1996. This increase in funds provided was caused by
continued premium growth which results in increased cash flows as loss payments
lag receipt of premiums. Net cash used in investing activities increased from
$92,769,000 in 1996 to $106,164,000 in 1997 reflecting investment of remaining
proceeds from the Preferred Securities Offering and cash flow from operations.
In 1997, financing activities provided cash of $88,400,000 compared to cash
provided of $93,550,000 in 1996, with funds in 1997 primarily from the Preferred
Securities Offering while funds provided in 1996 were primarily from the
financing of the acquisition of Superior.
Net cash provided by operating activities in 1996 was $10,003,000 compared
to $9,654,000 in 1995 for an increase of $349,000. This increase was due to
improved profitability and growth in written premiums. Loss payments in the
nonstandard automobile insurance business tend to lag behind receipt of premiums
thus providing cash for operations. Net cash used in investing activities
increased from $8,835,000 in 1995 to $92,769,000 in 1996. Included in 1996 was a
$66,590,000 use of cash for the Acquisition. The remaining increase in cash used
in investing activities in 1996 related to the growth in investments due
-14-
<PAGE>
[small SIG logo]
to increased cash provided by operating activities. The primary items comprising
the $93,550,000 of cash provided by financing activities in 1996 were the
$48,000,000 of proceeds from the GGS Senior Credit Facility, $21,200,000
minority interest investment received as part of the formation of GGS Holdings
and the funding of the Acquisition and $37,969,000 of proceeds from the Initial
Public Offering.
The Company believes cash flows in the nonstandard automobile segment from
premiums, investment income and billing fees are sufficient to meet that
segment's obligations to policyholders, operating expenses and debt service for
the foreseeable future. This is due primarily to the lag time between receipt of
premiums and claims payments. Therefore, the Company does not anticipate
additional borrowings for this segment other than in the event of an
acquisition. The Company also believes cash flows in the crop segment from
premiums and expense reimbursements are sufficient to meet the segment's
obligations for the foreseeable future. Due to the more seasonal nature of the
crop segment's operations, it may be necessary to obtain short term funding at
times during a calendar year by drawing on an existing line of credit. Except
for this short term funding and normal increases therein resulting from an
increase in the business in force, the Company does not anticipate any
significant short or long term additional borrowing needs for this segment.
Accordingly, while there can be no assurance as to the sufficiency of the
Company's cash flow in future periods, the Company believes that its cash flow
will be sufficient to meet all of the Company's operating expenses and debt
service for the foreseeable future and, therefore, does not anticipate
additional borrowings except as may be necessary to finance acquisitions.
While GAAP shareholders' equity was $78,363,000 at December 31, 1997, it
does not reflect the statutory equity upon which the Company conducts its
various insurance operations. Pafco, Superior and IGF individually had statutory
surplus at December 31, 1997 of $19,924,000, $65,146,000 and $42,809,000,
respectively.
Effects of Inflation
Due to the short term that claims are outstanding in the two product lines
the Company underwrites, inflation does not pose a significant risk to the
Company.
Primary Differences Between GAAP and SAP
The financial statements contained herein have been prepared in conformity
with Generally Accepted Accounting Principles ("GAAP") which differ from
statutory accounting practices ("SAP") prescribed or permitted for insurance
companies by regulatory authorities in the following respects: (i) certain
assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii)
costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes, (iii) the investment in wholly owned
subsidiaries is consolidated for GAAP rather than valued on the statutory equity
method. The net income or loss and changes in unassigned surplus of the
subsidiaries is reflected in net income for the period rather than recorded
directly to unassigned surplus, (iv) fixed maturity investments are reported at
amortized cost or market value based on their National Association of Insurance
Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment
expenses and unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes, (vi) deferred income taxes are not
recognized on a statutory basis and (vii) credits for reinsurance are recorded
only to the extent considered realizable.
New Accounting Standards
During 1996, the Company adopted the provisions of SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company has adopted SFAS No. 128, "Earnings Per Share" in 1997. There was no
material impact on the consolidated financial statements from adoption of these
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[small SIG logo]
statements. The Company will adopt SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About A Segments of and Enterprise and
Related Information" in 1998. The Company does not expect the adoption of these
statements to have a material impact on the financial statements. Refer to Note
1 to the Company's "Consolidated Financial Statements."
The NAIC is considering the adoption of a recommended statutory accounting
standard for crop insurers, the impact of which is uncertain since several
methodologies are currently being examined. Although the Indiana Department has
permitted the Company to continue, for its statutory financial statements
through March 31, 1998, its practice of recording its MPCI business as 100%
ceded to the FCIC with net underwriting results recognized in ceding
commissions, the Indiana Department has indicated that in the future it will
require the Company to adopt the MPCI accounting practices recommended by the
NAIC or any similar practice adopted by the Indiana Department. Since such a
standard would be adopted industry wide for crop insurers, the Company would
also be required to conform its future GAAP financial statements to reflect the
new MPCI statutory accounting methodology and to restate all historical GAAP
financial statements consistent with this methodology for comparability. The
Company cannot predict what accounting methodology will eventually be
implemented or when the Company will be required to adopt such methodology. The
Company anticipates that any such new crop accounting methodology will not
affect GAAP net income.
The NAIC currently has a project under way to codify SAP, as existing SAP
does not address all accounting issues and may differ from state to state. Upon
completion, the codification is expected to replace prescribed or permitted SAP
in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the codification is uncertain at this
time, yet implementation could be required as early as January 1, 1999. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting may, however, materially impact
statutory capital and surplus.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. This could
result in recognizing data using "00" as 1900 rather than 2000 which could
result in system failures or miscalculations. This could create a disruption in
business activities.
The Company's nonstandard automobile operations have been in the process
of developing a completely new array of information technology services. During
1998 the Company will be testing and implementing these new systems and expects
to be fully operational with these new systems in 1998. The new systems will be
completely Year 2000 compliant. However, the intention of the new systems was to
improve transaction processing and the Company's expense ratio rather than any
Year 2000 issue. The Company has expended most of the funds necessary for
implementation of these new systems prior to January 1, 1998 and does not expect
expenditures in 1998 to be material. There is no assurance that such systems
will be implemented without a disruption to the Company's operations.
The Company's crop operations have been implementing changes to
incorporate Year 2000 concerns for the past two years and expect completion of
such efforts in 1998. Expenditures for these changes have not been material and
are not expected to be material in the future.
While implementation of these new systems or changes to existing systems
carries risks that modifications will need to be made in order for them to be
completely effective, the Company believes at this time that such modifications
will not require material funds and will not be extensive subsequent to December
31, 1998.
-16-
<PAGE>
[small SIG logo]
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1997 and 1996
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------------------
Investments:
- ----------------------------------------------------------------------------------------------
Available for sale:
- ----------------------------------------------------------------------------------------------
Fixed maturities, at market $ 169,385 $ 127,681
- ----------------------------------------------------------------------------------------------
Equity securities, at market 35,542 27,920
- ----------------------------------------------------------------------------------------------
Short-term investments, at amortized cost,
which approximates market 8,871 9,565
- ----------------------------------------------------------------------------------------------
Real estate, at cost 450 466
- ----------------------------------------------------------------------------------------------
Mortgage loans, at cost 2,220 2,430
- ----------------------------------------------------------------------------------------------
Other 50 75
------- -------
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 216,518 168,137
- ----------------------------------------------------------------------------------------------
Investments in and advances to related parties 839 1,152
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents 11,276 13,095
- ----------------------------------------------------------------------------------------------
Receivables (net of allowance for doubtful accounts of
$1,993 and $1,480 in 1997 and 1996, respectively) 91,730 65,194
- ----------------------------------------------------------------------------------------------
Reinsurance recoverable on paid and unpaid losses, net 93,832 48,294
- ----------------------------------------------------------------------------------------------
Prepaid reinsurance premiums 36,606 14,983
- ----------------------------------------------------------------------------------------------
Federal income taxes recoverable 1,505 319
- ----------------------------------------------------------------------------------------------
Deferred policy acquisition costs 10,740 12,800
- ----------------------------------------------------------------------------------------------
Deferred income taxes 4,722 3,329
- ----------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation 12,051 8,137
- ----------------------------------------------------------------------------------------------
Intangible assets 43,756 4,881
- ----------------------------------------------------------------------------------------------
Other assets 6,300 4,358
------- -------
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 529,875 $ 344,679
======= =======
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------------------
Losses and loss adjustment expenses $ 136,772 $ 101,719
- ----------------------------------------------------------------------------------------------
Unearned premiums 114,635 87,285
- ----------------------------------------------------------------------------------------------
Reinsurance payables 35,692 6,508
- ----------------------------------------------------------------------------------------------
Payables to affiliates --- 366
- ---------------------------------------------------------------------------------------------
Line of credit 4,182 ---
- ---------------------------------------------------------------------------------------------
Term debt --- 48,000
- ---------------------------------------------------------------------------------------------
Distributions Payable on Preferred Securities 4,801 ---
- ---------------------------------------------------------------------------------------------
Other 20,430 18,291
------- ------
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 316,512 262,169
------- -------
- ---------------------------------------------------------------------------------------------
Minority interest:
- ---------------------------------------------------------------------------------------------
Preferred Securities 135,000 ----
- ---------------------------------------------------------------------------------------------
Equity in net assets of subsidiary --- 21,610
------- ------
- ---------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, no par value, 100,000,000 shares
authorized, 10,451,667 and 10,450,000 shares
issued and outstanding in 1997 and 1996, respectively 39,019 38,969
- ---------------------------------------------------------------------------------------------
Additional paid-in capital 5,925 5,905
- ---------------------------------------------------------------------------------------------
Unrealized gain on investments, net of deferred tax
of $1,008 in 1997 and $625 in 1996 1,908 820
- --------------------------------------------------------------------------------------------
Retained earnings 31,511 15,206
------ ------
- --------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 78,363 60,900
------ ------
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 529,875 $ 344,679
======= =======
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-17-
<PAGE>
[small SIG logo]
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996, and 1995
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross premiums written $ 460,600 $ 305,499 $ 124,634
- -------------------------------------------------------------------------------------------------------------------------------
Less ceded premiums (183,059) (95,907) (71,187)
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET PREMIUMS WRITTEN 277,541 209,592 53,447
- -------------------------------------------------------------------------------------------------------------------------------
Change in unearned premiums (5,727) (17,833) (3,806)
------- -------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET PREMIUMS EARNED 271,814 191,759 49,641
- -------------------------------------------------------------------------------------------------------------------------------
Fee income 20,309 9,286 2,170
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 11,447 6,733 1,173
- -------------------------------------------------------------------------------------------------------------------------------
Net realized capital gain (loss) 9,444 (1,015) (344)
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 313,014 206,763 52,640
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 212,085 137,109 35,971
- -------------------------------------------------------------------------------------------------------------------------------
Policy acquisition and general and administrative expenses 62,631 42,013 7,981
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense 3,158 3,527 1,248
- -------------------------------------------------------------------------------------------------------------------------------
Amortization of intangibles 1,197 411 ---
------- ------- ------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 279,071 183,060 45,200
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST,
AND EXTRAORDINARY ITEM 33,943 23,703 7,440
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
Income taxes:
- -------------------------------------------------------------------------------------------------------------------------------
Current income tax expense 13,105 7,982 2,275
- -------------------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit) (1,124) 64 344
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES 11,981 8,046 2,619
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM 21,962 15,657 4,821
- -------------------------------------------------------------------------------------------------------------------------------
Minority interest:
- -------------------------------------------------------------------------------------------------------------------------------
Earnings in consolidated subsidiary (1,824) (2,401) ---
- -------------------------------------------------------------------------------------------------------------------------------
Distributions on Preferred Securities, net of tax (3,120) --- ---
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY ITEM 17,018 13,256 4,821
- -------------------------------------------------------------------------------------------------------------------------------
Extraordinary Item, net of tax (713) --- ---
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 16,305 $ 13,256 $ 4,821
======= ======= ======
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Basic 10,450 7,537 7,000
====== ===== =====
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully Diluted 10,699 7,537 7,000
====== ===== =====
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings per share - Basic $ 1.56 $ 1.76 $ 0.69
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings per share - Fully Diluted $ 1.52 $ 1.76 $ 0.69
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-18-
<PAGE>
[small SIG logo]
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Additional Gain/(Loss) Total
Common Paid-in on Retained Stockholders'
Stock Capital Investments Earnings Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 1,000 $ 3,130 $ (504) $ 629 $ 4,255
- --------------------------------------------------------------------------------------------------------------------
Change in unrealized loss on investments,
net of deferred taxes --- --- 459 --- 459
- --------------------------------------------------------------------------------------------------------------------
Net earnings --- --- --- 4,821 4,821
------ ----- ----- ----- -----
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1,000 3,130 (45) 5,450 9,535
- --------------------------------------------------------------------------------------------------------------------
Sale of subsidiary stock --- 2,775 --- --- 2,775
- --------------------------------------------------------------------------------------------------------------------
Change in unrealized loss on investments,
net of deferred taxes --- --- 865 --- 865
- --------------------------------------------------------------------------------------------------------------------
Issuance of common stock 37,969 --- --- --- 37,969
- --------------------------------------------------------------------------------------------------------------------
Dividend to parent --- --- --- (3,500) (3,500)
- --------------------------------------------------------------------------------------------------------------------
Net earnings --- --- --- 13,256 13,256
------ ------ ----- ------ -------
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 38,969 5,905 820 15,206 60,900
- --------------------------------------------------------------------------------------------------------------------
Adjustment of offering costs 50 --- --- --- 50
- --------------------------------------------------------------------------------------------------------------------
Change in unrealized gain on investments,
net of deferred taxes --- --- 1,088 --- 1,088
- --------------------------------------------------------------------------------------------------------------------
Exercise of stock options --- 20 --- --- 20
- --------------------------------------------------------------------------------------------------------------------
Net earnings --- --- --- 16,305 16,305
------ ------- ----- ------ ------
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 39,019 $ 5,925 $ 1,908 $ 31,511 $ 78,363
======= ====== ====== ======= ======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-19-
<PAGE>
[small SIG logo]
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $16,305 $13,256 $4,821
- -------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to net
cash provided from (used in) operations:
- -------------------------------------------------------------------------------------------------------------------------
Minority interest 1,824 2,401 ---
- -------------------------------------------------------------------------------------------------------------------------
Depreciation, amortization and other 5,136 2,194 742
- -------------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit) (1,124) 64 344
- -------------------------------------------------------------------------------------------------------------------------
Net realized capital (gain) loss (9,444) 1,015 344
- -------------------------------------------------------------------------------------------------------------------------
Net changes in operating assets and liabilities
(net of assets acquired):
- -------------------------------------------------------------------------------------------------------------------------
Receivables (27,050) (22,673) 6,462
- -------------------------------------------------------------------------------------------------------------------------
Reinsurance recoverable on losses, net (45,538) 5,842 (41,250)
- -------------------------------------------------------------------------------------------------------------------------
Prepaid reinsurance premiums (21,624) (8,720) 725
- -------------------------------------------------------------------------------------------------------------------------
Federal income taxes recoverable (payable) (1,186) (1,270) 325
- --------------------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs 2,060 (2,496) (900)
- -------------------------------------------------------------------------------------------------------------------------
Other assets 2,860 (2,923) 1,019
- -------------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 35,053 (2,125) 30,152
- -------------------------------------------------------------------------------------------------------------------------
Unearned premiums 27,350 24,508 3,081
- -------------------------------------------------------------------------------------------------------------------------
Reinsurance payables 29,184 (1,978) 2,133
- -------------------------------------------------------------------------------------------------------------------------
Other liabilities 2,139 2,908 1,656
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM (USED IN) OPERATIONS 15,945 10,003 9,654
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
- -------------------------------------------------------------------------------------------------------------------------
Purchase of minority interest (61,000) --- ---
- -------------------------------------------------------------------------------------------------------------------------
Cash paid for Superior --- (66,590) ---
- -------------------------------------------------------------------------------------------------------------------------
Net sales (purchases) of short-term investments 694 8,026 (4,493)
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from sales, calls and maturities of fixed maturities 224,037 56,903 8,603
- -------------------------------------------------------------------------------------------------------------------------
Purchases of fixed maturities (263,560) (73,503) (12,517)
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities 34,475 19,796 29,599
- -------------------------------------------------------------------------------------------------------------------------
Purchase of equity securities (35,358) (34,157) (28,173)
- -------------------------------------------------------------------------------------------------------------------------
Purchases of mortgage loans --- --- (100)
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from repayment of mortgage loans 210 490 120
- -------------------------------------------------------------------------------------------------------------------------
Purchase of property and equipment (5,662) (3,734) (1,874)
------- ------- ------
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (106,164) (92,769) (8,835)
------- ------- ------
- -------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of preferred securities 129,947 --- ---
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from initial public offering, net of expenses --- 37,969 ---
- -------------------------------------------------------------------------------------------------------------------------
Proceed from exercise of stock options 20 --- ---
- -------------------------------------------------------------------------------------------------------------------------
Net proceeds (payments) from line of credit 4,182 (5,811) 370
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from/payments made on term debt (48,000) 48,000 ---
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from consolidated subsidiary minority interest owner 2,304 21,200 ---
- -------------------------------------------------------------------------------------------------------------------------
Payment of dividend to parent --- (3,500) ---
- -------------------------------------------------------------------------------------------------------------------------
Loans from and (repayments to) related parties (53) (4,308) 1,080
----- ------- ------
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 88,400 93,550 1,450
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,819) 10,784 2,269
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 13,095 2,311 42
------ ----- ------
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $11,276 $13,095 $ 2,311
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-20-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies:
Symons International Group, Inc. (the "Company") is a 67% owned subsidiary of
Goran Capital, Inc. (Goran). The Company is primarily involved in the sale of
personal nonstandard automobile insurance and crop insurance. Nonstandard
automobile represents approximately 70% of the Company's premium volume. The
Company's products are marketed through independent agents and brokers and is
licensed in 38 states, primarily in the Midwest and Southern United States.
The following is a description of the significant accounting policies and
practices employed:
a. Principles of Consolidation: The consolidated financial statements include
the accounts, after intercompany eliminations, of the Company and its
wholly-owned subsidiaries as follows:
GGS Management Holdings, Inc. (GGSH)-a holding company for the nonstandard
automobile operations which includes GGS Management, Inc., Pafco General
Insurance Company, Pafco Premium Finance Company and the Superior entities, as
described below:
GGS Management, Inc. (GGS)-a management company for the nonstandard automobile
operations;
Superior Insurance Company (Superior)-an insurance company domiciled in
Florida;
Superior American Insurance Company (Superior American)-an insurance company
domiciled in Florida;
Superior Guaranty Insurance Company (Superior Guaranty)-an insurance company
domiciled in Florida;
Pafco General Insurance Company (Pafco)-an insurance company domiciled in
Indiana;
IGF Holdings, Inc. (IGFH)-a holding company for the crop operations which
includes IGF and Hail Plus Corp.;
IGF Insurance Company (IGF)-an insurance company domiciled in Indiana.
On January 31, 1996, the Company entered into an agreement with GS Capital
Partners II, L.P. (Goldman Funds) to create a company, GGSH, to be owned 52% by
the Company and 48% by Goldman Funds. GGSH created GGS, a management company for
the nonstandard automobile operations which include Pafco and the Superior
entities. (See Note 2.)
On April 30, 1996, GGSH acquired the Superior entities through a purchase
business combination. The Company's Consolidated Results of Operations for the
year ended December 31, 1996 include the results of operations of the Superior
entities subsequent to April 30, 1996. (See Note 2.)
On August 12, 1997, the Company acquired the 48% minority interest in GGSH from
Goldman Funds through a business purchase combination. (See Note 2.)
b. Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles (GAAP)
which differ from statutory accounting practices (SAP) prescribed or permitted
for insurance companies by regulatory authorities in the following respects:
Certain assets are excluded as "Nonadmitted Assets" under statutory accounting.
Costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes.
-21-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The investment in wholly owned subsidiaries is consolidated for GAAP rather than
valued on the statutory equity method. The net income or loss and changes in
unassigned surplus of the subsidiaries is reflected in net income for the period
rather than recorded directly to unassigned surplus.
Fixed maturity investments are reported at amortized cost or market value based
on their National Association of Insurance Commissioners' (NAIC) rating.
The liability for losses and loss adjustment expenses and unearned premium
reserves are recorded net of their reinsured amounts for statutory accounting
purposes.
Deferred income taxes are not recognized on a statutory basis.
Credits for reinsurance are recorded only to the extent considered realizable.
Under Statutory Accounting Principles ("SAP"), credit for reinsurance ceded are
allowed to the extent the reinsurers meet the statutory requirements of the
Insurance Departments of the States of Indiana and Florida.
Net earnings and capital and surplus for the insurance subsidiaries reported on
the statutory accounting basis is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Capital and surplus:
- ---------------------------------------------------------------------------
Superior entities $65,146 $57,121 N/A
- ---------------------------------------------------------------------------
Pafco 19,924 18,112 $11,875
- ---------------------------------------------------------------------------
IGF 42,809 29,412 9,219
- ---------------------------------------------------------------------------
Net earnings (losses):
- ---------------------------------------------------------------------------
Superior entities 379 1,978 N/A
- ---------------------------------------------------------------------------
Pafco (6,080) 5,151 (553)
- ---------------------------------------------------------------------------
IGF 13,404 12,122 6,574
- ---------------------------------------------------------------------------
</TABLE>
c. Use of Estimates: The preparation of financial statements requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known which could impact the amounts
reported and disclosed herein.
d. Premiums: Premiums are recognized as income ratably over the life of the
related policies and are stated net of ceded premiums. Unearned premiums are
computed on the semimonthly pro rata basis.
e. Investments: Investments are presented on the following bases:
Fixed maturities and equity securities are classified as available for sale and
are carried at market value with the unrealized gain or loss as a component of
stockholders' equity, net of deferred tax, and accordingly, has no effect on net
income.
Real estate-at cost, less allowances for depreciation.
Mortgage loans-at outstanding principal balance.
Realized gains and losses on sales of investments are recorded on the trade date
and are recognized in net income on the specific identification basis. Interest
and dividend income are recognized as earned.
-22-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
f. Cash and Cash Equivalents: For purposes of the statement of cash flows, the
Company includes in cash and cash equivalents all cash on hand and demand
deposits with original maturities of three months or less.
g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are
comprised of agents' commissions, premium taxes and certain other costs which
are related directly to the acquisition of new and renewal business, net of
expense allowances received in connection with reinsurance ceded, which have
been accounted for as a reduction of the related policy acquisition costs and
are deferred and amortized accordingly. These costs are deferred and amortized
over the terms of the policies to which they relate. Acquisition costs that
exceed estimated losses and loss adjustment expenses and maintenance costs are
charged to expense in the period in which those excess costs are determined.
h. Property and Equipment: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5 years
and the declining balance method for other property and equipment over their
estimated useful lives ranging from five to seven years. Asset and accumulated
depreciation accounts are relieved for dispositions, with resulting gains or
losses reflected in net income.
i. Intangible Assets: Intangible assets consists primarily of goodwill, debt
acquisition costs, and organization costs. Goodwill is amortized over a 25-year
period on a straight-line basis based upon management's estimate of the expected
benefit period. Deferred debt acquisition costs are amortized over the term of
the debt. Organization costs are amortized over five years.
j. Losses and Loss Adjustment Expenses: Reserves for losses and loss adjustment
expenses include estimates for reported unpaid losses and loss adjustment
expenses and for estimated losses incurred but not reported. These reserves have
not been discounted. The Company's loss and loss adjustment expense reserves
include an aggregate stop-loss program. The Company retains an independent
actuarial firm to estimate reserves. Reserves are established using individual
case-basis valuations and statistical analysis as claims are reported. Those
estimates are subject to the effects of trends in loss severity and frequency.
While management believes the reserves are adequate, the provisions for losses
and loss adjustment expenses are necessarily based on estimates and are subject
to considerable variability. Changes in the estimated reserves are charged or
credited to operations as additional information on the estimated amount of a
claim becomes known during the course of its settlement. The reserves for losses
and loss adjustment expenses are reported net of the receivables for salvage and
subrogation of approximately $8,099 and $ 4,766 at December 31, 1997 and 1996,
respectively.
k. Preferred Securities: Preferred securities represent Company-obligated
mandatorily redeemable securities of subsidiary holding solely parent debentures
and are reported at their liquidation value under minority interest.
Distributions on these securities are charged against consolidated earnings.
l. Income Taxes: The Company utilizes the liability method of accounting for
deferred income taxes. Under the liability method, companies will establish a
deferred tax liability or asset for the future tax effects of temporary
differences between book and taxable income. Changes in future tax rates will
result in immediate adjustments to deferred taxes. (See Note 11.) Valuation
-23-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
m. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies and the terms of the
reinsurance contracts.
Premiums ceded to other companies have been reported as a reduction of premium
income.
n. Certain Accounting Policies for Crop Insurance Operations: In 1996, IGF
instituted a policy of recognizing (i) 35% of its estimated Multi Peril Crop
Insurance (MPCI) gross premiums written for each of the first and second
quarters, (ii) commission expense at a rate of 16% of MPCI gross premiums
written recognized and (iii) Buy-up Expense Reimbursement at a rate of 29% in
1997 and 31% in 1996 of MPCI gross premiums written recognized along with normal
operating expenses incurred in connection with premium writings. In the third
quarter, if a sufficient volume of policyholder acreage reports have been
received and processed by IGF, IGF's policy is to recognize MPCI gross premiums
written for the first nine months based on a reestimate which takes into account
actual gross premiums processed. If an insufficient volume of policies has been
processed, IGF's policy is to recognize in the third quarter 20% of its full
year estimate of MPCI Gross Premiums Written, unless other circumstances require
a different approach. The remaining amount of Gross Premiums Written is
recognized in the fourth quarter, when all amounts are reconciled. In prior
years, recognition of MPCI gross premiums written was 30%, 30%, 30% and 10%, for
the first, second, third and fourth quarters, respectively. Commencing with its
June 30, 1995 financial statements, IGF also began recognizing MPCI underwriting
gain or loss during the first and second quarters, as well as the third quarter,
reflecting IGF's best estimate of the amount of such gain or loss to be
recognized for the full year, based on, among other things, historical results,
plus a provision for adverse developments.
o. Accounting Changes: In December 1995, SFAS No. 123, "Accounting for
Stock-Based Compensation", was issued. It introduces the use of a fair
value-based method of accounting for stock-based compensation. It encourages,
but does not require, companies to recognize compensation expense for
stock-based compensation to employees based on the new fair value accounting
rules. Companies that choose not to adopt the new rules will continue to apply
the existing accounting rules contained in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting rules to
disclose pro forma net income and earnings per share under the new method. The
Company adopted the disclosure provisions of SFAS No. 123 (see Note 22) in 1996.
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS No. 121 requires that long-lived assets to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of SFAS No. 121 in 1996, did not have a material impact on
the Company's results of operations.
In 1997, the Company adopted the provision of SFAS No. 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. This statement simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings per Share",
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures, and requires a reconciliation
of the numerator and denominator of the basic EPS
-24-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
computation to the numerator and denominator of the diluted EPS computation. The
only item impacting the Company's fully diluted EPS is the inclusion of a
portion of the Company's stock options which aggregated 249,000 shares in 1997.
Prior to 1997, there was no dilutive impact on EPS computations. The provisions
of SFAS No. 128 were retroactively applied to all periods presented.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), both of which are effective for financial
statements issued for periods beginning after December 15, 1997. SFAS 130 will
require companies to disclose comprehensive income in their financial
statements. In addition to items included in net income, comprehensive income
will include items currently charged or credited directly to shareholders'
equity, such as the change in unrealized appreciation (depreciation) of
securities. Implementing SFAS 130 is not expected to have a material impact on
the financial statements.
SFAS 131 establishes new standards for reporting operating segments, products
and services, geographic areas and major customers. Segments are to be defined
consistent with the basis management uses internally to assess performance and
allocate resources. Implementing SFAS 131 is not expected to have a material
impact on the financial statements.
p. Vulnerability from Concentration: At December 31, 1997, the Company did not
have a material concentration of financial instruments in an industry or
geographic location. Also at December 31, 1997, the Company did not have a
concentration of (1) business transactions with a particular customer, lender or
distributor, (2) revenues from a particular product or service, (3) sources of
supply of labor or services used in the business, or (4) a market or geographic
area in which business is conducted that makes it vulnerable to an event that is
at least reasonably possible to occur in the near term and which could cause a
serious impact to the Company's financial condition.
q. Earnings Per Share: The Company's basic earnings per share calculations are
based upon the weighted average number of shares of common stock outstanding
during each period, as restated for the 7,000-for-1 stock split. The weighted
average shares outstanding in 1996 have been increased by 44,000 shares for the
$3.5 million dividend paid to Goran from the proceeds of the Initial Public
Offering, ("IPO") in accordance with generally accepted accounting principles.
The fully diluted earnings per share for 1997 were computed using actual
weighted average shares outstanding of 10,450,000 plus 249,000 assumed shares
from stock option proceeds based upon the treasury stock method.
r. Reclassifications: Amounts from prior periods have been reclassified to
conform to the 1997 presentation. Net earnings and stockholders' equity have not
been affected by these reclassifications.
-25-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
2. Corporate Reorganization and Acquisitions:
In April 1996, Pafco contributed all of the outstanding shares of capital stock
of IGF to IGF Holdings, a wholly owned and newly formed subsidiary of Pafco, and
the Board of Directors of IGF Holdings declared an $11,000 distribution to Pafco
in the form of cash of $7,500 and a note payable of $3,500 (Pafco Note). IGFH
borrowed the $7,500 portion of the distribution from a bank (IGFH Note). The
notes were paid in full from the proceeds of the Offering. Immediately following
the distribution, Pafco distributed all of the outstanding common stock of IGF
Holdings to the Company, collectively referred to as the "IGF Reorganization".
Although the Company believes the plan of reorganization or spin off did not
result in gain or loss, no assurance can be given that the Internal Revenue
Service will not challenge the transaction.
On January 31, 1996, the Company entered into an agreement (Agreement) with GS
Capital Partners II, L.P. to create GGSH, to be owned 52% by the Company and 48%
by the Goldman Funds. In accordance with the Agreement, on April 30, 1996, the
Company contributed certain fixed assets and Pafco with a combined book value,
determined in accordance with generally accepted accounting principles, of
$17,186, to GGSH. Goldman Funds contributed $21,200 to GGSH, in accordance with
the Agreement. In return for the cash contribution of $21,200, Goldman Funds
received a minority interest share in GGSH at the date of contribution of
$18,425, resulting in a $2,775 increase to additional paid-in capital. At
December 31, 1996, Goldman Funds' minority interest share consisted of the
following:
<TABLE>
<S> <C>
Contribution, April 30, 19 $ 18,425
GGSH earnings 2,401
Unrealized gains, net of deferred tax of $599 784
------
$ 21,610
======
</TABLE>
In connection with the above transactions, GGSH acquired (the "Acquisition") all
of the outstanding shares of common stock of Superior Insurance Company and its
wholly owned subsidiaries, domiciled in Florida, (collectively referred to as
"Superior") for cash of $66,590. In conjunction with the Acquisition, the
Company's funding was through a senior bank facility of $48,000 and a cash
contribution from Goldman Funds of $21,200.
The acquisition of Superior was accounted for as a purchase and recorded as
follows:
<TABLE>
<S> <C>
Assets acquired $ 163,605
Liabilities assumed 100,566
-------
Net assets required 63,039
Purchase price 66,590
-------
Excess purchase price 3,551
Less amounts allocated to deferred income
taxes on unrealized gains on investments 1,334
-------
Goodwill $ 2,217
=======
</TABLE>
The Company's results from operations for the year ended December 31, 1996
include the results of Superior subsequent to April 30, 1996.
On August 12, 1997, the Company purchased the remaining minority interest in
GGSH for $61 million in cash. The excess of the acquisition price over the
minority interest liability aggregated approximately $36,045,000 and was
assigned to goodwill as the fair market value of acquired assets approximately
their carrying value.
-26-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
3. Public Offerings:
On November 5, 1996, the Company sold 3,000,000 shares at $12.50 per share in an
initial public offering of common stock. An additional 450,000 shares were sold
in December 1996 representing the exercise of the over allotment option. The
Company generated net proceeds, after underwriter's discount and expenses, of
$37,900 from the IPO. The proceeds were used to repay the IGFH Note and Pafco
Note totaling $11,000, repay indebtedness to Goran and Granite Re of
approximately $7,500, pay Goran a dividend of $3,500 and contribute capital to
IGF of $9,000. The remainder will be used for general corporate purposes,
including acquisitions. After completion of the IPO, Goran owns 67% of the total
common stock outstanding.
Assuming that these transactions, described in Notes 2 and 3, took place
(including the IPO) at January 1, 1995 or at January 1, 1996, the pro forma
effect of these transactions on the Company's Consolidated Statements of
Earnings is as follows:
<TABLE>
<CAPTION>
1996 1995
(unaudited)
<S> <C> <C>
Revenues $ 250,848 $159,899
======= =======
Net Income $ 15,238 $ 6,701
====== =====
Net Income per common share $ 1.42 $ 0.65
==== ====
</TABLE>
Assuming that these transactions took place (including the IPO) at January 1,
1995 or January 1, 1996 and that shares outstanding only included shares issued
in connection with the IPO whose proceeds were used to repay indebtedness, the
pro forma effect of these transactions on the Company's net income per common
share is as follows:
<TABLE>
<CAPTION>
1996 1995
(unaudited)
<S> <C> <C>
Net Income per common share $ 1.86 $ 0.81
==== ====
</TABLE>
Outstanding shares used in the above calculation include the 7,000,000 shares
outstanding before the Offering plus 1,200,000 shares issued in connection with
the IPO whose proceeds were used to pay external indebtedness. The latter
calculation was determined by dividing the aggregate amount of the repayment of
the $7.5 million IGFH Note and the $7.5 million repayment of parent indebtedness
by the IPO price of $12.50 per share.
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities"). These Preferred Securities were
offered through a wholly-owned trust subsidiary of the Company and are backed by
Senior Subordinated Notes to the Trust from the Company. These Preferred
Securities were offered under Rule 144A of the SEC ("Preferred Securities
Offering") and, pursuant to the Registration Rights Agreement executed at
closing, the Company filed a Form S-4 Registration Statement with the SEC on
September 16, 1997 to effect the Exchange Offer. The S-4 Registration Statement
was declared effective on September 30, 1997 and the Exchange Offer successfully
closed on October 31, 1997. The proceeds of the Preferred Securities Offering
were used to repurchase the remaining minority interest in GGSH for $61 million,
repay the balance of the term debt of $44.9 million and the Company expects to
contribute the balance, after expenses, of approximately $24 million to the
nonstandard automobile insurers of which $10.5 million was contributed in 1997.
Expenses of the issue aggregated $5.1 million and will be amortized over the
term of the Preferred Securities (30 years). In the third quarter the Company
wrote off the remaining unamortized costs of the term debt of approximately $1.1
million pre-tax or approximately $0.07 per share which was recorded as an
extraordinary item.
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1998.
-27-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The Preferred Securities may be redeemed in whole or in part after 10 years.
The Company shall not, and shall not permit any subsidiary, to incur directly or
indirectly, any indebtedness unless, on the date of such incurrence (and after
giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1. The
Coverage Ratio is the aggregate of net earnings, plus interest expense, income
taxes, depreciation, and amortization divided by interest expense for the same
period.
Assuming the Preferred Securities Offering took place at January 1, 1997, the
proforma effect of this offering on the Company's consolidated statement of
earnings from continuing operations for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Unaudited
(In thousands)
<S> <C>
Revenues $313,014
Net earnings from continuing operations $15,314
Net earnings from continuing operations per common share
(fully diluted) $1.43
</TABLE>
Proforma results for the Preferred Securities Offerings for 1996 and 1995 would
not be meaningful due to the Acquisition and IPO in 1996.
The pro forma results are not necessarily indicative of what actually would have
occurred if these transactions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
-28-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
4. Investments:
Investments are summarized as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Unrealized Estimated
December 31, 1997 Cost Gain Loss Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 83,661 $ 910 $ (48) $ 84,523
- -----------------------------------------------------------------------------------------------------------
Foreign governments 537 11 --- 548
- -----------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 1,000 --- --- 1,000
- -----------------------------------------------------------------------------------------------------------
Corporate securities 82,628 746 (60) 83,314
------ ----- ---- ------
- -----------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 167,826 1,667 (108) 169,385
------- ----- ---- -------
- -----------------------------------------------------------------------------------------------------------
Equity securities 34,220 4,427 (3,105) 35,542
- -----------------------------------------------------------------------------------------------------------
Short-term investments 8,871 -- --- 8,871
- -----------------------------------------------------------------------------------------------------------
Real estate 450 -- --- 450
- -----------------------------------------------------------------------------------------------------------
Mortgage Loans 2,220 -- --- 2,220
- -----------------------------------------------------------------------------------------------------------
Other loans 50 -- --- 50
------- ----- ----- -------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 213,637 $6,094 $ (3,213) $ 216,518
======= ====== ====== =======
- -----------------------------------------------------------------------------------------------------------
Cost or
Amortized Unrealized Estimated
December 31, 1996 Cost Gain Loss Market Value
- -----------------------------------------------------------------------------------------------------------
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 55,034 $ 343 $ (233) $ 55,144
- -----------------------------------------------------------------------------------------------------------
Foreign governments 1,515 --- (30) 1,485
- -----------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 2,945 11 (4) 2,952
- -----------------------------------------------------------------------------------------------------------
Corporate securities 67,545 977 (422) 68,100
------- ------ ----- ------
- -----------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 127,039 1,331 (689) 127,681
------- ----- ----- -------
- -----------------------------------------------------------------------------------------------------------
Equity securities 25,734 2,884 (698) 27,920
- -----------------------------------------------------------------------------------------------------------
Short-term investments 9,565 --- --- 9,565
- -----------------------------------------------------------------------------------------------------------
Real estate 466 --- --- 466
- -----------------------------------------------------------------------------------------------------------
Mortgage Loans 2,430 --- --- 2,430
- ----------------------------------------------------------------------------------------------------------
Other loans 75 --- --- 75
----- ----- ----- ------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 165,309 $4,215 $ (1,387) $ 168,137
======= ====== ====== =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
At December 31, 1997, 90.2% of the Company's fixed maturities were considered
investment grade by The Standard & Poors Corporation or Moody's Investor
Services, Inc. Securities with quality ratings Baa and above are considered
investment grade securities. In addition, the Company's investments in fixed
maturities did not contain any significant geographic or industry concentration
of credit risk.
The amortized cost and estimated market value of fixed maturities at December
31, 1997, by contractual maturity, are shown in the table which follows.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalty:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Maturity:
- ------------------------------------------------------------------------------------------
Due in one year or less $1,882 $1,880
- ------------------------------------------------------------------------------------------
Due after one year through five years 57,350 57,782
- ------------------------------------------------------------------------------------------
Due after five years through ten years 30,102 30,793
- ------------------------------------------------------------------------------------------
Due after ten years 8,139 8,390
------ ------
- ------------------------------------------------------------------------------------------
97,473 98,845
- ------------------------------------------------------------------------------------------
Mortgage-backed securities 70,353 70,540
------- -------
- ------------------------------------------------------------------------------------------
TOTAL $167,826 $169,385
======= =======
- ------------------------------------------------------------------------------------------
</TABLE>
Gains and losses realized on sales of investments are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $254,470 $76,699 $38,202
- -----------------------------------------------------------------------------------------
Gross gains realized 10,639 1,194 653
- -----------------------------------------------------------------------------------------
Gross losses realized 1,195 2,209 997
- -----------------------------------------------------------------------------------------
</TABLE>
Net investment income for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $10,061 $5,714 $534
- ----------------------------------------------------------------------------------------
Equity securities 305 756 256
- ----------------------------------------------------------------------------------------
Cash and short-term investments 1,385 281 194
- ----------------------------------------------------------------------------------------
Mortgage loans 182 207 231
- ----------------------------------------------------------------------------------------
Other (39) 76 322
----- ----- ----
- ----------------------------------------------------------------------------------------
Total investment income 11,894 7,034 1,537
- ----------------------------------------------------------------------------------------
Investment expenses (447) (301) (364)
------ ----- -----
- ----------------------------------------------------------------------------------------
Net investment income $11,447 $6,733 $1,173
====== ===== =====
- ----------------------------------------------------------------------------------------
</TABLE>
Investments with a market value of $24,067 and $23,419 (amortized cost of
$23,913 and $22,749) as of December 31, 1997 and 1996, respectively, were on
deposit in the United States and Canada. The deposits are required by various
insurance departments and others to support licensing requirements and certain
reinsurance contracts, respectively.
-30-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
5. Deferred Policy Acquisition Costs:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
Policy acquisition costs both acquired and deferred, and the related
amortization charged to income were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $12,800 $2,379 $1,479
- ----------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs purchased in
the Superior acquisition --- 7,925 ---
- ----------------------------------------------------------------------------------------------------------------
Costs deferred during year 57,155 27,657 8,050
- ----------------------------------------------------------------------------------------------------------------
Amortization during year (59,215) (25,161) (7,150)
------ ------ -----
- ----------------------------------------------------------------------------------------------------------------
Balance, end of year $10,740 $12,800 $2,379
======= ======= ======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
6. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 Accumulated 1997 1996
Cost Depreciation Net Net
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land $ 226 $ -- $ 226 $ 226
- ---------------------------------------------------------------------------------------------------------------
Buildings 5,421 1,323 4,098 3,156
- ---------------------------------------------------------------------------------------------------------------
Office furniture and equipment 3,449 1,636 1,813 1,024
- ---------------------------------------------------------------------------------------------------------------
Automobiles 20 13 7 13
- ---------------------------------------------------------------------------------------------------------------
Computer equipment 8,344 2,437 5,907 3,718
----- ----- ----- -----
- --------------------------------------------------------------------------------------------------------------
Total $ 17,460 $ 5,409 $ 12,051 $ 8,137
====== ===== ====== =====
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Accumulated depreciation at December 31, 1996 was $4,009. Depreciation expense
related to property and equipment for the years ended December 31, 1997, 1996
and 1995 were $1,764, $1,783, and $637, respectively.
7. Intangible Assets:
Intangible assets at December 31 are as follows:
<TABLE>
<CAPTION>
1997 Accumulated 1997 1996
Cost Amortization Net Net
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $ 38,168 $ 654 $ 37,514 $ 2,122
- -------------------------------------------------------------------------------------------------------------
Deferred debt costs 5,123 69 5,054 1,232
- -------------------------------------------------------------------------------------------------------------
Organization costs 1,527 339 1,188 1,527
----- --- ----- -----
- -------------------------------------------------------------------------------------------------------------
$ 44,818 $ 1,062 $ 43,756 $ 4,881
====== ===== ====== =====
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Accumulated amortization at December 31, 1996 was $411. Amortization expense
related to intangible assets for the years ended December 31, 1997, 1996, and
1995 was $1,197, $411 and $0, respectively.
8. Line of Credit:
At December 31, 1997, IGF maintained a revolving bank line of credit in the
amount of $7,000. At December 31, 1997 and 1996, the outstanding balance
including accrued interest of $100, was $4,182 and $0, respectively. Interest on
this line of credit was at the New York prime rate (8.5% at December 31, 1997)
plus 0.25% adjusted daily. Subsequent to December 31, 1997 this rate was
adjusted to prime minus .75%. This line is collateralized by the crop-related
uncollected premiums, reinsurance recoverable on paid losses, Federal Crop
-31-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
Insurance Corporation (FCIC) annual settlement, and a first lien on the real
estate owned by IGF. The line requires IGF to maintain its primary banking
relationship with the issuing bank, limits capital purchases and requires the
maintenance of certain financial ratios. At December 31, 1997, IGF was in
compliance with all covenants associated with the line or had received proper
waivers.
The weighted average interest rate on the line of credit was 8.75%, 8.6%, and
9.7% during 1997, 1996, and 1995, respectively.
9. Term Debt:
The term debt, with an outstanding principal balance of $44,872 was repaid in
full on August 12, 1997. The interest on the term debt was paid fully at LIBOR
plus 2.75%.
10. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $101,719 $59,421 $29,269
- --------------------------------------------------------------------------------------------------------
Less reinsurance recoverables 29,459 37,798 12,542
------ ------ ------
- --------------------------------------------------------------------------------------------------------
NET BALANCE AT JANUARY 1 72,260 21,623 16,727
------ ------ ------
- --------------------------------------------------------------------------------------------------------
Reserves acquired in connection with the Superior Acquisition -- 44,423 --
- --------------------------------------------------------------------------------------------------------
Incurred related to:
- --------------------------------------------------------------------------------------------------------
Current year 201,118 138,618 35,184
- --------------------------------------------------------------------------------------------------------
Prior years 10,967 (1,509) 787
------ ------- --------
- --------------------------------------------------------------------------------------------------------
TOTAL INCURRED 212,085 137,109 35,971
------- ------- ------
- --------------------------------------------------------------------------------------------------------
Paid related to:
- --------------------------------------------------------------------------------------------------------
Current year 138,111 102,713 21,057
- --------------------------------------------------------------------------------------------------------
Prior years 60,566 28,182 10,018
------ ------ ------
- --------------------------------------------------------------------------------------------------------
TOTAL PAID 198,677 130,895 31,075
------- ------- ------
- --------------------------------------------------------------------------------------------------------
NET BALANCE AT DECEMBER 31 85,668 72,260 21,623
- --------------------------------------------------------------------------------------------------------
Plus reinsurance recoverables 51,104 29,459 37,798
------ ------ ------
- --------------------------------------------------------------------------------------------------------
Balance at December 31 $136,772 $101,719 $59,421
======= ======= ======
- --------------------------------------------------------------------------------------------------------
</TABLE>
Reserve estimates are regularly adjusted in subsequent reporting periods,
consistent with sound insurance reserving practices, as new facts and
circumstances emerge which indicates a modification of the prior estimate is
necessary. The adjustment, referred to as "reserve development," is inevitable
given the complexities of the reserving process and is recorded in the
statements of earnings in the period the need for the adjustments becomes
apparent. The foregoing reconciliation indicates that deficient (redundant)
reserve developments of $10,967, $(1,509) and $787 in the December 31, 1996,
1995 and 1994 loss and loss adjustment expense reserves, respectively, emerged
in the following year. The higher than anticipated 1996 deficient reserve
development occurred primarily due to volatility in the historical trends for
the nonstandard automobile business as a result of significant growth during
-32-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
1996. Reserve developments also result from lower or higher than anticipated
losses resulting from a change in settlement costs relating to those estimates.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered in estimating the ultimate claim costs, the increase in
average severities of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected based
on historical trends adjusted for implemented changes in underwriting standards,
policy provisions, and general economic trends. Those anticipated trends are
monitored based on actual development and are modified if necessary.
Liabilities for loss and loss adjustment expenses have been established when
sufficient information has been developed to indicate the involvement of a
specific insurance policy. In addition, a liability has been established to
cover additional exposure on both known and unasserted claims. The effects of
changes in settlement costs, inflation, growth and other factors have all been
considered in establishing the current year reserve for unpaid losses and loss
adjustment expenses.
11. Income Taxes:
The Company files a consolidated federal income tax return with its wholly owned
subsidiaries. GGSH filed a short-period consolidated tax return with its wholly
owned subsidiaries through July 31, 1997. In 1998, the Company shall file a
consolidated federal income tax return which includes GGSH. Intercompany tax
sharing agreements between the Company and its wholly owned subsidiaries provide
that income taxes will be allocated based upon separate return calculations in
accordance with the Internal Revenue Code of 1986, as amended. Intercompany tax
payments are remitted at such times as estimated taxes would be required to be
made to the Internal Revenue Service.
The difference between federal tax at the statutory rate of 35% in 1997 and 1996
and 34% in 1995 and actual income tax recorded was primarily the effects of
nondeductible goodwill and the dividends received deduction.
The net deferred tax asset at December 31, 1997 and 1996 is comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
- --------------------------------------------------------------------------
Unpaid losses and loss adjustment expenses $2,974 $2,705
- --------------------------------------------------------------------------
Unearned premiums and prepaid reinsurance 5,462 5,061
- --------------------------------------------------------------------------
Allowance for doubtful accounts 698 518
- --------------------------------------------------------------------------
Net operating loss carryforwards 233 328
- --------------------------------------------------------------------------
Other 242 685
--- -----
- --------------------------------------------------------------------------
DEFERRED TAX ASSET 9,609 9,297
----- -----
- --------------------------------------------------------------------------
Deferred tax liabilities:
- --------------------------------------------------------------------------
Deferred policy acquisition costs (3,759) (4,480)
- --------------------------------------------------------------------------
Unrealized gains on investments (1,008) (1,224)
- --------------------------------------------------------------------------
Other (120) (264)
----- -----
- --------------------------------------------------------------------------
DEFERRED TAX LIABILITY 4,887 (5,968)
----- -----
- --------------------------------------------------------------------------
NET DEFERRED TAX ASSET $4,722 $3,329
===== =====
- --------------------------------------------------------------------------
</TABLE>
-33-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The Company is required to establish a "valuation allowance" for any portion of
its deferred tax assets which is unlikely to be realized. No valuation allowance
has been established as of December 31, 1997 and 1996 since management believes
it is more likely than not that the Company will realize the benefit of its
deferred tax assets through utilization of such amounts under the carryback
rules and through future taxable income.
As of December 31, 1997, the Company has unused net operating loss carryovers
available as follows:
<TABLE>
<CAPTION>
Amount
- -------------------------------------------------------------------------------
<S> <C>
Years ending not later than December 31:
- -------------------------------------------------------------------------------
2000 $541
- -------------------------------------------------------------------------------
2002 126
---
- -------------------------------------------------------------------------------
TOTAL $667
- -------------------------------------------------------------------------------
</TABLE>
Federal income tax filings attributed to the Company have been examined by the
Internal Revenue Service through 1993.
12. Leases:
The Company has certain commitments under long-term operating leases for a
branch office and sales offices for Superior Insurance Company. Rental expense
under these commitments was $1,176 for 1997 and $751 in 1996. Future minimum
lease payments required under these noncancellable operating leases are as
follows:
<TABLE>
<S> <C>
1998 $ 502
- --------------------------------------------------------------------------------
1999 417
- --------------------------------------------------------------------------------
2000 274
- --------------------------------------------------------------------------------
2001 214
- --------------------------------------------------------------------------------
2002 and thereafter 136
----
- --------------------------------------------------------------------------------
TOTAL $1,543
- --------------------------------------------------------------------------------
</TABLE>
13. Reinsurance:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. In addition, the Company assumes reinsurance on
certain risks. The Company remains contingently liable with respect to
reinsurance, which would become an ultimate liability of the Company in the
event that such reinsuring companies might be unable, at some later date, to
meet their obligations under the reinsurance agreements.
Approximately 34% of amounts recoverable from reinsurers are with the FCIC, a
branch of the federal government. Another 30% of recoverable amounts are with
Granite Re Insurance Company Ltd. ("Granite Re"), an affiliated foreign
corporation, which has not applied for an A.M. Best rating. An additional 3.8%
of uncollateralized recoverable amounts are with companies which maintain an
-34-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
A.M. Best rating of at least A+. Company management believes amounts recoverable
from reinsurers are collectible.
On April 29, 1996, Pafco and IGF entered into a 100% quota share reinsurance
agreement, whereby all of IGF's nonstandard automobile business from 1996 and
forward was ceded to Pafco effective January 1, 1996.
On April 29, 1996, Pafco retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Re, with an effective date of
January 1, 1996. Approximately $3,519 and $2,380 of loss and loss adjustment
expense reserves and unearned premium reserves, respectively, were ceded and no
gain or loss recognized. Effective January 1, 1998, Granite Re ceded the 1995
and prior commercial business back to Pafco. Approximately $1,803 in loss and
loss adjustment expense reserves were ceded back to Pafco and no gain or loss
was recognized.
On April 29, 1996, Pafco also entered into a 100% quota share reinsurance
agreement with Granite Re, whereby all of Pafco's commercial business from 1996
and thereafter was ceded effective January 1, 1996.
Reinsurance activity for 1997, 1996, and 1995, which includes reinsurance with
related parties, is summarized as follows:
<TABLE>
<CAPTION>
1997 Direct Assumed Ceded Net
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums Written $430,002 $30,598 $(183,059) $277,541
- -------------------------------------------------------------------------------------------------
Premiums Earned 400,081 33,209 (161,476) 271,814
- -------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses 290,712 35,034 (133,661) 212,085
- -------------------------------------------------------------------------------------------------
Commission expenses (income) 59,951 7,461 (77,898) (10,486)
- -------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums Written $298,596 $6,903 $(95,907) $209,592
- -------------------------------------------------------------------------------------------------
Premiums Earned 279,061 6,903 (94,205) 191,759
- -------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses 223,879 4,260 (91,030) 137,109
- -------------------------------------------------------------------------------------------------
Commission expenses (income) 44,879 3,663 (46,716) 1,826
- -------------------------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums Written $123,381 $1,253 $(71,187) $53,447
- -------------------------------------------------------------------------------------------------
Premiums Earned 116,860 1,256 (68,475) 49,641
- -------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses 125,382 2,839 (92,250) 35,971
- -------------------------------------------------------------------------------------------------
Commission expenses (income) 17,177 174 (27,092) (9,741)
- -------------------------------------------------------------------------------------------------
</TABLE>
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were $51,104, $29,459, and $37,798, as of December 31, 1997,
1996, and 1995, respectively. These amounts are reported gross of the related
reserves for unpaid losses and loss adjustment expenses in the accompanying
Consolidated Balance Sheets.
14. Related Parties:
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with Goran, and its affiliates, Symons
International Group, Ltd. (SIG Ltd.), Goran's parent, Granite Insurance Company
(Granite), and Granite Re, Goran's subsidiaries.
-35-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The following balances were outstanding at December 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Investments in and advances to related parties:
- ------------------------------------------------------------------------------------
Nonredeemable, nonvoting preferred stock of Granite $ 702 $ 702
- ------------------------------------------------------------------------------------
Unsecured mortgage loan from director and officer -- 278
- ------------------------------------------------------------------------------------
Due from directors and officers 110 172
- ------------------------------------------------------------------------------------
Other receivables from related parties 27 ---
- ------------------------------------------------------------------------------------
$ 839 $ 1,152
==== =====
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Payable to affiliates:
- ------------------------------------------------------------------------------------
Other payables to Goran $ --- $ 350
- ------------------------------------------------------------------------------------
Other payables to related parties --- 16
- ------------------------------------------------------------------------------------
$ --- $ 366
=== ====
- ------------------------------------------------------------------------------------
</TABLE>
The following transactions occurred with related parties in the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees charged by Goran $ --- $ 139 $ 414
- ------------------------------------------------------------------------------------------------------------
Reinsurance under various treaties, net:
- ------------------------------------------------------------------------------------------------------------
Ceded premiums earned 13,537 5,463 5,235
- ------------------------------------------------------------------------------------------------------------
Ceded losses and loss adjustment expenses incurred 11,876 5,168 2,612
- ------------------------------------------------------------------------------------------------------------
Ceded commissions 3,523 2,620 1,142
- ----------------------------------------------------------------------------------------------------------
Consulting fees charged by various related parties 26 180 26
- ------------------------------------------------------------------------------------------------------------
Interest charged by Goran --- 196 208
- ------------------------------------------------------------------------------------------------------------
Interest charged by Granite Re --- 385 346
- ------------------------------------------------------------------------------------------------------------
</TABLE>
In February 1998, GGS Management loaned Granite Re $3,199 payable in February
2002 with interest due semiannually at 6.8% to be used as collateral for
reinsurance transactions.
15. Stockholders' Equity:
On July 29, 1996, the Board of Directors approved an increase in the authorized
common stock of the Company from 1,000 shares to 100,000,000 shares. The common
stock remains no par value. On July 29, 1996, the Board approved a 7,000-for-1
stock split of the Company's issued and outstanding shares. All share and per
share amounts have been restated to retroactively reflect the stock split. On
July 29, 1996, the Board of Directors authorized the issuance of 50,000,000
shares of preferred stock. No shares of preferred stock have been issued.
16. Effects of Statutory Accounting Practices and Dividend Restrictions:
The minimum capital and surplus required by Indiana statute for Pafco and IGF is
$1,250. Statutory requirements place limitations on the amount of funds which
can be remitted to the Company from Pafco and IGF. The Indiana statute allows
-36-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
10% of surplus as regard to policyholders or 100% of net income, whichever is
greater, to be paid as dividends only from earned surplus.
The minimum capital and surplus required by Florida statute for Superior is
$1,950 and $2,100 at December 31, 1997 and 1996, respectively. In the consent
order approving the Acquisition, the Florida Department has prohibited Superior
from paying any dividends for four years without the prior written approval of
the Florida Department.
Subsequent to Board of Directors and regulatory approval, IGF declared and paid
in April 1996 and December 1995 extraordinary dividends to Pafco in the amounts
of $11 million and $2 million on the 2,494,000 shares of convertible preferred
stock owned by Pafco. In December 1995, upon Board of Directors of Pafco and
regulatory approval, Pafco declared and paid to the Company a $1.5 million
extraordinary dividend on the common stock owned by the Company.
17. Regulatory Matters:
Pafco and IGF, domiciled in Indiana, prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance (IDOI). The Superior entities, domiciled in
Florida, prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Florida Department of
Insurance (FDOI). Prescribed statutory accounting practices include a variety of
publications of the NAIC, as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
IGF received written approval through March 31, 1998 from the IDOI to reflect
its business transacted with the FCIC as a 100% cession with any net
underwriting results recognized in ceding commissions for statutory accounting
purposes, which differs from prescribed statutory accounting practices. As of
December 31, 1997, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit results of the FCIC business, net of
reinsurance of $26,589, $12,277 and $9,653, are netted with policy acquisition
and general and administrative expenses for the years ended December 31, 1997,
1996, and 1995, respectively, in the accompanying Consolidated Statements of
Earnings.
The NAIC is considering the adoption of a recommended statutory accounting
standard for crop insurers, the impact of which is uncertain since several
methodologies are currently being examined. Although the Indiana Department has
permitted the Company to continue for its statutory financial statements through
December 31, 1997 its practice of recording its MPCI business as 100% ceded to
the FCIC with net underwriting results recognized in ceding commissions, the
Indiana Department has indicated that in the future it will require the Company
to adopt the MPCI accounting practices recommended by the NAIC or any similar
practice adopted by the Indiana Department. Since such a standard would be
adopted industry-wide for crop insurers, the Company would also be required to
conform its future GAAP financial statements to reflect the new MPCI statutory
accounting methodology and to restate all historical GAAP financial statements
consistently with this methodology for comparability. The Company cannot predict
what accounting methodology will eventually be implemented or when the Company
will be required to adopt such methodology. The Company anticipates that any
such new crop accounting methodology will not affect GAAP net earnings.
As of December 31, 1997, IGF, Pafco and the Superior entities had risk-based
capital ratios that were in excess of the minimum requirements.
-37-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
The NAIC currently has a project under way to codify SAP, as existing SAP does
not address all accounting issues and may differ from state to state. Upon
completion, the Codification is expected to replace prescribed or permitted SAP
in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the Codification is uncertain at this
time, yet implementation could be required as early as January 1, 1999. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting is, however, expected to
materially impact statutory capital and surplus.
18. Commitments and Contingencies:
The Company, and its subsidiaries, are named as defendants in various lawsuits
relating to their business. Legal actions arise from claims made under insurance
policies issued by the subsidiaries. These actions were considered by the
Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial position.
On October 27, 1997, IGF reached an agreement with the FCIC to settle a lawsuit
started March 23, 1995, with both parties dismissing all claims against one
another which were subject to the litigation. The FCIC has agreed to pay IGF a
lump sum payment of $60,000.
The Company bought an office building in Des Moines, Iowa, as its crop insurance
division home office. The purchase price was $2.6 million. The sale of the old
building is expected to close on April 1, 1998 for $1,350,000.
19. Supplemental Cash Flow Information:
Cash paid for interest and income taxes are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $3,467 $5,178 $553
- ------------------------------------------------------------------------------
Cash paid for federal income taxes, net of refunds 11,670 9,825 1,953
- ------------------------------------------------------------------------------
</TABLE>
During 1996, the Company contributed the stock of Pafco and certain assets of
the Company totaling $17,186 to GGSH in exchange for a 52% ownership interest in
GGSH. In addition, Goldman Funds received a minority interest share of $18,425
in GGSH for its $21,200 contribution, resulting in a $2,775 increase to
additional paid-in capital from the sale of Pafco common stock and certain
assets.
20. Disclosures About Fair Values of Financial Instruments:
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and, accordingly,
the estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
a. Fixed Maturity and Equity Securities: Fair values for fixed maturity and
equity securities are based on quoted market prices.
-38-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
b. Mortgage Loan: The estimated fair value of the mortgage loan was
established using a discounted cash flow method based on credit rating,
maturity and future income when compared to the expected yield for
mortgages having similar characteristics. The estimated fair value of the
mortgage loan was $2,130 at December 31, 1997.
c. Short-term Investments, and Cash and Cash Equivalents: The carrying value
for assets classified as short-term investments, and cash and cash
equivalents in the accompanying Consolidated Balance Sheets approximates
their fair value.
d. Short-term Debt: The carrying value for short-term debt approximates fair
value.
e. Preferred Securities: The December 31, 1997 market value of the
Preferred Securities was $136,350 based on quoted market prices.
21. Segment Information:
The Company has two business segments: Nonstandard automobile and Crop
insurance. The Nonstandard automobile segment offers personal nonstandard
automobile insurance coverages through a network of independent general
agencies. These products are sold by Pafco in eleven states, Superior in nine
states, and IGF in four states. The Crop segment writes MPCI and crop hail
insurance in thirty-six states through independent agencies with its primary
concentration in the Midwest. Activity which is not included in the major
business segments is shown as "Corporate and Other."
"Corporate and Other" includes operations not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated overhead expenses).
Identifiable assets by business segment are those assets in the Company's
operations in each segment. Corporate and other assets are principally cash,
short-term investments, related-party assets, intangible assets, and property
and equipment. Capital expenditures are reported exclusive of the Acquisition.
-39-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
Segment information for 1995 through 1997 is as follows (certain information for
1995 is not available by segment due to general use by all segments of corporate
assets):
<TABLE>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 286,966 $ 181,799 $ 36,363
- ----------------------------------------------------------------------------------------------------------
Crop 25,731 24,865 12,830
- ----------------------------------------------------------------------------------------------------------
Corporate and other 317 99 3,447
------- ------- ------
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 313,014 $ 206,763 $ 52,640
======= ======= ======
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before taxes and minority interest:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 18,603 $ 10,618 $ (1,989)
- ----------------------------------------------------------------------------------------------------------
Crop 20,862 17,685 11,040
- ----------------------------------------------------------------------------------------------------------
Corporate and other (5,522) (4,600) (1,611)
------- ------- ------
- ----------------------------------------------------------------------------------------------------------
TOTAL EARNINGS BEFORE TAXES AND
MINORITY INTEREST $ 33,943 $ 23,703 $ 7,440
======= ======= =======
- ----------------------------------------------------------------------------------------------------------
Identifiable assets:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 302,795 $ 260,332
- ----------------------------------------------------------------------------------------------------------
Crop 108,650 72,916
- ----------------------------------------------------------------------------------------------------------
Corporate and other 118,430 11,431
------- -------
- ----------------------------------------------------------------------------------------------------------
TOTAL IDENTIFIABLE ASSETS $ 529,875 $ 344,679
======= =======
- ----------------------------------------------------------------------------------------------------------
Depreciation and amortization:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 1,007 $ 1,209
- ----------------------------------------------------------------------------------------------------------
Crop 754 574
- ----------------------------------------------------------------------------------------------------------
Corporate and other 1,200 411
------- -------
- ----------------------------------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 2,961 $ 2,194
======= =======
- ----------------------------------------------------------------------------------------------------------
Capital expenditures:
- ----------------------------------------------------------------------------------------------------------
Nonstandard automobile $ 4,409 $ 2,058
- ----------------------------------------------------------------------------------------------------------
Crop 1,241 1,676
- ----------------------------------------------------------------------------------------------------------
Corporate and other 12 -
------- -------
- ----------------------------------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 5,662 $ 3,734
======= =======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
22. Stock Option Plans:
On November 1, 1996, the Company adopted the Symons International Group, Inc.
1996 Stock Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan
provides the Company authority to grant nonqualified stock options and incentive
-40-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
stock options to officers and key employees of the Company and its subsidiaries
and nonqualified stock options to nonemployee directors of the Company and
Goran. Options were granted at an exercise price equal to the Offering price of
the Company's common stock. The options granted to the Company's Chairman
(436,567 shares) vest and become exercisable in full on the first anniversary of
the grant date. All of the remaining outstanding stock options vest and become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant. All options were granted at an exercise
price equal to the fair market value of the Company's common stock at time of
grant.
Information regarding the SIG Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year 830,000 $12.50 --- $ ---
- -----------------------------------------------------------------------------------------------------------------------------
Granted 185,267 15.35 830,000 12.50
- -----------------------------------------------------------------------------------------------------------------------------
Exercised (1,667) 12.50 --- ---
- -----------------------------------------------------------------------------------------------------------------------------
Forfeited (13,600) 12.50 --- ---
------- ---
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of the year 1,000,000 $13.03 830,000 $12.50
========= =======
- -----------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 521,578 ---
- -----------------------------------------------------------------------------------------------------------------------------
Available for future grant --- 170,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years) price exercisable price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$12.50-$13.75 933,733 8.9 $12.66 521,578 $12.50
- ---------------------------------------------------------------------------------------------------------------------------------
$17.75-$19.25 66,267 9.7 18.23 --- ---
------ ---
- ---------------------------------------------------------------------------------------------------------------------------------
1,000,000 521,578
========= =======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. Stock
Option Plan (the "GGS Stock Option Plan"), effective April 30, 1996. The GGS
Stock Option Plan authorizes the granting of nonqualified and incentive stock
options to such officers and other key employees as may be designated by the
Board of Directors of GGSH. Options granted under the GGS Stock Option Plan have
a term of ten years and vest at a rate of 20% per year for the five years after
the date of the grant. The exercise price of any options granted under the GGS
Stock Option Plan shall be subject to the following formula: 50% of each grant
of options having an exercise price determined by the Board of Directors of GGSH
at its discretion, with the remaining 50% of each grant of options subject to a
compound annual increase in the exercise price of 10%, with a limitation on the
exercise price escalation as such options vest.
-41-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
Information regarding the GGS Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1997 1996
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year 55,972 $51.75 --- $ ---
- -----------------------------------------------------------------------------------------------------------------------------
Granted --- --- 55,972 51.75
- -----------------------------------------------------------------------------------------------------------------------------
Forfeited (1,950) 51.75 --- ---
------ ------
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of the year 54,022 $51.75 55,972 $51.75
====== ======
- -----------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 10,804 ---
- -----------------------------------------------------------------------------------------------------------------------------
Available for future grant 57,089 55,139
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years) price exercisable price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$44.17-$53.45 37,815 8.3 $46.13 10,804 $46.38
- ---------------------------------------------------------------------------------------------------------------------------
$58.79-$71.14 16,207 8.3 64.87 --- ---
------ ---
- ---------------------------------------------------------------------------------------------------------------------------
54,022 10,804
====== ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting of
Stock Issued to Employees" and related interpretation in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
such plans. Had compensation cost been determined, based on the fair value at
the grant dates for options granted under both the SIG Stock Option Plan and the
GGS Stock Option Plan during 1997 and 1996, consistent with the method of SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net
earnings and pro forma earnings per share for the years ended December 31, 1997
and 1996 would have been as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in thousands, 1997 1997 1996 1996
except per share amounts) As Reported Pro forma As Reported Pro forma
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $16,305 $14,927 $13,256 $13,021
- ---------------------------------------------------------------------------------------------
Basic earnings per share $1.56 $1.43 $1.76 $1.73
- ---------------------------------------------------------------------------------------------
Fully diluted earnings per share $1.52 $1.38 $1.76 $1.73
- ---------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant used for purposes of estimating the pro
forma amounts summarized above is estimated on the date of grant using the
Black-Scholes option-price model with the weighted average assumptions for 1997
and 1996 shown in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SIG SIG GGSH
1997 Grants 1996 Grants 1996 Grants
----------- ----------- -----------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rates 6.40% 6.27% 6.41%
- --------------------------------------------------------------------------------------------
Dividend yields --- --- ---
- ---------------------------------------------------------------------------------------------
Volatility factors 0.39 0.40 ---
- ---------------------------------------------------------------------------------------------
Weighted average expected life 3.3 years 3.1 years 5.0 years
- ---------------------------------------------------------------------------------------------
Weighted average fair value per share $5.54 $4.27 $5.90
- ---------------------------------------------------------------------------------------------
</TABLE>
-42-
<PAGE>
[small SIG logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Continued
23. Subsequent Event:
On March 2, 1998, the Company announced that it had signed a definitive
agreement with CNA to purchase its multi-peril and crop hail operations. The
Company will reinsure back to CNA a small portion of the Company's total crop
book of business. CNA wrote approximately $110 million of multi-peril and crop
hail insurance business in 1997. Starting in the year 2000, assuming no event of
change of 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 after the buyout. The formula for the buyout is based on a multiple of
average pre-tax earnings that CNA receives from reinsuring the Company's book of
business.
24. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
<TABLE>
Quarters
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross written premiums $129,890 $149,175 $103,919 $77,616 $460,600
- -------------------------------------------------------------------------------------------------------------------
Net earnings 5,909 3,677 6,013 706 16,305
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.56 0.35 0.56 0.09 1.56
- -------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share 0.56 0.35 0.55 0.06 1.52
- -------------------------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------------------------
Gross written premiums $41,422 $105,528 $71,813 $86,736 $305,499
- -------------------------------------------------------------------------------------------------------------------
Net earnings 1,586 2,718 4,589 4,363 13,256
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.22 0.39 0.66 0.49 1.76
- -------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share 0.22 0.39 0.66 0.49 1.76
- -------------------------------------------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------------------------------------------
Gross written premiums $28,272 $67,487 $16,978 $11,897 $124,634
- -------------------------------------------------------------------------------------------------------------------
Net earnings 1,066 940 1,464 1,351 4,821
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.15 0.14 0.21 0.19 0.69
- -------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share 0.15 0.14 0.21 0.19 0.69
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
During the fourth quarter of 1997, the Company increased reserves on its
nonstandard automobile business by $1.5 million for accident years 1996 and
prior and by $1.5 million for accident year 1997.
As is customary in the crop insurance industry, insurance company participants
in the FCIC program receive more precise financial results from the FCIC in the
fourth quarter based upon business written on spring-planted crops. On the basis
of FCIC-supplied financial results, IGF recorded, in the fourth quarter, an
additional underwriting gain, net of reinsurance, on its FCIC business of
$6,979, $5,572 and $3,139 during 1997, 1996 and 1995, respectively.
-43-
<PAGE>
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations on the Company's business and results of
operations, (ii) the competitive advantage afforded to the Company's crop
insurance operations by approaches adopted by management in the areas of
information, technology, claims handling and underwriting, (iii) the
sufficiency of the Company's cash flow to meet the operating expenses, debt
service obligations and capital needs of the Company and its subsidiaries, and
(iv) the impact of declining MPCI Buy-up Expense Reimbursements on the Company's
results of operations, are forward-looking statements. The Company desires to
take advantage of the "safe harbor" afforded such statements under the
Private Securities Litigation Reform Act of 1995 when they are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statements. Such cautionary statements which discuss certain risks associated
with the Company's business including the variability of the results of
operations of the Company's crop insurance business as a result of weather and
natural perils, the highly competitive nature of both the Company's crop
insurance and nonstandard automobile insurance business and the effects of state
and federal regulation, the capital intensive nature of the property and
casualty business and potential limitations on the ability of the Company to
raise additional capital set forth under the heading "Forward-Looking Statements
- --Safe Harbor Provisions" in Item 1 - Business in the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1997.
- -------------------------------------------------------------------------------
MANAGEMENT RESPONSIBILITY
- --------------------------------------------------------------------------------
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which involve the use
of judgement and estimates in applying the accounting principles selected. Other
financial information in this Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains systems of internal controls which are designed to provide
reasonable assurance that accounting records are reliable and to safe-guard the
Company's assets. The independent accounting firm of Coopers & Lybrand L.L.P.
has audited and reported on the Company's financial statements. Their opinion is
based upon audits conducted by them in accordance that the consolidated
financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representative to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations to
the Board of Directors.
/s/ Alan G. Symons
Chief Executive Officer
/s/ Gary P. Hutchcraft
Gary P. Hutchcraft
Vice President and Chief Financial Officer
February 27, 1998
-44-
<PAGE>
[small SIG logo]
REPORTS OF INDEPENDENT ACCOUNTANTS
Board of Directors And Stockholders of Symons International Group, Inc.
And Subsidiaries
We have audited the accompanying consolidated balance sheets of Symons
International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Symons
International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand
Indianapolis, Indiana
February 27, 1998 , except as to note 23
which is as of March 2, 1998
-45-
<PAGE>
[small SIG logo]
Stockholder Information
Corporate Offices
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
(317) 259-6300
Registrar and Transfer Agent
National City Bank
4100 West 150th Street
3rd Floor
Cleveland, Ohio 44135-1385
Independent Public Accountants
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
Annual Meeting of Stockholders
Wednesday, May 20, 1998
10:00 a.m.
Corporate Offices
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K for Symons International Group, Inc.
for the year ended December 31, 1997, filed with the Securities and Exchange
Commission, may be obtained, without charge, upon request to the individual and
address noted under Shareholder Inquiries.
Market and Dividend Information
Symons International Group, Inc. effected its initial public offering on
November 5, 1996. Symons International Group, Inc.'s common stock trades on the
NASDAQ Stock Market's National Market under the symbol SIGC. The initial
offering price of its shares of Common Stock was $12.50 per share.
<TABLE>
NASDAQ
- ---------------------------------------------------------------------
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter Ended High Low High Low
- ---------------------------------------------------------------------
March 31 17.625 14.00 N/A N/A
- ---------------------------------------------------------------------
June 30 16.625 13.625 N/A N/A
- ---------------------------------------------------------------------
September 30 23.25 15.75 N/A N/A
- ---------------------------------------------------------------------
December 31 23.75 18.63 16.75 12.50
- ---------------------------------------------------------------------
</TABLE>
As of March 20, 1998, the Company had approximately 120 stockholders based on
the number of holders of record and an estimate of the number of individual
participants represented by securities position listings.
Symons International Group, Inc. did not declare or pay cash dividends on its
common stock during the years ended December 31, 1997 and 1996. The Company does
not plan to pay cash dividends on its common stock in order to retain earnings
to support the growth of its business.
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Tel: (317) 259-6402
-46-
<PAGE>
[small SIG logo]
Board of Directors
G. Gordon Symons
Chairman of the Board
Symons International Group, Inc.
Goran Capital Inc.
Alan G. Symons
Chief Executive Officer, Symons International Group, Inc.
President and Chief Executive Officer, Goran Capital Inc.
Douglas H. Symons
President and Chief Operating Officer, Symons International Group, Inc.
Vice President and Chief Operating Officer, Goran Capital Inc.
John K. McKeating
Retired former President and Owner of Vision 2120 Optometric Clinics
Robert C. Whiting
President, Prime Advisors, Ltd
James G. Torrance, Q.C.
Partner Emeritus, Smith, Lyons
Barristers & Solicitors
David R. Doyle
Director and Vice President, Secretary and
Treasurer of ONEX, Inc.
Jerome B. Gordon
Managing Director of Lutine Corporation
Executive Officers
G. Gordon Symons Roger C. Sullivan Jr.
Chairman of the Board Executive Vice President
Symons International Group, Inc. Superior Insurance Company
Alan G. Symons David L. Bates
Chief Executive Officer Vice President, General Counsel and
Symons International Group, Inc. and Secretary
Symons International Group, Inc.
Douglas H. Symons Dennis G. Daggett
President and Chief Operating Officer President and Chief Operating Officer
Symons International Group, Inc. IGF Insurance Company
Gary P. Hutchcraft Thomas F. Gowdy
Vice President, Chief Financial Officer Executive Vice Presidenter
and Treasurer IGF Insurance Company
Symons International Group, Inc.
Carl F. Schnaufer
Vice President, Chief Information Officer
Symons International Group, Inc.
Donald E. Barrett
Vice President, Human Resources
Symons International Group, Inc.
Terry E. Diers
Vice President, Marketing
GGS Management, Inc.
-47-
<PAGE>
[small SIG logo]
Company, Subsidiaries and Branch Offices
CORPORATE OFFICE
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317 259-6300
Fax: 317 259-6395
SUBSIDIARIES AND BRANCHES
Pafco General Insurance Company IGF Southwest
4720 Kingsway Drive 7914 Abbeville Avenue
Indianapolis, Indiana 46205 Lubbock, Texas 79424
Tel: 317 259-6300 Tel: 806 783-3010
Fax: 317 259-6395 Fax: 806 783-3017
Superior Insurance Company IGF South
280 Interstate North Circle, N.W. 101 Business Park Drive, Suite C
Atlanta, Georgia 30339 Jackson, Mississippi 39213
Tel: 770 952-4885 Tel: 601 957-9780
Fax: 770 952-6616 Fax: 601 957-9793
Superior Insurance Company IGF East
3030 N. Rocky Point Drive 8000 Regency Park, Suite 280
Suite 770 Cary, North Carolina 27511
Tampa, Florida 33607 Tel: 919 462-7850
Tel: 813 281-2444 Fax: 919 462-7863
Fax: 813 281-8036
IGF West
Superior Insurance Company 1750 Bullard Avenue, Suite 106
1745 West Orangewood Road Fresno, California 93710
Orange, California 92868 Tel: 209 432-0196
Tel: 714 978-6811 Fax: 209 432-0294
Fax: 714 978-0353
IGF North
IGF Insurance Company 116 South Main, Box 1090
Corporate Office Stanley, North Dakota 58784
6000 Grand Avenue Tel: 701 628-3536
Des Moines, Iowa 50312 Fax: 701 628-3537
Tel: 515 633-1000
Fax: 515 633-1010
IGF Mid West
6000 Grand Avenue
Des Moines, Iowa 50312
Tel: 515 633-1000
Fax: 515 633-1012
IGF Mid East
3900 Wood Duck Drive, Suite B
Springfield, Illinois 62707
Tel: 217 726-2450
Fax: 217 726-2451
-48-
<PAGE>
BACK PAGE
[SIG logo]
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Exhibit 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
Symons International Group, Inc. on Form S-8 (File No. 333-44643) of our reports
dated February 27, 1998, on our audits of the consolidated financial statements
and financial statement schedules of Symons International Group, Inc. as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995, which reports are incorporated by reference or included in this Annual
Report on Form 10-K.
Indianapolis, Indiana
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001013698
<NAME> Symons International
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 167,826,000
<DEBT-MARKET-VALUE> 169,385,000
<EQUITIES> 35,542,000
<MORTGAGE> 2,220,000
<REAL-ESTATE> 450,000
<TOTAL-INVEST> 216,518,000
<CASH> 11,276,000
<RECOVER-REINSURE> 93,832,000
<DEFERRED-ACQUISITION> 10,740,000
<TOTAL-ASSETS> 529,875,000
<POLICY-LOSSES> 136,772,000
<UNEARNED-PREMIUMS> 114,635,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,182,000
0
135,000,000
<COMMON> 39,019,000
<OTHER-SE> 39,344,000
<TOTAL-LIABILITY-AND-EQUITY> 529,875,000
460,600,000
<INVESTMENT-INCOME> 11,447,000
<INVESTMENT-GAINS> 9,444,000
<OTHER-INCOME> 20,309,000
<BENEFITS> 313,014,000
<UNDERWRITING-AMORTIZATION> 1,197,000
<UNDERWRITING-OTHER> 62,631,000
<INCOME-PRETAX> 33,943,000
<INCOME-TAX> 11,981,000
<INCOME-CONTINUING> 21,962,000
<DISCONTINUED> 0
<EXTRAORDINARY> 713,000
<CHANGES> 0
<NET-INCOME> 16,305,000
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.52
<RESERVE-OPEN> 101,719,000
<PROVISION-CURRENT> 201,118,000
<PROVISION-PRIOR> 10,967,000
<PAYMENTS-CURRENT> 138,111,000
<PAYMENTS-PRIOR> 60,566,000
<RESERVE-CLOSE> 136,772,000
<CUMULATIVE-DEFICIENCY> (10,584,000)
</TABLE>
Exhibit 99
SYMONS INTERNATIONAL GROUP, INC.
4720 KINGSWAY DRIVE
INDIANAPOLIS, INDIANA 46205
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On May 20, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Symons International Group, Inc. ("Company") will be held at the Company's
offices, 4720 Kingsway Drive, Indianapolis, Indiana on Wednesday, May 20, 1998,
at 10:00 a.m., Indianapolis time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of 2 Directors for terms to
expire in 2001.
2. Ratification of Auditors. Ratification of the appointment of
Coopers & Lybrand L.L.P. as auditors for the Company for the
year ending December 31, 1998.
3. Stock Option Plan. Approve an increase of options available
pursuant to the Company's Stock Option Plan from 1,000,000 to
1,500,000.
4. Other Business. Such other matter as may properly come before
the meeting or any adjournment thereof.
Shareholders of record as of the close of business on March 20, 1998
are entitled to vote at the meeting or any adjournment thereof.
Please read the enclosed Proxy Statement carefully so that you may be
informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
Proxy in the postage-paid envelope furnished for that purpose.
A copy of the Company's Annual Report for the year ended December 31,
1997 is enclosed. The Annual Report is not a part of the Proxy soliciting
material enclosed with this letter.
FOR THE BOARD OF DIRECTORS
Alan G. Symons
Chief Executive Officer
Indianapolis, Indiana
March 27, 1998
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
4720 Kingsway Drive
Indianapolis, Indiana 46205
PROXY STATEMENT
The accompanying Proxy is solicited by the Board of Directors of Symons
International Group, Inc. (the "Company") for use at the Annual Meeting of
Shareholders to be held May 20, 1998 and any adjournments thereof. When the
Proxy is properly executed and returned, the shares it represents will be voted
at the meeting in accordance with any directions noted on that Proxy. If no
direction is indicated, the Proxy will be voted in favor of the proposals set
forth in the Notice attached to this Proxy Statement.
The election of Directors will be determined by a plurality of the
shares present in person or represented by Proxy. Abstentions, broker non-votes
and instructions on the accompanying Proxy Card to withhold authority to vote
for one or more nominees might result in some nominees receiving fewer votes.
However, the number of votes otherwise received by the nominee will not be
reduced by such action. The holder of each outstanding share of common stock is
entitled to vote for as many persons as there are Directors to be elected. All
other matters to come before the meeting will be approved if the votes cast in
favor exceed the votes cast against. Any abstention or broker non-vote on any
such matter will not change the number of votes cast for or against the matter,
however, such abstaining shares will be counted in determining whether a quorum
is present pursuant to the applicable provisions of the Indiana Business
Corporation Law.
The Board of Directors knows of no matters, other than those reported
herein, which are to be brought before the meeting. However, if other matters
properly come before the meeting, it is the intention of the persons named in
the enclosed Form of Proxy to vote such Proxy in accordance with their judgment
on such matters. Any shareholder giving a Proxy has the power to revoke it at
any time before it is voted by a written notice delivered to the Secretary of
the Company or in person at the meeting. The approximate date of mailing of this
Proxy Statement is April 10, 1998.
<PAGE>
VOTING SECURITIES AND BENEFICIAL OWNERS
Only shareholders of record as of the close of business on March 20,
1998 will be entitled to vote at the Annual Meeting. On the Record Date, there
were 10,419,332 shares of Common Stock outstanding, the only class of the
Company's stock which is currently outstanding.
The following table shows, as of March 10, 1998 the number and
percentage of shares of Common Stock held by each person known to the Company
who owned beneficially more than 5% of the issued and outstanding Common Stock
of the Company and Goran and the ownership interests of the Company's and
Goran's Directors and Named Executive Officers:
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
Symons International
Group, Inc. Goran Capital Inc.
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Amount and Nature Percent Amount and Nature Percent
Name of of Beneficial of of Beneficial of
Beneficial Owner Ownership Class Ownership Class
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
G. Gordon Symons1 444,900 3.9% 2,506,069 39.3%
- --------------------------------------------------------------------------------------------------------------------
Alan G. Symons2 295,400 2.6% 631,335 9.9%
- --------------------------------------------------------------------------------------------------------------------
Douglas H. Symons3 164,300 1.4% 259,705 4.1%
- --------------------------------------------------------------------------------------------------------------------
Robert C. Whiting4 10,000 * 14,900 *
- --------------------------------------------------------------------------------------------------------------------
James G. Torrance, Q.C.5 7,000 * 4,000 *
- --------------------------------------------------------------------------------------------------------------------
David R. Doyle6 10,000 * - 0 - *
- --------------------------------------------------------------------------------------------------------------------
John K. McKeating7 7,000 * 2,000 *
- --------------------------------------------------------------------------------------------------------------------
Jerome B. Gordon8 5,000 * - 0 - *
- --------------------------------------------------------------------------------------------------------------------
David B. Shapira12+ 3,000 * 103,000 1.6%
- --------------------------------------------------------------------------------------------------------------------
J. Ross Schofield13+ 4,000 * 6,800 *
- --------------------------------------------------------------------------------------------------------------------
Goran Capital Inc. 7,000,000 61.1% ------
- --------------------------------------------------------------------------------------------------------------------
FMR Corp./Fidelity Canadian
Growth Company Fund ----- 270,400 4.2%
- --------------------------------------------------------------------------------------------------------------------
Symons International Group
Ltd.9 ----- 1,646,413 25.8%
- --------------------------------------------------------------------------------------------------------------------
David L. Bates10 20,750 * 7,916 *
- --------------------------------------------------------------------------------------------------------------------
Gary P. Hutchcraft11 18,200 * 3,450 *
- --------------------------------------------------------------------------------------------------------------------
All Executive Officers and 1,072,750 9.4% 3,585,370 56.2%
Directors as a Group
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
* Less than 1% of class
+ Goran Director that is not a member of the Symons International Group, Inc.
Board
1 With respect to Symons International Group, Inc., 10,000 shares are owned
directly and 434,900 are subject to option. With respect to the shares of
Goran Capital Inc., 544,511 shares are held by trusts of which Mr. Symons
is the beneficiary, 315,145 are subject to option and 1,646,413 of the
shares indicated are owned by Symons International Group Ltd., of which Mr.
Symons is the controlling shareholder.
2 With respect to Symons International Group, Inc., 30,500 shares are owned
directly and 264,900 shares are subject to option. With respect to the
shares of Goran Capital Inc., 506,366 are owned directly and 124,969 are
subject to option.
3 With respect to Symons International Group, Inc., 26,500 shares are owned
directly and 137,800 shares are subject to option. With respect to the
shares of Goran Capital Inc., 195,722 are owned directly and 63,983 are
subject to option.
4 Mr. Whiting owns 5,000 shares of Symons International Group, Inc. directly
and 5,000 shares are subject to option. With respect to Goran Capital Inc.,
all shares indicated are owned directly.
5 Mr. Torrance owns 2,000 shares of Symons International Group, Inc. directly
and 5,000 shares are subject to option. With respect to Goran Capital Inc.,
2,000 shares are owned directly and 2,000 shares are subject to option.
6 Mr. Doyle owns 5,000 shares of Symons International Group, Inc. directly
and 5,000 shares are subject to option.
7 Mr. McKeating owns 2,000 shares of Symons International Group, Inc.
directly and 5,000 shares are subject to option. With respect to Goran
Capital Inc., 2,000 shares are subject to option.
8 Mr. Gordon owns 0 shares of Symons International Group, Inc. directly and
5,000 shares are subject to option.
9 Mr. G. Gordon Symons is the controlling shareholder of Symons International
Group Ltd., a private company.
10 Mr. Bates owns 7,000 shares of Symons International Group, Inc. directly
and 13,750 shares are subject to option. With respect to Goran Capital
Inc., 997 are held in Mr. Bates' 401(k) account pursuant to the Symons
International Group, Inc. Retirement Savings Plan, 1,055 are owned directly
and 5,864 shares are subject to option.
11 Mr. Hutchcraft owns 3,700 shares of Symons International Group, Inc.
directly and 14,500 shares are subject to option. Mr. Hutchcraft also owns
450 shares of Goran Capital Inc. directly and 3,000 shares are subject to
option.
12 Mr. Shapira owns 0 shares of Symons International Group, Inc. directly and
3,000 shares are subject to option. With respect to Goran Capital Inc.,
100,000 shares are held directly and 3,000 shares are subject to option.
13 Mr. Schofield owns 1,000 shares of Symons International Group, Inc.
directly and 3,000 shares are subject to option. With respect to Goran
Capital Inc., 3,800 shares are owned directly and 3,000 shares are subject
to option.
3
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers and Directors, as well as persons who own more than 10% of
the outstanding common shares of the Company, to file reports of ownership with
the Securities and Exchange Commission. Officers, Directors and greater than 10%
shareholders are required to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of copies of such forms
received by it, or written representations from certain reporting persons that
no reports were required for those persons, the Company believes that during
1997, all filing requirements applicable to its Officers, Directors and greater
than 10% shareholders were met with the exception of one report with respect to
Robert C. Whiting due October 10, 1997 and filed on December 3, 1997.
PROPOSALS
Proposal No. 1: Election Of Directors
The Directors of the Company are divided into three classes and are
elected to hold office for a three year term or until their successors are
elected and qualified. The election of each class of Directors is staggered over
each three-year period. All Directors of the Company were initially elected by
Goran Capital Inc. ("Goran") as the sole shareholder of the Company prior to the
Initial Public Offering ("IPO") of the Company which occurred on November 5,
1996. Messrs. Alan G. Symons, Robert C. Whiting and Jerome B. Gordon, who was
first elected to the Board on March 19, 1997, were elected to a three year term
by the shareholders at the Company's annual meeting on May 20, 1997. Mr. Gordon
resigned from the Board on March 24, 1998 to devote more time to his business
affairs and help the Company as a merchant banker.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Director Term to
Name Age Present Principal Occupation Since Expire
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
G. Gordon Symons 76 Chairman of the Board of Directors of 1987 1999
the Company and Goran Capital Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
James G. Torrance, Q.C. 69 Partner Emeritus, Smith, Lyons 1996 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Alan G. Symons 51 CEO of the Company and President and 1995 2000
CEO of Goran Capital Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
John K. McKeating 62 Owner, Vision 2120 1996 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Robert C. Whiting 65 President, Prime Advisors Ltd. 1996 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Douglas H. Symons 45 President and COO of the Company and 1987 1998
COO of Goran Capital Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
David R. Doyle 51 Director, Vice President, Secretary and 1996 1999
Treasurer of ONEX, Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
G. Gordon Symons has been Chairman of the Board of Directors of the
Company since its formation
</TABLE>
4
<PAGE>
in 1987. He founded the predecessor to Goran Capital Inc. the 67%
Shareholder of the Company ("Goran") in 1964 and has served as the
Chairman of the Board of Goran since its formation in 1986. Mr. Symons
also served as the President of Goran until 1992 and the Chief
Executive Officer of Goran until 1994. Mr. Symons currently serves as
a Director of Symons International Group Ltd. ("SIGL"), a federally-
chartered Canadian corporation controlled by him which, together with
members of the Symons family, controls Goran. Mr. Symons also serves
as Chairman of the Board of Directors of all of the subsidiaries of
Goran. Mr. Symons is the father of Alan G. Symons and Douglas H.
Symons.
Alan G. Symons has served as a Director of the Company since 1995 and
was named its Chief Executive Officer in 1996. Mr. Symons has been a
Director of Goran since 1986, and has served as Goran's President and
Chief Executive Officer since 1994. Prior to becoming the President
and Chief Executive Officer of Goran, Mr. Symons held other executive
positions within Goran since its inception in 1986. Mr. Symons is the
son of G. Gordon Symons and the brother of Douglas H. Symons.
Douglas H. Symons has served as a Director and as President of the
Company since its formation in 1987 and as it Chief Operating Officer
since July 1996. Mr. Symons served as Chief Executive Officer of the
Company from 1989 until July 1996. Mr. Symons has been a Director of
Goran since 1989, and has served as Goran's Chief Operating Officer and
Vice President since 1989. Mr. Symons is the son of G. Gordon Symons
and the brother of Alan G. Symons.
Mr. McKeating has served as a Director of the Company since 1996 and as
a Director of Goran since 1995. Mr. McKeating retired in January 1996
after serving as President and owner of Vision 2120 Optometric Clinics
("Vision 2120") for 36 years. Vision 2120, located in Montreal, Quebec,
is a chain of Canadian full-service retail clinics offering all aspects
of professional eye care.
Mr. Whiting has served as a Director of the Company since 1996. Since
July 1994, Mr. Whiting has served as President of Prime Advisors, Ltd.,
a Bermuda-based insurance consulting firm. From its inception until
June 1994 Mr. Whiting served as President and Chairman of the Board of
Jardine Pinehurst Management Co., Ltd., a Bermuda-based insurance
management and brokerage firm.
Mr. Torrance has served as a Director of the Company since 1996. Mr.
Torrance was a founding partner in the Canadian law firm of Smith Lyons
in 1962 and in April 1993, was named a Partner Emeritus in that firm.
Mr. Torrance was re-elected as a Director of Goran in 1995 after having
left the Board of Directors of Goran in 1991. He also serves as a
Director of Mitsui & Co. (Canada) Ltd., Sakura Bank (Canada), Toyota
Canada Inc. and Wintershall Canada Ltd.
Mr. Doyle helped form ONEX, Inc., a full service human resource firm
which specializes in permanent placement, contract consulting and
business consulting for business clients, in April 1997. Mr. Doyle
currently serves on the ONEX, Inc. Board of Directors and is the Vice
President, Secretary and Treasurer of that firm. From January 1996
until the formation of ONEX, Inc., Mr. Doyle was the Vice
President-Finance and Administration, and a Director of Avantec, Inc.,
a Carmel, Indiana-based company which provides data management services
for the pharmaceutical industry. From May 1994 to January 1996, Mr.
Doyle served as Vice President-Financial Consultant for Raffensberger,
Hughes & Co., a firm which provides brokerage services and financial
consulting.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee shall be unable or
5
<PAGE>
unwilling to stand for election at the time of the Annual Meeting, the proxy
holders will nominate and vote for a replacement nominee recommended by the
Board. At this time, the Board knows of no reason why the nominees listed below
may not be able to serve as Directors if elected.
The Board of Directors unanimously recommends the election of the
following nominees for a three (3) year term to expire in the year 2001:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Name Age Present Principal Occupation Director Since
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James G. Torrance, Q.C. 69 Partner Emeritus, Smith Lyons 1996
- ----------------------------------------------------------------------------------------------------------
Douglas H. Symons 45 Chief Operating Officer of the 1987
Company
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Meetings And Committees Of The Board
During the year ended December 31, 1997, the Board of Directors of the
Company met seven (7) times, including teleconferences, in addition to taking a
number of actions by unanimous written consent. During 1997, all Directors
attended all meetings (including Committee Meetings) of the Board on which such
Directors served.
The Board of Directors of the Company has an Audit Committee, a
Compensation Committee and an Executive Committee.
The Company's Audit Committee is responsible for recommending the
appointment of the Company's independent auditors, meeting with the independent
auditors to outline the scope, and review the results of, the annual audit and
reviewing with the auditor the systems of internal control and audit reports.
The current members of this Committee are Messrs. James G. Torrance, John K.
McKeating and Alan G. Symons.
During 1997, the Compensation Committee of the Company was comprised of
Messrs. David R. Doyle, Robert C. Whiting, Jerome B. Gordon and Douglas H.
Symons. The Committee makes recommendations concerning executive compensation
and benefit levels to the Board of Directors and has the authority to approve
all specific transactions pursuant to the Symons International Group, Inc. 1996
Stock Option Plan (the "Plan").
The Executive Committee is comprised of Messrs. G. Gordon Symons, Alan
G. Symons and Douglas H. Symons. The Executive Committee is empowered by the
board to take action on behalf of the board when the need arises.
Directors of the Company who are not employees of the Company or its
affiliates receive a flat annual retainer of $10,000. The annual retainer is
paid currently in cash. In addition, the Company reimburses its Directors for
reasonable travel expenses incurred in attending Board and
6
<PAGE>
Board Committee meetings. Each Director of the Company who is not also an
employee of the Company receives a meeting fee of $1,000 for each quarterly
Board meeting or Board Committee meeting attended.
Compensation Committee Report
The Compensation Committee met four (4) times during 1997 wherein it
reviewed and recommended awards of stock options pursuant to the Company's Stock
Option Plan. The objectives of the Plan are to align executive and shareholder
long-term interests by creating a strong and direct link between executive
compensation and shareholder return and to enable executive officers and other
key employees to develop and maintain a long-term ownership position in the
Company's common stock. A total of 1 million shares of the Company's common
stock have been reserved for issuance under the Plan, all of which had been
granted by the Board of Directors to executive officers, Board members and other
key employees as of December 31, 1997. The grants to senior executives of the
Company and its subsidiaries are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Name Total Options Options Granted In
Granted 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
G. Gordon Symons 434,900 54,900
- ---------------------------------------------------------------------------------------------------
Alan G. Symons 264,900 64,900
- ---------------------------------------------------------------------------------------------------
Douglas H. Symons 137,800 17,800
- ---------------------------------------------------------------------------------------------------
Dennis G. Daggett (President of IGF Insurance 26,500 6,500
Company
- ---------------------------------------------------------------------------------------------------
Thomas F. Gowdy (Executive Vice President of 26,000 6,000
IGF Insurance Company
- ---------------------------------------------------------------------------------------------------
Roger C. Sullivan (Executive Vice President of 18,000 8,000
Superior Insurance Company)
- ---------------------------------------------------------------------------------------------------
David L. Bates 13,750 3,750
- ---------------------------------------------------------------------------------------------------
Gary P. Hutchcraft 14,500 4,500
- ---------------------------------------------------------------------------------------------------
</TABLE>
The Company's total compensation program for Officers includes base
salaries, bonuses and the grant of stock options pursuant to the Plan. The
Company's primary objective is to achieve above-average performance by providing
the opportunity to earn above-average total compensation (base salary, bonus and
value derived from stock options) for above-average performance. Each element of
total compensation is designed to work in concert. The total program is designed
to attract, motivate, reward and retain the management talent required to serve
shareholder, customer and employee interests. The Company believes that this
program also motivates the Company's officers to acquire and retain appropriate
levels of stock ownership. It is the opinion of the
7
<PAGE>
Compensation Committee that the total compensation earned by Company officers
during 1997 achieves these objectives and is fair and reasonable.
Consistent with that, certain of the Company's Officers have entered
into employment contracts with the Company or one of its subsidiaries.
Alan G. Symons, Chief Executive Officer of the Company and Douglas H.
Symons, President and Chief Operating Officer of the Company, are subject to
employment agreements, with such agreements calling for a base salary of not
less than $300,000 per year for Alan G. Symons and $200,000 for Douglas H.
Symons. These agreements became effective on April 30, 1996 and continue in
effect for an initial period of five (5) years. Upon the expiration of the
initial five (5) year period, the term of each agreement is automatically
extended from year to year thereafter and are cancelable (after the expiration
of the initial five (5) year term) upon six (6) months' notice. The base salary
of Alan Symons pursuant to this agreement was increased to $300,000 during 1997.
These two agreements contain customary restrictive covenants respecting
confidentiality and non-competition during the term of their employment and for
a period of two (2) years after the termination of the agreement. In addition to
annual salary, the agreements with Alan G. Symons and Douglas H. Symons
stipulate that Alan G. Symons may earn a bonus in an amount ranging from 25% to
100% of base salary and that Douglas H. Symons may earn a bonus in an amount
ranging from 25% to 50% of base salary. At the discretion of the Board, bonus
awards may be greater than the amounts indicated if agreed upon financial
targets are exceeded.
Goran has entered into an employment agreement with Gary P. Hutchcraft
pursuant to which Mr. Hutchcraft has agreed to serve as Vice President and Chief
Financial Officer of Goran and its subsidiaries, including the Company. Pursuant
to the term of this Agreement, Mr. Hutchcraft is entitled to a base salary of
not less than $132,000 per year and may earn a bonus in an amount ranging from
10% to 30% of his base salary or a greater amount as may be approved by the
board.
Goran has entered into an employment agreement with David L. Bates
pursuant to which Mr. Bates has agreed to serve as Vice President, General
Counsel and Secretary of Goran and its subsidiaries, including the Company.
Pursuant to the terms of this agreement, Mr. Bates is entitled to a base salary
of not less than $121,000 per year and may earn a bonus in an amount ranging
from 10% to 30% of his base salary or a greater amount as may be approved by the
board.
In 1993, Congress enacted Section 162(m) of the Internal Revenue Code
that disallows corporate deductibility for "compensation" paid in excess of $1
Million, unless such compensation is payable solely on account of achievement of
an objective performance goal. The Compensation Committee does not anticipate
that the compensation paid to any executive officer in the form of base
salaries, bonus and stock options will exceed $1 Million in the near future.
However, as part of its on-going responsibilities with respect to executive
compensation, the Compensation Committee will monitor this issue to determine
what actions, if any, should be taken as a result of the limitation on
deductibility.
8
<PAGE>
Compensation Committee Interlocks And Insider Participation
During 1997 the Company's Compensation Committee consisted of Messrs.
Robert C. Whiting, Jerome B. Gordon, David R. Doyle and Douglas H. Symons.
Neither Messrs. Whiting or Gordon, nor Mr. Doyle, have any interlocks reportable
under Item 402(j)(3) and (4) of Regulation S-K. Douglas H. Symons has served as
a Director and Executive Officer of the Company since its formation in 1987 and
as a Director and Chief Operating Officer of Goran since 1989. Douglas H.
Symons is also an Executive Officer of each of the Company's subsidiaries.
Since Alan G. Symons, the Chief Executive Officer of the Company, is a Director
of each of the Company's subsidiaries and is empowered to determine the
compensation of the managers of the Company's subsidiaries, Douglas and Alan
Symons have reportable interests under Item 402(j)(3) (i)-(iii) of Regulation
S-K.
Remuneration Of Executive Officers
The following table sets forth the compensation awarded to, earned by
or paid to the Chief Executive Officer and the four most highly compensated
executive officers of the Company other than the Chief Executive Officer
(collectively, the "Named Executive Officers") during the last two (2) years.
9
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options Compensation
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
G. Gordon Symons, 1997 $0 $0 434,900 $26,0002
Chairman 1996 $0 $0 375,000 $27,9992
- -------------------------------------------------------------------------------------------------------------------------
Alan G. Symons, 1997 $278,230 $200,000 264,900
Chief Executive 1996 $142,786 $133,333 200,000
Officer
- -------------------------------------------------------------------------------------------------------------------------
Douglas H. Symons, 1997 $200,000 $200,000 137,800
President and Chief 1996 $195,973 $50,000 120,000
Operating Officer
- -------------------------------------------------------------------------------------------------------------------------
Gary P. Hutchcraft, 1997 $127,846 $65,569 14,500
Vice President, Chief 19961 $55,415 $28,000 10,000
Financial Officer and
Treasurer
- -------------------------------------------------------------------------------------------------------------------------
David L. Bates, Vice 1997 $107,307 $41,461 13,750
President, General 1996 $95,162 $97,076 10,000
Counsel and Secretary
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
1Mr. Hutchcraft joined the Company on July 1, 1996.
2Consulting fees paid to companies owned by Mr. G. Gordon Symons.
STOCK OPTION GRANTS
The following table provides details regarding stock options granted to
the Company's Executive Officers in 1997. In addition there are shown the
hypothetical gains or "option spreads" that would exist for the respective
options. These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over the full
option term. These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on stock option exercises and common stock holdings are
dependent on the future performance of the Company's common stock and the
overall stock market conditions. There can be no assurance that the amounts
reflected on this table will be achieved.
10
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Percentage
of Total Potential Realized Value
Options Exercise At Assumed Annual
Granted to Price Rates Of Stock
Options Employees Per Expiration Appreciation For
Name Granted During 1997 Share Date Option Term
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
- ---------------------------------------------------------------------------------------------------------------------------
G. Gordon 50,000 26.99 $13.75 4-23-2007 $432,369 $1,095,669
Symons 5,000 2.70 $17.5625 8-13-2007 $55,225 $139,947
4,900 2.65 $18.50 10-28-2007 $57,009 $144,469
- ---------------------------------------------------------------------------------------------------------------------------
Alan G. 50,000 26.99 $13.75 4-23-2007 $432,369 $1,095,669
Symons 10,000 5.40 $17.5625 8-13-2007 $110,450 $279,893
4,900 2.65 $18.50 10-28-2007 $57,009 $144,464
- ---------------------------------------------------------------------------------------------------------------------------
Douglas 5,000 2.70 $13.75 4-23-2007 $55,225 $139,947
H. Symons 10,000 5.40 $17.5625 8-13-2007 $110,450 $279,893
2,800 1.51 $18.50 10-28-2007 $32,577 $82,554
- ----------------------------------------------------------------------------------------------------------------------------
Gary P. 1,500 .81 $13.75 4-23-2007 $12,971 $32,870
Hutchcraft 2,500 1.35 $17.5625 8-13-2007 $27,613 $69,973
500 .26 $18.50 10-28-2007 $5,817 $14,741
- ----------------------------------------------------------------------------------------------------------------------------
David L. 1,500 .81 $13.75 4-23-2007 $12,971 $32,870
Bates 2,500 1.35 $17.5625 8-13-2007 $27,613 $69,973
250 .14 $18.50 10-28-2007 $2,909 $7,371
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The options granted to Mr. G. Gordon Symons vest one (1) year from the
date of grant. All other options to purchase the Company's stock vest ratably
over three (3) years and all options expire ten (10) years from date of grant.
OPTION EXERCISES AND YEAR-END VALUES
The following table shows stock options held by the Company's Named
Executive Officers during 1997. In addition, this table includes the number of
shares covered by both exercisable and non-exercisable stock options. Also
reported are the value of unexercised in-the-money options as of December 31,
1997.
11
<PAGE>
<TABLE>
STOCK OPTIONS
OUTSTANDING GRANTS AND VALUE AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Value Number of
Shares Realized Shares Value of
Acquired at Underlying In-the-Money
on Exercise Unexercised Options Options
Name Exercise Date at 12-31-97 at 12-31-97
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable1
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
G. Gordon 0 $0.00 375,000 59,900 $2,519,531 $285,241
Symons
- ------------------------------------------------------------------------------------------------------------------------------------
Alan G. 0 $0.00 66,667 198,233 $447,919 $1,189,353
Symons
- ------------------------------------------------------------------------------------------------------------------------------------
Douglas H. 0 $0.00 40,000 97,800 $268,750 $583,419
Symons
- ------------------------------------------------------------------------------------------------------------------------------------
Gary P. 0 $0.00 3,333 11,167 $22,394 $57,497
Hutchcraft
- ------------------------------------------------------------------------------------------------------------------------------------
David L. 0 $0.00 3,333 10,417 $22,394 $57,318
Bates
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Amount reflecting gains on outstanding options are based on the December 31,
1998 closing NASDAQ stock price which was $19.21875 per share.
INDEBTEDNESS OF MANAGEMENT
The following Directors and Executive Officers of the Company were
indebted to the Company, or its parent or subsidiaries, in amounts exceeding
$60,000 during 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Largest Loan
Name Date of Loan Balance During 1997 Present Balance
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
G. Gordon Symons June 27, 1986 $148,000 $148,000
June 30, 1986 $200,000 $200,000
May 31, 1988 (US) $51,729 (US) -0-
- --------------------------------------------------------------------------------
</TABLE>
The foregoing loans to Mr. G. Gordon Symons are on account of loans to
purchase common stock of Goran. Such loans are collateralized by pledges of the
common shares of Goran acquired
12
<PAGE>
and are payable on demand and are interest-free. During 1997, G. Gordon Symons
had an unsecured loan payable to Goran in the amount of $70,000 not relating to
the purchase of common shares of Goran. This loan was repaid on March 26, 1998.
Douglas H. Symons has a demand loan payable to the Company in the amount of
$39,377 plus accrued interest of $24,577 collateralized by a second mortgage on
his personal residence. Interest on this loan is at prime plus 1%. In addition,
the Company held a mortgage note of G. Gordon Symons collateralized by a second
mortgage on his personal residence. This mortgage loan was originally incurred
on October 3, 1988 and when paid off in full during February of 1997, had a
principal balance of $277,502. The Company also loaned Alan G. Symons an
aggregate amount of $515,000 during 1997 pursuant to interest bearing notes.
These notes had been repaid to the Company in full prior to December 31, 1997.
Also during 1997, Goran paid to Symons International Group, Ltd. $295,091 in
excess of the management fee owed to Symons International Group, Ltd. G. Gordon
Symons is the Controlling Shareholder of Symons International Group, Ltd.
PROPOSAL #2 - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors proposes the ratification by the Shareholders at
the Annual Meeting of the appointment of the accounting firm of Coopers &
Lybrand L.L.P. ("Coopers") as independent auditors for the Company's year ending
December 31, 1998. Coopers has served as auditors for the Company for the year
1997 and worked with the Company in effecting its Initial Public Offering. A
representative of Coopers is expected to be present at the Annual Meeting with
the opportunity to make a statement if he or she so desires. This individual
will also be available to respond to any appropriate questions the shareholders
may have.
RATIFICATION OF THE APPOINTMENT OF AUDITORS REQUIRES THAT THE VOTES
CAST (IN PERSON OR BY PROXY) AT THE ANNUAL MEETING OR AT ANY ADJOURNMENT THEREOF
IN FAVOR OF RATIFICATION EXCEED THOSE CAST AGAINST.
PROPOSAL #3 - INCREASE STOCK OPTIONS AVAILABLE PURSUANT TO THE
SYMONS INTERNATIONAL GROUP, INC. STOCK OPTION PLAN FROM 1,000,000 to
1,500,000
At the time of its adoption in October 1996, the Symons International
Group, Inc. Stock Option Plan provided for the award of up to 1,000,000 options
to purchase shares of the Company's Stock. The Symons International Group, Inc.
Stock Option Plan ("Plan") was designed, and is maintained, in a manner so that
qualifying individuals could receive Incentive Stock Options from the Company,
in accordance with Section 422 of the Internal Revenue Code of 1986, as amended
("Code").
The Plan, which was approved by the shareholders of the Company in
October 1996, contains provisions relating to the price at which such options
may be granted, the period for their exercise, and provisions for the method of
exercise of options granted pursuant to the Plan.
13
<PAGE>
Although designed to comply with the rules regarding qualification of
an option as an Incentive Stock Option, the Plan allows non-qualified stock
options to be granted pursuant to its terms. Further, the Plan allows for the
granting of stock appreciation rights, although none have been granted pursuant
to the Plan as of the date hereof. Options may be granted to Directors of the
Company pursuant to the Plan and the Plan provides for adjustments in the event
of any reorganization, recapitalization, stock split, stock dividend, or other
change in the capital structure of the Company that would disadvantage such
option holders but for these adjustment provisions.
The Board of Directors has the discretion pursuant to the Plan to amend
the Plan from time to time except that, without the prior approval of the
Company's shareholders, the Directors may not:
(a) Change the number of shares of common stock which may be reserved
for issuance pursuant to the Plan;
(b) Alter the period during which an option or a director option
may be exercised to provide for its exercise beyond ten years
from the date of the grant of such option; and
(c) Modify the class of persons to whom options may be granted
pursuant to the Plan.
Further, the Directors do not have the discretionary authority to make
any other amendment to the Plan which requires shareholder approval pursuant to
applicable law, the Code, or the rules and regulations of NASDAQ.
Pursuant to the Plan, the Directors have the authority to approve
grants of options to employees and certain non-employees who have provided
significant service to the Company. In the course of the Company's rapid growth,
the Board has felt it necessary, from time to time, to incentivize certain of
its employees and those non-employees who have provided significant services to
the Company. As a consequence of the Company's growth and success, all 1,000,000
options originally authorized pursuant to the Plan have been granted. Management
and the Company's Board of Directors feels that it is necessary to increase the
options available pursuant to the Plan to continue to incentivize management and
others. The Company's Board of Directors and management unanimously recommend a
vote in favor of increasing the options available for grant pursuant to the Plan
from 1,000,000 to 1,500,000. Unless otherwise directed, each proxy executed and
returned by a shareholder will be voted for the proposition to increase the
number of options available for grant pursuant to the Plan from 1,000,000 to
1,500,000.
CERTAIN RELATIONSHIPS/RELATED TRANSACTIONS
Jerome B. Gordon received fees in the amount of $75,000 (including
reimbursement of expenses) for his consulting service to the Company during
1997.
Three (3) of the Company's subsidiaries, Superior, IGF and Pafco, have
entered into reinsurance agreements with Granite Reinsurance Company Ltd.,
("Granite Re"), an affiliate of Goran.
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Granite Re participates in a 10% share of the 1997 Quota Share
Reinsurance Treaty between Pafco, Superior and Vesta Fire Insurance Company.
Granite Re reinsures all Pafco insurance policies which were previously
issued through Symons International Group, Inc. - Florida, ("SIGF"), a former
subsidiary of the Company and now a subsidiary of Goran. This agreement is in
respect of business other than nonstandard automobile insurance. Granite Re
reinsures 100% of this SIGF business on a quota share basis.
IGF reinsures a portion of its crop insurance with Granite Re. For year
1997, Granite Re reinsured 20% of IGF's multi-peril crop insurance stop loss
protection ("MPCI") underwriting losses to the extent that aggregate losses
nationwide exceed 100% of MPCI Retention up to 125% of MPCI Retention and 95% of
IGF's MPCI underwriting losses to the extent that aggregate losses nationwide
exceed 125% of MPCI Retention up to 150% of MPCI Retention. Further, for 1997,
Granite Re had a 10% participation in 95% of IGF's crop-hail losses in excess of
an 80% pure loss ratio up to a 100% pure loss ratio and a 10% participation in
95% of IGF crop-hail losses in excess of 100% pure loss ratio up to a 130% pure
loss ratio.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Any shareholder of the Company wishing to have a proposal considered
for inclusion in the Company's 1999 proxy solicitation materials must set forth
such proposal in writing and file it with the Secretary of the Company on or
before December 11, 1998. In order to be considered in the 1999 Annual Meeting,
shareholder proposals not included in the Company 1999 Proxy Solicitation
materials, as well as shareholder nominations for Directors, must be submitted
in writing to the Secretary of the Company at least sixty (60) days before the
date of the 1999 Annual Meeting, or, if the 1999 Annual Meeting is held prior to
March 31, 1999, within ten (10) days after notice of the Annual Meeting as
mailed to shareholders. The Board of Directors of the Company will review any
shareholder proposals that are filed as required, and will determine whether
such proposals meet applicable criteria for inclusion in its 1999 Proxy
Solicitation materials or consideration at the 1999 Annual Meeting.
OTHER MATTERS
Management is not aware of any business to come before the Annual
Meeting other than those matters described in the Proxy Statement. However, if
any other matters should properly come before the Annual Meeting, it is intended
that the proxies solicited hereby will be voted with respect to those matters in
accordance with the judgment of the persons voting the proxies. The cost of
solicitation of proxies will be borne by the Company. The Company will reimburse
brokerage firms and other custodians, nominees and fiduciaries for reasonable
expenses incurred by them in sending proxy material to the beneficial owners of
common stock of the Company. In addition to solicitation by mail, Directors,
Officers and employees of the Company may solicit proxies personally or by
telephone without additional compensation.
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Each Shareholder is urged to complete, date and sign the proxy and
return it promptly in the enclosed return envelope. Insofar as any of the
information in this Proxy Statement may rest peculiarly within the knowledge of
persons other than the Company, the Company relies upon information furnished by
others for the accuracy and completeness thereof.
Signed by Order of the Board of Directors
Alan G. Symons
Chief Executive Officer
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