UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1998
Commission File Number: 1-12369
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1707115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6400 (U.S.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of March 31, 1998, there were 10,395,532 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
For The Quarter Ended March 31, 1998
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 ...........................3
Unaudited Consolidated Statements of Earnings
for the Three Months Ended March 31, 1998 and 1997 .............4
Unaudited Consolidated Statements of Stockholders'
Equity .........................................................5
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997 .............6
Condensed Notes to Unaudited Consolidated Financial
Statements .....................................................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................8
PART 2 OTHER INFORMATION .............................................15
SIGNATURES ............................................................16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
<S> <C> <C>
Investments
Available for sale:
Fixed maturities, at market $176,370 $169,385
Equity securities, at market 40,993 35,542
Short-term investments, at amortized cost which approximates market 9,098 8,871
Real estate, at cost 3,034 450
Mortgage loans, at cost 2,190 2,220
Other 400 50
------- -------
TOTAL INVESTMENTS 232,085 216,518
Investment in and advances to related parties 5,277 839
Cash and cash equivalents 26,295 11,276
Receivables, net of allowance for doubtful accounts 164,272 91,730
Reinsurance recoverable on paid and unpaid losses, net 67,384 93,832
Prepaid reinsurance premiums 96,882 36,606
Federal income taxes recoverable -- 1,505
Deferred policy acquisition costs 17,267 10,740
Deferred income taxes 4,680 4,722
Property and equipment, net of accumulated depreciation 14,319 12,051
Intangible assets 43,252 43,756
Other assets 6,541 6,300
------- -------
TOTAL ASSETS $678,254 $529,875
======= =======
LIABILITIES
Losses and loss adjustment expenses $126,629 $136,772
Unearned premiums 205,987 114,635
Reinsurance payables 96,686 35,692
Notes payable 2,569 4,182
Federal income taxes payable 3,981 --
Distributions payable on preferred securities 1,559 4,801
Other 21,196 20,430
------- -------
TOTAL LIABILITIES 458,607 316,512
------- -------
Minority interest:
Preferred securities 135,000 135,000
------- -------
STOCKHOLDERS' EQUITY
Common stock 38,296 39,019
Additional paid-in capital 5,946 5,925
Unrealized gain on investments 4,130 1,908
Retained earnings 36,275 31,511
------- -------
TOTAL STOCKHOLDERS' EQUITY 84,647 78,363
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $678,254 $529,875
======= =======
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Gross premiums written $178,396 $129,890
Less ceded premiums (78,835) (63,101)
------- -------
Net premiums written 99,561 66,789
Change in net unearned premiums (31,076) (3,674)
------ -------
Net premiums earned 68,485 63,115
Fee income 6,487 5,038
Net investment income 2,958 2,438
Net realized gain 1,968 942
------ ------
Total Revenues 79,898 71,533
------ ------
Loss and loss adjustment expenses 53,205 45,268
Policy acquisition and general and administrative expenses 14,923 12,883
Interest expense 183 1,371
Amortization of intangibles 511 129
------ ------
Total Expenses 68,822 59,651
------ ------
Earnings before income taxes and minority interest 11,076 11,882
Provision for income taxes 4,022 4,286
------ ------
Net earnings before minority interest 7,054 7,596
Minority interest:
Distributions on preferred securities, net of tax 2,130 --
Equity in earnings of subsidiary -- 1,687
------ ------
Net Earnings $ 4,924 $ 5,909
====== ======
Net earnings per share - basic $0.47 $0.57
==== ====
Net earnings per share - fully diluted $0.46 $0.56
==== ====
Weighted average shares outstanding:
Basic 10,445 10,450
====== ======
Fully diluted 10,726 10,641
====== ======
See notes to consolidated financial statements
</TABLE>
-4-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Shares Total
Common Stockholders' Retained
Stock Equity Earnings
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 10,450,000 $60,900 $15,206
Comprehensive income:
Net earnings 5,909 5,909
Change in unrealized gains (losses) on securities (943) --
------
Comprehensive income 4,966 --
------ -----
BALANCE AT MARCH 31, 1997 10,450,000 $65,866 $21,115
========== ====== ======
BALANCE AT DECEMBER 31, 1997 10,451,667 $78,363 $31,511
Comprehensive income:
Net earnings 4,924 4,924
Change in unrealized gains (losses) on securities 2,222 --
------ -----
Comprehensive income 7,146 4,924
Exercise of stock options 1,665 20 --
Cost of shares acquired (57,800) (882) (160)
--------- ------ ------
BALANCE AT MARCH 31, 1998 10,395,532 $84,647 $36,275
========== ====== ======
See notes to consolidated financial statements
</TABLE>
-5-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings for the period $4,924 $5,909
Adjustments to reconcile net earnings to net cash provided from operations:
Equity in earnings of subsidiary -- 1,687
Depreciation and amortization 1,117 487
Deferred income tax expense (1,173) 226
Net realized gain (1,968) (942)
Net changes in operating assets and liabilities:
Receivables (72,542) (49,716)
Reinsurance recoverable on paid and unpaid losses, net 26,448 22,846
Prepaid reinsurance premiums (60,275) (35,659)
Deferred policy acquisition costs (6,527) 476
Other assets (243) (1,175)
Losses and loss adjustment expenses (10,143) (15,432)
Unearned premiums 91,352 39,334
Reinsurance payables 60,994 42,973
Distributions payable on preferred securities (3,242) --
Federal income taxes 5,485 3,970
Other liabilities 768 4,179
------ ------
NET CASH PROVIDED FROM OPERATIONS 34,975 19,163
------ ------
Cash flow used in investing activities:
Net (purchases) sales of short-term investments (227) 3,372
Purchases of fixed maturities (41,319) (22,892)
Proceeds from sales, calls and maturities of fixed maturities 34,322 1,232
Purchase of equity securities (6,466) (3,998)
Proceeds from sales of equity securities 6,421 8,937
Purchase of real estate (2,584) --
Purchases of property and equipment (2,869) (1,003)
(Purchases) sales of other investments (320) 70
------- ------
NET CASH USED IN INVESTING ACTIVITIES (13,042) (14,282)
------ ------
Cash flow provided from/(used in) financing activities:
Cost of shares acquired (862) --
Payments on notes payable (1,613) --
Contribution from minority interest owner -- 2,304
Repayments from related parties (4,439) (481)
------ -------
NET CASH PROVIDED FROM/(USED IN) FINANCING ACTIVITIES (6,914) 1,823
------ ------
Increase in cash and cash equivalents 15,019 6,704
Cash and cash equivalents, beginning of period 11,276 13,095
------ ------
Cash and cash equivalents, end of period $26,295 $19,799
====== ======
See notes to consolidated financial statements
</TABLE>
-6-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three Months Ended March 31, 1998
NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. Operating
results for the interim periods are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. Interim
financial statements should be read in conjunction with the Company's
annual audited financial statements.
(2) Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses). Comprehensive income for
the three month periods ended March 31, 1998 and 1997 is presented in the
Statements of Changes in Stockholders' Equity.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), which is effective for years beginning after
December 15, 1997. SFAS 131 established standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company
will adopt the new requirements effective December 31, 1998. Management has
not completed its review of SFAS 131, but does not anticipate that the
adoption of this statement will have a significant effect on the Company's
reported segments.
(3) On March 2, 1998, the Company announced that it had signed an agreement
with CNA to assume its multi-peril and crop hail operations. CNA
wrote approximately $110 million of multi-peril and crop hail
insurance business in 1997. The Company will reinsure 100% of all
multi-peril and crop hail premiums written by CNA during 1998 and cede
a small portion of the Company's total crop book of business
(approximately 22% MPCI and 15% crop hail) back to CNA. Starting in
the year 2000, assuming no event of change in control as defined in
the agreement, the Company can purchase the insurance premiums
reinsured to CNA through a call provision or CNA can require the
Company to buy the insurance premiums reinsured to CNA. Regardless of
the method of takeout of CNA, CNA must not compete in MPCI or crop
hail for a period of time. There was no purchase price. The formula
for the buyout in the year 2000 is based on a multiple of average
pre-tax earnings that CNA received from reinsuring the Company's book
of business.
-7-
<PAGE>
(4) Basic and diluted net income per share are computed by dividing net
income as reported by the average number of shares outstanding as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Basic:
Weighted-average common shares outstanding 10,450,000 10,450,000
Diluted:
Weighted-average common shares outstanding 10,450,000 10,450,000
Dilutive effect of stock options 281,000 191,000
---------- ----------
Average common shares outstanding assuming
dilution 10,726,000 10,641,000
========== ==========
</TABLE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Nonstandard Automobile Insurance Operations
The Company, through its wholly owned subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks". Nonstandard insureds are those
individuals who are unable to obtain insurance coverage through standard market
carriers due to factors such as poor premium payment history, driving
experience, record of prior accidents or driving violations, particular
occupation or type of vehicle. The Company offers several different policies
which are directed towards different classes of risk within the nonstandard
market. Premium rates for nonstandard risks are higher than for standard risks.
Since it can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when the standard coverage becomes more restrictive. Nonstandard policies
have relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers.
-8-
<PAGE>
Crop Insurance Operations
The two principal components of the Company's crop insurance business are
Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop hail
insurance. Crop insurance is purchased by farmers to reduce the risk of crop
loss from adverse weather and other uncontrollable events. Farms are subject to
drought, floods and other natural disasters that can cause widespread crop
losses and, in severe cases, force farmers out of business. Historically, one
out of every twelve acres planted by farmers has not been harvested because of
adverse weather or other natural disasters. Because many farmers rely on credit
to finance their purchases of such agricultural inputs as seed, fertilizer,
machinery and fuel, the loss of a crop to a natural disaster can reduce their
ability to repay these loans and to find sources of funding for the following
year's operating expenses.
The Company, like other private insurers participating in the MPCI program,
generates revenues from the MPCI program in two ways. First, it markets, issues
and administers policies, for which it receives administrative fees; and second,
it participates in a profit-sharing arrangement in which it receives from the
government a portion of the aggregate profit, or pays a portion of the aggregate
loss, in respect of the business it writes. The Company writes MPCI and crop
hail insurance through approximately 925 independent agencies in 42 states.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from the more traditional property and casualty insurance
lines. For income statement purposes under generally accepted accounting
principles, gross premiums written consist of the aggregate amount of MPCI
premiums paid by farmers for buy-up coverage (MPCI coverage in excess of CAT
Coverage), and any related federal premium subsidies, but do not include MPCI
premium on CAT Coverage (the minimum available level of MPCI Coverage). By
contrast, net premiums written do not include any MPCI premiums or subsidies,
all of which are deemed to be ceded to the FCIC as a reinsurer. The Company's
profit or loss from its MPCI business is determined after the crop season ends
on the basis of a complex profit sharing formula established by law and the
FCIC. For generally accepted accounting principles income statement purposes,
any such profit or loss sharing earned or payable by the Company is treated as
an adjustment to commission expense and is included in policy acquisition and
general and administrative expenses.
The Company also receives from the FCIC (i) an expense reimbursement payment
equal to a percentage of gross premiums written for each Buy-Up Coverage policy
it writes ("Buy-Up Expense Reimbursement Payment"), (ii) an LAE reimbursement
payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it
writes (the "CAT LAE Reimbursement Payment"), and (iii) a small excess LAE
reimbursement payment of two hundredths of one percent (.02%) of MPCI Retention
(as defined herein) to the extent the Company's MPCI loss ratios on a per state
basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For
1998 and 1997, the Buy-Up Expense Reimbursement Payment has been set at 27% and
29%, respectively, of the MPCI Premium. For generally accepted account
principles income statement purposes, the Buy-Up Expense Reimbursement Payment
is treated as a contribution to income and reflected as an offset against policy
acquisition and general and administrative expenses. The CAT LAE Reimbursement
Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement
purposes, recorded as an offset against LAE, up to the actual amount of LAE
incurred by the Company in respect of such policies, and the remainder of the
payment, if any, is recorded as Other Income.
-9-
<PAGE>
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary product which
combines the application and underwriting process for MPCI and hail coverages.
This product tends to produce less volatile loss ratios than the stand alone
product since the combined product generally insures a greater number of acres,
thereby spreading the risk of damage over a larger insured area. Approximately
half of the Company's hail policies are written in combination with MPCI.
Although both crop hail and MPCI provide coverage against hail damage, under
crop hail coverages farmers can receive payments for hail damage which would not
be severe enough to require a payment under an MPCI policy. The Company believes
that offering crop hail insurance enables it to sell more policies than it
otherwise would.
In addition to crop hail insurance, the Company also sells a small volume of
insurance against crop damage from other specific named perils. These products
cover specific crops and are generally written on terms that are specific to the
kind of crop and farming practice involved and the amount of actuarial data
available. The Company plans to seek potential growth opportunities in this
niche market by developing basic policies on a diverse number of named crops
grown in a variety of geographic areas and to offer these policies primarily to
large producers through certain select agents.
In order to reduce the Company's potential loss exposure under the MPCI program,
in addition to reinsurance obtained from the FCIC, the Company purchases
stop-loss reinsurance from other private reinsurers. Such private reinsurance
would not eliminate the Company's potential liability in the event a reinsurer
was unable to pay or losses exceeded the limits of the stop-loss coverage. For
crop hail insurance, the Company has in effect various layers of stop-loss
reinsurance.
Certain other conditions of the Company's crop business may effect comparisons
of the Company's results and operating ratios with that of other insurers,
including: (i) the seasonal nature of the business whereby profits are generally
recognized predominantly in the second half of the year, (ii) the short-term
nature of crop business whereby losses are known within a short time period, and
(iii) the limited amount of investment income associated with crop business. In
addition, cash flows from the crop business differ from cash flows from certain
more traditional lines.
In 1996, the Company instituted a policy of recognizing (i) 35% of its estimated
MPCI gross premiums written for each of the first and second quarters, 20% for
the third quarter and 10% for the fourth quarter, (ii) commission expense at a
rate of 16% of MPCI gross premiums written recognized and (iii) Buy-Up Expense
Reimbursement at the applicable rate of MPCI gross premiums written recognized
along with normal operating expenses incurred in connection with premium
writings. In the third quarter, if a sufficient volume of policyholder acreage
reports have been received and processed by the Company, the Company's policy is
to recognize MPCI gross premiums written for the first nine months based on a
re-estimate which takes into account actual gross premiums processed. If an
insufficient volume of policies has been processed, the Company's policy is to
recognize in the third quarter 20% of its full year estimate of MPCI gross
premiums written, unless other circumstances require a different approach. The
remaining amount of gross premiums written is recognized in the fourth quarter,
when all amounts are reconciled. The Company also recognizes the MPCI
underwriting gain or loss during each quarter, reflecting the Company's best
estimate of the amount of such gain or loss to be recognized for the full year,
based on, among other
-10-
<PAGE>
things, historical results, plus a provision for adverse developments. In the
third and fourth quarters, a reconciliation amount is recognized for the
underwriting gain or loss based on final premium and loss information.
Results of Operations
For the three months ended March 31, 1998, the Company recorded net earnings of
$4,923,000 or $0.47 per share (basic). This is approximately a 16.7% decrease
from 1997 comparable amounts of $5,909,000 or $0.57 per share (basic). This
resulted from lower earnings in both the nonstandard automobile and crop
segments. However, earnings in the first quarter of 1998 were at consensus
expectations. Increases in nonstandard automobile premiums contributed to
lowering the expense ratio which was offset by a higher loss ratio. However, the
first quarter 1998 loss ratio improved from the fourth quarter of 1997 due to
the effects of certain rate increases. Lower crop results reflect increased
commission rates due to competition and a lower expense reimbursement from the
federal government offset by significant volume growth created internally and
through the transaction with CNA.
-11-
<PAGE>
<TABLE>
<CAPTION>
For the three months
ended March 31,
1998 1997
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
<S> <C> <C>
Gross premiums written $89,976 $75,066
====== ======
Net premiums written $82,267 $59,588
====== ======
Net premiums earned $68,323 $63,105
Fee income 4,155 2,899
Net investment income 2,801 2,338
Net realized gain 1,968 942
------ ------
TOTAL REVENUES 77,247 69,284
------ ------
Losses and loss adjustment expenses 53,146 45,268
Policy acquisition and general and administrative expenses 18,123 17,124
------ ------
TOTAL EXPENSES 71,269 62,392
------ ------
Earnings before income taxes $5,978 $6,892
===== =====
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 77.8% 71.7%
Expense ratio, net of billing fees 20.4 22.5
---- ----
Combined ratio 98.2% 94.2%
==== ====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $86,175 $51,709
====== ======
Net premiums written $17,294 $7,201
====== =====
Net premiums earned $161 $10
Fee income 2,332 2,139
Net investment income 53 49
----- -----
TOTAL REVENUES 2,546 2,198
----- -----
Losses and loss adjustment expenses 59 --
Policy acquisition and general and administrative expenses(1) (3,647) (4,766)
Interest expense 183 11
----- ------
TOTAL EXPENSES (3,405) (4,755)
----- -----
Earnings before income taxes $5,951 $6,953
===== =====
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain.
(2) Includes premiums assumed from CNA in accordance with
the Strategic Alliance Agreement.
Consolidated gross premiums written increased 37.4% due to growth in both the
nonstandard auto and crop segments.
Gross premiums written for the nonstandard auto segment increased 19.9%. Such
increase was due primarily to continued introduction of multi-tiered products,
introduction of two new states and increased market share penetration.
-12-
<PAGE>
Gross premiums written for the crop segment increased 66.7%. Such increase was
due to the transactions with CNA and internal growth. Premium increases were
noted in all lines of crop insurance. Crop premiums for the three months ended
March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CAT imputed $16,319 $13,032
MPCI 60,743 39,777
Crop hail and named perils 25,431 11,932
------ ------
102,493 64,741
Less: CAT imputed (16,318) (13,032)
------ ------
$86,175 $51,709
====== ======
</TABLE>
Remaining gross written premiums represent commercial business which is ceded
100% to an affiliate, Granite Reinsurance Company Ltd.
MPCI premiums are considered to be 100% ceded to the federal government for
accounting purposes. Quota share cession rates for other lines of insurance for
the three months ended March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Nonstandard automobile 10% 20%
Crop hail 30% 40%
Named peril 50% 50%
</TABLE>
Fee income increased 28.8% for the three months ended March 31, 1998 as compared
to the corresponding period of the prior year. Such increase was due to greater
installment billings on nonstandard automobile policies, which averaged 4.62%
and 3.86% of gross written premiums in 1998 and 1997, respectively, and
additional CAT fees on crop business due to growth in volume.
Net investment income increased 21.3% for the three months ended March 31, 1998
as compared to the corresponding period of the prior year. Such increase was due
primarily to greater invested assets and a stable yield.
The loss ratio for the nonstandard automobile segment in 1998 was 77.8% as
compared to 71.7% in 1997. The increase in the loss ratio in 1998 from the first
quarter of 1997 reflects increased severity costs and the effects of certain
pending rate increases. However, this loss ratio has improved from the fourth
quarter of 1997 which was 79.4%, excluding the effects of certain fourth quarter
adjustments, due to the effects of recent rate increases. Crop hail loss ratios
in the first quarter do not have significant impact on consolidated earnings.
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $14,923,000 or 21.8%
of net premium earned for the three months ended March 31, 1998 compared to
$12,883,000 or 20.4% of net premium earned in the corresponding period of 1997.
The increase in the expense ratio in the first quarter of 1998 is due to the
effects of higher commissions and lower expense reimbursements in the crop
segment. However, the consolidated expense ratio has been reduced from the
fourth quarter 1997 rate of 25.8%. The expense ratio, for the nonstandard
segment improved to 20.4% in 1998 as compared to 22.5% in 1997, due primarily
-13-
<PAGE>
to reduced expenses from the Indianapolis operations (Pafco General Insurance
Company) resulting from lower commissions on multi-tiered products and other
efficiency implementations as well as higher billing fee rates.
Crop segment expenses include agent commissions, stop loss reinsurance costs and
operating expenses which are offset by MPCI Expense Reimbursements and MPCI
Underwriting Gain. The negative expense results primarily from the inclusion of
the MPCI Underwriting Gain. The increase in expenses results primarily from a 2%
lower MPCI Expense Reimbursement for 1998 versus 1997 and higher commissions due
to competition offset by a higher MPCI Underwriting Gain due to volume. This
gain is an estimate until later in the year when crops are harvested and losses
are known. The gain ratio in the first quarter of 1998 was consistent with the
first quarter of 1997 at 10%.
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest position in
GGSH, debt or preferred security issuance costs and organizational costs. The
increase in the first quarter of 1998 reflects the effects of the Preferred
Securities Offering in late 1997.
Interest expense primarily represents interest incurred since April 30, 1996 on
the GGS Senior Credit Facility. The GGS Senior Credit Facility was repaid with
the proceeds from the Preferred Securities Offering.
Income tax expense was 36.3% and 36.1% of pre-tax income for the three months
ended March 31, 1998 and 1997.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
federal income taxes.
Financial Condition
The Company's total assets of $678,254,000 at March 31, 1998 increased
$148,378,000 from $529,875,000 as of December 31, 1997. The primary reasons for
this increase were an increase of $30,585,000 in cash and invested assets due to
continued growth in premiums and the normal receipt of crop funds from the FCIC.
The remaining increase is due to increases in receivables from insureds and
reinsurers due to continued growth in volume and growth in prepaid reinsurance
in crop operations due to the accounting for MPCI with the FCIC.
Net cash provided by operating activities improved to $34,975,000 in 1998 from
$19,163,000 in 1997 due to continued premium growth and normal receipt of crop
funds from the FCIC. This additional cash flow was used to increase invested
assets. Financing activities included normal activities on the Company's line of
credit for crop operations. Loans to related parties is primarily a $3.3 million
loan to an affiliate, Granite Re, for reinsurance activities and certain
short-term officer loans. In the first quarter of 1998, the Company bought back
57,800 treasury shares as part of an announced buy back program.
-14-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising
in the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimated costs of litigation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 8, 1998 By:______________________
Alan G. Symons
Chief Executive Officer
Dated: May 8, 1998 By:______________________
Gary P. Hutchcraft
Vice President, Treasurer and
Chief Financial Officer
-16-
<PAGE>
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