UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1999
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, 1999, there were 10,385,399 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q/A Index
For The Quarter Ended March 31, 1999
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 . ...................... 3
Unaudited Consolidated Statements of Earnings
for the Three Months Ended March 31, 1999 and 1998........... 4
Unaudited Consolidated Statements of Stockholders'
Equity....................................................... 5
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998........... 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............................................ 17
SIGNATURES........................................................... 19
<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 1999 1998
Restated
<S> <C> <C>
Investments
Available for sale:
Fixed maturities, at market $196,916 $191,002
Equity securities, at market 12,516 13,264
Short-term investments, at amortized cost which approximates market 18,025 15,597
Mortgage loans, at cost 2,059 2,100
Other 1,180 890
------- -------
TOTAL INVESTMENTS 230,696 222,853
Investment in and advances to related parties 3,725 3,545
Cash and cash equivalents 4,373 14,800
Receivables, net of allowance for doubtful accounts 189,038 120,559
Reinsurance recoverable on paid and unpaid losses, net 61,555 71,640
Prepaid reinsurance premiums 81,249 31,172
Federal income taxes recoverable 18,813 12,672
Deferred policy acquisition costs 14,907 16,332
Deferred income taxes 2,608 5,146
Property and equipment, net of accumulated depreciation 19,207 18,863
Intangible assets 45,176 45,781
Other assets 9,981 6,074
------- -------
TOTAL ASSETS $681,328 $569,437
======= =======
LIABILITIES
Losses and loss adjustment expenses $177,806 $200,972
Unearned premiums 176,021 110,664
Reinsurance payables 102,652 25,484
Notes payable 4,520 13,744
Distributions payable on preferred securities 1,559 4,809
Other 24,177 16,769
------- -------
TOTAL LIABILITIES 486,735 372,442
------- -------
Minority interest:
Preferred securities 135,000 135,000
------- -------
STOCKHOLDERS' EQUITY
Common stock 38,136 38,136
Additional paid-in capital 5,851 5,851
Unrealized gain on investments (119) 1,261
Retained earnings 15,725 16,747
------- -------
TOTAL STOCKHOLDERS' EQUITY 59,593 61,995
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $681,328 $569,437
======= =======
See notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
Restated
<S> <C> <C>
Gross premiums written $152,022 $178,396
Less ceded premiums (76,723) (78,835)
------- -------
Net premiums written 75,299 99,561
Change in net unearned premiums (10,962) (31,077)
------- -------
Net premiums earned 64,337 68,484
Fee income 4,463 5,120
Net investment income 3,289 2,958
Net realized gain (loss) (1,382) 1,968
------- -------
Total Revenues 70,707 78,530
------- -------
Loss and loss adjustment expenses 56,487 53,205
Policy acquisition and general and administrative expenses 11,892 13,555
Interest expense 74 183
Amortization of intangibles 605 511
------- -------
Total Expenses 69,058 67,454
------- -------
Earnings (loss) before income taxes and minority interest 1,649 11,076
Provision for income taxes 616 4,022
------- -------
Net earnings (loss) before minority interest 1,033 7,054
Minority interest:
Distributions on preferred securities, net of tax 2,055 2,130
------- -------
Net Earnings (loss) $(1,022) $ 4,924
======= =======
Net earnings (loss) per share - basic $(0.10) $0.47
==== ====
Net earnings (loss) per share - fully diluted $(0.10) $0.46
==== ====
Weighted average shares outstanding:
Basic 10,385 10,445
====== ======
Fully diluted 10,548 10,726
====== ======
See notes to consolidated financial statements
</TABLE>
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<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, 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
========== ====== ======
BALANCE AT DECEMBER 31, 1998 10,385,399 $61,995 $16,747
Comprehensive income:
Net earnings (loss) (restated) (1,022) (1,022)
Change in unrealized gains (losses) on securities (1,380) --
------ ------
Comprehensive income (restated) (2,402) (1,022)
---------- ------ ------
BALANCE AT MARCH 31, 1999 (restated) 10,385,399 $59,593 $15,725
========== ====== ======
See notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
Restated
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) for the period $(1,022) $4,924
Adjustments to reconcile net earnings to net cash provided
from operations:
Depreciation and amortization 1,364 1,117
Deferred income tax expense (recovery) 3,319 (1,173)
Net realized loss (gain) 1,382 (1,968)
Net changes in operating assets and liabilities:
Receivables (68,479) (72,542)
Reinsurance recoverable on paid and unpaid losses, net 10,085 26,448
Prepaid reinsurance premiums (50,077) (60,275)
Deferred policy acquisition costs 1,425 (6,527)
Other assets (3,907) (243)
Losses and loss adjustment expenses (23,166) (10,143)
Unearned premiums 65,357 91,352
Reinsurance payables 77,168 60,994
Distributions payable on preferred securities (3,250) (3,242)
Federal income taxes (6,141) 5,485
Other liabilities 7,406 768
------ ------
NET CASH PROVIDED FROM OPERATIONS 11,464 34,975
------ ------
Cash flow used in investing activities:
Purchases sales of short-term investments (2,428) (227)
Purchases of fixed maturities (75,340) (41,319)
Proceeds from sales, calls and maturities of fixed maturities 67,429 34,322
Purchases of equity securities (944) (6,466)
Proceeds from sales of equity securities 22 6,421
Purchase of real estate (7) (2,584)
Purchases of property and equipment (976) (2,869)
Purchases of other investments (243) (320)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (12,487) (13,042)
------ ------
Cash flow provided from/(used in) financing activities:
Cost of shares acquired -- (862)
Payments on notes payable (9,224) (1,613)
Repayments from related parties (180) (4,439)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (9,404) (6,914)
------ ------
Increase (decrease) in cash and cash equivalents (10,427) 15,019
Cash and cash equivalents, beginning of period 14,800 11,276
------ ------
Cash and cash equivalents, end of period $ 4,373 $26,295
====== ======
See notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three Months Ended March 31, 1999
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, 1999. Interim financial statements should be read in
conjunction with the Company's annual audited financial statements.
Certain reclassifications have been made to prior year amounts to
conform to current year presentation.
(2) Basic and diluted net income per share are computed by dividing net
income as reported by the average number of shares outstanding as
follows:
Three Months Ended
March 31,
1999 1998
Basic:
Weighted-average common shares outstanding 10,385,000 10,450,000
Diluted:
Weighted-average common shares outstanding 10,385,000 10,450,000
Dilutive effect of stock options 163,000 281,000
---------- ----------
Average common shares outstanding assuming
dilution 10,548,000 10,726,000
========== ==========
(3) The Company writes nonstandard insurance business through agents in
California where some of the agents charge administration fees on top
of the premium to these customers. The California Department of
Insurance (CDOI) in early 1998 indicated that such broker fees are part
of premium and has requested reimbursement to the policyholders by
Superior Insurance Company. The CDOI has indicated it may assess the
Company to repay fees the agents received from the insured. The Company
did not receive any of these broker fees and has carried on the
insurance practice that is normal for many of the insurance companies
writing automobile insurance in California. The total amount, if CDOI
proceeds and requires all fees returned with no recovery from agents,
is $3 million. As the ultimate outcome of this potential assessment is
not deemed probable, the Company has not accrued any amount in its
consolidated financial statements. Although the assessment has not been
formally made by the CDOI at this time, the Company believes it will
prevail and will vigorously defend any potential assessment.
As part of an agreement by the Company to assume the multi-peril and
crop operations of CNA during 1998, the Company agreed to reimburse CNA
for certain direct overhead costs incurred by CNA during the first
quarter of 1998 before the Company assumed this book of business. CNA
has requested reimbursement of $2.0 million in expenses which the
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<PAGE>
Company believes should only be $1.1 million. Negotiations are in
process to settle this dispute. The Company fully expects the ultimate
settlement will approximate $1.1 million and has therefore, accrued
this amount in its consolidated financial statements at March 31, 1999.
(4) These restated financials contain a correction of an accounting error.
The error related to the recording of the retroactive reinsurance
recoverable pertaining to AgPI(R) in the incorrect accounting period.
The correction of the error defers the recognition of a gain on a
reinsurance recovery from first quarter 1999 to second quarter 1999.
The amount of the deferred gain is $4,668,000. The Company recorded an
increase in loss and loss adjustment expense of $4,668,000 due to the
deferral of the gain which reduced net income by $3,034,000 or $0.29
per share (basic).
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.
Crop Insurance Operations
General
The three principal components of the Company's crop insurance business
are Multi-Peril Crop Insurance ("MPCI") and private named peril, crop hail
insurance and fee based services to farmers. 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
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<PAGE>
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 2,007 independent agencies in 43
states.
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 60% 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 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.
The fee income business is primarily services to farmers for global
positioning grid mapping of their farm and soil sampling to enhance the growing
conditions of the crops.
AgPI(R) is business interruption insurance that protects businesses
that depend upon a steady flow of a crop (or crops) to stay in business. This
protection is available to those involved in agribusiness who are a step beyond
the farm gate, such as elevator operators, custom harvesters, cotton gins and
other processing businesses that are dependent upon a single supplier of
products, (i.e., popping corn).
These businesses have been able to buy normal business interruption
insurance to protect against on-site calamities such as a fire, wind storm or
tornado. But until now, they have been totally unprotected by the insurance
industry if they encounter a production shortfall in their trade area which
limited their ability to bring raw materials to their operation. AgPI(R) allows
the agricultural business to protect against a disruption in the flow of the raw
materials these businesses depends on. AgPI(R) was formally introduced at the
beginning of the 1998 crop year.
Geo AgPLUS(TM) provides to the farmer measuring, gridding and soil
sampling services combined with fertility maps and the software that is
necessary to run precision farming programs. Grid soil sampling, when combined
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<PAGE>
with precision farming technology, allows the farmer to apply just the right
amount of fertilization, thus balancing soil nutrients for a maximum crop yield.
Precision farming technology increases the yield to the farmer, reduces the cost
of unnecessary fertilization and enhances the environment by reducing overflows
of fertilization into the ecosystem. Geo AgPLUS(TM) is an IGF Insurance Company
trademarked precision farming division that is now marketing its fee based
services to the farmer.
Certain Accounting Policies for Crop Insurance Operations
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 - the minimum available level of MPCI Coverage), and any related
federal premium subsidies, but do not include MPCI premium on CAT Coverage. By
contrast, net premiums written do not include any MPCI premiums or subsidies,
all of which are deemed to be ceded to the Federal Crop Insurance Corporation
(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") and (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"). 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 accounting 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 is, 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 June 1998, the United States Congress passed legislation which
provided permanent funding for the crop insurance industry. However, beginning
with the 1999 MPCI crop year, the Buy-Up Expense Reimbursement Payment was
reduced to 24.5%, the CAT LAE Reimbursement Payment was reduced to 11% and the
$60 CAT coverage fee will no longer go to the insurance companies.
The Company expects to more than offset these reductions through growth
in non-federally subsidized programs such as AgPI(R) and Geo AgPLUS(TM)
initiated in 1998. The Company has also been working to reduce its costs. While
the Company fully believes it can more than offset these reductions, there is no
assurance the Company will be successful in its efforts or that further
reductions in federal reimbursements will not continue to occur.
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<PAGE>
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI gross premiums written for each of the first and second quarters,
20% for the third quarter and 10% for the fourth quarter, (ii) commission
expense at the applicable rate of MPCI gross premiums written recognized and
(iii) Buy-Up Expense Reimbursement at the applicable rate of MPCI gross premiums
written recognized along with normal operating expenses incurred in connection
with premium writings. In the third quarter, if a sufficient volume of
policyholder acreage reports have been received and processed by the Company,
the Company's policy is to recognize MPCI gross premiums written for the first
nine months based on a re-estimate which takes into account actual gross
premiums processed. If an insufficient volume of policies has been processed,
the Company's policy is to recognize in the third quarter 20% of its full year
estimate of MPCI gross premiums written, unless other circumstances require a
different approach. The remaining amount of gross premiums written is recognized
in the fourth quarter, when all amounts are reconciled. The Company also
recognizes the MPCI underwriting gain or loss during each quarter, reflecting
the Company's best estimate of the amount of such gain or loss to be recognized
for the full year, based on, among other things, historical results, plus a
provision for adverse developments. In the third and fourth quarters, a
reconciliation amount is recognized for the underwriting gain or loss based on
final premium and latest available loss information.
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<PAGE>
Results of Operations
<TABLE>
<CAPTION>
For the three months
ended March 31,
1999 1998
Restated
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $61,171 $89,976
====== ======
Net premiums written $73,687 $82,267
====== ======
Net premiums earned $65,396 $68,323
Fee income 4,521 4,155
Net investment income 3,164 2,801
Net realized gain (loss) (1,382) 1,968
------ ------
TOTAL REVENUES 71,699 77,247
------ ------
Losses and loss adjustment expenses 51,313 53,146
Policy acquisition and general and administrative expenses 19,595 18,123
------ ------
TOTAL EXPENSES 70,908 71,269
------ ------
Earnings before income taxes $ 791 $5,978
====== =====
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 78.5% 77.8%
Expense ratio, net of billing fees 23.0 20.4
----- ----
Combined ratio 101.5% 98.2%
===== ====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $90,723 $86,175
====== ======
Net premiums written $ 1,613 $17,294
====== ======
Net premiums earned $(1,060) $161
Fee income (59) 2,332
Net investment income 57 53
------ ------
TOTAL REVENUES (1,062) 2,546
------ ------
Losses and loss adjustment expenses 5,174 59
Policy acquisition and general and administrative expenses(1) (8,008) (3,647)
Amortization of intangibles 95 --
Interest expense 74 183
------ ------
TOTAL EXPENSES (2,665) (3,405)
------ ------
Earnings before income taxes $ 1,603 $5,951
====== =====
</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.
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<PAGE>
Net Earnings
For the three months ended March 31, 1999 as restated, the Company recorded a
net loss of $1,022,000 or $0.10 per share (basic). This is approximately a
120.8% decrease from net earnings for the three months ended March 31, 1998 of
$4,924,000 or $0.47 per share (basic).
These restated financials contain a correction of an accounting error. The error
related to the recording of the retroactive reinsurance recoverable pertaining
to AgPI(R) in the incorrect accounting period. The correction of the error
defers the recognition of a gain on a reinsurance recovery from first quarter
1999 to second quarter 1999. The amount of the deferred gain is $4,668,000. The
Company recorded an increase in loss and loss adjustment expense of $4,668,000
due to the deferral of the gain which reduced net income by $3,034,000 or $0.29
per share (basic).
Consolidated Gross Premiums Written
Gross premiums written for the nonstandard automobile segment decreased 32.0%
for the three months ended March 31, 1999 compared to the three months ended
March 31, 1998. This represents an 8.8% decrease in premiums from the average
premium volume in the last half of 1998. The primary reasons for this decline in
volume has been the downsizing by the Company of its nonstandard automobile
business in certain competitive markets, the loss of some business prior to the
hiring of a new product development team and the slowing of new business during
the conversion by the Company to a new operating computer system.
Gross premiums written for the crop segment were comparable to those of a year
ago. Crop premiums for the three months ended March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CAT imputed $16,312 $16,319
MPCI 62,280 60,743
Crop hail and named perils 28,443 25,431
------- -------
107,035 102,493
Less: CAT imputed (16,312) (16,319)
------- -------
$90,723 $86,174
======= =======
</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>
1999 1998
---- ----
<S> <C> <C>
Nonstandard automobile 0% 10%
Crop hail 62% 25%
Named peril 50% 50%
AgPI(R) 62% 0%
</TABLE>
Fee income decreased 12.8% for the three months ended March 31, 1999 as compared
to the corresponding period of the prior year. Such decrease was primarily due
to the Federal government retaining the CAT fee policy, partially offset by
increased penetration of policy issuance fees on the automobile book.
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<PAGE>
Netinvestment income increased 11.2% for the three months ended March 31, 1999
as compared to the corresponding period of the prior year due to the transfer of
invested assets to interest bearing fixed maturities from equity based
investments since the first quarter of 1998. The realized loss was primarily due
to tax loss related selling of certain securities as well as some selling to
reduce the average duration of the fixed income portfolio.
The loss ratio for the nonstandard automobile segment for the three months ended
March 31, 1999 was 78.5% comparable to 77.8% for the three months ended March
31, 1998 . Crop hail loss ratios in the first quarter do not have significant
impact on consolidated earnings.
These restated financials contain a reclassification of reinsurance ceded
premium related to AgPI(R) from policy acquisition and general and
administrative expense to ceded premiums. The amount of the reclass is
$4,668,000 with no impact on net income. Policy acquisition and general and
administrative expenses have decreased to $11,892,000 or 18.5% of net premium
earned for the three months ended March 31, 1999 as restated compared to
$13,555,000 or 19.8% of net premium earned in the corresponding period of 1998.
The reduction in expense related to the reclassification was partially offset by
nonstandard auto general and administrative expenses which rose due to increased
use of temporary help to resolve processing backlogs and lower expense
recoveries from reinsurers due to the elimination of quota share reinsurance in
1999.
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.
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest portion of
GGSH and the acquisition of NACU, debt or preferred security issuance costs and
organizational costs.
Income tax expense was 37.4% and 36.3% of pre-tax income for the three months
ended March 31, 1999 and 1998.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
federal income taxes.
Liquidity and Capital Resources
The Company's total assets of $681,328,000 at March 31, 1999 as restated
increased $111,891,000 from $569,437,000 as of December 31, 1998. The primary
reasons for this increase were increased premium receivable and reinsurance
payable balances in the crop business due to the normal accumulation of these
balances during the year and settlement in the fall of each year, coincidental
with fall harvest.
Net cash provided by operating activities decreased to $11,464,000 in 1999 from
$34,975,000 in 1998 due to reduced gross premium volume in the automobile
business. Financing activities included normal activities on the Company's line
of credit for crop operations.
-14-
<PAGE>
Year 2000 Compliance
General
The Year 2000 Project ("Project") addresses the inability of computer software
and hardware to distinguish between the year 1900 and the year 2000. In 1996,
the Company began a company-wide replacement of hardware and software systems to
address this and other issues. The Company is utilizing systems from Dell,
Hewlett Packard, Sun Systems, Compaq, Oracle and ZIM as well as certain software
conversions using Java. The new hardware is in place and operational at all
subsidiaries. The software systems are in place in our nonstandard auto
operations and are being implemented on a state-by-state basis. The Company
first began implementing the new nonstandard auto operating system in those
states in which the Company writes annual policies (annual states). 100% of
those annual states are currently in production. The remaining non-annual states
are scheduled to be completed by June 30, 1999. The Y2K issue does not have an
effect on the crop operations until October 1, 1999. The Company is converting
non-compliant crop operating systems, through programmatic means, into a Y2K
compliant environment. The crop operation has completed the conversion and the
testing phase of the Project. A number of the Company's other IT projects are
being delayed or completely eliminated due to the implementation of the Project.
Project
The Company has divided the Project into three sections - Infrastructure,
Applications/Business Systems and Third Party Suppliers. There are common
portions of each of these divisions which are: (1) identifying Y2K items; (2)
assigning a priority for those items identified; (3) repairing or replacing
those items; (4) testing the fixes; and (5) designing a contingency and business
continuation plan for each subsidiary.
In February 1998, all items had been identified and the plans for replacement or
repair were proposed to management. These plans were approved and the process
began.
The infrastructure section of the Project was quickly implemented and tested by
the Company's IT staff and has been completed since May of 1998. All desktop,
mini and midrange systems as well as phone switches, phones and building
security systems have been tested for Y2K compliance. Any new systems required
by the Company are being tested and certified prior to purchase with completion
by June 30, 1999. Two mainframes being used by the Company are not Y2K certified
or compliant. These machines have been replaced by Sun and HP compliant systems
and are being kept in production until new applications are put in place on the
new machines.
The applications systems section of the Project includes: (1) the replacement of
nonstandard auto companies Policy Administration and Claims systems; (2) the
conversion of crop operations systems in total; and (3) replacement of
non-compliant business systems company-wide (this includes wordprocessors,
network operating systems, spreadsheet programs, presentation systems, etc.).
The Company had already made the decision to transition off all of its
nonstandard auto legacy systems and this process had been in work since 1996.
These systems are Y2K compliant and are scheduled for completion by the end of
June 30, 1999. The conversion of crop systems began in August 1998 and is
complete. Business systems are being replaced as vendors certify their
compliance. The Company is at 90% compliance in this area.
-15-
<PAGE>
The Company relies on third party vendors for investments, reinsurance treaties
and banking. The Company began inquiring about Y2K compliance with its third
party vendors beginning in July 1998. To date, all vendors have replied
regarding their compliance efforts. Those that are not in compliance have until
the end of second quarter 1999 to do so, or they will be replaced.
Costs
The Company considers the cost associated with the Project to be material. The
Company has estimated the total cost to be $5.7 million, the majority of which
has been capitalized as hardware or software costs. The Company has also
incurred substantial costs for carrying two systems including personnel costs
and outside service fees. The component of these costs specifically associated
with Y2K cannot be reasonably estimated. The total amount expended through March
31, 1999 on all infrastructure and software upgrades is approximately $5
million. The Company expects to spend another $800,000 in its efforts to
complete the Project. This does not include additional annual maintenance costs
that will be incurred as we move forward. Funding for these costs will continue
to be provided by funds from operations. The Company believes that the new
nonstandard auto system will significantly enhance service capability and reduce
future operating costs.
Risks
Failure to correct the Y2K problem through efficient and timely implementation
of the Company's new operating system could cause a failure or interruption of
normal business operations. These failures could materially affect the Company's
operational results, financial condition and liquidity through reduction of
premium volume and an increase in operating costs as a percentage of premium
volume or deterioration of loss experience. Due to the nature of the Y2K
problem, the Company is uncertain whether it will have a material affect or the
potential magnitude of any financial impact. The Company believes that the
possibility of significant business interruptions should be reduced by
successful implementation of the Project.
-16-
<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
Within this form 10-Q/A the Company has incorporated the financial
impact of events which had occurred as of March 31, 1999, but which
came to management's attention and / or became quantifiable after the
release to the public of the first quarter results of operations on
May 12, 1999.
The Company writes a portion of its crop hail insurance based on
continuous policies which remain in-force unless and until cancelled
by the policyholder. The Company also writes a lesser amount of crop
hail insurance on an annual basis. In the first quarter earnings
release dated May 12, 1999, the Company recorded approximately $11.3
million of crop hail gross written premium related to processed crop
hail policies. However, the Company failed to record all of the
continuous policies for which liabilities had attached as of the March
31, 1999 balance sheet date, thus understating crop hail gross written
premium by approximately $16.6 million, and net written premium by
approximately $4.0 million. The crop hail gross written premium should
have totalled $27.9 million for the first quarter, which is comparable
with the $24.5 million in crop hail gross written premium recorded in
the first quarter of 1998.
The increase in the crop hail premiums has an effect on income through
ceding commissions the Company receives on quota share reinsurance
treaties. It also improves earnings through profits on the net
retained portion of the crop hail business. The total amount of
pre-tax earnings related to the additional $16.6 million in gross
written premiums recorded for the first quarter of 1999 was
approximately $2.0 million.
The Company reinsures 100% of a book of crop insurance business
written through a third party insurance company. As described in the
notes to the 1998 audited financial statements, this product, called
"AgPI(R)", insures against business interruption risk. At year end
1998 the Company had recorded $7.5 million in gross assumed loss
reserves. Based on further recent analysis, coupled with recently
released national data related to the 1998 crop year, the Company has
increased its assumed gross loss reserves from $7.5 million to $15.0
million as of March 31, 1999.
-17-
<PAGE>
To date, there has not been a ceding of paid losses to the Company
from the third party reinsurance company related to the potential
AgPI(R) liability. The Company believes the ultimate development on
these gross reserves could range from $10 million to $20 million, and,
as such, believes that recorded gross loss reserves of $15 million is
sufficient. However, there can be no assurance that the Company's
ultimate liability for AgPI(R) related losses will not be materially
greater or less than the Company's reserve for this liability.
The Company retrocedes the majority of this business to reinsurers.
The retrocession cover on this book of business is 62% quota share
reinsurance of which 7.5% is retroceded to Granite Reinsurance Company
Ltd., an affiliate, and as such the Company has ceded approximately
$4,668,000 of premium, and $9,336,000 of loss reserves, to retro
reinsurers of which $4,668,000 is deferred to second quarter. The
company also incurred approximately $996,000 in pretax fee expense
related to this treaty in the first quarter.
These restated financials contain a correction of an accounting error.
The error related to the recording of the retroactive reinsurance
recoverable pertaining to AgPI(R) in the incorrect accounting period.
The correction of the error defers the recognition of a gain on a
reinsurance recovery from first quarter 1999 to second quarter 1999.
The amount of the deferred gain is $4,668,000. The Company recorded
an increase in loss and loss adjustment expense of $4,668,000 due to
the deferral of the gain which reduced net income by $3,034,000 or
$0.29 per share (basic).
ITEM 6. EXHIBITS AND REPORTS ON
FORM 8-K Exhibit 1.0 - AgPI(R), Crop Hail and MPCI Multi-year Quota
Share Reinsurance Agreement
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 20, 1999 By: /s/ Alan G. Symons
Alan G. Symons
Chief Executive Officer
Dated: August 20, 1999 By: /s/ Thomas R. Kaehr
Thomas R. Kaehr
Vice President, Treasurer and
Chief Financial Officer
-19-
<PAGE>
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