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, 1998.
( ) 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 Section 12(g) of the Act: Common Stock
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 3,256,599 shares of the Issuer's Common Stock
held by non-affiliates, as of March 22, 1999 was $17,300,682.
The number of shares of Common Stock of the Registrant, without par value,
outstanding as of March 22, 1999 was 10,385,399.
<PAGE>
SYMONS INTERNATIONAL GROUP INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1998
PART I PAGE
Item 1. Business 3
Forward Looking Statements - Safe Harbor Provisions 31
Item 2. Properties 36
Item 3. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of Security
Holders 37
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 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
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
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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. Based on the Company's Gross Premiums Written in
1998, the Company believes that it is the twelfth largest underwriter of
nonstandard automobile insurance in the United States. Based on premium
information compiled in 1997 by the NCIS, the Company believes that IGF is the
fourth largest underwriter of crop insurance in the United States.
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 nonstandard market accounted for
approximately 19% of total private passenger automobile insurance premiums
written in 1997. According to statistical information derived from insurer
annual statements compiled by A.M. Best, the nonstandard automobile market
accounted for $22 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.
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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.
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 16 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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Symons International Group, Inc. and Superior Insurance Company (Combined)
Year Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
State 1996 1997 1998
<S> <C> <C> <C>
Arizona $ --- $ --- $6,228
Arkansas 2,004 1,539 1,383
California 25,131 59,819 48,181
Colorado 10,262 9,865 8,115
Florida 97,659 141,907 107,746
Georgia 7,398 11,858 21,575
Illinois 2,994 3,541 2,908
Indiana 16,599 17,227 18,735
Iowa 5,818 7,079 6,951
Kentucky 11,065 9,538 8,108
Mississippi 2,250 2,830 5,931
Missouri 13,423 9,705 8,669
Nebraska 5,390 6,613 6,803
Nevada --- 4,273 8,849
Ohio 3,643 3,731 2,106
Oklahoma 2,559 3,418 3,803
Oregon --- 2,302 6,390
Tennessee (2) --- 1,443
Texas 10,122 7,192 7,520
Virginia 14,733 21,446 22,288
Washington 106 32 5
------- ------- -------
Total $231,154 $323,915 $303,737
======= ======= =======
</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
several 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 delivering 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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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 reinforcing 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%. Refer to
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a further discussion on the Combined Ratio.
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.
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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 10%. These treaties were commuted effective October
1, 1998, thereby completely and fully discharging Vesta and Granite Re of any
obligations relative to this business for payments of $7,698,997 and $1,123,294,
respectively.
In 1998, 1997 and 1996, 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, 1998 follows:
<TABLE>
<CAPTION>
Reinsurance
Recoverables as of
A.M. Best December 31, 1998 (1)
Rating (in thousands)
<S> <C> <C>
Everest Reinsurance Company A+ (2) $315
Granite Reinsurance Not Rated (3) $23,890
Q.B.I. Insurance (UK) Ltd. Not Rated $249
Constitution Reinsurance Corporation A+ $251
Federal Emergency Management Administration Not Rated $463
</TABLE>
(1) Only recoverable greater than $200,000 are shown. Total nonstandard
automobile reinsurance recoverables as of December 31, 1998 were
approximately $26,182,000.
(2) An A.M. Best Rating of "A+" is the second highest of 15 ratings.
(3) Granite Re is an affiliate of the Company. Reinsurance recoverables with
Granite Re are fully collateralized.
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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.
During the fourth quarter of 1998, Pafco ceded $22,500,000 of
nonstandard automobile premiums under a quota share reinsurance treaty to
Granite Re.
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 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 weather 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
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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 since been eliminated by the
Federal Agriculture Improvement and Reform Act of 1996 ("the 1996 Reform Act").
The 1996 Reform Act was signed into law by President Clinton in April 1996 and
also eliminated the linkage between CAT Coverage and qualification for certain
federal farm program benefits.
In June 1998, President Clinton signed the Agricultural Research,
Extension and Education Reform Act of 1998 into law ("Ag Research Act"). That
Act contained a number of changes in the crop insurance program, the largest of
which was the conversion of funding for the MPCI Expense Reimbursement subsidy
that had previously been 50% permanent (mandatory spending) under the federal
budget and 50% discretionary (dependent on annual Congressional appropriations)
to 100% permanent/mandatory funding. Thus, the program and the companies are no
longer subject to the annual budget battles in Washington with respect to
administrative funding. This is a major positive change in the stability of the
program.
Other changes included a reduction in the rate of MPCI Expense
Reimbursement from the general 27% in the 1998 reinsurance year to 24.5% in
1999. The reinsurance terms of the 1998 (and now 1999 and 2000) SRA were also
frozen for subsequent reinsurance years thereby providing another aspect of
stability to the program. Two other changes were made related to the
Catastrophic (CAT) level of insurance under the MPCI program. The law
significantly changed the administrative fee structure attached to such policies
(farmers pay no premium only administrative fees for CAT) - the previous $50 per
crop per county (with $200/county, $600 overall limit) was changed to the higher
of $50 or 10% of the imputed premium for such policies plus $10 and no part of
the fees would be retained by the participating reinsured company any longer
(previously up to $100 per county could be retained). Starting in 1999, all fees
would go directly to the Federal Government rather than the Company. In
addition, the CAT LAE Reimbursement was lowered from approximately 13.7% of
imputed premium in 1998 to 11% of premium in 1999.
In October 1998, President Clinton signed the Fiscal Year 1999 Omnibus
Consolidated and Emergency Supplemental Appropriations Act into law. This
provided a total of $2.375 billion in disaster assistance to help producers
weather 1998 and multi-year disasters. Any producer receiving a payment under
that program who did not have crop insurance in 1998 will be required to secure
coverage (CAT or MPCI Buy-up) for the 1999 and 2000 crop years. In addition, on
December 12, 1998, President Clinton and the USDA announced that $400 million of
the $2.375 billion would be set aside as a 1999 crop year crop insurance premium
incentive to encourage producers to secure additional coverage on their 1999
crops. In addition, on January 8, 1999, the FCIC announced that it would accept
additional applications for insurance or accept changes in insurance coverage
from producers for their 1999 crops (2000 crop of citrus) in cases where sales
closing dates had already passed and it would extend upcoming spring application
periods across the country to allow producers additional time to take advantage
of the premium incentive. Additional options for allowing the reinsured
companies to manage the risk associated with these actions were also provided.
The Company expects to more than offset these reimbursement reductions
through growth in fee income from non-federally subsidized programs such as
AgPI(R) and GEO Ag Plus(R) initiated in 1998. The Company has also been working
to reduce its 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.
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 MPCI policies than it otherwise would.
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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 135 full-time claims adjusters, most of whom are
agronomy-trained, to reduce the cost of losses experienced by
IGF and to provide opportunity to produce fee based income.
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 Agriculture Production Interruption (AgPI(R)),
Agriculture Revenue Interruption (AgRI) and specific named
peril crop insurance. Further, IGF has recently released new
products such as timber, fresh market vegetables and
environmental ("green") coverages.
o The Company has recently launched a new fee based service for
farmers called Geo AgPLUS(TM).
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 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 1996
Reform Act established CAT Coverage as a new minimum level of MPCI coverage,
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which farmers may purchase upon payment of a fixed administrative fee of $60 per
policy instead of any premium. CAT Coverage insures 50% of historic crop yield
at 55% 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 production and 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 Company also offers 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 since then it has been expanded
virtually nationwide on corn, soybeans and wheat and to additional crops in new
pilot areas. Currently, CRC represents approximately 20% of all of the Company's
MPCI policies.
Revenue insurance coverage plans such as CRC are largely the result of
the 1996 Reform Act, which directed the FCIC to develop a 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 Federal Crop Insurance Act, which authorizes private companies
to design alternative 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 1998 Crop Year, the Company received
from the FCIC an expense reimbursement payment equal to 23.5% of Gross Premiums
Written in respect of each CRC policy it writes. The MPCI Buy-up Expense
Reimbursement Payment is currently established by legislation. The expense
reimbursement payment on CRC was 31% in 1996, 29% in 1997, 23.50% in 1998 and
21.1% in 1999.
CRC protects revenues by extending crop insurance protection based on
APH to include price as well as yield
-11-
<PAGE>
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 (including CRC), 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.
AgPI(R) protects agriculture based businesses that depend upon a steady
flow of a crop (or crops) to stay in business. This protection is available to
those involved in agribusiness who are a step beyond the farm gate, such as
elevator operators, custom harvesters, cotton gins and businesses that are
dependent upon a single supplier of products, (i.e., popping corn).
These businesses have been able to buy normal business interruption
insurance to protect against on-site calamities such as a fire, wind storm or
tornado. But until now, they have been totally unprotected by the insurance
industry if they 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 it depends on. AgPI(R) was formally introduced at the beginning of the
1998 crop year.
Geo AgPLUS(TM) provides to the farmer mapping and soil sampling
services combined with fertility maps and the software that is necessary to run
their precision farming program. Grid soil sampling, when combined with
precision farming technology, allows the farmer to apply just the right amount
of fertilization, thus balancing the soil for a maximum crop yield. Precision
farming increases the yield to the farmer, reduces the cost of unnecessary
fertilization and enhances the environment by reducing overflows of
fertilization into the ecosystem. Geo AgPLUS(TM) is an IGF Insurance Company
trademarked precision farming division that is now marketing its fee based
products to the farmer.
-12-
<PAGE>
Gross Premiums
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 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 $60 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 seven 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. The seven pools have three fundamental designations; Commercial,
Developmental and Assigned Risk. 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 seven
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 seven
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 Standard Reinsurance Agreement
(SRA). The profit and loss sharing percentages are different for risks allocated
to each of the seven Reinsurance pools and private insurers will receive or
-13-
<PAGE>
pay the greatest percentage of profit 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's SRA. The FCIC has extended the SRA for the 1999 reinsurance year to
2000.
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
1996, 1997 and 1998, the maximum Buy-up Expense Reimbursement Payment was set at
31%, 29% and 27%, 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 1999 crop year, the Buy-up Expense
Reimbursement payment has been set at 24.5%.
Farmers are required to pay a fixed administrative fee of $60 per
policy in order to obtain CAT Coverage. This fee through 1998 was retained by
the Company (maximum of $100 per county) 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
(11.0% for the 1999 crop year) in respect of each CAT Coverage policy it writes
and a small MPCI Excess LAE Reimbursement Payment. Beginning with the 1999 crop
year, the Company will no longer receive the CAT Coverage Fee. All such fees
will now go to the federal government.
In addition to premium revenues, the Company received the following
Federally funded fees and commissions from its crop insurance segment for the
periods indicated:
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
CAT Coverage Fees (1) $1,181 $1,191 $2,346
Buy-up Expense Reimbursement Payments 24,971 24,788 37,982
CAT LAE Reimbursement Payments and MPCI Excess
LAE Reimbursement Payments 5,753 4,565 6,520
------ ------ ------
Total $31,905 $30,544 $46,848
====== ====== ======
</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.
-14-
<PAGE>
Third-Party Reinsurance
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 had in effect quota share Reinsurance of 40% of business for 1996
and 1997 and 25% for 1998, 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. The Company maintains a 50% quota share reinsurance
treaty for its named peril product. For 1999, the Company plans to increase its
crop hail and AgPI(R) quota share portion to 80% and add AgPI(R) to its MPCI
stop loss coverage.
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.
-15-
<PAGE>
Year Ended December 31, 1998 (1)
(in thousands, except footnotes)
<TABLE>
<CAPTION>
A.M. Best Ceded
Reinsurers Rating Premiums
<S> <C> <C>
Continental Casualty Insurance Co. (CNA)(2) A $10,796
Muchener Ruckversicherungs-Gesellschaft Not Rated $2,532
Granite Re (3) Not Rated $1,271
New Cap Re Not Rated $1,056
Monde Re (4) Not Rated $2,844
Partner Reinsurance Company Ltd. Not Rated $832
R & V Versicherung AG Not Rated $1,451
Reinsurance Australia Corporation, Ltd. (REAC) (4) Not Rated $2,848
Swiss Reinsurance Company (5) A+ $384
</TABLE>
- --------
(1) For the twelve months ended December 31, 1998, total ceded premiums were
$201,929.
(2) An A.M. Best rating of "A" is the third highest of 15 ratings.
(3) Granite Re is an affiliate of the Company.
(4) Monde Re is owned by REAC.
(5) An A.M. Best rating of "A+" is the second highest of 15 ratings.
As of December 31, 1998, IGF's Reinsurance recoverables aggregated
approximately $5,305 excluding recoverables from the FCIC and recoverables from
affiliates on nonstandard automobile business.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 43
states through approximately 4,670 agents associated with approximately 2,007
independent insurance agencies, with its primary geographic concentration in the
states of Texas, North Dakota, Iowa, Minnesota, Illinois, California, Nebraska,
Mississippi, Arkansas and South Dakota.
IGF is licensed in 30 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
1998. 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.
-16-
<PAGE>
The following table presents MPCI and crop hail premiums written by IGF
by state for the periods indicated.
<TABLE>
<CAPTION>
(in thousands)
Year Ended Year Ended
December 31, 1997 December 31, 199
State Crop Hail MPCI/CAT Total Crop Hail MPCI/CAT Other(1) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama $144 $1,958 $2,102 $83 $2,714 $--- $2,797
Arkansas 652 7,455 8,107 1,460 11,141 --- 12,601
California 1,062 8,498 9,560 661 9,754 7,797 18,212
Colorado 1,309 3,322 4,631 1,626 3,024 7 4,657
Florida 19 5,730 5,749 6 1,994 --- 2,000
Illinois 655 14,023 14,678 2,409 20,407 151 22,967
Indiana 92 4,971 5,063 244 7,031 --- 7,275
Iowa 7,628 13,798 21,426 9,724 16,554 --- 26,278
Kansas 832 6,881 7,713 1,904 4,703 57 6,664
Louisiana 41 3,630 3,671 36 5,486 35 5,557
Minnesota 4,405 4,088 8,493 4,222 16,017 497 20,736
Mississippi 509 9,025 9,534 445 10,382 --- 10,827
Missouri 383 2,116 2,499 1,228 5,822 --- 7,050
Montana 2,879 2,122 5,001 4,280 5,338 --- 9,618
Nebraska 1,597 3,315 4,912 5,752 6,635 --- 12,387
North Dakota 787 3,363 4,150 10,131 20,423 254 30,808
Oklahoma 451 1,727 2,178 857 2,232 --- 3,089
South Dakota 932 1,575 2,507 5,320 6,017 --- 11,337
Texas 3,211 18,071 21,282 9,492 35,212 306 45,010
Wisconsin 407 1,887 2,294 269 3,219 288 3,776
All Other 10,354 3,791 14,145 16,049 13,247 211 29,507
------ ------- ------- ------ ------- ----- -------
Total $38,349 $121,346 $159,695 $76,198 $207,352 $9,603 $293,153
====== ======= ======= ====== ======= ===== =======
</TABLE>
(1) Includes named peril and AgPI(R). There is a small amount of named peril
premiums included with crop hail in 1997. No AgPI(R) I policies were written in
1997.
-17-
<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, AgentPlus,
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. As an aid to promote a rapid claims response, the Company has
available numerous all terrain four wheel drive vehicles for use by its
adjusters. The adjusters report to a Field Service Manager 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 Field Service
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 may use Global Positioning System Units 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 seven regional service offices to assist in heavy claim work
load situations.
-18-
<PAGE>
In September of 1998, IGF restructured its loss adjustment services. A
new Field Service Department was created with an organization structure designed
to provide better efficiency and accountability at the point of service in the
field. The restructuring eliminated one middle level management layer
stimulating quicker response and more accurate communication. The new structure
placed claim distribution and coordination in the field. It also coordinated the
activities of loss adjustment and precision agriculture support services. The
new structure was also designed to establish better information flow for loss
reserving.
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 1998 crop year, the number of insurance companies
having agreements with the FCIC to sell and service MPCI policies has declined
from fifty to seventeen. The Company believes that IGF is the fourth largest
MPCI crop insurer in the United States based on premium information compiled in
1997 by the FCIC and NCIS. The Company's primary competitors are Rain & Hail LLC
(affiliated with Cigna Insurance Company), Rural Community Insurance Services,
Inc. (which is owned by Norwest Corporation), Acceptance Insurance Company
(Redland), FF Agribusiness (affiliated with Fireman's Fund), Great American
Insurance Company, Blakely Crop Hail (an affiliate of Farmers Alliance Mutual
Insurance Company) and North Central Crop Insurance, Inc. (an affiliate of
Farmers Alliance Mutual Insurance Company). 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.
-19-
<PAGE>
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.
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 and 1998, 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 and 1998 coupled with the
growth in premium volume produced sufficient volatility in prior year loss
patterns to warrant the Company to re-estimate its 1996 and 1997 reserve for
losses and loss expenses and record an additional reserve during 1997 and 1998.
The effects of changes in settlement patterns, costs, inflation, growth and
other factors have all been considered in establishing the current year serve
for unpaid losses and loss expenses.
-20-
<PAGE>
Symons International Group, Inc.
Nonstandard Automobile Insurance Only
For The Years Ended December 31, (in thousands)
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995(A) 1996 1997 1998
<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 $121,333
Deduct reinsurance
recoverable 10,927 9,921 8,124 16,378 6,515
Reserve for unpaid losses
and LAE, net of reinsurance $10,747 $13,518 $15,923 $15,682 $17,055 $14,822 14,321 61,827 71,427 84,807 114,818
Paid cumulative as of:
One Year Later 5,947 7,754 7,695 7,519 10,868 8,875 7,455 42,183 59,410 62,962
Two Years Later 7,207 10,530 10,479 12,358 15,121 11,114 10,375 53,350 79,319
Three Years Later 7,635 11,875 12,389 13,937 16,855 13,024 12,040 58,993 --
Four Years Later 7,824 12,733 13,094 14,572 17,744 13,886 12,822 -- --
Five Years Later 8,009 12,998 13,331 14,841 18,195 14,229 -- -- --
Six Years Later 8,135 13,095 13,507 14,992 18,408 -- -- -- --
Seven Years Later 8,154 13,202 13,486 15,099 -- -- -- -- --
Eight Years Later 8,173 13,216 13,567 -- -- -- -- -- --
Nine Years Later 8,174 13,249 -- -- -- -- -- -- --
Ten Years Later 8,175 -- -- -- -- -- -- -- --
Liabilities re-estimated as of:
One Year Later 8,474 13,984 13,888 14,453 17,442 14,788 13,365 59,626 82,011 97,905
Two Years Later 8,647 13,083 13,343 14,949 18,103 13,815 12,696 60,600 91,735
Three Years Later 8,166 13,057 13,445 15,139 18,300 14,051 13,080 63,812 --
Four Years Later 8,108 13,152 13,514 15,218 18,313 14,290 13,561 -- --
Five Years Later 8,179 13,170 13,589 15,198 18,419 14,586 -- -- --
Six Years Later 8,165 13,246 13,612 15,114 18,651 -- -- -- --
Seven Years Later 8,196 13,260 13,529 15,321 -- -- -- -- --
Eight Years Later 8,198 13,248 13,738 -- -- -- -- -- --
Nine Years Later 8,199 13,374 -- -- -- -- -- -- --
Ten Years Later 8,217 -- -- -- -- -- -- -- --
Net cumulative (deficiency)
or redundancy 2,530 144 2,185 361 (1,596) 236 760 (1,985) (20,308) (13,098)
Expressed as a percentage
of unpaid losses and LAE 23.5% 1.1% 13.7% 2.3% (9.4%) 1.6% 5.3% (3.2)% (28.4%) (15.4%)
</TABLE>
(A) Includes Superior loss and loss expense reserves of $44,423 acquired on
April 29, 1996 and subsequent development thereon.
-21-
<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 investments in real estate and mortgage
loans represent 1.1% of the Company's aggregate investments. The investment
portfolios of the Company at December 31, 1998, consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
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 $71,033 $72,815
Obligations of states and political subdivisions 6,765 6,650
Corporate securities 110,657 111,537
------- -------
Total Fixed Maturities 188,455 191,002
Equity Securities:
Common stocks 13,918 13,264
Short-term investments 15,597 15,597
Mortgage loans 2,100 2,100
Other invested assets 890 890
------- -------
Total Investments $220,960 $222,853
======= =======
- ---------------
</TABLE>
-22-
<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>
<CAPTION>
(in thousands) 1997 1998
Market Percent Total Market Percent Total
Time To Maturity Value Market Value Value Market Value
<S> <C> <C> <C> <C>
1 year or less $1,880 1.1% $7,937 4.2%
More than 1 year through 5 years 57,782 34.1% 50,099 26.2%
More than 5 years through 10 years 30,793 18.2% 35,215 18.4%
More than 10 years 8,390 5.0% 23,034 12.1%
------ ----- ------- ----
98,845 58.4% 116,285 60.9%
Mortgage-backed securities 70,540 41.6% 74,717 39.1%
------ ----- ------- -----
Total $169,385 100.0% $191,002 100.0%
======= ===== ======= =====
</TABLE>
The following table sets forth the ratings assigned to the fixed
maturity securities of the Company as of December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1998
Market Percent Total Market Percent Total
Rating (1) Value Market Value Value Market Value
<S> <C> <C> <C> <C>
Aaa or AAA $112,366 66.3% $72,520 37.9%
Aa or AA 2,410 1.4% 1,486 .8%
A 18,271 10.8% 79,809 41.8%
Baa or BBB 19,065 11.3% 23,450 12.3%
Ba or BB 16,519 9.8% 13,737 7.2%
Not rated (2) 754 0.4% -- --
------- ----- ------- -----
Total $169,385 100.0% $191,002 100.0%
======= ===== ======= =====
</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.
-23-
<PAGE>
The investment results of the Company for the periods indicated are set
forth below:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
Net investment income (1) $6,733 $11,447 $12,373
Average investment portfolio (2) $153,565 $189,473 $217,298
Pre-tax return on average investment portfolio 5.9% 6.0% 5.7%
Net realized gains (losses) $(1,015) $9,444 $4,341
</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.
Market-Sensitive Instruments and Risk Management
The Company's investment strategy is to invest available funds in a
manner that will maximize the after-tax yield of the portfolio while emphasizing
the stability and preservation of the capital base. The Company seeks to
maximize the total return on investment through active investment management
utilizing third-party professional administrators, in accordance with
pre-established investment policy guidelines established and reviewed regularly
by the Board of Directors of the Company. Accordingly, the entire portfolio of
fixed maturity securities is available to be sold in response to changes in
market interest rate; changes in relative values of individual securities and
asset sectors; changes in prepayment risks; changes in credit quality; liquidity
needs and other factors.
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 diversified among industries, issuers and geographic locations.
The Company's fixed maturity and common equity investments are substantially all
in public companies.
-24-
<PAGE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity date. Additionally,
the Company has assumed its available for sale securities are similar enough to
aggregate those securities for presentation purposes.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
<TABLE>
<CAPTION>
Fair
There- Value
1999 2000 2001 2002 2003 after Total 12/31/98
---- ---- ---- ---- ---- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Available for sale $7,883 $5,298 $19,967 $19,705 $13,934 $135,296 $202,083 $191,002
Average interest rate 6.1% 6.5% 7.0% 8.1% 7.1% 5.9% 6.3% 6.3%
Liabilities:
IGF line of credit $12,000 $ - $ - $ - $ - $ - $12,000 $12,000
Preferred securities $ - $ - $ - $ - $ - $135,000 $135,000 $135,000
Average interest rate 7.75% -% -% -% -% 9.5% 9.4% 9.4%
</TABLE>
The Company has the ability to hold its fixed maturity securities to
maturity. If interest rates were to increase 10% from the December 31, 1998
levels, the decline in fair value of the fixed maturity securities would not
significantly affect the Company's ability to meet its obligations to
policyholders and debtors.
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 are amortized over the term of the
Preferred Securities (30 years). In the third quarter of 1997 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company" for a discussion
of the impact of these covenants on the Company's operations.
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 $80 million of multi-peril and crop hail insurance business in
1997. The Company will reinsure a small portion of the Company's total crop book
of business (approximately 22% MPCI and 15% crop hail) to CNA. Starting in the
year 2000, assuming no event of change in control as defined in the agreement,
the Company can purchase this reinsurance from CNA through a call provision or
CNA can require the Company to buy the 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.
On July 8, 1998, the Company acquired North American Crop Underwriters
(NACU) a Henning, Minnesota based managing general agency which focuses
exclusively on crop insurance. The acquisition price was $4 million with $3
million paid at closing and $1 million due July 1, 2000 without interest. This
acquisition captures 100% of the MPCI underwriting gain and fees on
approximately $27 million of premiums. Prior to this transaction, NACU received
all fees and 50% of the underwriting gain with the balance going to the Company
through the CNA transaction.
-26-
<PAGE>
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.
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. The Company did not receive 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, 1998, IGF and Pafco
had earned surplus of $16,377 and $(8,362), 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
-27-
<PAGE>
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 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 1999 by IGF and Pafco without prior regulatory
approval are $3,123 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.
-28-
<PAGE>
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.
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. See Industry Background for further discussion of
Federal Regulations impacting crop insurance.
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 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 1998, Pafco had unusual values for three IRIS tests. These included
two-year overall operating ratio where Pafco's ratio was 116.7 compared to the
IRIS upper limit of 100, change in surplus where Pafco's ratio was (24.4%)
compared to the IRIS lower limit of (10%) and two-year reserve development where
Pafco's ratio was 39.1% compared to 20%. Pafco failed the first two tests due
primarily to a high loss ratio. Pafco failed the third test due to adverse
development on accident year 1996 due to higher than normal severity as a result
of a disruption in claims management in early 1997. Pafco does not expect such
results to continue due to improvements in product development and rate filing,
hiring of a chief actuary, focus on improved claims management and continued
consolidation of operations with its affiliate, Superior Insurance Company.
Pafco expects these actions will improve loss ratio which will lead to a
reduction in the combined ratio, stabilization of surplus and elimination of
significant adverse reserve development. However, such projections involve a
high degree of subjectivity in a competitive marketplace. Therefore, there is no
assurance such results will not continue.
During 1998, Superior had unusual values for three IRIS tests. These
included two-year overall operating ratio where Superior's ratio was 108
compared to the IRIS upper limit of 100, change in surplus where Superior's
ratio was (10%) compared to the IRIS lower limit of (10%) and estimated current
reserve deficiency to surplus where Superior's ratio was (5%) compared to the
IRIS lower limit of 0. Superior failed these tests for the same reasons as Pafco
and expects results to improve in 1999 for the same reasons as Pafco. However,
such projections involve a high degree of subjectivity in a competitive
marketplace. Therefore, there is no assurance such results will not continue.
During 1998, IGF had unusual values for seven IRIS tests. These included
gross premiums to surplus where IGF's ratio was 1,006 compared to the IRIS upper
limit of 900, net premiums to surplus where IGF's ratio was 359.9 compared to
-29-
<PAGE>
the IRIS upper limit of 300, change in net writings where IGF's ratio was 440.6
compared to the IRIS upper limit of 33, investment yield where IGF's ratio was
195.5 compared to the IRIS upper limit of 10, change in surplus where IGF's
ratio was (27) compared to the IRIS lower limit of (10), liabilities to
liquid assets where IGF's ratio was 735.7 compared to the IRIS upper
limit of 105 and agent's balances to surplus where IGF's ratio was 235.8
compared to the IRIS upper limit of 40. IGF failed the first three premium
writing tests due to the assumption of the CNA book of business and the fourth
quarter assumption of auto premiums from Pafco and Superior combined with the
reduction in surplus due to catastrophic losses. IGF expects to maintain
compliance with these covenants in 1999 through a return to profitability and
greater utilization of quota share reinsurance. IGF failed the investment test
in a positive way due to the high amount of interest received from farmers which
is generally offset by interest expense to the FCIC. IGF generally fails the
final two tests due to the nature of its business whereby such amounts are
settled in full subsequent to year end. IGF's projections involve a high degree
of subjectivity in a competitive marketplace. Therefore, there is no assurance
such results will not continue.
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, 1998, the
RBC ratios of the Insurers were in excess of the Company Action Level, the first
trigger level that would require regulatory action except for Pafco, which was
1.2 million below the Company Action Level as its ratio of surplus to the RBC
amount was 186%. The required plan of action has been filed by Pafco with the
IDOI. Pafco expects to be in compliance in 1999 through a contribution of
capital from its parent.
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.
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Contingencies
The California Department of Insurance (CDOI) has advised the Company that
they are reviewing a possible assessment which could total $3 million. The
Company does not believe it will owe anything for this possible assessment. This
possible assessment relates to the charging of brokers fees to policyholders by
independent agents who have placed business for one of the Company's nonstandard
automobile carriers, Superior Insurance Company. The CDOI has indicated that
such broker fees charged by the independent agent to the policyholder were
improper and has requested reimbursement to the policyholders by Superior
Insurance Company. The Company did not receive any of these broker fees. 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.
Employees
At December 31, 1998 the Company and its subsidiaries employed
approximately 1,270 full and part-time employees. The Company believes that
relations with its employees are excellent.
Recent Developments
On March 4, 1999, Gary Hutchcraft and James Lund, the Company's Chief
Financial Officer and Chief Accounting Officer, resigned from the Company
effective April 9, 1999. The Company has hired Mr. Thomas Kaehr effective
April 19, 1999 as the Company's new Chief Financial Officer. Mr. Kaehr was
formerly Second Vice President of Lincoln National Corporation, Fort Wayne.
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 the absence of a base of experience
with such products' performance.
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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.
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.
AgPI(R) is a new insurance product for 1998 and the Company expects to
significantly expand this new product in future years. While the Company
believes there is adequate information to establish pricing and little
competition exits, there is no assurance such pricing will be adequate and
competition will not develop.
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,
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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 17. 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.
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 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 "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 1999, 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, Georgia, Indiana and Virginia; consequently
the Company will be significantly affected by changes in the regulatory and
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business climate in those states. The Company's crop insurance business is
concentrated in the states of Texas, North Dakota, Iowa, Minnesota, Illinois,
California, Nebraska, Mississippi, Arkansas and South Dakota 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.
The Company's ability to borrow additional funds has been limited under the
terms of the Indenture for the Preferred Securities.
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
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.
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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 some
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 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
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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 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.
Y2K
Please refer to the section, "Impact of Year 2000 Issue", in "Management's
Discussion and Analysis of Results and Operations" in the 1998 Annual Report for
a discussion on this topic.
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.
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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. 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
May 1999.
IGF owns a 57,799 square foot office building located at 6000 Grand Avenue,
Des Moines, Iowa which serves as its corporate headquarters. The building is
fully occupied by IGF.
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
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 40 Vice President, General Counsel and Secretary of
the Company
Dennis G. Daggett 44 Chief Operating Officer of IGF Insurance Company
Gary P. Hutchcraft 37 Vice President, Chief Financial Officer and
Treasurer of the Company
James J. Lund 48 Vice President, Chief Accounting Officer of
the Company
Carl F. Schnaufer 39 Vice President, Chief Information Officer of
the Company
Roger C. Sullivan, Jr. 53 Executive Vice President of Superior Insurance
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. Daggett has served as the Chief Operating Officer of IGF since 1994, as its
President since September, 1996 and as a director of IGF since 1989. From 1992
to 1996, Mr. Daggett served as an Executive Vice President of IGF. Mr. Daggett
also served as Vice President of Marketing for IGF from 1988 to 1993. Prior to
joining IGF, Mr. Daggett was an initial employee of a crop insurance managing
general agency, McDonald National Insurance Services, Inc., from 1984 until
1988. From 1977 to 1983, Mr. Daggett was employed as a crop insurance specialist
with the FCIC.
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.
Mr. Lund, C.P.A., has served as Vice President, Chief Accounting Officer of the
Company since November, 1998 after having served as Director of Financial
Reporting of the Company starting January, 1998. Prior to that time, Mr.
Lund served as an Assurance Manager with Ernst & Young LLP.
-37-
<PAGE>
Mr. Schnaufer has served as Vice President and Chief Information Officer of the
Company since September, 1997. Prior to that time, Mr. Schnaufer served as
Director of Field Technology and Corporate Systems with The Midland Life
Insurance Company, Columbus, Ohio from July, 1994 to September, 1997. From
March, 1992 to July, 1994, Mr. Schnaufer was Manager of Technical Services for
Newcome Electronic Systems in Columbus, Ohio after serving as an Information
Systems Specialist at The Midland for three years. Prior to that, Mr. Schnaufer
served in the United States Marine Corp from December, 1977 to January, 1990 as
a Network Systems Specialist and as Head of the Data Communications Environment
Division at MCAS Cherry Point, N.C.
Mr. Sullivan was named Executive Vice President of Superior Insurance Group in
May, 1996. From June, 1995 to May, 1996, Mr. Sullivan served as Vice President
of Claims for Superior. Prior to joining Superior, Mr. Sullivan served as a
claim consultant and on-site manager for Milliman and Robertson, Inc., a
Chicago-based insurance consulting firm, from August, 1994 to June, 1995. From
May, 1987 to August, 1994, Mr. Sullivan served as Vice President of Claims for
Atlanta Casualty Insurance Companies, an Atlanta-based carrier of standard and
nonstandard automobile insurance.
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, 1998 and other matters is included under the
caption "Market and Dividend Information" on page 42 of the 1998 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 1998 Annual Report, included as Exhibit 13,
under "Selected Financial Data" is incorporated herein by reference.
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 1998 Annual Report on pages
5 through 17 included as Exhibit 13 is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements in the 1998 Annual Report, included as
Exhibit 13, and listed in Item 14 of this Report are incorporated herein by
reference from the 1998 Annual Report.
ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-38-
<PAGE>
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 1999 annual meeting of common stockholders filed with the Commission
pursuant to Regulation 14A (the "1999 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Company's 1999 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 1999 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Company's 1999 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 ItemLocation in 1998 Annual Report
Report of Independent Accountants Page 44
Consolidated Balance Sheets, December 31,
1998 and 1997 Page 18
Consolidated Statements of Earnings, Years
Ended December 31, 1998, 1997 and 1996 Page 19
Consolidated Statements of Changes In
Shareholders' Equity, Years Ended
December 31, 1998, 1997 and 1996 Page 20
Consolidated Statements of Cash Flows,
Years Ended December 31, 1998, 1997 and 1996 Page 21
Notes to Consolidated Financial Statements,
Years Ended December 31, 1998, 1997 and 1996 Page 22 through 42
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
-39-
<PAGE>
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 1998 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 39 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
April 13, 1999
-41-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As Of December 31, 1997 and 1998
(In Thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1998
<S> <C> <C>
Assets:
Investments In And Advances To Related Parties $173,348 $154,298
Cash and Cash Equivalents 299 2,586
Federal Income Tax Receivable 223 3,844
Property and Equipment 15 13
Other 646 99
Intangible Assets 43,749 41,718
------- -------
Total Assets $218,280 $202,558
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued Distributions on Preferred Securities 4,801 4,809
Other 116 754
------- ------
Total Liabilities 4,917 5,563
------- ------
Minority Interest:
Preferred Securities 135,000 135,000
------- -------
Stockholders' Equity:
Common Stock, No Par, 100,000,000 Shares Authorized,
10,450,000 and 10,402,000 Issued and Outstanding 39,019 38,136
Additional Paid-In Capital 5,925 5,851
Unrealized Gain On Investments (Net of Deferred
Taxes of $1,008 in 1997 and $680 in 1998) 1,908 1,261
Retained Earnings 31,511 16,747
------- -------
Total Stockholders' Equity 78,363 61,995
------- -------
Total Liabilities and Stockholders' Equity $218,280 $202,558
======= =======
</TABLE>
-42-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 1996, 1997 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Fee Income $5,353 $628 $600
Net Investment Income 98 2,248 6,462
------ ------ ------
Total Revenue 5,451 2,876 7,062
------ ------ ------
Expenses:
Policy Acquisition and General and
Administrative Expenses 4,269 2,576 3,663
Interest Expense 613 -- --
------ ------ ------
Total Expenses 4,882 2,576 3,663
------ ------ ------
Income Before Taxes and Minority Interest 569 300 3,399
Provision for Income Taxes 228 328 1,789
------ ------ ------
Net Income (Loss) Before Minority Interest 341 (28) 1,610
Minority Interest:
Equity in Consolidated Subsidiary 12,915 19,453 (7,616)
Distributions on Preferred Securities,
Net of Tax -- (3,120) (8,411)
------ ------ ------
Net Income (Loss) for the Period $13,256 $16,305 $(14,417)
====== ====== ======
</TABLE>
-43-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 1996, 1997 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Net Income (Loss) $13,256 $16,305 $(14,417)
Cash Flows From Operating Activities:
Adjustments to Reconcile Net Cash
Provided by (Used In) Operations:
Equity In Net (Income) Loss of
Subsidiaries (12,915) (19,453) 7,616
Depreciation of Property and Equity 52 5 7
Amortization of Intangible Assets 3 858 2,040
Net Changes in Operating Assets and
Liabilities:
Federal Income Taxes 81 (304) (3,621)
Other Assets (145) (478) 538
Other Liabilities 163 (876) 646
------ ------ -----
Net Cash Provided From (Used In) Operations 495 (3,943) (7,191)
------ ------ -----
Cash Flow Used In Investing Activities:
Purchase of Minority Interest -- (61,000) --
Purchase of Property and Equipment -- (12) (5)
------ ------ -----
Net Cash Used in Investing Activities -- (61,012) (5)
------ ------ -----
Cash Flows Provided by Financing Activities:
Proceeds From Preferred Securities -- 129,947 --
Proceeds From Common Stock Offering 37,969 -- --
Repayment of Loans -- (350) --
Contributions of Capital or Dividends
Received from Subsidiaries (20,475) (70,503) 10,786
Loans From Related Parties (8,329) -- --
Other Investing Activities -- -- (1,303)
Payment of Dividend to Parent (3,500) -- --
------ ------ -----
Net Cash Provided By Financing Activities 5,665 59,094 9,483
------ ------ -----
Increase (Decrease) in Cash and Cash
Equivalents 6,160 (5,861) 2,287
Cash and Cash Equivalents - Beginning of Year -- 6,160 299
----- ------ -----
Cash and Cash Equivalents - End of Year $6,160 $299 $2,586
===== ===== =====
</TABLE>
-44-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 1996, 1997 and 1998
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, 1996, 1997 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Direct Amount $298,596 $430,002 $425,526
Assumed From Other Companies $6,903 $30,598 $126,805
Ceded to Other Companies $(95,907) $(183,059) $(220,123)
Net Amount $209,592 $277,541 $332,208
Percentage of Amount Assumed to Net 3.3% 11.0% 38.2%
</TABLE>
-45-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1996, 1997 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1996 1997 1998
Allowance for Allowance for Allowance for
Doubtful Accounts Doubtful Accounts Doubtful Account
<S> <C> <C> <C>
Additions:
Balance at Beginning of Period $927 $1,480 $1,993
Reserves Acquired in the
Superior Acquisition 500 -- --
Charged to Costs and Expenses(1) 5,034 9,519 12,690
Charged to Other Accounts -- -- --
Deductions from Reserves 4,981 9,006 8,290
----- ----- -----
Balance at End of Period $1,480 $1,993 $6,393
===== ===== =====
</TABLE>
(1) The Company continually monitors the adequacy of its allowance for doubtful
accounts and believes the balance of such allowance at December 31, 1996,
1997 and 1998 was adequate.
-46-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE VI - SUPPLEMENTAL
INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS For The Years
Ended December 31, 1996, 1997 and 1998 (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 Current Prior
Expense Years Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
1998 16,332 200,972 -- 110,664 324,923 12,373 257,470 12,996 48,066 229,695 553,190
</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.
April 13, 1999 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 April 13, 1999, on behalf of
the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial Officer:
/s/ Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/ G. Gordon Symons /s/ James G. Torrance
Chairman of the Board Director
/s/ John K. McKeating /s/ Douglas H. Symons
Director Director
/s/ Robert C. Whiting /s/ Alan G. Symons
Director Director
/s/ David R. Doyle
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 is incorporated by reference to Exhibit 2.1
of the Registrant's 1997 Form 10-K.
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 is incorporated by reference to Exhibit 2.2
of the Registrant's 1997 Form 10-K.
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 is incorporated by reference to Exhibit 2.3
of the Registrant's 1997 Form 10-K.
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 is incorporated by reference to Exhibit 2.4
of the Registrant's 1997 Form 10-K.
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 is incorporated by reference to Exhibit 2.5
of the Registrant's 1997 Form 10-K.
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 is incorporated by reference to Exhibit 2.6
of the Registrant's 1997 Form 10-K.
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 is incorporated by reference to Exhibit 2.7
of the Registrant's 1997 Form 10-K.
2.8 The Stock Purchase Agreement between Symons International Group,
Inc. and GS Capital Partners II, L.P. dated July 23, 1997 is
incorporated by reference to Exhibit 2.8 of the Registrant's 1997
Form 10-K.
<PAGE>
2.9 The Stock Purchase Agreement between IGF Holdings, Inc. and
1911 CORP. dated July 7, 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 is incorporated by
reference to Exhibit 4.3(2) of the Registrant's 1997 Form 10-K.
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.
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.
<PAGE>
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 is incorporated
by reference to Exhibit 10.9 of the Registrant's 1997 Form 10-K.
10.10 The Employment Agreement between Goran Capital Inc. and Gary P.
Hutchcraft effective May 1, 1997 is incorporated by reference to
Exhibit 10.10 of the Registrant's 1997 Form 10-K.
10.11 The Employment Agreement between Goran Capital Inc. and David L.
Bates effective April 1, 1997 is incorporated by reference to
Exhibit 10.11 of the Registrant's 1997 Form 10-K.
10.12 The Employment Agreement between Symons International Group, Inc.
and Carl F. Schnaufer effective August 14, 1998.
10.13 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.
10.14 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.
10.15 The Registrant's 1996 Stock Option Plan is incorporated by
reference to Exhibit 10.22 of the Registrant's Registration
<PAGE>
Statement on Form S-1, Reg. No. 333-9129.
10.16 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.
10.17 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.
10.18(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.
10.18(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.
10.18(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.
10.18(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.
10.18(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(6) The Automobile Variable Quota Share Reinsurance Agreement
between The Superior Group and IGF Insurance Company
dated October 1, 1998.
10.18(7) The Automobile Variable Quota Share Reinsurance Agreement
between The Pafco Group and IGF Insurance Company
dated October 1, 1998.
10.18(8) The Automobile Variable Quota Share Reinsurance Agreement
between The Pafco Group and Granite Reinsurance Company, Ltd.
dated October 1, 1998.
10.19 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
<PAGE>
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.20(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.
10.20(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.
10.20(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.
10.20(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.
27 Financial Data Schedule
99 Proxy Statement with respect to 1998 Annual Meeting
of Shareholders of Registrant
<PAGE>
Exhibit 2.9
1911 Corp. Draft 7-6-98
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into this 7th day of July, 1998, by
and among 1911 CORP., a Delaware corporation ("Seller"), and IGF Holdings, Inc.,
an Indiana corporation ("Purchaser").
ARTICLE I
Definitions
The following terms, when used in this Agreement, shall have the
meanings described in this Section:
1.1 Balance Sheet shall have the meaning given in Section 3.6.
1.2. Code shall mean the Internal Revenue Code of 1986 and regulations,
revenue rulings and court decisions adopted or decided thereunder.
1.3. Closing and Closing Date shall have the meanings given in Section
2.3.
1.4. Company shall mean North American Crop Underwriters, Inc., a
Minnesota corporation.
1.5. Employee Benefit Arrangement shall mean each employee benefit
(including, but not limited to, fringe benefits as defined in Section 132 of the
Code, and whether or not in writing) that is not salary, a Plan, or an
employment or severance agreement.
1.6. Encumbrance shall mean any pledge, security interest, mortgage,
community property interest, lien, automatic or other stay in a bankruptcy or
insolvency proceeding, legal or equitable claim, trust agreement, constructive
or resulting trust, voting trust or agreement, restricted stock agreement, right
of first refusal, or option, including any restriction on use, voting, transfer,
receipt of income, or exercise of any other attribute of ownership, except such
restrictions as may be contained in the Articles of Incorporation or the By-Laws
of Company and restrictions on subsequent transfer contained in federal and
state securities laws and state insurance laws.
1.6. ERISA shall mean the Employee Retirement Income Security Act
of 1974.
1.7. Governmental Authority means any government or political
subdivision, board, commission or other instrumentality thereof, whether
federal, state, local or foreign.
<PAGE>
1.8. Indemnified Party shall have the meaning given in Section 9.3.
1.9. Indemnifying Party shall have the meaning given in Section 9.4.
1.10. Interim Balance Sheet shall have the meaning given in Section
3.6.
1.11. Legal Requirement shall mean any constitution, law, ordinance,
established principle of common law, regulation, administrative ruling, or
applicable court decision of any Governmental Authority.
1.12. Licenses and Permits shall mean any license, permit, order,
approval, registration, authorization or qualification under any federal, state
or local law or with any Governmental Authority or under any industry or
non-governmental self-regulatory organization that is necessary for the conduct
of the business of the Company or any Subsidiary or the ownership of the
properties of either.
1.13. Plan shall mean a plan as defined in Section 3(3) of ERISA.
1.14. Permitted Encumbrance shall mean Encumbrances described in
Schedule 3.2 with respect to the Shares and in Schedule 3.4 with respect to
Company's assets.
1.15. Purchase Price shall have the meaning given in Section 2.2.
1.16. Securities Act shall mean the federal Securities Act of 1933 and
rules, regulations and applicable administrative rulings and court decisions
issued thereunder.
1.17. Shares shall mean 600 shares of the Common Stock without par
value of the Company, of which 200 shares are individually owned by each person
who is a Seller.
ARTICLE II
2.1. Purchase of the Shares. On the terms and conditions set forth
herein, Seller shall sell, transfer, convey and assign the Shares to Purchaser
and Purchaser shall purchase the Shares from Seller:
2.2. The Purchase Price.
2.2.1. Aggregate Purchase Price. The purchase price payable by
Purchaser to Seller for the Shares pursuant to this Agreement shall be the sum
of Four Million Dollars ($4,000,000.00) (the "Purchase Price").
2.2.2. Method of Payment. Three Million Dollars of the Purchase Price
shall be paid in cash at the Closing (as defined in Section 2.3) by wire
transfer in available funds by Purchaser upon the instructions of Seller, with
the remaining One Million Dollars ($1,000,000) payable by Purchaser
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1911 Corp. Draft 7-6-98
to Seller no earlier than three (3) years from the date hereof, with such
obligation of Purchaser to Seller being unsecured and without interest.
2.3. The Closing. The signing of this Agreement and the Closing of the
purchase and sale under this Agreement (the "Closing") shall take place on July
7, 1998 (provided all of the conditions to Closing set forth in Sections 5 and 6
have been satisfied or waived) (the "Closing Date"), or on such later date as
soon thereafter as possible upon which such conditions have been satisfied or
waived. The Closing shall occur at the place mutually agreed by the parties
hereto.
2.4. Conveyance of the Shares. Conveyance of the Shares to Purchaser
shall be effected by delivery by Seller to Purchaser of the certificates
therefore with stock powers attached thereto duly endorsed in blank. Title to
the Shares shall be conveyed from Seller to Purchaser free and clear of all
Encumbrances.
ARTICLE III
Representations and Warranties of Seller
Seller hereby warrants and represents:
3.1. Organization and Good Standing. Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota. Company has no Subsidiaries. Company has full corporate power and
authority to conduct its business as it is now being conducted. Company is duly
qualified to do business as a foreign corporation in the jurisdictions listed in
Schedule 3.1, and is in good standing in each such jurisdiction, and such
jurisdictions constitute each jurisdiction in which Company is required to be so
qualified as a result of the nature of its business or the ownership or use of
property.
3.2. Capitalization of Company. The authorized capital stock of Company
consists of 100,000 shares of Common Stock without par value, of which 1,000
shares are issued and outstanding, and are held as shown in Schedule 3.2. The
Shares have been duly authorized and validly issued by Company and are fully
paid and non-assessable. The Shares are free and clear of any Encumbrance (other
than any Encumbrance caused to exist by Purchaser), except for Permitted
Encumbrances shown in Schedule 3.2. Company has not authorized or granted any
call, option, warrant, subscription, conversion right or other right to capital
stock of the Company. None of the Shares was issued in violation of the
Securities Act or any other Legal Requirement. Company has no ownership interest
or right or obligation to acquire any ownership interest in any other
corporation, trust, partnership, joint venture or other legal entity.
3.3. Enforceability. Seller has full power and authority to execute and
to deliver this Agreement, and to carry out the transaction contemplated herein.
This Agreement is the valid and binding obligation of the Seller, and
enforceable against Seller in accordance with its terms, except
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as such enforceability may be limited by laws affecting the rights and remedies
of creditors and applicable principles of equity. The execution, delivery and
performance of this Agreement by the Seller will not, with or without the giving
of notice or passage of time or both, (i) conflict with, result in a default,
right to accelerate or loss of rights under, or result in the creation of any
lien, charge or encumbrance pursuant to any provision of any mortgage, deed of
trust, lease, license agreement or other agreement to which Seller or Company is
a party or by which it is bound or affected, (ii) conflict with or result in a
default under any provision of the Articles of Incorporation or By-Laws of
Seller or Company, or any effective resolution of the Directors or Stockholders
of Seller or Company, (iii) conflict with or provide grounds for modification,
suspension or revocation of any license, permit or other governmental
authorization held by Seller or Company at the Closing, or (iv) conflict with or
result in a violation of any Legal Requirement.
3.4. Company's Assets. Company owns all of the assets included in the
Balance Sheet and the Interim Balance Sheet, except for acquisitions,
dispositions or retirements in the ordinary course of business and any other
dispositions described in Schedule 3.4. Except as stated in Schedule 3.4,
Company has good and marketable title to its assets, and none of the assets of
Company are subject to any Encumbrance.
3.5. Accounts Receivable. The accounts receivable of Company reflected
on the Balance Sheet and the Interim Balance sheet or otherwise on the books of
Company represent valid obligations arising from sales actually made or services
actually performed in the ordinary course of business. Unless paid prior to the
Closing Date, such accounts receivable will be as of the Closing Date current
and collectible net of the respective reserves shown on the Interim Balance
Sheet or the accounting records of Company as of the Closing Date (which
reserves are adequate and calculated in accordance with past practice).
3.6. Financial Statements. Seller has delivered to Purchaser (a) the
unaudited balance sheet of Company and the related statements of income,
statements of operations and retained earnings, and statement of cash flows for
the year ended December 31, 1997 (the "Balance Sheet"), (b) the unaudited
balance sheet, income statement and related financial statements of Company for
year to date and the month ended May 31, 1998 (the "Interim Balance Sheet"). The
Balance Sheet and the Interim Balance Sheet accurately present the financial
condition and results of operations and cash flows of Company as at the
respective dates thereof or for the periods referred to therein, all in
accordance with United States generally accepted accounting principles, applied
on a basis consistent with the basis on which the Balance Sheet was prepared,
and applied on a basis that is consistent from period to period as shown
therein. Seller expressly warrants to Purchaser that the Company's net worth as
of December 31, 1997, was not less than $1,141,641. Except as set forth in
Schedule 3.6, Company has no liabilities as of the dates of the Balance Sheet
and the Interim Balance Sheet that are not reflected therein, including, without
limitation, contingent liabilities required to be disclosed under United States
generally accepted accounting principles.
3.7. No Material Adverse Change. Since the dates of the Balance Sheet
and the Interim Balance Sheet, there has been no material adverse change in the
business, operations, properties, assets or condition of Company.
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1911 Corp. Draft 7-6-98
3.8. Litigation. There is no litigation, investigation, arbitration or
other proceeding of any court or other Governmental Authority pending or, to the
best of Company's knowledge, threatened against or relating to Company, except
as listed in Schedule 3.8 to this Agreement by date of filing, names of parties,
court or agency and docket number. Company is not a party to or bound by any
order, judgments, injunctions, decrees or settlement agreements under which it
may have continuing obligations as of the date hereof and which may restrict or
affect the current business operations of Company or Company's capacity to
authorize and issue the Shares. Seller does not know or have reasonable grounds
to know of any basis for any such litigation, investigation, arbitration or
other proceeding. The right or ability of Company to consummate the transaction
contemplated herein has not been challenged by any Governmental Authority or any
other person.
3.9. Books and Records. The books of account, stock record books,
minute books, and other records of Company are complete and correct and have
been maintained in accordance with good business practice.
3.10. Contracts. Each and every executory contract under which Company
has any continuing right to performance or any obligation to perform (except for
agreements (i) with employees and (ii) Plans, which are discussed elsewhere in
this Agreement) is listed in Schedule 3.10. True and correct copies of the
contracts listed in Schedule 3.10 have been provided to Purchaser. There are no
defaults under said contracts.
3.11. Intellectual Property.
3.11.1. Trademarks and Service Marks. Company currently uses the
trademarks or service marks listed in Schedule 3.11.1. Except as provided in
Schedule 3.8, Company has received no notice from any person that such
trademarks and service marks may infringe upon trademarks and service marks of
any other entity.
3.11.2. Know-How, Methods of Operation and Customer Lists. Company has
the unrestricted right to use its know-how, methods of operation, and customer
lists free and clear of any claims of third persons to compensation for the use
thereof (except for claims for compensation under agreements disclosed by
Company in Schedule 3.10).
3.11.3. Software Programs. All software programs that are currently
used by Company as part of its management information systems are listed in
Schedule 3.11.3. Seller knows of no claim of conflicting ownership rights,
breaches of license agreements or past or future license expirations that would
materially interfere with Company's continued use of the software programs
listed in Schedule 3.11.3 for the purposes for which such programs are currently
being used, whether such programs are owned by or licensed to Company.
3.12. Compliance with Legal Requirements. Company is in compliance with
Legal Requirements applicable to Company and its business. To the best knowledge
of Seller, Company has not committed any breach of any Legal Requirement that
may, as of the Closing Date, result in
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any penalty, fine, suspension or loss of any License or Permit listed in
Schedule 3.13, or other adverse or remedial action that would interfere with the
conduct of the business of Company or result in the incurring of costs or
expenses over and above those customarily incurred in the ordinary course of
business.
3.13. Licenses and Permits. Schedule 3.13 lists each License and Permit
of Company as of the Closing Date. Schedule 3.13 specifies for each state or
province in which Company is licensed as an insurance agent, third party
administrator or other regulated provider of similar products or services, the
specific products or services for which Company is licensed in such state, and
the date of expiration of such license, if any. Each License and Permit is
currently effective and is not the subject of any proceedings by which such
License or Permit might be suspended, restricted or revoked. Company is not a
party to any such proceeding. The Licenses and Permits listed in Schedule 3.13
constitute all of the licenses and permits that are necessary for the conduct of
the business of Company as such business is currently conducted. With respect to
each License and Permit listed in Schedule 3.13, such schedule states any
approval or notice filing that is a legal precondition to the closing of the
transactions contemplated by this Agreement, and the applicable statutory or
regulatory reference describing such notice filing or approval.
3.14. Taxes and Tax Returns. Company has filed with the appropriate
governmental authorities all federal, state and local tax returns required to be
filed by Company or appropriate extensions have been obtained therefor. All of
the foregoing have been correct and complete. All federal, state and local
income, sales, use, occupation, property, excise, employment, employee
withholding and other taxes which have become due (including interest and
penalties) have been fully paid (except for taxes, if any, listed in Schedule
3.14 that are being contested in good faith and as to which adequate reserves
have been provided in the Balance Sheet and the Interim Balance Sheet). None of
the federal income tax returns of Company for any year not closed by applicable
statutes of limitations have been audited. All deficiencies proposed as a result
of such audits have been paid, reserved against, settled, or are being contested
in good faith as described in Schedule 3.14. Except as stated in Schedule 3.14,
Company has not granted any waiver of any statute of limitations related to any
federal, state or local tax. Seller shall file or cause to be filed on behalf of
the Company a United States federal income tax return for the Company for the
period ended on the Closing Date, which return shall be subject to prior review
by Purchaser, and Seller shall be responsible for payment of any adjustments to
the tax on such return that are required by the Internal Revenue Service, or to
contest such adjustments only in good faith and at Seller's sole expense, and
Seller shall also receive any refunds with respect to such return.
3.15. Employees. Company is not a party to any employment or severance
agreement with any of its employees or directors except as stated in Schedule
3.15 (except for personnel policies applicable to all employees generally, true
and complete copies of which have previously been made available to Purchaser).
Such Schedule 3.15 contains a complete and accurate list of the following
information for each employee of Company, including each employee on leave of
absence: name, position title, current rate of compensation payable, vacation
accrued, and participation status in any Plan.
3.16. Employee Benefits. Neither Company nor any entity acquired by
Company (whether currently owned by Company or not) has contributed to a
multiemployer plan as defined in Section
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1911 Corp. Draft 7-6-98
3(37) of ERISA, nor have they ever sponsored or participated in any plan subject
to Title IV of ERISA. Company does not sponsor or contribute to any Plan that
reimburses or funds health or other insurance benefits to retired employees, or
otherwise has any obligation to reimburse or fund health or other insurance
benefits for retired employees. Except as stated in Schedule 3.16, Company has
not terminated any Plan. Each Plan to which Company contributes or of which
Company is a sponsor is listed in Schedule 3.16. True and correct copies of each
Plan listed in Schedule 3.16, have been made available to Purchaser. Each Plan
that is intended to be qualified under Section 401 of the Code is so qualified,
and no event has occurred that would reasonably be expected to cause any such
Plan to fail to meet any requirements for qualification. True and correct copies
of any Internal Revenue Service determination letter, Forms 5500, financial
statements, and consultant reports with respect to each Plan for the most recent
three plan years have been made available to Purchaser. Except as stated in
Schedule 3.16, Company or the administrator of each Plan has administered each
Plan in accordance with the provisions thereof and reasonable interpretations
thereof. Each Employee Benefit Arrangement of Company is listed in Schedule
3.16. True and correct copies of each Employee Benefit Arrangement have been
made available to Purchaser.
3.17. Labor Relations. None of the employees of Company is a member of
a labor union or subject to a collective bargaining agreement or actively
seeking formation of a labor union.
Company is not a party to any labor dispute or grievance.
3.18. Insurance. Schedule 3.18 lists all insurance policies of Company
by type of insurance, name of insurer, expiration date, deductibles and policy
limits. Except as stated in Schedule 3.18, all of such insurance is written on
an occurrence and not on a claims made basis. The retroactive date for any such
insurance that is written on a claims made basis is stated in Schedule 3.18.
True and complete copies of Company's current professional liability, officers
and directors, and errors and omissions insurance policies, including the
declarations pages thereof, have been provided to Purchaser. With respect to any
insurance policy listed as a claims made policy on Schedule 3.18, Company has
delivered to the insurer a notice of any claim or potential claim of which
Company is aware as of the date hereof that may reasonably be expected to be
covered by such policy, and such notice is in accordance with the notice
provisions of such policy.
3.19. Real Estate. Company has no ownership interest in any real
property except for an office building and land located at Highway 210 West,
Henning, Minnesota, and an office building and land located at 801 Inman Street,
Henning, Minnesota. The Inman Street building was constructed in approximately
1988 and the Highway 210 building was constructed in approximately 1978. Neither
Seller nor Company has notice or knowledge of the presence of any hazardous
materials, including but not limited to asbestos, petroleum derivatives or
pesticides, in quantities or concentrations sufficient to require any remedial
action under any federal, state or local law, regulation or court proceeding
effective as of the Closing Date. Company has not disposed of any substances
from the site of such office building or any other site occupied by Company in
such a manner that Company is subject to current or future payment of clean up
or remediation costs under
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the federal CERCLA statute or any similar state or local law effective as of the
Closing Date with respect to any site at which such substances may have been
disposed.
3.20. Brokers or Finders. Neither Company nor Seller has incurred any
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement and the transactions contemplated thereby.
3.21. Absence of Certain Changes and Events. Since the dates of the
Balance Sheet and the Interim Balance Sheet, Company has conducted its business
in the ordinary course, and has not (without limitation):
(a) Increased the rate of compensation to any employee;
(b) Adopted or modified any Plan or Employee Benefit Arrangement;
(c) Granted or modified any employment contract, severance agreement, or
other benefit not constituting a Plan or Employee Benefit Arrangement;
(d) Made any distribution with respect to its stock;
(e) Suffered any loss or damage to any asset or assets, whether or not
covered by insurance, that materially and adversely affects the
business, financial condition or prospects of Company, taken as a
whole;
(f) Sold, leased or otherwise disposed of any asset of Company that is
material to the operation of Company;
(g) Merged with or acquired capital stock in any corporation;
(h) Made any loan or advance under any loan to or guaranteed any obligation
of any person;
(i) Made any material change in the accounting methods employed by Company;
or
(j) Entered into any agreement to do any of the foregoing.
3.22. Disclosure. No representation or warranty by or on behalf of
Seller contained in this Agreement and no certificate, schedule, or other
document furnished or to be furnished to Purchaser pursuant hereto contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material facts which are necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
3.23. Survival of Representations and Warranties. The representations
and warranties of Seller in this Section of this Agreement shall be true and
correct as of the Closing. The representations and warranties of Seller shall
survive the Closing for a period of two years, except that the representations
and warranties in Section 3.14 shall survive the Closing separately as to each
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1911 Corp. Draft 7-6-98
tax obligation until the thirtieth day following the expiration of the statute
of limitations applicable to such tax obligation, including any voluntary
extensions thereof.
ARTICLE IV
Representations and Warranties of Purchaser
Purchaser hereby warrants and represents to Seller that:
4.1. Status of Purchaser. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Indiana.
Purchaser has full corporate power and authority to conduct its business as it
is now being conducted. Purchaser is duly qualified to do business as a foreign
corporation in each jurisdiction in which Purchaser is required to be so
qualified as a result of the nature of its business or the ownership or use of
property.
4.2. Enforceability. Purchaser has full power and authority to execute
and to deliver this Agreement and all related documents, and to carry out the
transaction contemplated herein. Purchaser has taken all necessary corporate
action to authorize its execution and performance of this Agreement. This
Agreement is the valid and binding obligation of Purchaser, and enforceable
against Purchaser in accordance with its terms, except as such enforceability
may be limited by laws affecting the rights and remedies of creditors and
applicable principles of equity. The execution, delivery and performance of this
Agreement by the Purchaser will not, with or without the giving of notice or
passage of time or both, (i) conflict with, result in a default, right to
accelerate or loss of rights under, or result in the creation of any lien,
charge or encumbrance pursuant to any provision of any mortgage, deed of trust,
lease, license agreement or other agreement to which Purchaser is a party or by
which it is bound or affected, (ii) conflict with or result in a default under
any provision of the Certificate of Incorporation or By-Laws of Purchaser, or
any effective resolution of the Directors or Stockholders of Purchaser, or (iii)
conflict with or result in a violation of any Legal Requirement.
4.3. Certain Proceedings. There is no pending action against Purchaser
in any court or administrative agency that challenges or may have the effect of
preventing or delaying or making unlawful the consummation of the transactions
contemplated by this Agreement. To Purchaser's knowledge, no such proceeding has
been threatened.
4.4. Brokers or Finders. Purchaser has incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and the
transactions contemplated thereby.
4.5 Disclosure. No representation or warranty by or on behalf of
Purchaser contained in this Agreement and no statement contained in any
certificate, list, exhibit, or other instrument furnished or to be furnished to
Seller pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit to state any material facts which are
necessary in order to
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make the statements contained herein or therein, in light of the circumstances
under which they were made, not misleading.
4.6. Survival of Representations and Warranties. The representations
and warranties of Purchaser in this Section of this Agreement shall be true and
correct as of the date of execution of this Agreement, and as of the Closing.
The representations and warranties of Purchaser shall survive the Closing for a
period of two years.
ARTICLE V
Purchaser's Conditions to Closing
All obligations of Purchaser under this Agreement are subject to
fulfillment, prior to or at Closing, of each of the following conditions, any
one or all or which may be waived in writing by Purchaser:
5.1. Seller's Representations and Warranties True at Closing. Seller's
representations and warranties contained in this Agreement or in any certificate
or document delivered in connection with this Agreement or the transactions
contemplated herein shall be true in all material respects at and as of the date
of Closing as though such representations and warranties were then made.
5.2. Seller's Performance. Seller shall have performed all of its
material obligations under this Agreement that are to be performed prior to or
at Closing to the extent the same have not been waived by Purchaser in
accordance with the terms hereof.
5.3. Delivery of Documents. Seller shall have delivered to Purchaser
the agreements, certificates, consents and other documents required to be
delivered by Seller to Purchaser in accordance with Article VII of this
Agreement.
5.4. Seller's Closing Certificate. Purchaser shall have received a
certificate of Seller dated as of the Closing Date confirming that all
conditions set forth in this Article V to be satisfied by Seller have been
satisfied.
In the event any of the foregoing conditions is not satisfied by
Seller, or waived by Purchaser prior to Closing, Purchaser shall have the right
to terminate this Agreement in accordance with the provisions of Section 10.
ARTICLE VI
Seller's Conditions to Closing
All obligations of Seller under this Agreement are subject to the
fulfillment, prior to or at Closing, of each of the following conditions, any
one or all of which may be waived by Seller in writing:
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1911 Corp. Draft 7-6-98
6.1. Purchaser's Representations and Warranties True at Closing.
Purchaser's representations and warranties contained in this Agreement or in any
certificate or document delivered in connection with this Agreement or the
transactions contemplated herein shall be true in all material respects at and
as of the date of Closing.
6.2. Purchaser's Performance. Purchaser shall have performed its
obligations under this Agreement that are to be performed prior to or at Closing
to the extent the same have not been waived by Seller in accordance with the
terms hereof.
6.3. Delivery of Documents. Purchaser shall have delivered to Seller
the agreements, certificates, consents and other documents to be delivered by
Purchaser to Seller in accordance with Article VIII of this Agreement.
6.4. Purchaser's Closing Certificate. Seller shall have received a
certificate of Purchaser dated as of the Closing Date confirming that all
conditions set forth in this Article VI to be satisfied by Purchaser have been
satisfied.
In the event any of the foregoing conditions is not satisfied by
Purchaser, or waived by Seller prior to Closing, Seller shall have the right to
terminate this Agreement in accordance with the provisions of Section 10.
ARTICLE VII
Seller's Obligations at Closing
7.1 Deliveries by Seller at Closing. On the Closing Date, Seller
agrees that it will deliver to Purchaser:
(a) The Shares, with stock powers attached thereto duly endorsed in
blank.
(b) Seller's certificates and such certificates from public officials
relating to organization and good standing of the Company, which
Purchaser may reasonably request to verify any of the Seller's
representations and warranties herein.
(c) Copies of the duly adopted Articles of Organization and By-Laws of
Company, certified as true and complete by the Secretary of
Company.
(d) Employment Agreements between Company and Raymond C. Murdock,
Harry Pieterick, and Lonnie Anderson.
(e) Release of stock pledge of Shares held by Lonnie Anderson and
Release of those certain Security Agreements pertaining to amounts
owed by the Company to William M. Bengson and Ernest E. Read for
the purchase of their Company Shares in 1996.
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(f) Key man life insurance policy on the life of Raymond C. Murdock.
(g) Estoppel letters from each person who is a Seller.
(h) Termination of Stockholders Agreement dated September 19, 1996.
(i) Any other document reasonably requested by Purchaser to confirm the
accuracy of the representations and warranties by Seller herein and
the compliance by Seller with the provisions of this Agreement.
7.2. Post-Closing. After the Closing of this Agreement, Seller agrees
that at Purchaser's sole cost and expense, it will take such actions and
properly execute and deliver to Purchaser such further instruments of
assignment, conveyance and transfer as, in the reasonable opinion of counsel for
Purchaser and Seller, may be reasonably necessary to assure, complete and
evidence the full and effective transfer and conveyance of the Shares. Purchaser
shall not, however, be responsible for reimbursing Seller for the cost of
Seller's performance of any actions required or contemplated by this Agreement
to be performed by Seller.
ARTICLE VIII
Purchaser's Obligations at Closing
8.1. Purchaser's Obligations at Closing. On the Closing Date, Purchaser
agrees that it will deliver to Seller:
(a) Payment of the Purchase Price.
(b) Secretary's certificates and such certificates from public
officials relating to the legal existence, corporate good
standing, charter documents, and state tax clearance, which
Seller may reasonably request to verify any of Purchaser's
representations and warranties herein.
(c) Certified resolutions of the Boards of Directors of Purchaser,
authorizing the transactions contemplated hereby, certified by
the Secretary of Purchaser.
(d) Certificates of the Secretary of Purchaser as to incumbency and
related matters.
(e) Copies of the duly adopted Articles of Organization and By-Laws of
Purchaser, certified as true and complete by the Secretary of such
corporation.
(fg) Any other document reasonably requested by Seller to confirm the
accuracy of the representations and warranties by Purchaser herein
and the compliance by Purchaser with the provisions of this
Agreement.
8.2. Post-Closing.
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1911 Corp. Draft 7-6-98
8.2.1. After the Closing of this Agreement, Purchaser agrees that it
will take such actions and properly execute and deliver such further instruments
as Seller may reasonably request to assure, complete and evidence the
transaction provided for in this Agreement.
ARTICLE IX
Indemnification
9.1. Seller's Indemnification. Each person constituting a Seller,
jointly and severally, shall indemnify and hold Purchaser harmless from and
against:
(a) Except as otherwise expressly provided in this Agreement, any
and all damage, loss, or liability resulting from any
misrepresentation of a material fact, breach of warranty or
nonfulfillment of any agreement on the part of Seller under this
Agreement or from any misrepresentation in any certificate
furnished or to be furnished to Purchaser hereunder; and
(b) Any and all actions, suits, proceedings, demands, assessments,
judgments, reasonable costs, and other reasonable expenses,
including, but not limited to, reasonable attorney's fees,
incident to any of the foregoing.
9.2. Purchaser's Indemnification. Purchaser shall indemnify and hold
Seller harmless from and against:
(a) Except as otherwise expressly provided in this Agreement, any and
all damage, loss or liability resulting from any
misrepresentation of a material fact, breach of warranty or
nonfulfillment of any agreement on the part of Purchaser under
this Agreement or from any misrepresentation in any certificate
furnished or to be furnished to Seller hereunder; and
(b) Any and all actions, suits, proceedings, demands, assessments,
judgments, reasonable costs and other reasonable expenses,
including, but not limited to, reasonable attorney's fees,
incident to any of the foregoing.
9.3. Conditions of Indemnification. The respective obligations and
liabilities of Seller and Purchaser (the "Indemnifying Party") to the other
(herein sometimes called the "Indemnified Party") under Sections 9.1 and 9.2
hereof with respect to claims resulting from the assertion of liability by third
parties shall be subject to the following terms and conditions:
(a) Within 20 days after receipt of notice (referred to herein as
"notice") of commencement of any action or the assertion in
writing, formal or informal, of any claim, audit or inquiry by
a person (referred to herein as a "claim"), the Indemnified
Party shall give the Indemnifying Party written notice thereof
together with a copy
-13-
<PAGE>
of the document asserting such claim, and the Indemnifying Party
shall have the right to respond to such claim and to undertake
the defense thereof by a representative of its own choosing and
to enter into a settlement or compromise thereof or consent to a
judgment with respect thereto; provided, however, the
Indemnifying Party shall not, without the prior written consent
of the Indemnified Party, settle or compromise any claim or
consent to the entry of judgment (i) that does not include as an
unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party a release from all
liability in respect of such claim, or (ii) that contemplates
any payment or performance by the Indemnified Party.
(b) In the event that the Indemnifying Party, by the 20th day after
receipt of notice of a claim (or, if earlier, by the tenth day
preceding the day on which a responsive pleading must be served
in order to prevent judgment by default in favor of the person
asserting such claim), (i) does not elect to defend against
such claim, and (ii) if an election to defend is made, does not
provide reasonable assurances to the Indemnified Party of the
Indemnifying Party's (or its insurer's) ability to pay defense
costs and indemnity costs likely to be incurred with respect to
the claim, the Indemnified Party will, upon notice to the
Indemnifying Party, have the right to respond to such claim and
to undertake to defense, compromise or settlement of such claim
on behalf of and for the account and risk of loss of the
Indemnifying Party, subject to the right of the Indemnifying
Party to assume the defense of such claim upon satisfying
conditions (i) and (ii) above at any time prior to the
settlement, compromise or final determination thereof (if such
assumption be permitted by any court or other tribunal having
jurisdiction thereof), provided that the Indemnifying Party
shall be given at least 15 days' prior written notice of the
effectiveness of any such proposed settlement or compromise;
(c) In connection with any such indemnification, the Indemnified
Party shall cooperate in all reasonable requests of the
Indemnifying Party.
9.4. Indemnification Limits. Neither Seller on the one hand nor
Purchaser on the other hand shall have any obligation to indemnify the other
party for any breach of any misrepresentation, breach of warranty or
nonfulfillment of any agreement on the part of Seller or Purchaser under this
Agreement or from any misrepresentation in any certificate furnished or to be
furnished hereunder unless the aggregate amount of such indemnifiable claims
previously paid by Seller to Purchaser, on the one hand, or by Purchaser to
Seller, on the other hand, shall exceed $100,000.00, and thereafter Seller, on
the one hand, and Purchaser, on the other hand, shall be responsible only for
the excess of such aggregate amount over $100,000.00, provided, however, that in
no event shall the aggregate of all indemnifiable claims paid by Seller to
Purchaser or by Purchaser to Seller hereunder exceed $1,000,000, adjusted for
inflation by the percentage increase in the U.S. Department of Labor consumer
price index, all urban wage earners, from the Closing Date though the date on
which payment is made by Seller.
9.5. No Rescission. It is agreed by Purchaser and Seller in
consideration of their mutual agreements in this Article IX that neither of them
shall be entitled to rescission of this Agreement as a remedy, unless the other
party fails to perform its material obligations under this Article, and
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<PAGE>
1911 Corp. Draft 7-6-98
rescission would otherwise be available to the party not in breach under
principles of applicable law.
ARTICLE X
Termination of Agreement
10.1. Termination of Agreement. This Agreement may be terminated and
the transaction contemplated herein abandoned at any time prior to Closing:
(a) By mutual agreement of the parties;
(b) By Seller, if any of the conditions set forth in Article VI
shall have become incapable of fulfillment prior to the Closing
Date or such earlier date as may be specifically provided for
the performance thereof (as the same may be extended) through
no fault of Seller and the same shall not have been waived by
Seller;
(c) By Purchaser, if any of the conditions set forth in Article V
shall have become incapable of fulfillment prior to the Closing
Date or such earlier date as may be specifically provided for
the performance thereof (as the same may be extended) through
no fault of Purchaser and the same shall not have been waived
by Purchaser; or
(d) By either Seller or Purchaser in the event of a material breach
by the other party of its obligations hereunder.
10.2. Notice of Breach Required. Neither party to this Agreement may
claim termination or pursue any other remedy referred to in Section 10.1 on
account of a breach of a condition, covenant or warranty by the other, without
first giving such other party written notice of such breach and not less than
twenty (20) days within which to cure such breach; provided, however, that no
such cure right shall exist in the event of a breach by Purchaser of its
obligation to pay the purchase price due at Closing pursuant to Section 2.2
hereof. The Closing Date shall be postponed, if necessary, to afford such
opportunity to cure.
10.3. Termination by Purchaser for Breach. In the event of the
termination of this Agreement by Purchaser under Sections 10.1(c) or (d) due to
a material breach by Seller of its obligations hereunder, Purchaser shall have
the right either to (i) terminate this Agreement and to sue for any damages
suffered as a result thereof or (ii) seek specific performance of Seller's
obligations hereunder (the costs of which shall be borne by Seller if Purchaser
establishes that Seller has committed a material breach of its obligations
hereunder).
10.4. Termination by Seller for Breach. In the event of the
termination of this Agreement by Seller under Sections 10.1(b) or (d) due to a
material breach by Purchaser of its obligations
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<PAGE>
hereunder, Seller shall have the right either to (i) terminate this Agreement
and sue for any damages suffered as a result thereof or (ii) seek specific
performance of the Purchaser's obligations hereunder (the costs of which shall
be borne by Purchaser if Seller establishes that Purchaser has committed a
material breach of its obligations hereunder).
ARTICLE XI
Miscellaneous Provisions
11.1. Notices. Any notice, request or other communication to be given
by any party hereunder shall be in writing and shall be sent by registered or
certified mail, postage prepaid, by overnight courier guaranteeing overnight
delivery or by facsimile transmission (if confirmed verbally or in writing by
mail as aforesaid), to the following address:
To Seller: Joseph Cole
1911 Corp.
CNA Plaza - 36 South
Chicago, Illinois 60685
Telephone No.: 312-822-2052
Fax Number: 312-755-7196
With a copy to: Michael T. Gengler, Esq.
Vice President, Associate General Counsel
CNA Financial Corporation
CNA Plaza-42 South
333 South Wabash
Chicago, Illinois 60685-0001
Telephone No.: 312-922-7189
Fax Number: 312-755-7376
To Purchaser: Dennis Daggett
President
IGF Holding Company
6000 Grand Avenue
Des Moines, Iowa 50312
Telephone No.: 515-633-1000
Fax Number: 515-633-1010
With a copy to: David L. Bates, Esq.
Vice President, General Counsel and Secretary
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Telephone No.: 317-259-6384
Fax Number: 317-259-6395
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<PAGE>
1911 Corp. Draft 7-6-98
Notice shall be deemed given three (3) business days after deposit in the mail,
on the next day if sent by overnight courier and on receipt if sent by facsimile
(and confirmed verbally or by mail as aforesaid).
11.2. Arbitration. Any dispute arising between the parties to this
Agreement with respect to performance or interpretation of this Agreement shall
be submitted to arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association before a single arbitrator. The
arbitrator shall give effect to any applicable statutes of limitations. The
essential determinations of the arbitrator's award shall be based upon written
findings of fact and conclusions of law, and judgment upon the award of the
arbitrator may be entered in any court having jurisdiction thereof. The award
shall be subject to judicial review as to any harmful errors of law.
11.3. Sole Agreement. This Agreement may not be amended or modified in
any respect whatsoever except by instrument in writing signed by the parties
hereto. This Agreement, and the exhibits hereto and documents and agreements
delivered pursuant hereto, constitute the entire agreement between the parties
hereto with respect to the sale of the Shares and supersede all prior
negotiations, discussions, writings and agreements between them with respect to
the subject matter hereof.
11.4. Successors. The terms of this Agreement shall be binding upon and
inure to the benefit of and be enforceable by and against the heirs and
successors of the parties hereto.
11.5. Captions. The captions of this Agreement are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.
11.6. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois applicable to contracts
entered into therein, without consideration of principles of choice of law or
conflicts of laws.
11.7. Severability. Should any one or more of the provisions of this
Agreement be determined to be invalid, unlawful or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby.
11.8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
11.9. Third Party Beneficiary. The provisions of this Agreement are not
intended to confer any benefits upon any person or entity not a party to this
Agreement, provided, however, that IGF Insurance Company shall be entitled to
rely upon the agreement of Seller in Section 2.5.
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<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the
day and year first set forth above.
PURCHASER: IGF HOLDINGS, INC.
By:________________________________________
Name:
Title:
SELLER: 1911 CORP.
By:________________________________________
Name:
Title:
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<PAGE>
1911 Corp. Draft 7-6-98
SCHEDULE INDEX
Schedule 3.1 Qualifications as Foreign Corporation
Schedule 3.2 Holders of Company's Stock
Schedule 3.4 Dispositions and Permitted Encumbrances
Schedule 3.6. Exceptions to Balance Sheet
Schedule 3.8 Litigation
Schedule 3.10 Executory Contracts
Schedule 3.11.1 Trademarks and Service Marks
Schedule 3.11.3 Software Programs
Schedule 3.13 Licenses and Permits
Schedule 3.14 Taxes and Tax Returns
Schedule 3.15 Employees
Schedule 3.16 Plans and Employee Benefit Arrangements
Schedule 3.18 Insurance
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<PAGE>
Exhibit 10.12
EMPLOYMENT AGREEMENT
WHEREAS, Symons International Group, 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
Carl F. Schnaufer ("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 Information Officer effective as of August 14, 1998 and
continuing until August 13, 1999, 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 the Company or Executive gives written
notice that it or he does not intend to extend this Agreement. Executive shall
give to the Company two (2) months written notice prior to the date Executive
desires to terminate his employment by the Company. 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
Information 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 Information 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 of the Company, which duties shall be consistent with the
position of Vice President and Chief Information Officer of the Company, which
shall grant Executive authority, responsibility, title and standing comparable
to that of the vice president and chief information officer of a stock insurance
holding company of similar standing. Your primary place of work will be at the
company'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 area
home so that you will be enabled to purchase 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
<PAGE>
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 Chief Information Officer. Consistent with
Section 1.2 of this Agreement, Executive shall be primarily responsible for the
information systems 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 $140,000. 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 sixty (60) 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 Symons International Group,
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>
<CAPTION>
BONUS TABLE
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>
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<PAGE>
2.3 Employee Benefits. During the term of this Agreement, You shall be
entitled to participate in all incentive, savings, and retirement plans,
practices, policies, and programs available generally to other employees of the
Company. During the term of this Agreement, You and/or Your family, as the case
may be, shall be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies, and programs available
generally to other employees of the Company.
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) An automobile allowance of six hundred thirty dollars ($630.00)
per month.
(c) A golfing membership, including initiation and monthly fees,
at a country club as shall be approved by the Chief Executive
Officer of Company, in his sole and absolute discretion.
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.
3. Termination of Executive's Employment
3.1 Termination of Employment and Severance Pay. Executive's employment
under this Agreement may be terminated by the Company at any time for any
reason; provided, however, that if Executive's employment is terminated for any
reason other than for cause prior to February 14, 1999, he shall receive, as
severance pay, an amount equal to his salary which would have been otherwise
payable from the date of termination of employment to August 13, 1999. If
Executive's employment is terminated subsequent to February 13, 1999 for any
reason other than for cause, he shall receive, as severance pay, an amount equal
to six (6) month's current salary. Further, if Executive shall be terminated
without cause, receipt of severance payments are conditioned upon execution by
Executive and the Company of that mutual Agreement of Release and Waiver
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. The Chief
Executive Officer of the Company may, in his sole and absolute discretion,
provide Executive notice of the Company's intent to terminate this Agreement as
of a future date. In such event, Executive shall receive the right to remain
employed by the Company for a period of six (6) months, in lieu of severance
payments pursuant to this Section 3.1.
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<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;
(e) gross negligence or willful misconduct by the Executive in the
performance of his duties hereunder; or
failure of the Executive to follow the written directive of
the Chief Executive Officer of the Company or the Board of
Directors of the Company such that the activities of the
Executive are detrimental to the business operations.
3.3 Change of Control. Notwithstanding any other provisions of this
Agreement, if (i) a Change of Control shall occur during the initial one year
term of this Agreement ; and (ii) prior to February 14, 1999 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 date Executive shall commence employment with a
firm or entity other than the Company; provided, however, in such event
Executive shall continue to receive a portion of his current salary (in
bi-weekly payments) only to the extent that his salary with such firm or entity
is less than his current salary payable under the terms of this Agreement but in
any event such payments shall terminate no later than August 14, 1999.
If a Change of Control shall occur and subsequent to February 13, 1999
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 date Executive shall commence
employment with a firm or entity other than the Company; provided, however, in
such
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<PAGE>
event Executive shall continue to receive a portion of his current salary (in
bi-weekly payments) only to the extent that his salary with such firm or entity
is less than his current salary payable under the terms of this Agreement, but
in no event shall such payments continue for a period in excess of six (6)
months from the date of termination of Executive's employment with the Company.
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
-5-
<PAGE>
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 Dsability, 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
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<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:
If to the Company, to:
Chief Executive Officer
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
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<PAGE>
If to Executive, to:
Carl F. Schnaufer
948 Queensbury Drive
Noblesville, Indiana 46060
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.
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.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
SYMONS INTERNATIONAL GROUP, INC.
("Company")
By:__________________________________
Title:_______________________________
State of Indiana )
) SS:
County of Marion )
Before me the undersigned, a Notary Public for Marion County, State of
Indiana, personally appeared ______________________________, and acknowledged
the execution of this instrument this _______ day of August, 1998.
-------------------------------
CARL F. SCHNAUFER
("Executive")
---------------------------------------
State of Indiana )
) SS:
County of Marion )
Before me the undersigned, a Notary Public for Marion County, State of
Indiana, personally appeared Carl F. Schnaufer and acknowledged the execution of
this instrument this _______ day of ___________________, 1998.
-------------------------------
-9-
<PAGE>
Exhibit 10.18(6)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
This Agreement is made and entered into by and between
SUPERIOR INSURANCE COMPANY
Atlanta, Georgia
SUPERIOR AMERICAN INSURANCE COMPANY
Tampa, Florida
SUPERIOR GUARANTY INSURANCE COMPANY
Tampa, Florida
(hereinafter together called "SUPERIOR GROUP")
and/or any subsidiaries of the above companies (hereinafter together called the
"Company") and the Reinsurer specifically identified on the signature page of
this Agreement (hereinafter called the "Reinsurer").
ARTILCE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company's net retained liability under all Policies classified by the
Company as Private Passenger Automobile and Motorcycle business (including
Artisans' vehicles) covering Bodily Injury and Property Damage Liability,
Personal Injury Protection, Medical Payments, Uninsured and Underinsured
Motorists Liability, Physical Damage, inforce, written or renewed by or on
behalf of the Company and produced by Superior Insurance Company, Atlanta,
Georgia, Superior American Insurance Company, Tampa, Florida and Superior
Guaranty Insurance Company, Tampa, Florida, during the term of this Agreement,
subject to the terms and conditions herein contained.
ARTICLE 2
COVER
A. The Company will cede, and the Reinsurer will accept as reinsurance, a
37% share of all business reinsured hereunder, subject to the maximum
limits as specified in the MAXIMUM LIMITS OF LIABILITY ARTICLE.
ARTICLE 3
COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective at 12:01 a.m., Eastern Standard
Time, October 1, 1998, and shall remain in full force and effect until
terminated as provided in the following paragraph.
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<PAGE>
B. Either the Company or the Reinsurer shall have the right to terminate
this Agreement at any time.
C. Notwithstanding the termination provisions as set forth in section B.
above, this Agreement may be terminated, if:
1. The Company defaults upon its obligation to pay the Reinsurer any net
balances due hereunder in accordance with the terms and conditions
hereof, by the Reinsurer giving 15 days' notice prior to any month-end.
Should the Company correct the default within a 10-day period following
receipt of such notice, then termination of this reinsurance by the
Reinsurer for reason of default shall be rescinded automatically.
2. The Company:
a. Is acquired or controlled by, or merged with any other
company;
b. Reinsures its entire business;
c. Loses the whole or any part of its paid in capital;
d. Has a liquidator, receiver or conservator appointed, or is the
subject of any liquidation, conservation, insolvency or cease and
desist proceedings, then the Reinsurer may terminate at any month-
end by giving 15 days' prior written notice.
D. In the event of termination of this Agreement, the Reinsurer will continue
to cover all Policies coming within the scope of this Agreement, including
those written or renewed during the period of notice, until the natural
expiration or anniversary of such Policies, whichever occurs first, but
in no event longer than 12 months plus odd time, not to exceed 15 months
in all, from the date of termination.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination. The
Reinsurer will return to the Company a portfolio representing the unearned
premium reserve under this Agreement appropriate to the mode of termination.
E. Either party hereto may request commutation of the ceded reserves for
losses and loss adjustment expenses outstanding for any Underwriting Year
at the end of the Underwriting Year of at anytime thereafter. The Reinsurer
shall have no liability beyond such amount and upon payment by the
Reinsurer of an amount equal to the ceded reserves for losses and loss
adjustment expenses outstanding, which said amount shall be mutually agreed
between the Company and Reinsurer, the Reinsurer shall be relieved of all
further liability hereunder with respect to the losses so commuted.
ARTICLE 4
TERRITORY
This Agreement applies to losses arising out of Policies written in the United
States of America, its territories and possessions, Puerto Rico and Canada,
wherever occurring or to follow the Company's original Policies.
Page 2
<PAGE>
ARTICLE 5
MAXIMUM LIMITS OF LIABILITY
For purposes of determining the liability of the Reinsurer, the limits of
liability of the Company with respect to any one Policy shall be deemed not to
exceed the maximum limits as follows:
1. Bodily Injury: $100,000 per person/
$300,000 per occurrence
2. Uninsured Motorist BI: $100,000 per person/
$300,000 per occurrence
3. Underinsured Motorist BI: $100,000 per person/
$300,000 per occurrence
4. Property Damage Liability: $100,000 per occurrence
5. Uninsured Motorist PD: $50,000 per occurrence
6. Automobile Physical Damage: $50,000 per vehicle
Notwithstanding the maximum Policy limits listed above, it is agreed that the
Company may issue, and the Reinsurer will be liable for, a maximum of ten
Policies per Underwriting Year with limits of $1,000,000.
Loss in excess of the Policy limit and Extra Contractual Obligations as set
forth in the EXCESS OF POLICY LIMITS ARTICLE and the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE will be covered hereunder subject to the maximum Policy
limits as set forth in this Article, including the Policies with $1,000,000
limits.
The Company may request prior approval of the Reinsurer to cover more than ten
Policies per Underwriting Year with limits of $1,000,000.
ARTICLE 6
WARRANTY
The Company maintains the following reinsurance, which inure to the benefit of
this Agreement, whether collectible or not:
1. Casualty Excess of Loss Reinsurance Agreement of $800,000 in excess of
$200,000 each and every occurrence.
2. Contingent and Clash Casualty Excess of Reinsurance Agreement of $4,000,000
in excess of $1,000,000 each and every occurrence.
3. First Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of $750,000
in excess of $250,000 each and every occurrence.
4. Second Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of
$2,000,000 in excess of $1,000,000 each and every occurrence.
Page 3
<PAGE>
ARTICLE 7
EXCLUSIONS
This Agreement does not cover:
A. All excess of loss reinsurance assumed by the Company.
B. Reinsurance assumed by the Company under obligatory reinsurance agreements,
except;
1. agency reinsurance where the Policies involved are to be reunderwritten
in accordance with the underwriting standards of the Company and
reissued as Company Policies at the next anniversary or expiration date,
and;
2. reinsurance assumed by the Company for Old American Insurance Company
of Texas and Southern County Mutual Insurance Company.
C. Financial guarantee and insolvency.
D. Business written by the Company on a co-indemnity basis where the Company
is not the controlling carrier.
E. Business written to apply in excess of a deductible of more than $5,000,
and business issued to apply specifically in excess over underlying
insurance.
F. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability Reinsurance - U.S.A., No. 08-31.1 and Physical Damage -
Reinsurance - U.S.A., No. 08-33.
G. War Risks as excluded in the attached North American War Exclusion Clause
(Reinsurance) No. 08-45.
H. Pollution or contamination liability except mandatory coverage for motor
carriers subject to environmental restoration coverage under the Motor
Carrier Act of 1980 or similar mandatory coverages.
I. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or
Association.
J. All liability of the Company arising by contract, operations of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee or other obligation of
an insurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise deemed
unable to meet any claim, debt, charge, fee or other obligation in
whole or in part.
K. All classifications of business not specifically included under the BUSINESS
REINSURED ARTICLE.
Page 4
<PAGE>
L. Automobile Liability with respect to any vehicle used principally as:
1. A taxicab, public or livery conveyance or bus.
2. An ambulance or fire department vehicle.
3. A racing or exhibition vehicle.
4. A long-haul public freight carrier operating regularly and frequently
beyond a 300-mile radius from its territorial location.
5. A truck greater than 10 tons transporting explosive, munitions,
ammonium nitrate, gasoline or liquefied petroleum gas, including
butane and propane.
Not withstanding the foregoing, any reinsurance falling within the scope of one
or more of the exclusions set forth in paragraph L that is specially accepted by
the Reinsurer from the Company shall be covered under this Agreement and be
subject to the terms hereof, except as such terms shall be modified by the
special acceptance. Furthermore, any exclusion set forth in paragraph L shall be
waived automatically when, in the opinion of the Company, the exposure excluded
therein is incidental to the principal exposure on the risk in question.
If the Company is bound, without the knowledge and contrary to the instructions
of the Company's supervisory underwriting personnel, on any business falling
within the scope of one or more of the exclusions set forth in paragraph L, the
exclusion shall be suspended with respect to such business until 30 days after
an underwriting supervisor of the Company acquires knowledge thereof.
ARTICLE 8
ACCOUNTS AND REMITTANCES
A. Within 45 days following the end of each month, the Company shall report to
the Reinsurer:
1. Net Written Premium for the month;
2. Unearned premium at the end of the month;
3. Earned premium for the month;
4. Provisional ceding commission based on item 3. Above;
5. Ceded losses and allocated loss adjustment expense paid during the
month, as respects losses occurring during the Underwriting Period
under consideration;
6. The ceded reserves for losses outstanding and allocated loss adjustment
expenses outstanding at the end of the month, as respects losses
occurring during the Underwriting Period under consideration;
7. The balance 3. Less 4. Less 5.
B. In the event the balances shown in A.7. above for the Underwriting Period,
for the Superior Group, are due the Reinsurer, the Company will hold such
funds as it is the intent of this Agreement that the Company receive
interest on such funds. However, 2.5% of the amount shown in paragraph A.7.
shall be paid by the Company to the Reinsurer in cash within 30 days after
the due dates representing the Reinsurer's margin. In the event the balance
shown in paragraph A.7. is negative as of the end of any month, the negative
balance due the Company shall be payable by the Reinsurer in cash, within
60 days after the end of the month, but any such cash payment by the
Reinsurer shall be returned by the Company before any subsequent monthly net
balance due the Reinsurer is withheld from payment. However, it is agreed
that any negative balance due the Company will be offset by the positive
balance due the Company.
Page 5
<PAGE>
C. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 9
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of 21.0% of
the Net Earned Premium Income ceded hereunder. Return commission shall be
allowed on return premiums at the same rate.
ARTICLE 10
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss experience
under this Agreement. The Company will calculate an adjusted ceding
commission for the Underwriting Period within 14 months following the
inception of the Underwriting Period based on premiums earned and losses
incurred. The provisional ceding commission will be adjusted between
the parties as appropriate. Adjustments for the Underwriting Period
continue to be made annually until all losses ascribed to the
Underwriting Period have been paid or closed, at which time the ceding
commission will become final. For purposes of this calculation, no
upward adjustment will be made until 26 months following the inception
of the Underwriting Period.
2. Premium earned for the Underwriting Period shall mean all written
premium ceded to this Agreement and ascribed to the Underwriting Period
(less cancellations and returns) less the unearned premium reserve at
the time of the adjustment, if any.
3. Losses incurred for the Underwriting Period shall mean the loss and
allocated loss expense paid by the Reinsurer (less salvages and
recoveries received) on losses ascribed to the Underwriting Period, plus
loss and allocated loss expense reserves outstanding on losses ascribed
to the Underwriting Period, and plus or minus any debit or credit
carryforward as provided in this Article.
4. The adjusted ceding commission shall be calculated for the Underwriting
Period for the Company as a whole.
B. 1. Should the ratio of losses incurred to premium earned be 76.5% or
higher, then the adjusted ceding commission shall be 21.0%.
2. Should the ratio of losses incurred to premium earned be less than
76.5%, then the adjusted commission shall be further adjusted by
adding one percent (1%) to the ceding commission for each one percent
reduction of loss ratio subject to a maximum ceding commission of 28.0%
at a loss ratio of 69.5% or less.
Page 6
<PAGE>
ARTICLE 11
DEFINITIONS
A. The term "Net Written Premium" as used in this Agreement shall mean the
gross written premium income on business subject to this Agreement less
returns and cancellations.
B. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
C. The term "Underwriting Period" as used in this Agreement shall mean those
Policies inforce at the effective date hereof or issued or renewed on and
after that date and all premium attributable to, and all loss arising out
of such Policies from such until expiration or cancellation, whichever
occurs first, will be ascribed to the Underwriting Period.
C. The term "Superior Group" means Superior Insurance Company, Superior
American Insurance Company and Superior Guaranty Insurance Company.
ARTICLE 12
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Company (except that in the
event of the insolvency of the Company the provisions of the INSOLVENCY ARTICLE
of this Agreement shall apply).
ARTICLE 13
OFFSET
The Company and the Reinsurer shall have the right to offset any balances or
amounts due from one party to the other under the terms of this Agreement or any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming Reinsurer or Ceding Company. However, in
the event of the insolvency of any party hereto, offset shall only be allowed in
accordance with applicable law.
ARTICLE 14
CURRENCY
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
Page 7
<PAGE>
ARTICLE 15
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss and Unearned Premium Reserve Funding Clause
No. 13-04.
ARTICLE 16
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 17
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (including claim-specific declaratory
judgment expenses but excluding office expenses and salaries of officials of the
Company) and shall receive its proportionate share of any recoveries of such
expenses.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific policies and claims
subject to this Agreement. Declaratory judgment expense will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
Page 8
<PAGE>
ARTICLE 18
EXCESS OF POLICY LIMITS
In the event the loss includes an amount in excess of the Company's Policy
limit, 100% of such amount in excess of the Company's Policy limit shall be
added to the amount of the Company's Policy limit, and the sum thereof shall be
covered hereunder, subject to the Reinsurer's limit of liability appearing in
the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE of this Agreement.
However, this Article shall not apply where the loss has been incurred due to
the fraud of 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 19
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE
of this Agreement, where the loss includes any Extra Contractual Obligations for
100% of such Extra Contractual Obligations. "Extra Contractual Obligations" are
defined as those liabilities not covered under any other provision of this
Agreement and which arise from 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 the preparation of the defense or in the trial of any action
against its insured or in the preparation or prosecution of an appeal consequent
upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of 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.
ARTICLE 20
DELAY, OMISSION OR ERROR
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, providing such delay, omission or
error is rectified upon discovery.
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ARTICLE 21
INSPECTION
The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
any reinsurance hereunder or claims in connection herewith.
ARTICLE 22
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Indianapolis, Indiana in accordance with the attached Arbitration
Clause No. 22-01.1.
ARTICLE 23
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this
Agreement.
ARTICLE 24
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-01 - 1/1/86 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
ARTICLE 25
AFFILIATED COMPANIES
Superior Insurance Company shall be deemed to be the agent of the Company and/or
the Superior Group.
The retention of the Company and the liability of the Reinsurer and all other
benefits accruing to the Company as provided in this Agreement shall apply to
the companies comprising the Company and not separately to each of the
companies. Any payments by the Reinsurer to any of the companies comprising the
Company shall discharge the Reinsurer's liability under this Agreement.
Each of the companies comprising the Company shall be jointly and severally
liable for the obligations of the Company hereunder.
Page 10
<PAGE>
ARTICLE 26
PARTICIPATION: AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE October 1, 1998
This Agreement obligates the Reinsurer for 100% of the interests and liabilities
set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
IGF Insurance Company 100.0%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
Page 11
<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
SUPERIOR INSURANCE COMPANY
SUPERIOR AMERICAN INSURANCE COMPANY
SUPERIOR GUARANTY INSURANCE COMPANY
(hereinafter together called "SUPERIOR GROUP")
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
SUPERIOR INSURANCE COMPANY
SUPERIOR AMERICAN INSURANCE COMPANY
SUPERIOR GUARANTY INSURANCE COMPANY
(hereinafter together called "SUPERIOR GROUP")
Page 12
<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
IGF INSURANCE COMPANY
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
SUPERIOR INSURANCE COMPANY
SUPERIOR AMERICAN INSURANCE COMPANY
SUPERIOR GUARANTY INSURANCE COMPANY
(hereinafter together called "SUPERIOR GROUP")
Page 13
<PAGE>
Exhibit 10.18(7)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
This Agreement is made and entered into by and between
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
(hereinafter together called "COMPANY")
and the Reinsurer specifically identified on the signature page of this
Agreement (hereinafter called the "Reinsurer").
ARTILCE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company's net retained liability under all Policies written or assumed and
classified by the Company as Private Passenger Automobile and Motorcycle
business (including Artisans' vehicles) covering Bodily Injury and Property
Damage Liability, Personal Injury Protection, Medical Payments, Uninsured and
Underinsured Motorists Liability, Physical Damage, inforce, written or renewed
by or on behalf of the Company and produced by Pafco General Insurance Company,
Indianapolis, Indiana or assumed from IGF Insurance Company, Indianapolis,
Indiana, during the term of this Agreement, subject to the terms and conditions
herein contained.
ARTICLE 2
COVER
A. The Company will cede, and the Reinsurer will accept as reinsurance, a
7.72% share of all business reinsured hereunder, subject to the maximum
limits as specified in the MAXIMUM LIMITS OF LIABILITY ARTICLE.
ARTICLE 3
COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective at 12:01 a.m., Eastern Standard Time,
October 1, 1998, and shall remain in full force and effect until terminated
as provided in the following paragraph.
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<PAGE>
B. Either the Company or the Reinsurer shall have the right to terminate this
Agreement at any time.
C. Notwithstanding the termination provisions as set forth in section B. above,
this Agreement may be terminated, if:
1. The Company defaults upon its obligation to pay the Reinsurer any net
balances due hereunder in accordance with the terms and conditions
hereof, by the Reinsurer giving 15 days' notice prior to any month-end.
Should the Company correct the default within a 10-day period following
receipt of such notice, then termination of this reinsurance by the
Reinsurer for reason of default shall be rescinded automatically.
2. The Company:
a. Is acquired or controlled by, or merged with any other company;
b. Reinsures its entire business;
c. Loses the whole or any part of its paid in capital;
d. Has a liquidator, receiver or conservator appointed, or is the
subject of any liquidation, conservation, insolvency or cease and
desist proceedings, then the Reinsurer may terminate at any
month-end by giving 15 days' prior written notice.
D. In the event of termination of this Agreement, the Reinsurer will continue
to cover all Policies coming within the scope of this Agreement, including
those written or renewed during the period of notice, until the natural
expiration or anniversary of such Policies, whichever occurs first, but in
no event longer than 12 months plus odd time, not to exceed 15 months in
all, from the date of termination.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination. The
Reinsurer will return to the Company a portfolio representing the unearned
premium reserve under this Agreement appropriate to the mode of termination.
E. Either party hereto may request commutation of the ceded reserves for losses
and loss adjustment expenses outstanding for any Underwriting Year at the
end of the Underwriting Year of at anytime thereafter. The Reinsurer shall
have no liability beyond such amount and upon payment by the Reinsurer of
an amount equal to the ceded reserves for losses and loss adjustment
expenses outstanding, which said amount shall be mutually agreed between the
Company and Reinsurer, the Reinsurer shall be relieved of all further
liability hereunder with respect to the losses so commuted.
ARTICLE 4
TERRITORY
This Agreement applies to losses arising out of Policies written in the United
States of America, its territories and possessions, Puerto Rico and Canada,
wherever occurring or to follow the Company's original Policies.
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<PAGE>
ARTICLE 5
MAXIMUM LIMITS OF LIABILITY
For purposes of determining the liability of the Reinsurer, the limits of
liability of the Company with respect to any one Policy shall be deemed not to
exceed the maximum limits as follows:
1. Bodily Injury: $100,000 per person/
$300,000 per occurrence
2. Uninsured Motorist BI: $100,000 per person/
$300,000 per occurrence
3. Underinsured Motorist BI: $100,000 per person/
$300,000 per occurrence
4. Property Damage Liability: $100,000 per occurrence
5. Uninsured Motorist PD: $50,000 per occurrence
6. Automobile Physical Damage: $50,000 per vehicle
Notwithstanding the maximum Policy limits listed above, it is agreed that the
Company may issue, and the Reinsurer will be liable for, a maximum of ten
Policies per Underwriting Year with limits of $1,000,000.
Loss in excess of the Policy limit and Extra Contractual Obligations as set
forth in the EXCESS OF POLICY LIMITS ARTICLE and the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE will be covered hereunder subject to the maximum Policy
limits as set forth in this Article, including the Policies with $1,000,000
limits.
The Company may request prior approval of the Reinsurer to cover more than ten
Policies per Underwriting Year with limits of $1,000,000.
ARTICLE 6
WARRANTY
The Company maintains the following reinsurance, which inure to the benefit of
this Agreement, whether collectible or not:
1. Casualty Excess of Loss Reinsurance Agreement of $800,000 in excess of
$200,000 each and every occurrence.
2. Contingent and Clash Casualty Excess of Reinsurance Agreement of $4,000,000
in excess of $1,000,000 each and every occurrence.
3. First Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of $750,000
in excess of $250,000 each and every occurrence.
4. Second Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of
$2,000,000 in excess of $1,000,000 each and every occurrence.
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ARTICLE 7
EXCLUSIONS
This Agreement does not cover:
A. All excess of loss reinsurance assumed by the Company.
B. Reinsurance assumed by the Company under obligatory reinsurance agreements,
except;
1. agency reinsurance where the Policies involved are to be reunderwritten
in accordance with the underwriting standards of the Company and
reissued as Company Policies at the next anniversary or expiration date,
and;
2. reinsurance assumed by the Company for Old American Insurance Company
of Texas and Southern County Mutual Insurance Company.
C. Financial guarantee and insolvency.
D. Business written by the Company on a co-indemnity basis where the Company is
not the controlling carrier.
E. Business written to apply in excess of a deductible of more than $5,000, and
business issued to apply specifically in excess over underlying insurance.
F. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability Reinsurance - U.S.A., No. 08-31.1 and Physical Damage -
Reinsurance - U.S.A., No. 08-33.
G. War Risks as excluded in the attached North American War Exclusion Clause
(Reinsurance) No. 08-45.
H. Pollution or contamination liability except mandatory coverage for motor
carriers subject to environmental restoration coverage under the Motor
Carrier Act of 1980 or similar mandatory coverages.
I. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or
Association.
J. All liability of the Company arising by contract, operations of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee or other obligation of
an insurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise deemed
unable to meet any claim, debt, charge, fee or other obligation in
whole or in part.
K. All classifications of business not specifically included under the BUSINESS
REINSURED ARTICLE.
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L. Automobile Liability with respect to any vehicle used principally as:
1. A taxicab, public or livery conveyance or bus.
2. An ambulance or fire department vehicle.
3. A racing or exhibition vehicle.
4. A long-haul public freight carrier operating regularly and frequently
beyond a 300-mile radius from its territorial location.
5. A truck greater than 10 tons transporting explosive, munitions,
ammonium nitrate, gasoline or liquefied petroleum gas, including
butane and propane.
Not withstanding the foregoing, any reinsurance falling within the scope of one
or more of the exclusions set forth in paragraph L that is specially accepted by
the Reinsurer from the Company shall be covered under this Agreement and be
subject to the terms hereof, except as such terms shall be modified by the
special acceptance. Furthermore, any exclusion set forth in paragraph L shall be
waived automatically when, in the opinion of the Company, the exposure excluded
therein is incidental to the principal exposure on the risk in question.
If the Company is bound, without the knowledge and contrary to the instructions
of the Company's supervisory underwriting personnel, on any business falling
within the scope of one or more of the exclusions set forth in paragraph L, the
exclusion shall be suspended with respect to such business until 30 days after
an underwriting supervisor of the Company acquires knowledge thereof.
ARTICLE 8
ACCOUNTS AND REMITTANCES
A. Within 45 days following the end of each month, the Company shall report to
the Reinsurer:
1. Net Written Premium for the month;
2. Unearned premium at the end of the month;
3. Earned premium for the month;
4. Provisional ceding commission based on item 3. Above;
5. Ceded losses and allocated loss adjustment expense paid during the
month, as respects losses occurring during the Underwriting Period under
consideration;
6. The ceded reserves for losses outstanding and allocated loss adjustment
expenses outstanding at the end of the month, as respects losses
occurring during the Underwriting Period under consideration;
7. The balance 3. Less 4. Less 5.
B. In the event the balances shown in A.7. above for the Underwriting Period,
for the Company, are due the Reinsurer, the Company will hold such funds as
it is the intent of this Agreement that the Company receive interest on such
funds. However, 2.5% of the amount shown in paragraph A.7. shall be paid by
the Company to the Reinsurer in cash within 30 days after the due dates
representing the Reinsurer's margin. In the event the balance shown in
paragraph A.7. is negative as of the end of any month, the negative balance
due the Company shall be payable by the Reinsurer in cash, within 60 days
after the end of the month, but any such cash payment by the Reinsurer
shall be returned by the Company before any subsequent monthly net balance
due the Reinsurer is withheld from payment. However, it is agreed that any
negative balance due the Company will be offset by the positive balance due
the Company.
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C. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 9
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of 24.0%
of the Net Earned Premium Income ceded hereunder. Return commission shall be
allowed on return premiums at the same rate.
ARTICLE 10
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss experience
under this Agreement. The Company will calculate an adjusted ceding
commission for the Underwriting Period within 14 months following the
inception of the Underwriting Period based on premiums earned and losses
incurred. The provisional ceding commission will be adjusted between
the parties as appropriate. Adjustments for the Underwriting Period
continue to be made annually until all losses ascribed to the
Underwriting Period have been paid or closed, at which time the ceding
commission will become final. For purposes of this calculation, no
upward adjustment will be made until 26 months following the inception
of the Underwriting Period.
2. Premium earned for the Underwriting Period shall mean all written
premium ceded to this Agreement and ascribed to the Underwriting Period
(less cancellations and returns) less the unearned premium reserve at
the time of the adjustment, if any.
3. Losses incurred for the Underwriting Period shall mean the loss and
allocated loss expense paid by the Reinsurer (less salvages and
recoveries received) on losses ascribed to the Underwriting Period,
plus loss and allocated loss expense reserves outstanding on losses
ascribed to the Underwriting Period, and plus or minus any debit or
credit carryforward as provided in this Article.
4. The adjusted ceding commission shall be calculated for the Underwriting
Period for the Company as a whole.
B. 1. Should the ratio of losses incurred to premium earned be 73.5% or
higher, then the adjusted ceding commission shall be 24.0%.
2. Should the ratio of losses incurred to premium earned be less than
73.5%, then the adjusted commission shall be further adjusted by adding
one percent (1%) to the ceding commission for each one percent reduction
of loss ratio subject to a maximum ceding commission of 31.0% at a loss
ratio of 66.5% or less.
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ARTICLE 11
DEFINITIONS
A. The term "Net Written Premium" as used in this Agreement shall mean the
gross written premium income on business subject to this Agreement less
returns and cancellations.
B. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
C. The term "Underwriting Period" as used in this Agreement shall mean those
Policies inforce at the effective date hereof or issued or renewed on and
after that date and all premium attributable to, and all loss arising out
of such Policies from such until expiration or cancellation, whichever
occurs first, will be ascribed to the Underwriting Period.
D. The term "Company" means Pafco General Insurance Company.
ARTICLE 12
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Company (except that in the
event of the insolvency of the Company the provisions of the INSOLVENCY ARTICLE
of this Agreement shall apply).
ARTICLE 13
OFFSET
The Company and the Reinsurer shall have the right to offset any balances or
amounts due from one party to the other under the terms of this Agreement or any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming Reinsurer or Ceding Company. However, in
the event of the insolvency of any party hereto, offset shall only be allowed in
accordance with applicable law.
ARTICLE 14
CURRENCY
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
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ARTICLE 15
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss and Unearned Premium Reserve Funding Clause
No. 13-04.
ARTICLE 16
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 17
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (including claim-specific declaratory
judgment expenses but excluding office expenses and salaries of officials of the
Company) and shall receive its proportionate share of any recoveries of such
expenses.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific policies and claims
subject to this Agreement. Declaratory judgment expense will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
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ARTICLE 18
EXCESS OF POLICY LIMITS
In the event the loss includes an amount in excess of the Company's Policy
limit, 100% of such amount in excess of the Company's Policy limit shall be
added to the amount of the Company's Policy limit, and the sum thereof shall be
covered hereunder, subject to the Reinsurer's limit of liability appearing in
the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE of this Agreement.
However, this Article shall not apply where the loss has been incurred due to
the fraud of 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 19
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE
of this Agreement, where the loss includes any Extra Contractual Obligations for
100% of such Extra Contractual Obligations. "Extra Contractual Obligations" are
defined as those liabilities not covered under any other provision of this
Agreement and which arise from 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 the preparation of the defense or in the trial of any action
against its insured or in the preparation or prosecution of an appeal consequent
upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of 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.
ARTICLE 20
DELAY, OMISSION OR ERROR
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, providing such delay, omission or
error is rectified upon discovery.
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ARTICLE 21
INSPECTION
The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
any reinsurance hereunder or claims in connection herewith.
ARTICLE 22
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Indianapolis, Indiana in accordance with the attached Arbitration
Clause No. 22-01.1.
ARTICLE 23
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this
Agreement.
ARTICLE 24
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-01 - 1/1/86 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
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ARTICLE 25
PARTICIPATION: AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE October 1, 1998
This Agreement obligates the Reinsurer for 100% of the interests and liabilities
set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
IGF Insurance Company 100.0%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
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and in Indianapolis, Indiana, this day of , 1999.
PAFCO GENERAL INSURANCE COMPANY
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
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<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
IGF INSURANCE COMPANY
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
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<PAGE>
Exhibit 10.18(8)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
This Agreement is made and entered into by and between
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
(hereinafter together called "COMPANY")
and the Reinsurer specifically identified on the signature page of this
Agreement (hereinafter called the "Reinsurer").
ARTILCE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company's net retained liability under all Policies written or assumed and
classified by the Company as Private Passenger Automobile and Motorcycle
business (including Artisans' vehicles) covering Bodily Injury and Property
Damage Liability, Personal Injury Protection, Medical Payments, Uninsured and
Underinsured Motorists Liability, Physical Damage, inforce, written or renewed
by or on behalf of the Company and produced by Pafco General Insurance Company,
Indianapolis, Indiana or assumed from IGF Insurance Company, Indianapolis,
Indiana, during the term of this Agreement, subject to the terms and conditions
herein contained.
ARTICLE 2
COVER
A. The Company will cede, and the Reinsurer will accept as reinsurance, a
57.24% share of all business reinsured hereunder, subject to the maximum
limits as specified in the MAXIMUM LIMITS OF LIABILITY ARTICLE.
ARTICLE 3
COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective at 12:01 a.m., Eastern Standard
Time, October 1, 1998, and shall remain in full force and effect until
terminated as provided in the following paragraph.
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B. Either the Company or the Reinsurer shall have the right to terminate this
Agreement at any time.
C. Notwithstanding the termination provisions as set forth in section B. above,
this Agreement may be terminated, if:
1. The Company defaults upon its obligation to pay the Reinsurer any net
balances due hereunder in accordance with the terms and conditions
hereof, by the Reinsurer giving 15 days' notice prior to any month-end.
Should the Company correct the default within a 10-day period following
receipt of such notice, then termination of this reinsurance by the
Reinsurer for reason of default shall be rescinded automatically.
2. The Company:
a. Is acquired or controlled by, or merged with any other company;
b. Reinsures its entire business;
c. Loses the whole or any part of its paid in capital;
d. Has a liquidator, receiver or conservator appointed, or is the
subject of any liquidation, conservation, insolvency or cease and
desist proceedings, then the Reinsurer may terminate at any month-
end by giving 15 days' prior written notice.
D. In the event of termination of this Agreement, the Reinsurer will continue
to cover all Policies coming within the scope of this Agreement, including
those written or renewed during the period of notice, until the natural
expiration or anniversary of such Policies, whichever occurs first, but in
no event longer than 12 months plus odd time, not to exceed 15 months in
all, from the date of termination.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination. The
Reinsurer will return to the Company a portfolio representing the unearned
premium reserve under this Agreement appropriate to the mode of termination.
E. Either party hereto may request commutation of the ceded reserves for losses
and loss adjustment expenses outstanding for any Underwriting Year at the
end of the Underwriting Year of at anytime thereafter. The Reinsurer shall
have no liability beyond such amount and upon payment by the Reinsurer of an
amount equal to the ceded reserves for losses and loss adjustment expenses
outstanding, which said amount shall be mutually agreed between the Company
and Reinsurer, the Reinsurer shall be relieved of all further liability
hereunder with respect to the losses so commuted.
ARTICLE 4
TERRITORY
This Agreement applies to losses arising out of Policies written in the United
States of America, its territories and possessions, Puerto Rico and Canada,
wherever occurring or to follow the Company's original Policies.
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ARTICLE 5
MAXIMUM LIMITS OF LIABILITY
For purposes of determining the liability of the Reinsurer, the limits of
liability of the Company with respect to any one Policy shall be deemed not to
exceed the maximum limits as follows:
1. Bodily Injury: $100,000 per person/
$300,000 per occurrence
2. Uninsured Motorist BI: $100,000 per person/
$300,000 per occurrence
3. Underinsured Motorist BI: $100,000 per person/
$300,000 per occurrence
4. Property Damage Liability: $100,000 per occurrence
5. Uninsured Motorist PD: $50,000 per occurrence
6. Automobile Physical Damage: $50,000 per vehicle
Notwithstanding the maximum Policy limits listed above, it is agreed that the
Company may issue, and the Reinsurer will be liable for, a maximum of ten
Policies per Underwriting Year with limits of $1,000,000.
Loss in excess of the Policy limit and Extra Contractual Obligations as set
forth in the EXCESS OF POLICY LIMITS ARTICLE and the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE will be covered hereunder subject to the maximum Policy
limits as set forth in this Article, including the Policies with $1,000,000
limits.
The Company may request prior approval of the Reinsurer to cover more than ten
Policies per Underwriting Year with limits of $1,000,000.
ARTICLE 6
WARRANTY
The Company maintains the following reinsurance, which inure to the benefit of
this Agreement, whether collectible or not:
1. Casualty Excess of Loss Reinsurance Agreement of $800,000 in excess of
$200,000 each and every occurrence.
2. Contingent and Clash Casualty Excess of Reinsurance Agreement of $4,000,000
in excess of $1,000,000 each and every occurrence.
3. First Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of $750,000
in excess of $250,000 each and every occurrence.
4. Second Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of
$2,000,000 in excess of $1,000,000 each and every occurrence.
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ARTICLE 7
EXCLUSIONS
This Agreement does not cover:
A. All excess of loss reinsurance assumed by the Company.
B. Reinsurance assumed by the Company under obligatory reinsurance agreements,
except;
1. agency reinsurance where the Policies involved are to be reunderwritten
in accordance with the underwriting standards of the Company and
reissued as Company Policies at the next anniversary or expiration date,
and;
2. reinsurance assumed by the Company for Old American Insurance Company
of Texas and Southern County Mutual Insurance Company.
C. Financial guarantee and insolvency.
D. Business written by the Company on a co-indemnity basis where the Company is
not the controlling carrier.
E. Business written to apply in excess of a deductible of more than $5,000, and
business issued to apply specifically in excess over underlying insurance.
F. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability Reinsurance - U.S.A., No. 08-31.1 and Physical Damage -
Reinsurance - U.S.A., No. 08-33.
G. War Risks as excluded in the attached North American War Exclusion Clause
(Reinsurance) No. 08-45.
H. Pollution or contamination liability except mandatory coverage for motor
carriers subject to environmental restoration coverage under the Motor
Carrier Act of 1980 or similar mandatory coverages.
I. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or
Association.
J. All liability of the Company arising by contract, operations of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee or other obligation of
an insurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise deemed
unable to meet any claim, debt, charge, fee or other obligation in
whole or in part.
K. All classifications of business not specifically included under the
BUSINESS REINSURED ARTICLE.
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<PAGE>
L. Automobile Liability with respect to any vehicle used principally as:
1. A taxicab, public or livery conveyance or bus.
2. An ambulance or fire department vehicle.
3. A racing or exhibition vehicle.
4. A long-haul public freight carrier operating regularly and frequently
beyond a 300-mile radius from its territorial location.
5. A truck greater than 10 tons transporting explosive, munitions,
ammonium nitrate, gasoline or liquefied petroleum gas, including
butane and propane.
Not withstanding the foregoing, any reinsurance falling within the scope of one
or more of the exclusions set forth in paragraph L that is specially accepted by
the Reinsurer from the Company shall be covered under this Agreement and be
subject to the terms hereof, except as such terms shall be modified by the
special acceptance. Furthermore, any exclusion set forth in paragraph L shall be
waived automatically when, in the opinion of the Company, the exposure excluded
therein is incidental to the principal exposure on the risk in question.
If the Company is bound, without the knowledge and contrary to the instructions
of the Company's supervisory underwriting personnel, on any business falling
within the scope of one or more of the exclusions set forth in paragraph L, the
exclusion shall be suspended with respect to such business until 30 days after
an underwriting supervisor of the Company acquires knowledge thereof.
ARTICLE 8
ACCOUNTS AND REMITTANCES
A. Within 45 days following the end of each month, the Company shall report to
the Reinsurer:
1. Net Written Premium for the month;
2. Unearned premium at the end of the month;
3. Earned premium for the month;
4. Provisional ceding commission based on item 3. Above;
5. Ceded losses and allocated loss adjustment expense paid during the
month, as respects losses occurring during the Underwriting Period under
consideration;
6. The ceded reserves for losses outstanding and allocated loss adjustment
expenses outstanding at the end of the month, as respects losses
occurring during the Underwriting Period under consideration;
7. The balance 3. Less 4. Less 5.
B. In the event the balances shown in A.7. above for the Underwriting Period,
for the Company, are due the Reinsurer, the Company will hold such funds as
it is the intent of this Agreement that the Company receive interest on such
funds. However, 2.5% of the amount shown in paragraph A.7. shall be paid by
the Company to the Reinsurer in cash within 30 days after the due dates
representing the Reinsurer's margin. In the event the balance shown in
paragraph A.7. is negative as of the end of any month, the negative balance
due the Company shall be payable by the Reinsurer in cash, within 60 days
after the end of the month, but any such cash payment by the Reinsurer shall
be returned by the Company before any subsequent monthly net balance due the
Reinsurer is withheld from payment. However, it is agreed that any negative
balance due the Company will be offset by the positive balance due the
Company.
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C. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 9
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of 24.0%
of the Net Earned Premium Income ceded hereunder. Return commission shall be
allowed on return premiums at the same rate.
ARTICLE 10
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss experience
under this Agreement. The Company will calculate an adjusted ceding
commission for the Underwriting Period within 14 months following the
inception of the Underwriting Period based on premiums earned and losses
incurred. The provisional ceding commission will be adjusted between
the parties as appropriate. Adjustments for the Underwriting Period
continue to be made annually until all losses ascribed to the
Underwriting Period have been paid or closed, at which time the ceding
commission will become final. For purposes of this calculation, no
upward adjustment will be made until 26 months following the inception
of the Underwriting Period.
2. Premium earned for the Underwriting Period shall mean all written
premium ceded to this Agreement and ascribed to the Underwriting
Period (less cancellations and returns) less the unearned premium
reserve at the time of the adjustment, if any.
3. Losses incurred for the Underwriting Period shall mean the loss and
allocated loss expense paid by the Reinsurer (less salvages and
recoveries received) on losses ascribed to the Underwriting Period, plus
loss and allocated loss expense reserves outstanding on losses ascribed
to the Underwriting Period, and plus or minus any debit or credit
carryforward as provided in this Article.
4. The adjusted ceding commission shall be calculated for the Underwriting
Period for the Company as a whole.
B. 1. Should the ratio of losses incurred to premium earned be 73.5% or
higher, then the adjusted ceding commission shall be 24.0%.
2. Should the ratio of losses incurred to premium earned be less than
73.5%, then the adjusted commission shall be further adjusted by adding
one percent (1%) to the ceding commission for each one percent reduction
of loss ratio subject to a maximum ceding commission of 31.0% at a loss
ratio of 66.5% or less.
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ARTICLE 11
DEFINITIONS
A. The term "Net Written Premium" as used in this Agreement shall mean the
gross written premium income on business subject to this Agreement less
returns and cancellations.
B. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
C. The term "Underwriting Period" as used in this Agreement shall mean those
Policies inforce at the effective date hereof or issued or renewed on and
after that date and all premium attributable to, and all loss arising out of
such Policies from such until expiration or cancellation, whichever occurs
first, will be ascribed to the Underwriting Period.
D. The term "Company" means Pafco General Insurance Company.
ARTICLE 12
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Company (except that in the
event of the insolvency of the Company the provisions of the INSOLVENCY ARTICLE
of this Agreement shall apply).
ARTICLE 13
OFFSET
The Company and the Reinsurer shall have the right to offset any balances or
amounts due from one party to the other under the terms of this Agreement or any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming Reinsurer or Ceding Company. However, in
the event of the insolvency of any party hereto, offset shall only be allowed in
accordance with applicable law.
ARTICLE 14
CURRENCY
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
Page 7
<PAGE>
ARTICLE 15
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss and Unearned Premium Reserve Funding Clause
No. 13-04.
ARTICLE 16
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 17
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (including claim-specific declaratory
judgment expenses but excluding office expenses and salaries of officials of the
Company) and shall receive its proportionate share of any recoveries of such
expenses.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific policies and claims
subject to this Agreement. Declaratory judgment expense will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
Page 8
<PAGE>
ARTICLE 18
EXCESS OF POLICY LIMITS
In the event the loss includes an amount in excess of the Company's Policy
limit, 100% of such amount in excess of the Company's Policy limit shall be
added to the amount of the Company's Policy limit, and the sum thereof shall be
covered hereunder, subject to the Reinsurer's limit of liability appearing in
the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE of this Agreement.
However, this Article shall not apply where the loss has been incurred due to
the fraud of 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 19
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE
of this Agreement, where the loss includes any Extra Contractual Obligations for
100% of such Extra Contractual Obligations. "Extra Contractual Obligations" are
defined as those liabilities not covered under any other provision of this
Agreement and which arise from 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 the preparation of the defense or in the trial of any action
against its insured or in the preparation or prosecution of an appeal consequent
upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of 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.
ARTICLE 20
DELAY, OMISSION OR ERROR
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, providing such delay, omission or
error is rectified upon discovery.
Page 9
<PAGE>
ARTICLE 21
INSPECTION
The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
any reinsurance hereunder or claims in connection herewith.
ARTICLE 22
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Indianapolis, Indiana in accordance with the attached Arbitration
Clause No. 22-01.1.
ARTICLE 23
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this
Agreement.
ARTICLE 24
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-01 - 1/1/86 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
Page 10
<PAGE>
ARTICLE 25
PARTICIPATION: AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE October 1, 1998
This Agreement obligates the Reinsurer for 100% of the interests and liabilities
set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
Granite Re Insurance Company 100.0%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
Page 11
<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
PAFCO GENERAL INSURANCE COMPANY
By______________________________________
(signature)
--------------------------------------
(name)
--------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
Page 12
<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
GRANITE RE INSURANCE COMPANY
By______________________________________
(signature)
--------------------------------------
(name)
--------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
Page 13
<PAGE>
Exhibit 13
SIG LOGO
1998 Annual Report
[Large SIG logo with three photos]
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 is the twelfth largest provider of
nonstandard automobile insurance in the United States. The crop segment markets
and sells crop insurance and other fee based services 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
Chairman's Report
Selected Financial Data
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Report of Independent Accountants
Stockholder Information
Board of Directors and Executive Officers
Subsidiary and Branch Offices
GRAPH 1994 1995 1996 1997 1998
$103,134 $124,634 $305,499 $460,600 $553,190
Gross Premiums Written By Year
1
<PAGE>
Financial Highlights
(in thousands, except per share data)
For the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Gross premiums written $553,190 $460,600 $305,499 $124,634 $103,134
Net operating earnings (loss) (1) $(17,239) $11,845 $13,916 $5,048 $2,222
Net earnings (loss) $(14,417) $16,305 $13,256 $4,821 $2,117
Basic operating earnings (loss) per share (1) $(1.66) $1.11 $1.85 $0.72 $0.32
Basic earnings (loss) per share $(1.39) $1.56 $1.76 $0.69 $0.30
Stockholders' equity $61,995 $78,363 $60,900 $9,535 $4,255
Return on average equity (20.5%) 21.9% 61.4% 69.9% 65.4%
Book value per share $5.97 $7.50 $5.83 $1.36 $0.61
Market value per share (2) $7.25 $19.22 $16.75 N/A N/A
Weighted average outstanding shares-basic 10,402 10,450 7,537 7,000 7,000
</TABLE>
(1) Operating earnings and per share amounts exclude the after tax effects of
realized capital gains and losses and any extraordinary items.
(2) 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 PAFCO General Superior Insurance
Company Insurance Company Company
("IGF") ("PAFCO") ("Superior")
| |
Superior Guaranty Superior American
Insurance Company Insurance Company
2
<PAGE>
Chairman's Report to our Shareholders
Greetings:
SYMONS INTERNATIONAL GROUP, INC. MILESTONES:
Usually I am in a good frame of mind when I sit down to rough out the Chairman's
comments for the annual report. This year I am far less happy for as you are
aware, our results, at least with respect to the profit aspects, are less than I
would have liked.
You will be aware of that, yet many of our shareholders are "profit" trained and
while that is not a bad formula for investing, it is not the only criterion for
considering the merits of an insurance company. Scattered in among our results,
there is a statement to the effect that Gross Premium rose to $546.8 million in
1998, up 22% from $449 million in 1997. We have concentrated on eliminating
those factors that had such a negative effect on our results.
When we acquired the crop insurance book of CNA, we had to close offices and
take other measures to reduce redundant personnel at a cost of $3.5 million.
During 1998 we upgraded our computer and reporting systems at an operating cost
in excess of $5 million. Adding to these non-recurring items, a further $12
million in reserve increases for years prior due to projected increases in the
cost of auto repairs, and higher liability settlements. As new business cures,
it becomes better with age. At the same time, the cost to put the business on
the books reduces thus improving our profitability. Today we have a company with
one of the lowest operating costs in both non-standard automobile insurance and
crop insurance. With this low operating cost, we can compete with the best of
our competition.
Those added expenses are in part, the cost of acquisition. What happened to our
crop insurers in 1998 was catastrophic. In the year of the worst loss record for
the industry, we took our share of hail and hurricane damage with losses in 1998
exceeding premiums by $16 million. We do not expect to see anything like that in
1999, in fact we are optimistic about the crop year ahead.
There have been a number of changes in the crop insurance industry with respect
to legislation put into effect by the U.S. government to increase the subsidies
to farmers. The effect on the crop insurance sector will increase the federal
government MPCI. insurance program from $1.8 billion to approximately $2.2
billion for 1999. This has a direct effect on the premium revenues we receive
and with the acquisition of new business in 1998 our premium levels will be
proportionately higher. The effect of this is to proportionately reduce costs as
a result of the size of the business we are handling. We have taken an ultra
conservative approach to the underwriting of the business through the use of
broader terms and scope of coverage available to us now from the re-insurance
markets.
As you may recall, up to the end of the second quarter of 1998, we were moving
along nicely, anticipating good results represented by volume gains in both crop
and non-standard auto insurance. Halfway through the year, the non-standard
automobile insurance writers took a very competitive attitude to the business,
forcing many of the smaller insurers to cut rates to remain competitive and
protect their market share. There is no sure reason for this action, but many
felt that the leading underwriter of non-standard auto, Progressive Insurance
Company's decision to go direct, cutting out many agents and reducing rates had
some effect on the psyche of the underwriting fraternity.
The summer months brought in the most severe weather patterns to hit the crop
insurance companies. Devastating heat and drought in Texas followed by
hurricanes and storms with large hail losses throughout the U.S. To add to this
burden, world commodity prices tumbled, leading us to the end of the crop year
with very poor underwriting results despite a large gain in our book of
business.
A little more information on our crop insurance business. When we acquired IGF
Insurance Company in 1990, it wrote $23 million of premiums and there were 55
crop insurers. In 1999 we will write in excess of approximately $300 million of
crop business and are the fourth ranked company in the field of 17 crop
insurers. The Gross Premium for the industry has grown from $1.3 billion in 1990
to $2.2 billion in 1998. With the recently announced
3
<PAGE>
federal legislation increasing the support for farmers buying crop insurance by
$400 million in 1999 and an additional $1.5 billion for the crop year 2001
onward, a large number of farmers who heretofore did not buy crop insurance will
find the incentive to do so through the generosity of their government. We will
also be the benefactors of this largesse for our share of the business should be
considerably enhanced in view of the gains we have made in our share of the
market. Oh yes, we expect to see better underwriting results in 1999.
We have some cause for optimism in 1999, for among other factors:
o Our crop insurance sales are showing the result early in the year that
would signal a banner year income.
o We increased the amount of re-insurance applicable to our crop
insurance enterprise to reduce exposure to catastrophic losses.
o Crop insurance has two components, fee income and premium income. We
developed Geo AgPLUS, a fee based innovative soil analysis service using
GPS (global positioning system) and through the advent of other fee based
products, we are increasing our fee income as it relates to our risk
income.
o We improved our operational staff by several new appointments and added
an in-house senior actuary to our professional staff.
o At considerable but necessary expense, we developed and are installing
a state of the art computer system to replace one that was proving costly
and non-compatible to our increased needs.
I anticipate that I will have a happier time writing the next Chairman's Report,
probably my last, but I must not forget to thank those ladies and gentlemen who
have helped our companies through the rough passage of 1998, our Board members
and our loyal staff.
Ladies and gentlemen, my heartfelt thanks to all of you.
4
<PAGE>
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>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Gross Premiums Written $553,190 $460,600 $305,499 $124,634 $103,134
Net Premiums Earned 324,923 271,814 191,759 49,641 32,126
Fee Income 20,203 17,821 9,286 2,170 1,632
Net Investment Income 12,373 11,447 6,733 1,173 1,241
NET EARNINGS (LOSS) $(14,417) $16,305 $13,256 $4,821 $2,117
====== ====== ====== ===== =====
Per Common Share Data:
Basic Earnings (Loss) Before
Extraordinary Item $(1.39) $1.63 $1.76 $0.69 $0.30
BASIC NET EARNINGS (LOSS) $(1.39) $1.56 $1.76 $0.69 $0.30
==== ==== ==== ==== ====
Basic Weighted Average Shares Outstanding 10,402 10,450 7,537 7,000 7,000
====== ====== ===== ===== =====
GAAP Ratios:
Loss and LAE Ratio 83.2% 78.2% 71.5% 72.5% 82.4%
Expense Ratio 29.8% 22.0% 24.0% 18.6% 21.7%
----- ----- ----- ---- -----
COMBINED RATIO 113.0% 100.2% 95.5% 91.1% 104.1%
===== ===== ===== ==== =====
Consolidated Balance Sheet Data:
Investments $222,853 $216,518 $168,137 $25,902 $18,572
Total Assets 569,437 526,293 344,679 110,516 66,628
Losses and Loss Adjustment Expenses 200,972 136,772 101,719 59,421 29,269
Total Long-term Debt or Preferred
Securities 135,000 135,000 48,000 11,776 10,683
Total Shareholders Equity 61,995 78,363 60,900 9,535 4,255
Book Value Per Share $5.97 $7.50 $5.83 $1.36 $0.61
Statutory Capital and Surplus:
Pafco $16,275 $19,924 $18,112 $11,875 $7,848
IGF $31,234 $42,809 $29,412 $9,219 $4,512
Superior $57,571 $65,146 $57,121
</TABLE>
5
<PAGE>
[photograph of crop field and automobiles down left side]
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. Goldman Sachs was bought
out and the bank term loan was repaid 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.
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 $80 million of multi-peril and crop hail
insurance business in 1997. The Company will reinsure a small portion of the
Company's total crop book of business (approximately 22% MPCI and 15% crop hail)
to CNA. Starting in the year 2000, assuming no event of change in control as
defined in the agreement, the Company can purchase this reinsurance from CNA
through a call provision or CNA can require the Company to buy the 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.
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.
6
<PAGE>
Crop Insurance Operations
General
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 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
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 insurance against
crop damage from other specific named perils. These products cover specific
crops and are generally written on terms that are specific to the kind of crop
and farming practice involved and the amount of actuarial data available. The
Company plans to seek potential growth opportunities in this niche market by
developing basic policies on a diverse number of named crops grown in a variety
of geographic areas and to offer these policies primarily to large producers
through certain select agents.
AgPI(R) 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 it
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
their precision farming program. Grid soil sampling, when combined 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
7
<PAGE>
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.
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 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 fee
income from 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.
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.
8
<PAGE>
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>
Nonstandard - Automobile Insurance Operations: Year ended December 31,
(in thousands, except ratios) 1998 1997 1996
<S> <C> <C> <C>
Gross premiums written $303,737 $323,915 $187,176
======= ======= =======
Net premiums written $269,741 $256,745 $186,579
======= ======= =======
Net premiums earned $264,022 $251,020 $168,746
Fee income 16,431 15,515 7,578
Net investment income 11,958 10,969 6,489
Net realized capital gain (loss) 4,124 9,462 (1,014)
------- ------- -------
Total Revenues 296,535 286,966 181,799
------- ------- -------
Losses and loss adjustment expenses 217,916 195,900 124,385
Policy acquisition and general and administrative expenses 73,346 72,463 46,796
------- ------- -------
Total Expenses 291,262 268,363 171,181
------- ------- -------
Earnings before income taxes $5,273 $18,603 $10,618
======= ======= =======
GAAP RATIOS (Nonstandard Automobile Only)
Loss and LAE ratio 82.5% 78.0% 73.7%
Expense ratio, net of billing fees 21.6% 22.7% 23.2%
----- ----- -----
Combined ratio 104.1% 100.7% 96.9%
===== ===== =====
Crop Insurance Operations:
Gross premiums written $243,026 $126,401 $110,059
======= ======= =======
Net premiums written $62,467 $20,796 $23,013
======= ======= =======
Net premiums earned $60,901 $20,794 $23,013
Fee income 3,772 2,276 1,672
Net investment income 275 191 181
Net realized capital gain (loss) 217 (18) (1)
------- ------- ------
Total Revenues 65,165 23,243 24,865
------- ------- ------
Losses and loss adjustment expenses 52,550 16,550 12,724
Policy acquisition and general and administrative expenses (1) 21,906 (14,404) (6,095)
Interest and amortization of intangibles 502 235 551
------- ------- ------
Total Expenses 74,958 2,381 7,180
------- ------- ------
Earnings (loss) before income taxes $(9,793) $20,862 $17,685
======= ======= =======
Statutory Capital and Surplus:
Pafco $16,275 $19,924 $18,112
IGF $31,234 $42,809 $29,412
Superior $57,571 $65,146 $57,121
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense
reimbursements and underwriting gain.
9
<PAGE>
[photograph of automobiles and crop field down left side]
Results of Operations
Overview
1998 Compared To 1997
The Company recorded a net loss of $(14,417,000) or $(1.39) per share (basic)
compared to net earnings of $16,305,000 or $1.56 per share in 1997. The loss in
1998 was due to reduced earnings in both crop and nonstandard automobile
operations. Results for 1998 for the crop operations were significantly impacted
by catastrophic crop hail losses primarily from Hurricane Bonnie and other
weather related events of approximately $14 million pre-tax. Contributing to the
lower results were higher than expected commission and integration costs related
to the CNA transaction of approximately $3.0 million pre-tax and a lower
underwriting gain on MPCI (11.2% in 1998 versus 25.0% in 1997) due primarily to
severe drought conditions in certain parts of the country, overly wet conditions
in other parts of the country and higher frequency of Crop Revenue Coverage
("CRC") claims due to extremely low commodity prices. Results for 1998 for the
nonstandard automobile operations were impacted by a higher loss ratio and lower
premium volume. These were the result of problems encountered with timely rate
filings, implementation of the Company's new operating system and competitive
pressure. The Company also increased loss reserves for prior accident years by
approximately $13.0 million in 1998 due to adverse loss development.
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 nonstandard auto reserves for prior accident years by approximately
$10 million due to adverse loss development. 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
were due to favorable crop conditions and continued improvement in risk
selection.
Years Ended December 31, 1998 and 1997
Gross Premiums Written
Consolidated Gross Premiums Written increased 20.1% in 1998 due to growth in the
crop operations from the integration of CNA, internal growth and introduction of
a new product line, AgPI(R). Crop Gross Premiums Written increased 92.3% in 1998
from 1997.
The following represents the breakdown of crop Gross Premiums Written by line:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CAT imputed $50,127 $33,294
MPCI 157,225 88,052
Crop hail 76,198 38,349
Named perils 2,074 -
AgPI(R) 7,529 -
------- -------
293,153 159,695
Less CAT imputed (50,127) (33,294)
------- -------
Total $243,026 $126,401
======= =======
</TABLE>
Nonstandard automobile Gross Premiums Written decreased 6.2% in 1998 as compared
to 1997 due primarily to reduced volume in the states of Florida and California
for the reasons previously cited. Remaining Gross Premiums Written represent
commercial business which is ceded 100% to an affiliate, Granite Re.
10
<PAGE>
Net Premiums Written
Net Premiums Written increased in 1998 as compared to 1997 due to the growth in
Gross Premiums Written offset by quota share reinsurance.
In 1998, the Company ceded 10% of its nonstandard automobile premiums as part of
a quota share treaty. This treaty and all previous quota share treaties for 1997
and 1998 were commuted effective October 1, 1998 with the Company receiving back
the unearned premiums on those treaties as of that date and their respective
loss reserves. 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 of 1997. In 1998, the Company ceded 25% of its crop hail premiums as
part of a quota share treaty as compared to 40% in 1997. Named peril premiums
were ceded at a 50% rate in both 1998 and 1997 under a quota share treaty.
Net Premiums Earned
Net Premiums Earned increased in 1998 as compared to the prior year reflecting
growth in Gross and Net Premiums Written. The ratio of Net Premiums Earned to
Net Premiums Written for the nonstandard automobile segment was 97.9% in 1998 as
compared to 97.8% in 1997.
Fee Income
Fee income increased 13.4% in 1998 compared to 1997. Fee income on nonstandard
automobile operations increased as a result of higher fees as a percentage of
gross premiums written, 5.41% in 1998 and 4.79% in 1997, offset by lower premium
volume. Crop fees primarily include CAT fees. CAT fees increased in 1998 as
compared to 1997 due to growth in premium volume. Fees in 1998 also increased
due to introduction of Geo AgPLUS(TM) and other processing fees.
Net Investment Income
Net investment income increased 8.1% in 1998 compared to 1997. Such increase was
due to greater invested assets offset somewhat by declining yields due to market
conditions.
Net Realized Capital Gains
Capital transaction activity primarily reflects activity in the Company's equity
portfolio. The higher level of gains in 1997 reflects the strong market
conditions during that year. Gains decreased in 1998 as a result of market
conditions. In the fourth quarter of 1998, the Company significantly reduced its
exposure to equities reflecting the Company's concern with the market and its
desire to increase investment income.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 82.5% for 1998
as compared to 78.0% for 1997. The Crop Hail Loss and LAE Ratio was 79.4% in
1998 compared to 75.1% in 1997. The increase in the Loss and LAE Ratio for the
nonstandard automobile segment reflects adverse development on prior years of
approximately 5.0%. The Company estimates its nonstandard automobile 1998
accident year loss ratio was 77.5% as compared to 76.1% in accident year 1997.
The increase in the accident year loss ratio results from product and pricing
decisions and increases in frequency in certain product lines. The increase in
the Crop Hail Loss and LAE Ratio includes $10.7 million for the effects of
catastrophic events net of reinsurance recoveries. The Crop Hail Loss and LAE
Ratio prior to reinsurance recoveries was 100.6%. The named perils loss ratio
was 100% and the AgPI(R) loss ratio was 100% in 1998 due to losses on certain
coverages due to unusual weather related events estimated to be $3.3 million.
11
<PAGE>
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 $96,876,000 or 29.8%
of Net Premiums Earned in 1998 compared to $59,778,000 or 22.0% of Net Premiums
Earned for 1997. The increase in the Company's overall expense ratio reflects
certain changes in the Company's crop operations as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
MPCI expense reimbursements $(37,982) $(24,788)
MPCI underwriting gain, net of stop loss
and CNA reinsurance in 1998 (14,902) (26,589)
Commissions 50,089 25,713
Ceding commission income (6,899) (5,030)
Operating expenses 31,600 16,290
------ ------
$21,906 $(14,404)
====== ======
</TABLE>
MPCI expense reimbursements declined to 24.2% of MPCI premiums for 1998 as
compared to 28.2% in 1997 due to federally mandated reductions. The MPCI
underwriting gain, net of stop loss costs, decreased to 9.5% of CAT and MPCI
premiums in 1998 (after adding back CNA share of $4,861,000 in 1998) compared to
21.9% in 1997 due to severe drought in certain sections of the country and
overly wet conditions in other sections of the country. The Company considers
the 1998 underwriting gain to be well below average while the 1997 gain was well
above average. Commission expense as a percentage of gross written premiums
(including CAT) increased in 1998 to 17.1% of gross written premiums compared to
16.1% in 1997 due to the integration of CNA and competitive industry pressure.
Ceding commission income increased in 1998 compared to 1997 due to a increase in
ceded premiums. Operating expenses as a percentage of gross written premiums
(including CAT) increased in 1998 to 10.8% compared to 10.2% 1997. Operating
expenses in 1998 include $3 million, or 1.0% of gross written premiums
(including CAT), of one time costs primarily related to the integration of CNA.
Operating expenses in 1998 also include a $3.2 million reserve, or 1.1% of gross
written premiums (including CAT), for potential processing errors during 1998 on
assumed premiums from CNA.
Nonstandard automobile expenses net of fee income were 21.6% of earned premiums
in 1998 compared to 22.7% in 1997.
Amortization of Intangibles
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. The increase in 1998 over 1997 reflects a full year's
impact of amortization of goodwill associated with the purchase of the minority
interest position in GGSH and a full year's amortization of deferred issuance
costs on the Preferred Securities.
Interest Expense
Interest expense in 1998 represents the crop segment's borrowings on its
seasonal line of credit. Interest expense for 1997 includes both interest for
the crop segment and interest on the GGSH Senior Credit Facility which was
repaid in 1997 from the proceeds of the Preferred Securities Offering.
Income Tax Expense (Benefit)
The variance in the rate from the federal statutory rate of 35% is primarily due
to nondeductible goodwill amortization.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at 9.5% net of federal
income taxes from the offering date of August 12, 1997.
12
<PAGE>
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
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.
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. No such treaty was in effect during 1996. In 1997, the Company ceded
40% of crop hail premiums as part of a quota share treaty. 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. The
ratio of 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 $8,535,000 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 and LAE Ratio
in 1997 was 75.1% compared to 59.2% in 1996. The increase in the Loss and LAE
Ratio for the nonstandard automobile segment reflects the 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.
Deficient reserve development was approximately $10 million in 1997. The
increase in the crop hail loss ratio was the result of storm damage in the third
quarter in certain eastern states on new business obtained in 1997.
13
<PAGE>
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses
increased as a result of the increased volume of business produced by the
Company. Policy acquisition and general and administrative expenses rose to
$59,778,000 or 22.0% 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 segment, operating
expenses for 1997 includes a contribution to earnings of $14,404,000 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
The increase in 1997 over 1996 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.
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, 1998, IGF has the ability to pay $3,123,000 in
dividends without prior regulatory approval.
14
<PAGE>
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 1998, IGF continued the practice of borrowing funds under a
revolving line of credit to finance premium payables to the FCIC on amounts not
yet received from farmers (the "IGF Revolver"). The maximum borrowing amount
under the IGF Revolver is $12,000,000. The IGF Revolver carried a weighted
average interest rate of 8.6%, 8.75% and 6.96% in 1996, 1997 and 1998,
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 minus 1.00% in 1998 (prime rate plus
.25% in 1997), 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. The IGF Revolver contains certain covenants
which (i) restricts IGF's ability to accumulate common stock, (ii) sets minimum
standards for investments and policyholder surplus and (iii) limits ratio of net
written premiums to surplus. 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, 1998, IGF had borrowed
the full amount available.
On August 12, 1997, the Company issued $135 million in Trust
Originated Preferred Securities (the "Preferred Securities Offering") at a rate
of 9.5% paid semi-annually. 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. 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 contribute $10.5 million to the nonstandard automobile
insurers with the balance held for general corporate purposes. Expenses of the
issue aggregated $5.1 million and are amortized over the term of the Preferred
Securities (30 years). In the third quarter of 1997, 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) 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 Preferred Security obligations of approximately $13 million
per year is funded from the Company's nonstandard automobile management company
and dividend capacity from the crop operations. The nonstandard auto funds are
the result of management and billing fees in excess of operating costs. For
calendar 1998 and 1997, the coverage ratio of nonstandard automobile cash flows
to Preferred Security costs was 2.1x and 2.2x, respectively. Coverage from the
Company's crop operations entailed a dividend capacity of $13.4 million in 1998
that will reduce to approximately $3.1 million in 1999 as a result of the
Company's operations and statutory limitations. The Company also has
approximately $10 million in excess funds for debt service. Surplus needs at the
insurance companies will be handled primarily by reinsurance for which the
Company believes it has good relationships and numerous alternatives. The
Company believes it can continue to meet its obligations in 1999 and that
coverage will increase through higher nonstandard automobile premium volumes and
more profitable crop operations.
The Trust Indenture for the Preferred Securities contains certain
preventative covenants. These covenants are based upon the Company's
Consolidated Coverage Ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA) whereby if the Company's EBITDA falls below 2.5 times
Consolidated Interest Expense (including Preferred Security distributions) for
the most recent four quarters the following restrictions become effective:
o The Company may not incur additional Indebtedness or guarantee additional
Indebtedness.
o The Company may not make certain Restricted Payments including loans for
advances to affiliates, stock repurchases and a limitation on the amount
of dividends is inforce.
o The Company may not increase its level of Non-Investment Grade Securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
15
<PAGE>
These restrictions currently apply as the Company's Consolidated
Coverage Ratio was (.15x) in 1998, and will continue to apply until the
Company's Consolidated Coverage Ratio is in compliance with the terms of the
Trust Indenture. This does not represent a Default by the Company on the
Preferred Securities. The Company is in compliance with these preventative
covenants as of December 31, 1998.
Net cash provided by operating activities in 1998 aggregated
$15,328,000 compared to $15,945,000 in 1997 due to reduced cash provided by
operations as a result of the net loss offset primarily by funds provided by the
commutation of the nonstandard automobile quota share treaty.
Net cash used in investing activities decreased from $106,164,000
in 1997 to $15,650,000 in 1998. Such decrease was due to the purchase of
minority interest in 1997 and less investing activities in 1998 due to lower
earnings offset by increased fixed asset expenditures from continued
technological improvements and the purchase of a new building for the crop
operations and the purchase of NACU. In 1998, financing activities provided cash
of $3,846,000 compared to $88,400,000 in 1997. Such decrease was due to the
proceeds of the Preferred Securities Offering in 1997 net of payments on term
debt and increased borrowings on the seasonal crop line of credit due to hail
losses and use of cash for loans to affiliates and repurchase of stock.
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.
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 $61,995,000 at December 31,
1998, 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, 1998 of $16,275,000, $57,571,000 and
$31,234,000, 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.
16
<PAGE>
New Accounting Standards
In 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." There was no material impact on the
consolidated financial statements from adoption of these statements. Refer to
Note 1 to the Company's "Consolidated Financial Statements."
On March 4, 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position No. 98-1 (SOP 98- 1), "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 was
issued to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized. SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
The Company will adopt the new requirements of the SOP in 1999. Management has
not completed its review of SOP 98-1, but does not anticipate that the adoption
of this SOP will have significant effect on net earnings during 1999.
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, 1999, 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.
In 1998, the National Association of Insurance Commissioners
("NAIC") adopted the Codification of Statutory Accounting Principles guidance,
which will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC is now considering
amendments to the Codification guidance that would also be effective upon
implementation. The NAIC has recommended an effective date of January 1, 2001.
The Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas.
It is not known whether the Indiana and Florida Insurance
Departments will adopt the Codification, and whether the Departments will make
any changes to the guidance. The Company has not estimated the potential effect
of the Codification guidance if adopted by the Departments. However, the actual
effect of adoption could differ as changes are made to the Codification
guidance, prior to its recommended effective date of January 1, 2001.
Impact of the Year 2000 Issue
The Year 2000 Project ("Project") is addressing 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. This replacement is using
systems from Dell, Hewlett Packard, Sun Systems, Compaq, Oracle and ZIM as well
as some 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 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 systems, through programmatic means, into a Y2K
compliant environment. The crop operations are at 70% of completion for this
conversion and are scheduled to be completed by the end of June 1999. A number
of the Company's other IT projects are being delayed or completely eliminated
due to the implementation of the Project. Additionally, the Company continues to
experience certain processing concerns related to its nonstandard automobile
operating system. The delay and/or elimination of these projects and the current
processing concerns has caused or could cause a loss of market share in the
nonstandard auto market.
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.
17
<PAGE>
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
scheduled for completion by the end of June 1999. Business systems are being
replaced as vendors certify their compliance. The Company is at 75% compliance
in this area.
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 December 31, 1998 on all infrastructure and software
upgrades is approximately $4.6 million. The Company expects to spend another
$1.1 million 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.
18
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1998 and 1997
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
ASSETS:
Investments:
Available for sale:
Fixed maturities, at market $191,002 $169,385
Equity securities, at market 13,264 35,542
Short-term investments, at amortized cost, which approximates market 15,597 8,871
Mortgage loans, at cost 2,100 2,220
Other invested assets 890 500
------- -------
TOTAL INVESTMENTS 222,853 216,518
Investments in and advances to related parties 3,545 839
Cash and cash equivalents 14,800 11,276
Receivables (net of allowance for doubtful accounts of
$6,393 in 1998 and $1,993 in 1997) 120,559 91,730
Reinsurance recoverable on paid and unpaid losses, net 71,640 90,250
Prepaid reinsurance premiums 31,172 36,606
Federal income taxes recoverable 12,672 1,505
Deferred policy acquisition costs 16,332 10,740
Deferred income taxes 5,146 4,722
Property and equipment, net of accumulated depreciation 18,863 12,051
Intangible assets 45,781 43,756
Other assets 6,074 6,300
------- -------
TOTAL ASSETS $569,437 $526,293
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses $200,972 $136,772
Unearned premiums 110,664 114,635
Reinsurance payables 25,484 32,110
Notes payable 13,744 4,182
Distributions payable on preferred securities 4,809 4,801
Other 16,769 20,430
------- -------
TOTAL LIABILITIES 372,442 312,930
------- -------
Minority interest:
Preferred Securities 135,000 135,000
------- -------
Stockholders' equity:
Common stock, no par value, 100,000,000 shares authorized,
10,385,399 and 10,451,667 shares issued and outstanding
in 1998 and 1997, respectively 38,136 39,019
Additional paid-in capital 5,851 5,925
Unrealized gain on investments, net of deferred tax of
$680 in 1998 and $1,008 in 1997 1,261 1,908
Retained earnings 16,747 31,511
------- -------
TOTAL STOCKHOLDERS' EQUITY 61,995 78,363
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $569,437 $526,293
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Gross premiums written $553,190 $460,600 $305,499
Less ceded premiums (220,982) (183,059) (95,907)
------- ------- -------
NET PREMIUMS WRITTEN $332,208 $277,541 $209,592
======= ======= =======
NET PREMIUMS EARNED $324,923 $271,814 $191,759
Fee income 20,203 17,821 9,286
Net investment income 12,373 11,447 6,733
Net realized capital gain (loss) 4,341 9,444 (1,015)
------- ------- -------
TOTAL REVENUES 361,840 310,526 206,763
------- ------- -------
Expenses:
Losses and loss adjustment expenses 270,466 212,450 137,109
Policy acquisition and general and
administrative expenses 96,876 59,778 42,013
Interest expense 163 3,158 3,527
Amortization of intangibles 2,379 1,197 411
------- ------- -------
TOTAL EXPENSES 369,884 276,583 183,060
------- ------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST, AND EXTRAORDINARY ITEM (8,044) 33,943 23,703
Income taxes:
Current income tax expense (benefit) (1,706) 13,105 7,982
Deferred income tax expense (benefit) (332) (1,124) 64
------- ------- -------
TOTAL INCOME TAXES (2,038) 11,981 8,046
------- ------- -------
NET EARNINGS (LOSS) BEFORE MINORITY
INTEREST AND EXTRAORDINARY ITEM (6,006) 21,962 15,657
Minority interest:
Earnings in consolidated subsidiary -- (1,824) (2,401)
Distributions on preferred securities,
net of tax (8,411) (3,120) --
------- ------- -------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY
ITEM (14,417) 17,018 13,256
Extraordinary item, net of tax -- (713) --
------- ------- -------
NET EARNINGS (LOSS) $(14,417) $16,305 $13,256
======= ======= =======
Weighted average shares outstanding -
Basic 10,402 10,450 7,537
====== ====== ======
Weighted average shares outstanding -
Fully Diluted 10,708 10,699 7,537
====== ====== ======
Net earnings (loss) per share - Basic $(1.39) $1.56 $1.76
==== ==== ====
Net earnings (loss) per share - Fully
Diluted $(1.39) $1.52 $1.76
==== ==== ====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
in thousands, except number of shares)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Total
Common Stockholders' Retained
Stock Equity Earnings
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 7,000,000 $9,535 $5,450
Comprehensive income:
Net earnings - 13,256 13,256
Change in unrealized gains (losses) on securities - 865 --
------
Comprehensive income - 14,121 --
------
Sale of subsidiary stock - 2,775 -
Issuance of common stock 3,450,000 37,969 -
Dividend to parent -- (3,500) (3,500)
---------- ------ ------
BALANCE AT DECEMBER 31, 1996 10,450,000 60,900 15,206
---------- ------ ------
Comprehensive income:
Net earnings - 16,305 16,305
Change in unrealized gains (losses) on securities - 1,088 -
------
Comprehensive income - 17,393 -
------
Adjustment of offering costs - 50 -
Exercise of stock options 1,667 20 -
---------- ------ ------
BALANCE AT DECEMBER 31, 1997 10,451,667 78,363 31,511
---------- ------ ------
Comprehensive income:
Net earnings (loss) - (14,417) (14,417)
Change in unrealized gains (losses) on securities - (647) -
------
Comprehensive income (loss) - (15,064) -
------
Exercise of stock options 4,332 37 -
Shares acquired (70,600) (1,341) (347)
---------- ------ ------
BALANCE AT DECEMBER 31, 1998 10,385,399 $61,995 $16,747
========== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(14,417) $16,305 $13,256
Adjustments to reconcile net earnings (loss) to net cash provided from
operations:
Minority interest -- 1,824 2,401
Depreciation, amortization and other 5,901 5,136 2,194
Deferred income tax expense (benefit) 326 (1,124) 64
Net realized capital (gain) loss (4,341) (9,444) 1,015
Net changes in operating assets and liabilities (net of assets acquired):
Receivables (8,690) (27,050) (22,673)
Reinsurance recoverable on losses, net 18,610 (41,956) 5,842
Prepaid reinsurance premiums 5,434 (21,624) (8,720)
Federal income taxes recoverable (payable) (11,167) (1,186) (1,270)
Deferred policy acquisition costs (5,592) 2,060 (2,496)
Other assets and liabilities (24,339) 4,999 (15)
Losses and loss adjustment expenses 64,200 35,053 (2,125)
Unearned premiums (3,971) 27,350 24,508
Reinsurance payables (6,626) 25,602 (1,978)
------ ------ ------
NET CASH PROVIDED FROM OPERATIONS 15,328 15,945 10,003
------ ------ ------
Cash flow from investing activities net of assets acquired:
Purchase of minority interest and subsidiaries (3,000) (61,000) (66,590)
Net sales (purchases) of short-term investments (6,726) 694 8,026
Proceeds from sales, calls and maturities of fixed maturities 127,428 224,037 56,903
Purchases of fixed maturities (147,428) (263,560) (73,503)
Proceeds from sales of equity securities 65,916 34,475 19,796
Purchase of equity securities (42,572) (35,358) (34,157)
Net proceeds from (purchases) sales of other investments (3) 210 490
Purchase of property and equipment (9,265) (5,662) (3,734)
------ ------- ------
NET CASH USED IN INVESTING ACTIVITIES (15,650) (106,164) (92,769)
------ ------- ------
Cash flow from financing activities net of assets acquired:
Proceeds from issuance of preferred securities -- 129,947 --
Proceeds from initial public offering, net of expenses -- -- 37,969
Net proceeds (payments) from line of credit 7,855 4,182 (5,811)
Proceeds from/payments made on term debt -- (48,000) 48,000
Proceeds from consolidated subsidiary minority interest owner -- 2,304 21,200
Other investing activities (1,303) 20 (3,500)
Loans from and (repayments to) related parties (2,706) (53) (4,308)
------ ------ ------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 3,846 88,400 93,550
------ ------ ------
Increase (decrease) in cash and cash equivalents 3,524 (1,819) 10,784
Cash and cash equivalents, beginning of year 11,276 13,095 2,311
------ ------ ------
Cash and cash equivalents, end of year $14,800 $11,276 $13,095
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
[HEADER] (Dollars in thousands)
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. The Company's
products are marketed through independent agents and brokers and is licensed in
35 states, primarily in the Midwest and Southern United States.
The following is a description of the significant accounting policies and
practices employed:
a. Basis of Presentation: 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;
North American Crop Underwriters (NACU) - a managing general agency
with exclusive focus on crop insurance.
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 Statement of Earnings for the
year ended December 31, 1996 includes 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 purchase business combination. (See Note 2.)
On July 8, 1998, the Company acquired NACU through a purchase business
combination. The Company's Consolidated Statement of Earnings for the year ended
December 31, 1998 includes the results of operations of NACU subsequent to July
8, 1998. (See Note 2.)
b. 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.
c. 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.
23
<PAGE>
[HEADER] (Dollars in thousands)
d. Investments: Investments are presented on the following basis:
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.
e. 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.
f. 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.
g. 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 straight-line 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.
h. 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.
i. 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 $9,927 and $8,099 at December 31, 1998 and 1997,
respectively.
j. 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.
k. 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
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.
l. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and
reserves related to reinsured business are accounted for on basis 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.
m. 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 the applicable rate of MPCI gross premiums
written recognized; and (iii) Buy-up Expense Reimbursement at a rate of 27%
24
<PAGE>
[HEADER] (Dollars in thousands)
in 1998, 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. IGF recognizes 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.
n. Accounting Changes: In 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS 130 requires companies
to disclose comprehensive income in their financial statements. In addition to
items included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the change in
unrealized appreciation (depreciation) of securities. SFAS 131 established new
standards for reporting operating segments, products and services, geographic
areas and major customers. Segments are defined consistent with the basis
management used internally to assess performance and allocate resources.
On March 4, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position No. 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 was issued to address
diversity in practice regarding whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The Company will adopt
the new requirements of the SOP in 1999. Management has not completed its review
of SOP 98-1, but does not anticipate that the adoption of this SOP will have
significant effect on net earnings during 1999.
o. 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 was 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. Due to the net loss in
1998, fully diluted earnings per share is the same as basic earnings per share.
p. Reclassifications: Amounts from prior periods have been reclassified to
conform to the 1998 presentation. Net earnings and stockholders' equity have not
been affected by these reclassifications.
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".
On January 31, 1996, the Company entered into an agreement (the "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.
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.
25
<PAGE>
[HEADER] (Dollars in thousands)
The acquisition of Superior was accounted for as a purchase and recorded as
follows:
<TABLE>
<CAPTION>
<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 and was assigned to
goodwill as the fair market value of assets and liabilities approximated their
carrying value.
In July 1998, IGFH acquired all of the outstanding shares of common stock of
North American Crop Underwriters ("NACU"), a Henning, Minnesota based managing
general agency which focuses exclusively on crop insurance. The acquisition
price for NACU was $4,000 of which $3,000 was paid in cash and the remaining
$1,000 payable July 1, 2001 without interest.
The acquisition of NACU was accounted for as a purchase and recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets acquired $21,035
Liabilities assumed 19,705
------
Net assets acquired 1,330
Purchase price 4,000
------
Excess purchase price (goodwill) $ 2,670
======
</TABLE>
The Company's results from operations for the year ended December 31, 1998
include the results of NACU subsequent to July 8, 1998.
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 was used for general corporate purposes. After
completion of the IPO, Goran owned 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, 1996, the pro forma effect of these
transactions on the Company's Consolidated Statements of Earnings is as follows:
1996
(unaudited)
Revenues $250,848
=======
Net income $15,238
======
Net income per common share $1.42
====
Assuming that these transactions took place (including the IPO) at 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
(unaudited)
<S> <C>
Net income per common share $1.86
====
</TABLE>
26
<PAGE>
[HEADER] (Dollars in thousands)
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.
4. Investments:
Investments are summarized as follows:
<TABLE>
<CAPTION>
Cost or Estimated
Amortized Unrealized Market
December 31, 1998 Cost Gain Loss Value
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $71,033 $1,956 $(174) $72,815
Foreign governments -- -- -- --
Obligations of states and political subdivisions 6,765 -- (115) 6,650
Corporate securities 110,657 1,579 (699) 111,537
------- ----- ----- -------
TOTAL FIXED MATURITIES 188,455 3,535 (988) 191,002
Equity securities 13,918 755 (1,409) 13,264
Short-term investments 15,597 -- -- 15,597
Mortgage loans 2,100 -- -- 2,100
Other invested assets 890 -- -- 890
------- ----- ----- -------
TOTAL INVESTMENTS $220,960 $4,290 $(2,397) $222,853
======= ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Cost or Estimated
Amortized Unrealized Market
December 31, 1997 Cost Gain Loss Value
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities and obligations of
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
Mortgage loans 2,220 -- -- 2,220
Other invested assets 500 -- -- 500
------- ----- ----- -------
TOTAL INVESTMENTS $213,637 $6,094 $(3,213) $216,518
======= ===== ===== =======
</TABLE>
At December 31, 1998, 92.8% 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.
27
<PAGE>
[HEADER] (Dollars in thousands)
The amortized cost and estimated market value of fixed maturities at December
31, 1998, 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 $7,872 $7,937
Due after one year through five years 49,631 50,099
Due after five years through ten years 34,013 35,215
Due after ten years 22,838 23,034
Mortgage-backed securities 74,101 74,717
------- -------
TOTAL $188,455 $191,002
======= =======
</TABLE>
Gains and losses realized on sales of investments are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Proceeds from sales $194,514 $254,470 $76,699
Gross gains realized 10,901 10,639 1,194
Gross losses realized 6,560 1,195 2,209
</TABLE>
Net investment income for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $11,034 $10,061 $5,714
Equity securities 551 305 756
Cash and short-term investments 1,245 1,385 281
Mortgage loans 173 182 207
Other 32 (39) 76
Total investment income 13,035 11,894 7,034
Investment expenses (662) (447) (301)
------ ------ -----
Net investment income $12,373 $11,447 $6,733
====== ====== =====
</TABLE>
Investments with a market value of $14,950 and $24,067 (amortized cost of
$14,726 and $23,913) as of December 31, 1998 and 1997, 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.
28
<PAGE>
[HEADER] (Dollars in thousands)
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>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $10,740 $12,800 $2,379
Deferred policy acquisition costs
purchased in the Superior acquisition -- -- 7,925
Costs deferred during year 53,658 57,155 27,657
Amortization during year (48,066) (59,215) (25,161)
------ ------ ------
Balance, end of year $16,332 $10,740 $12,800
====== ====== ======
</TABLE>
6. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 Accumulated 1998 1997
Cost Depreciation Net Net
<S> <C> <C> <C> <C>
Land $260 $-- $260 $226
Buildings 7,397 1,049 6,348 4,098
Office furniture and equipment 6,172 3,182 2,990 1,813
Automobiles 82 27 55 7
Computer equipment 14,353 5,143 9,210 5,907
------ ----- ------ ------
Total $28,264 $9,401 $18,863 $12,051
====== ===== ====== ======
</TABLE>
Accumulated depreciation at December 31, 1997 was $5,409. Depreciation expense
related to property and equipment for the years ended December 31, 1998, 1997
and 1996 were $3,109, $1,764 and $1,783, respectively.
7. Intangible Assets:
Intangible assets at December 31 are as follows:
<TABLE>
<CAPTION>
1998 Accumulated 1998 1997
Cost Depreciation Net Net
<S> <C> <C> <C> <C>
Goodwill $41,853 $2,521 $39,332 $37,514
Deferred debt costs 5,131 242 4,889 5,054
Organization costs 2,494 934 1,560 1,188
------ ----- ------ ------
$49,478 $3,697 $45,781 $43,756
====== ===== ====== =====
</TABLE>
Accumulated amortization at December 31, 1997 was $1,062. Amortization expense
related to intangible assets for the years ended December 31, 1998, 1997 and
1996 was $2,379, $1,197 and $411, respectively.
29
<PAGE>
[HEADER] (Dollars in thousands)
8. Notes Payable:
At December 31, 1998, IGF maintained a revolving bank line of credit in the
amount of $12,000. At December 31, 1998 and 1997, the outstanding balance was
$12,000 and $4,182, respectively. Interest on this line of credit was at the New
York prime rate (7.75% at December 31, 1998) minus 1% adjusted daily. Prior to
December 31, 1997 this rate was adjusted to prime plus .25%. This line is
collateralized by the crop-related uncollected premiums, reinsurance recoverable
on paid losses, Federal Crop Insurance Corporation (FCIC) annual settlement, and
a first lien on the real estate owned by IGF. The IGF Revolver contains certain
covenants which (i) restricts IGF's ability to accumulate common stock; (ii)
sets minimum standards for investments and policyholder surplus; and (iii)
limits ratio of net written premiums to surplus. At December 31, 1998, 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 6.96%, 8.75% and
8.6% during 1998, 1997 and 1996, respectively.
Notes payable at December 31, 1998 also includes a $1,000,000 note due 2001 on
the purchase of NACU at no interest. The balance of notes payable at December
31, 1998 includes three smaller notes (less than $300,000 each) assumed in the
acquisition of NACU due 2002-2006 with periodic payments at interest rates
ranging from 7% to 9.09%.
9. Preferred Securities:
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities") at a rate of 9.5% paid
semi-annually. 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 are amortized over the term of the Preferred
Securities (30 years). In the third quarter of 1997, 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. The Preferred Securities may be redeemed
in whole or in part after 10 years. The Preferred Security obligations of
approximately $13 million per year is funded from the Company's nonstandard
automobile management company and dividend capacity from the crop operations.
The nonstandard auto funds are the result of management and billing fees in
excess of operating costs.
For calendar 1998 and 1997, the coverage ratio of nonstandard automobile cash
flows to Preferred Security costs was 2.1x and 2.2x, respectively. Coverage from
the Company's crop operations entailed a dividend capacity of $13.4 million in
1998 that will reduce to approximately $3.1 million in 1999 as a result of the
Company's operations and statutory limitations. The Company also has
approximately $10 million in excess funds for debt service.
The Trust Indenture for the Preferred Securities contains certain preventative
covenants. These covenants are based upon the Company's Consolidated Coverage
Ratio of earnings before interest, taxes, depreciation and amortization (EBITDA)
whereby if the Company's EBITDA falls below 2.5 times Consolidated Interest
Expense (including Preferred Security distributions) for the most recent four
quarters the following restrictions become effective:
o The Company may not incur additional Indebtedness or guarantee
additional Indebtedness.
o The Company may not make certain Restricted Payments including loans
or advances to affiliates, stock repurchases and a limitation on the
amount of dividends is inforce.
o The Company may not increase its level of Non-Investment Grade Securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply as the Company's Consolidated Coverage Ratio
was (.15x) in 1998, and will continue to apply until the Company's Consolidated
Coverage Ratio is in compliance with the terms of the Trust Indenture. This does
not represent a Default by the Company on the Preferred Securities. The Company
is in compliance with these preventative covenants as of December 31, 1998.
30
<PAGE>
[HEADER] (Dollars in thousands)
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 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.
10. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at January 1 $136,772 $101,719 $59,421
Less reinsurance recoverables 51,104 29,459 37,798
------- ------- -------
NET BALANCE AT JANUARY 1 85,668 72,260 21,623
------- ------- -------
Reserves acquired in connection with the
Superior Acquisition -- -- 44,423
Incurred related to:
Current year 257,470 201,118 138,618
Prior years 12,996 10,967 (1,509)
------- ------- -------
TOTAL INCURRED 270,466 212,085 137,109
------- ------- -------
Paid related to:
Current year 167,171 138,111 102,713
Prior years 62,361 60,566 28,182
------- ------- -------
TOTAL PAID 229,532 198,677 130,895
------- ------- -------
NET BALANCE AT DECEMBER 31 126,602 85,668 72,260
Plus reinsurance recoverables 74,370 51,104 29,459
------- ------- -------
BALANCE AT DECEMBER 31 $200,972 $136,772 $101,719
======= ======= =======
</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 $12,996, $10,967 and $(1,509) in the December 31, 1998,
1997 and 1996 loss and loss adjustment expense reserves, respectively, emerged
in the following year. The higher than anticipated 1996 and 1997 deficient
reserve development occurred primarily due to volatility in the historical
trends for the nonstandard automobile business as a result of significant growth
during 1996 and 1997. 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
31
<PAGE>
[HEADER] (Dollars in thousands)
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.
A reconciliation of the differences between federal tax computed by applying the
federal statutory rate of 35% to income before income taxes and the income tax
provision is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Computed income taxes at statutory rate $(2,815) $11,880 $8,296
Dividends received deduction (130) (78) (158)
Goodwill 621 229 --
Other 286 (50) (92)
----- ------ -----
INCOME TAX EXPENSE (BENEFIT) $(2,038) $11,981 $8,046
===== ====== =====
</TABLE>
The net deferred tax asset at December 31, 1998 and 1997 is comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses $3,353 $2,974
Unearned premiums and prepaid reinsurance 5,972 5,462
Allowance for doubtful accounts 1,118 698
Net operating loss carryforwards 233 233
Other 1,468 242
------ -----
DEFERRED TAX ASSET 12,144 9,609
------ -----
Deferred tax liabilities:
Deferred policy acquisition costs (5,716) (3,759)
Unrealized gains on investments (680) (1,008)
Other (602) (120)
----- -----
DEFERRED TAX LIABILITY (6,998) (4,887)
----- -----
NET DEFERRED TAX ASSET $5,146 $4,722
===== =====
</TABLE>
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, 1998 and 1997 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.
32
<PAGE>
[HEADER] (Dollars in thousands)
As of December 31, 1998, the Company has unused net operating loss carryovers
available as follows:
<TABLE>
<CAPTION>
Years ending not later than December 31:
<S> <C>
2000 $541
2002 126
---
TOTAL $667
===
</TABLE>
Federal income tax filings attributed to the Company have been examined by the
Internal Revenue Service through 1996.
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 $2,939 in 1998 and $1,176 for 1997. Future minimum
lease payments required under these noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $3,087
2000 1,522
2001 1,291
2002 1,099
2003 and thereafter 284
-----
TOTAL $7,283
=====
</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 54.6% of amounts recoverable from reinsurers are with the FCIC, a
branch of the federal government. Another 34.8% 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, related primarily to
commercial business which is ceded 100% to Granite Re, which are fully
collateralized. An additional 1.6% of uncollateralized recoverable amounts are
with companies which maintain an A.M. Best rating of at least A+. Company
management believes amounts recoverable from reinsurers are collectible.
In the fourth quarter of 1998, the Company commuted its nonstandard automobile
quota share reinsurance treaties with an unrelated party at no gain or loss and
completely absolved the reinsurer of all future liabilities.
33
<PAGE>
[HEADER] (Dollars in thousands)
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 $80
million of multi-peril and crop hail insurance business in 1997. The Company
will reinsure a small portion of the Company's total crop book of business
(approximately 22% MPCI and 15% crop hail) to CNA. Starting in the year 2000,
assuming no event of change in control as defined in the agreement, the Company
can purchase the reinsurance from CNA through a call provision or CNA can
require the Company to buy the 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.
Reinsurance activity for 1998, 1997 and 1996, which includes reinsurance with
related parties, is summarized as follows:
<TABLE>
<CAPTION>
1998 Direct Assumed Ceded Net
<S> <C> <C> <C> <C>
Premiums Written $425,526 $127,664 $(220,982) $332,208
Premiums Earned 426,817 125,045 (226,938) 324,923
Incurred losses and loss adjustment expenses 402,093 127,970 (259,597) 270,466
Commission expenses (income) 65,652 28,900 (85,081) 9,471
1997
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 (113,296) 212,450
Commission expenses (income) 59,951 7,461 (77,898) (10,486)
1996
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
</TABLE>
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were $74,370 and $51,104, as of December 31, 1998 and 1997,
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, Granite
Insurance Company (Granite) and Granite Re, Goran's subsidiaries.
The following balances were outstanding at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Investments in and advances to related parties:
Nonredeemable, nonvoting preferred stock of Granite $702 $702
Due from directors and officers 1,443 110
Other receivables from related parties 1,400 27
----- ---
$3,545 $839
===== ===
</TABLE>
34
<PAGE>
[HEADER] (Dollars in thousands)
The following transactions occurred with related parties in the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Management fees charged by Goran $-- $-- $139
Reinsurance under various treaties, net:
Ceded premiums earned 21,439 13,537 5,463
Ceded losses and loss adjustment expenses
incurred 14,069 11,876 5,168
Ceded commissions 4,048 3,523 2,620
Consulting fees charged by various related parties 3,134 1,150 872
Interest charged by Goran -- -- 196
Interest charged by Granite Re -- -- 385
</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. At December 31, 1998, the amount outstanding on this
loan was $1,302. The amounts due from officers and directors is composed
substantially of interest bearing loans with definitive principal repayment
schedules. The Company paid $2,832,000, $1,034,000 and $692,000 in 1998, 1997
and 1996, respectively, for consulting and other services relative to the
conversion to the Company's new non-standard automobile operating system. The
Company has capitalized these costs as part of its new non-standard automobile
operating system. Approximately 90% of these payments are for services provided
by consultants and vendors unrelated to the Company. Stargate Solutions
("Stargate") manages the work of each unrelated consultants and vendors and, as
compensation for such work, has retained approximately 10% of the payments
referred to above in return for management services provided. During 1998,
Stargate was owned generally by certain directors of the Company and a relative
of those directors. Also included in consulting fees to related parties is $270
and $86 in 1998 and 1997, respectively, for payments to Onex, Inc., an officer
of whom is on the Company's Board of Directors, for employment related matters.
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. 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). Statutory requirements place
limitations on the amount of funds which can be remitted to the Company from
Pafco and IGF. The Indiana statute allows 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 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).
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. 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, 1999 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, 1998, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit results of the FCIC business, net of
reinsurance of $19,763, $26,589 and $12,277, are netted with policy acquisition
and general and administrative expenses for the years ended December 31, 1998,
1997 and 1996, 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
35
<PAGE>
[HEADER] (Dollars in thousands)
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, 1999 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.
Net income (loss) of the insurance subsidiaries, as determined in accordance
with statutory accounting practices (SAP), was $(21,459), $7,702 and $19,251 for
1998, 1997 and 1996, respectively. Consolidated statutory capital and surplus
for the insurance subsidiaries was $105,080 and $127,879 at December 31, 1998
and 1997, respectively.
As of December 31, 1998, IGF and the Superior entities had risk-based capital
ratios that were in excess of the minimum requirements. Pafco's risk-based
capital ratio was 186% or $1.2 million less than the Company Active Level. Pafco
has filed its plan of corrective action with the IDOI.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance, which will replace the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to the
Codification guidance that would also be effective upon implementation. The NAIC
has recommended an effective date of January 1, 2001. The Codification provides
guidance for areas where statutory accounting has been silent and changes
current statutory accounting in some areas.
It is not known whether the Indiana and Florida Insurance Departments will adopt
the Codification, and whether the Departments will make any changes to the
guidance. The Company has not estimated the potential effect of the Codification
guidance if adopted by the Departments. However, the actual effect of adoption
could differ as changes are made to the Codification guidance, prior to its
recommended effective date of January 1, 2001.
17. 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.
As part of the agreement by the Company to assume the multi-peril and crop
operations of CNA, the Company agreed to reimburse CNA for certain direct
overhead costs incurred by CNA during the first quarter of 1998 before the
Company assumed the book of business. CNA has requested reimbursement of $2.0
million in expenses which the Company believes should only be $1.1 million.
Negotiations are in process to settle this reimbursement. The Company fully
expects the ultimate settlement will approximate $1.1 million and has therefore,
accrued this amount in its consolidated financial statements. In the unforeseen
event the ultimate settlement is greater than $1.1 million, the Company will
accrue the full additional amount at that time.
The California Department of Insurance (CDOI) has advised the Company that they
are reviewing a possible assessment which could total $3 million. The Company
does not believe it will owe anything for this possible assessment. This
possible assessment relates to the charging of brokers fees to policyholders by
independent agents who have placed business for one of the Company's nonstandard
automobile carriers, Superior Insurance Company. The CDOI has indicated that
such broker fees charged by the independent agent to the policyholder were
improper and has requested reimbursement to the policyholders by Superior
Insurance Company. The Company did not receive any of these broker fees. 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.
The Company began writing a new crop insurance product in 1998, AgPI(R), which
provides business interruption coverage to
36
<PAGE>
[HEADER] (Dollars in thousands)
agricultural product processors. At December 31, 1998 certain coverages exist,
the results of which will not be fully known until the second quarter of 1999.
The Company fully believes it has sufficient reserves at December 31, 1998;
however, ultimate results could vary materially.
At December 31, 1998, the Company provided an allowance of $3.2 million
associated with discrepancies identified in connection with the processing of
premiums from the assumption of the CNA business and the related premiums
receivable balance. The Company has been unable to resolve these discrepancies
and has fully provided for this amount as the Company continues its
investigation. Ultimate resolution of this matter may result in a change in the
$3.2 million allowance.
An assertion has been made in Florida alleging that service charges or finance
charges are in violation of Florida law. The plaintiff is attempting to obtain a
class certification in this action. The Company believes that it has
substantially complied with the premium financing statue and intends to
vigorously defend any potential loss. The ultimate outcome is uncertain.
18. Supplemental Cash Flow Information:
Cash paid for interest and income taxes are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash paid for interest $260 $3,467 $5,178
Cash paid for federal income taxes, net of refunds 5,351 11,670 9,825
</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.
19. 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.
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 $2,036 at December 31, 1998.
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, 1998 market value of the Preferred
Securities was $113,400 based on quoted market prices.
37
<PAGE>
[HEADER] (Dollars in thousands)
20. Segment Information:
In 1998, the Company adopted FAS 131, "Disclosures About Segments of an
Enterprise and Related Information." The prior year's segment data has been
restated to present the Company's operating segments in accordance with the
requirement of FAS 131.
The Company has two reportable segments based on products: Nonstandard
automobile insurance and Crop insurance. The Nonstandard automobile segment
offers personal nonstandard automobile insurance coverages through a network of
independent general agencies. The Crop segment writes MPCI and crop hail
insurance through independent agencies with its primary concentration in the
Midwest. The accounting policies of the segments are the same as those described
in "Nature of Operations and Significant Accounting Policies." There are no
significant intersegment transactions. The Company evaluates performance and
allocates resources to the segments based on profit or loss from operations
before income taxes.
The following is a summary of the Company's segment data and a reconciliation of
the segment data to the Consolidated Financial Statements. The "Corporate and
Other" includes operations not directly related to the reportable business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated overhead expenses). Segment
assets 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.
<TABLE>
<CAPTION>
Nonstandard Segment Corporate Consolidated
Year ended December 31, 1998 Auto Crop Totals and Other Totals
---- ---- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Premiums earned $264,022 $60,901 $324,923 $- $324,923
Fee income 16,431 3,772 20,203 - 20,203
Net investment income 11,958 275 12,233 140 12,373
Net realized capital gain 4,124 217 4,341 - 4,341
------- ------ ------- ----- -------
Total revenue 296,535 65,165 361,700 140 361,840
------- ------ ------- ----- -------
Loss and loss adjustment expenses 217,916 52,550 270,466 - 270,466
Operating expenses 73,346 21,906 95,252 1,624 96,876
Amortization of intangibles - 339 339 2,040 2,379
Interest expense - 163 163 - 163
------- ------ ------- ----- -------
Total expenses 291,262 74,958 366,220 3,664 369,884
------- ------ ------- ----- -------
Earnings (loss) before income taxes, minority
interest and extraordinary item $ 5,273 $(9,793) $(4,520) $(3,524) $(8,044)
======= ======= ======= ====== =======
Segment assets $376,831 $143,434 $520,265 $49,172 $569,437
======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Nonstandard Segment Corporate Consolidated
Year ended December 31, 1997 Auto Crop Totals and Other Totals
---- ---- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Premiums earned $251,020 $20,794 $271,814 $ - $271,814
Fee income 15,515 2,276 17,791 30 17,821
Net investment income 10,969 191 11,160 287 11,447
Net realized capital gain 9,462 (18) 9,444 - 9,444
------- ------ ------- ------ -------
Total revenue 286,966 23,243 310,209 317 310,526
------- ------ ------- ------ -------
Loss and loss adjustment expenses 195,900 16,550 212,450 - 212,450
Operating expenses 72,463 (14,404) 58,059 1,719 59,778
Amortization of intangibles - 2 2 1,195 1,197
Interest expense - 233 233 2,925 3,158
------- ------ ------- ----- -------
Total expenses 268,363 2,381 270,744 5,839 276,583
------- ------ ------- ----- -------
Earnings before income taxes, minority
interest and extraordinary item $18,603 $20,862 $39,465 $(5,522) $33,943
====== ====== ====== ===== ======
Extraordinary item, net of tax (713) -- (713) -- (713)
=== ======= === ===== ===
Segment assets $363,864 $119,660 $483,524 $46,351 $529,875
======= ======= ======= ====== =======
</TABLE>
38
<PAGE>
[HEADER] (Dollars in thousands)
<TABLE>
<CAPTION>
Nonstandard Segment Corporate Consolidated
Year ended December 31, 1996 Auto Crop Totals and Other Totals
---- ---- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Premiums earned $168,746 $23,013 $191,759 $ - $191,759
Fee income 7,578 1,672 9,250 36 9,286
Net investment income 6,489 181 6,670 63 6,733
Net realized capital gain (1,014) (1) (1,015) - (1,015)
------- ------ ------- ----- -------
Total revenue 181,799 24,865 206,664 99 206,763
------- ------ ------- ----- -------
Loss and loss adjustment expenses 124,385 12,724 137,109 - 137,109
Operating expenses 46,796 (6,095) 40,701 1,312 42,013
Amortization of intangibles - - - 411 411
Interest expense - 551 551 2,976 3,527
------- ------- ------- ----- -------
Total expenses 171,181 7,180 178,361 4,699 183,060
------- ------- ------- ----- -------
Earnings before income taxes, minority
interest and extraordinary item $10,618 $17,685 $28,303 $(4,600) $23,703
====== ====== ====== ===== ======
Segment assets $264,067 $73,443 $337,510 $7,169 $344,679
======= ====== ======= ===== =======
</TABLE>
21. 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
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 have been granted at an exercise price equal to the fair market
value of the Company's stock at date of grant. The options granted to the
Company's Chairman (633,900 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. On October 14, 1998, all
SIG options were repriced to $6.3125 per share.
Information regarding the SIG Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 1,000,000 $6.3125 830,000 $12.50 -- $--
Granted 478,000 6.3125 185,267 15.35 830,000 12.50
Exercised (4,332) 6.3125 (1,667) 12.50 -- --
Forfeited (15,835) 6.3125 (13,600) 12.50 -- --
--------- --------- -------
Outstanding at the end of the year 1,457,833 $6.3125 1,000,000 $13.03 830,000 $12.50
========= ========= =======
Options exercisable at year end 760,289 $6.3125 521,578 $12.50
Available for future grant 42,167 -- 170,000
</TABLE>
The weighted average remaining life of the SIG options as of December 31, 1998
is 8.5 years.
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
39
<PAGE>
[HEADER] (Dollars in thousands)
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.
Information regarding the GGS Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 54,022 $51.75 55,972 $51.75 $-- $--
Granted -- -- -- -- 55,972 51.75
Forfeited (150) 51.75 (1,950) 51.75 -- --
------ ------ ------
Outstanding at the end of the year 53,872 $51.75 54,022 $51.75 55,972 $51.75
====== ====== ======
Options exercisable at year end 21,549 10,804 --
Available for future grant 57,239 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 37,710 7.3 $46.13 21,549 $47.60
$58.79-$71.14 16,162 7.3 64.87 -- --
------ ------
53,872 21,549
====== ======
</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 1998, 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,
1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, 1998 1998 1997 1997 1996 1996
except per share amounts) As Reported Pro Form As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $(14,417) $(16,352) $16,305 $14,927 $13,256 $13,021
Basic earnings (loss) per share $(1.39) $(1.57) $1.56 $1.43 $1.76 $1.73
Fully diluted earnings (loss) per share $(1.39) $(1.57) $1.52 $1.38 $1.76 $1.73
</TABLE>
40
<PAGE>
[HEADER] (Dollars in thousands)
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 shown in
the following table:
<TABLE>
<CAPTION>
SIG SIG GGSH SIG
1998 Grants 1997 Grants 1996 Grants 1996 Grants
<S> <C> <C> <C> <C>
Risk-free interest rates 5.4% 6.40% 6.41% 6.27%
Dividend yields -- -- -- --
Volatility factors 0.41 0.39 -- 0.40
Weighted average expected life 3.2 years 3.3 years 5.0 years 3.1 years
Weighted average fair value per share $5.73 $5.54 $5.90 $4.27
</TABLE>
22. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
<TABLE>
<CAPTION>
Quarters
1998 First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Gross written premiums $178,396 $173,094 $97,353 $104,347 $553,190
Net earnings (loss) 4,924 5,668 (13,326) (11,683) (14,417)
Basic earnings (loss) per share 0.47 0.55 (1.28) (1.13) (1.39)
Fully diluted earnings (loss) per
share 0.46 0.53 (1.28) (1.13) (1.39)
1997
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
</TABLE>
During the fourth quarters of 1998 and 1997, the Company increased reserves on
its nonstandard automobile business by $6.9 million and $3.0 million for both
current and prior accident years.
In the fourth quarter of 1998, the Company provided a $3.2 million reserve for
potential processing errors in the crop business assumed from CNA. The Company
also increased its reserves on AgPI(R) exposures by approximately $1.8 million.
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 (loss), net of reinsurance, on its FCIC business of
$(3,506), $6,979 and $5,572 during 1998, 1997 and 1996, respectively.
41
<PAGE>
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this Annual
Report and elsewhere (such as in other filings by the Company or its affiliates
with the Securities and Exchange Commission, press releases, presentations by
the Company or its management or oral statements) relative to markets for the
Company's products and/or trends in the Company's operations or financial
results, as well as other statements including words such as "anticipate,"
"could," "feel(s)," "believe," "believes," "plan," "estimate," "expect,"
"should," "intend" and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results to be materially different from
those contemplated by the forward-looking statements. Such factors include,
among other things: (i) general economic conditions, including prevailing
interest rate levels and stock market performance; (ii) factors affecting the
Company's crop operations such as weather-related events, final harvest results,
commodity price levels, governmental program changes, new product acceptance and
commission levels paid to agents; and (iii) factors affecting the Company's
nonstandard automobile operations such as premium volume, levels of operating
expenses as compared to premium volume, ultimate development of loss reserves
and implementation of the Company's operating system. 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 are 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, 1998.
- -------------------------------------------------------------------------------
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 PricewaterhouseCoopers LLP
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
April 13, 1999
42
<PAGE>
Board of Directors And Stockholders of Symons International Group, Inc.
And Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Symons International Group, Inc. and subsidiaries (the Company) at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
April 13, 1999
43
<PAGE>
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
PricewaterhouseCoopers LLP
Indianapolis, Indiana
Annual Meeting of Stockholders
Wednesday, June 16, 1999
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, 1998, 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>
<CAPTION>
NASDAQ
1998 1997
Quarter Ended High Low High Low
<S> <C> <C> <C> <C>
March 31 20.375 16.125 17.625 14.00
June 30 20.50 16.375 16.625 13.625
September 30 19.875 16.0 23.25 15.75
December 31 15.75 5.375 23.75 18.63
</TABLE>
As of March 22, 1999, 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, 1998 and 1997. 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.
44
<PAGE>
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Tel: (317) 259-6302
E-mail: [email protected]
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.
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
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 President
and Treasurer IGF Insurance Company
Symons International Group, Inc.
45
<PAGE>
Carl F. Schnaufer James J. Lund
Vice President, Chief Information Vice President, Chief Accounting
Officer Officer
Symons International Group, Inc. Symons International Group, Inc.
Mark C. Gozdecki
Vice President, Marketing
GGS Management, Inc.
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
Website: SIGINS.com
SUBSIDIARIES AND BRANCHES IGF Southwest
Pafco General Insurance Company 7914 Abbeville Avenue
4720 Kingsway Drive Lubbock, Texas 79424
Indianapolis, Indiana 46205 Tel: 806-783-3010
Tel: 317-259-6300 Fax: 806-783-3017
Fax: 317-259-6395
IGF South
Superior Insurance Company 101 Business Park Drive, Suite C
280 Interstate North Circle, N.W. Jackson, Mississippi 39213
Atlanta, Georgia 30339 Tel: 601-957-9780
Tel: 770-952-4885 Fax: 601-957-9793
Fax: 770-988-8583
IGF West
Superior Insurance Company 1750 Bullard Avenue, Suite 106
3030 N. Rocky Point Drive Fresno, California 93710
Suite 770 Tel: 209-432-0196
Tampa, Florida 33607 Fax: 209-432-0294
Tel: 813-281-2444
Fax: 813-287-8362 IGF North
161 South Main, Box 1090
Superior Insurance Company Stanley, North Dakota 58784
1745 West Orangewood Road Tel: 701-628-3536
Anaheim, California 92868 Fax: 701-628-3537
Tel: 714-978-6811
Fax: 714-978-0353 IGF Mid West
6000 Grand Avenue
IGF Insurance Company Des Moines, Iowa 50312
Corporate Office Tel: 515-633-1000
6000 Grand Avenue Fax: 515-633-1012
Des Moines, Iowa 50312
Tel: 515-633-1000 IGF - NACU
Fax: 515-633-1010 Highway 210 West, Box 375
Henning, Minnesota 56551
IGF Mid East Tel: 218-583-4800
3900 Wood Duck Drive, Suite B Fax: 218-583-4852
Springfield, Illinois 62707
Tel: 217-726-2450
Fax: 217-726-2451
46
<PAGE>
BACK PAGE
SIG Logo
SYMONS INTERNATIONAL GROUP, INC.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
47
<PAGE>
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 Nos. 333-44643 and 333-71093)
of our reports dated April 13, 1999, on our audits of the consolidated financial
statements and financial statement schedules of Symons International Group, Inc.
as of December 31, 1998 and 1997, and for the years ended December 31, 1998,
1997 and 1996, which reports are incorporated by reference or included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
April 13, 1999
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 181,310,000
<DEBT-MARKET-VALUE> 181,310,000
<EQUITIES> 13,264,000
<MORTGAGE> 2,100,000
<REAL-ESTATE> 420,000
<TOTAL-INVEST> 222,853,000
<CASH> 14,800,000
<RECOVER-REINSURE> 71,640,000
<DEFERRED-ACQUISITION> 16,332,000
<TOTAL-ASSETS> 569,437,000
<POLICY-LOSSES> 211,773,000
<UNEARNED-PREMIUMS> 110,664,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 13,744,000
0
135,000,000
<COMMON> 38,136,000
<OTHER-SE> 23,859,000
<TOTAL-LIABILITY-AND-EQUITY> 569,437,000
324,923,000
<INVESTMENT-INCOME> 12,373,000
<INVESTMENT-GAINS> 4,341,000
<OTHER-INCOME> 20,203,000
<BENEFITS> 270,466,000
<UNDERWRITING-AMORTIZATION> 2,379,000
<UNDERWRITING-OTHER> 97,039,000
<INCOME-PRETAX> (8,044,000)
<INCOME-TAX> (2,038,000)
<INCOME-CONTINUING> (6,006,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,417,000)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
<RESERVE-OPEN> 136,772,000
<PROVISION-CURRENT> 257,470,000
<PROVISION-PRIOR> 12,996,000
<PAYMENTS-CURRENT> 167,334,000
<PAYMENTS-PRIOR> 62,361,000
<RESERVE-CLOSE> 200,972,000
<CUMULATIVE-DEFICIENCY> (12,996,000)
</TABLE>
Exhibit 99
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14 (a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Symons International Group, Inc.
_______________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
_______________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
...................................................................
2) Aggregate number of securities to which transaction applies:
...................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state
how it was determined):
...................................................................
4) Proposed maximum aggregate value of transaction:
...................................................................
5) Total fee paid:
....................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
...................................................................
2) Form, Schedule or Registration Statement No.:
...................................................................
3) Filing Party:
...................................................................
4) Date Filed:
...................................................................
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
FORM OF PROXY
PROXY SOLICITED BY MANAGEMENT OF THE CORPORATION FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON WEDNESDAY, JUNE 16, 1999
The undersigned shareholder of Symons International Group, Inc. (the
"Corporation") hereby appoints G. Gordon Symons, Chairman of the Board, or Alan
G. Symons, CEO, or each of them, or instead of either G. Gordon Symons or Alan
G. Symons, ____________________ __________________________, as Proxy for the
undersigned, to attend, vote and act for and on behalf of the undersigned at the
Annual Meeting of the Shareholders of the Corporation to be held at the City of
Indianapolis on June 16, 1999, and at any adjournment thereof, in the same
manner, to the same extent and with the same power as if the undersigned were
present at the Meeting or any adjournment thereof, and the undersigned hereby
revokes any former instrument appointing a Proxy for the undersigned at the said
Meeting or at any adjournment thereof.
The Shares represented by this Proxy are to be:
1. Election of Directors
| | VOTED FOR all Nominees listed below | | WITHHOLD AUTHORITY to vote for
(except as marked to the contrary below) all Nominess listed below:
G. Gordon Symons, John K. McKeating, David R. Doyle
INSTRUCTION: To withhold authority to vote for any individual Nominee,
write that Nominee's name on the space provided below:
________________________________________________________________
2. VOTED FOR___ VOTED AGAINST___ ABSTAINED___ in the appointment of the
Auditor and the authorization
of the Directors to fix the
Auditor's remuneration.
DATED this ______ day of _______________, 1999.
..................................................
Signature of Shareholder
Notes:
1. The persons designated in this form of proxy are named by management. A
shareholder entitled to vote at the meeting has the right to appoint
some other person, who need not be a shareholder, to attend and act for
him on his behalf at the meeting other than the persons specified
above. Such right may be exercised by inserting the name of the person
to be appointed in the blank space provided in this form of proxy or by
completing another form of proxy and, in either case, delivering the
completed proxy to the Corporation.
2. If this Form of Proxy is to be utilized, it should be dated and must
be signed by the shareholder or his attorney authorized in writing. If
this Form of Proxy is not dated in the space provided, it will be
deemed to bear the date on which it was mailed to shareholders.
3. If it is desired that the shares represented by this Proxy are
to be withheld from voting in the election of Directors or the
appointment of the auditor, the appropriate box or boxes above must be
marked.
4. Unless otherwise specified the shares represented by this proxy will
be voted. If a choice is specified with respect to any or all of the
matters to be dealt with at the Meeting referred to above, such shares
will be voted in accordance with the specification made. If no choice
is specified, it is intended to vote such shares in favor of the
election of Directors and the reappointment of the Corporation's
Auditor. This proxy confers authority to do so.
5. This Proxy confers discretionary authority upon the person or persons
specified above with respect to amendments or variations to matters
identified in the notice of Annual Meeting accompanying this Proxy and
other matters as may properly come before the Meeting.
6. This Proxy should be voted, dated and signed and returned in the
enclosed envelope to National City Bank, Corporate Trust Operations,
3rd Floor, North Annex, 4100 West 150th Street, Cleveland, Ohio
44135-1385, or presented in person at the Annual Meeting to be held
June 16, 1999 at 4720 Kingsway Drive, Indianapolis, Indiana, at
10:00 a.m.
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
4720 KINGSWAY DRIVE
INDIANAPOLIS, INDIANA 46205
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On June 16, 1999
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, June 16, 1999,
at 10:00 a.m., Indianapolis time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of 3 Directors for terms to expire
in 2002.
2. Selection of Auditors. Ratification of the appointment of
PricewaterhouseCoopers LLP as auditors for the Company for the
year ending December 31, 1999.
3. Other Business. Such other matters as may properly come before the
meeting or any adjournment thereof.
Shareholders of record as of the close of business on April 30, 1999
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,
1998 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
April 13, 1999
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 June 16, 1999 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 May 5, 1999.
3
<PAGE>
VOTING SECURITIES AND BENEFICIAL OWNERS
Only shareholders of record as of the close of business on April 30,
1999 will be entitled to vote at the Annual Meeting. On the Record Date, there
were 10,455,999 shares of Common Stock outstanding, the only class of the
Company's stock which is currently outstanding.
The following table shows, as of April 10, 1999, 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 Capital Inc. ("Goran") and the ownership interests of
the Company's and Goran's Directors and Named Executive Officers:
<TABLE>
<CAPTION>
Symons International
Group, Inc. Goran Capital Inc.
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 643,900 5.4% 2,411,645 36.3%
Alan G. Symons2 383,400 3.2% 785,535 11.8%
Douglas H. Symons3 201,300 1.7% 281,105 4.2%
Robert C. Whiting4 24,800 * 20,000 *
James G. Torrance, Q.C.5 14,000 * 8,000 *
David R. Doyle6 15,000 * -0- *
John K. McKeating7 12,000 * 6,000 *
David B. Shapira11+ 4,000 * 107,000 1.6%
J. Ross Schofield12+ 4,000 * 10,800 *
Goran Capital Inc.14 7,000,000 58.8% ------
Symons International
Group Ltd.8 ----- 1,646,413 24.8%
Dennis G. Daggett9 56,500 * 37,000 *
Roger S. Sullivan10 48,000 * 17,000 *
All Executive Officers and
Directors as a Group 13 1,525,850 12.8% 3,748,651 56.4%
</TABLE>
* Less than 1% of class
+ Goran Director that is not a member of the Symons International Group, Inc.
Board
4
<PAGE>
1 With respect to Symons International Group, Inc., 10,000 shares are owned
directly and 633,900 are subject to option. With respect to the shares of
Goran Capital Inc., 479,111 shares are held by trusts of which Mr. Symons
is the beneficiary, 286,121 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. Mr. Symons resides at 2 Paynter's
Road, Tuckerstown, Bermuda HS02.
2 With respect to Symons International Group, Inc., 62,500 shares are owned
directly and 320,900 shares are subject to option. With respect to the
shares of Goran Capital Inc., 557,965 are owned directly and 227,570 are
subject to option.
3 With respect to Symons International Group, Inc., 28,500 shares are owned
directly and 172,800 shares are subject to option. With respect to the
shares of Goran Capital Inc., 251,455 are owned directly and 29,650 are
subject to option.
4 Mr. Whiting owns 14,800 shares of Symons International Group, Inc. directly
and 10,000 shares are subject to option. With respect to Goran Capital
Inc., all shares indicated are owned directly.
5 Mr. Torrance owns 4,000 shares of Symons International Group, Inc. directly
and 10,000 shares are subject to option. With respect to Goran Capital
Inc., 2,000 shares are owned directly and 6,000 shares are subject to
option.
6 Mr. Doyle owns 5,000 shares of Symons International Group, Inc. directly
and 10,000 shares are subject to option.
7 Mr. McKeating owns 2,000 shares of Symons International Group, Inc.
directly and 10,000 shares are subject to option. With respect to Goran
Capital Inc., 2,000 shares are owned directly and 4,000 shares are subject
to option.
8 Mr. G. Gordon Symons is the controlling shareholder of Symons International
Group Ltd., a private company.
9 Mr. Daggett owns 0 shares of Symons International Group, Inc. directly and
56,500 shares are subject to option. With respect to Goran Capital Inc.,
37,000 shares are subject to option.
10 Mr. Sullivan owns 0 shares of Symons International Group directly and
48,000 shares are subject to option. Mr.Sullivan also owns 0 shares of
Goran Capital Inc. directly and 17,000 shares are subject to option.
11 Mr. Shapira owns 1,000 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 7,000 shares are subject to option.
12 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 7,000 shares are subject
to option.
13 Totals and percentage numbers are calculated on a fully diluted basis.
14 Goran's office address is 181 University Avenue, Box 11, Suite 1101,
Toronto, Ontario Canada M5H 3M7.
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
1998, 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 August 10, 1998 and filed on October 26, 1998.
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 as the sole shareholder of the Company prior to the initial public
offering ("IPO") of the Company which occurred on November 5, 1996.
5
<PAGE>
<TABLE>
<CAPTION>
Director Term to
Name Age Present Principal Occupation Since Expire
<S> <C> <C> <C>
G. Gordon Symons 77 Chairman of the Board of 1987 1999
Directors of the Company and
Goran Capital Inc.
James G. Torrance, 70 Partner Emeritus, Smith, Lyons 1996 2001
Q.C.
Alan G. Symons 52 CEO and President of the Company 1995 2000
and CEO of Goran Capital Inc.
John K. McKeating 63 Former Owner, Vision 2120 1996 1999
Robert C. Whiting 66 President, Prime Advisors Ltd. 1996 2000
Douglas H. Symons 46 President and COO of the Company 1987 2001
and COO of Goran Capital Inc.
David R. Doyle 52 Director, Vice President, Secretary 1996 1999
and Treasurer of ONEX, Inc.
</TABLE>
G. Gordon Symons has been Chairman of the Board of Directors of the
Company since its formation in 1987. He founded the predecessor to
Goran the 67% Shareholder of the Company, 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.
6
<PAGE>
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 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 2002. Goran
owns sufficient shares of the Corporation to ensure their election and Goran
presently intends to vote for the nominees listed below.
<TABLE>
<CAPTION>
Name Age Present Principal Occupation Director Since
<S> <C> <C> <C>
G. Gordon Symons 77 Chairman of the Board of Directors 1987
of the Company and Goran Capital
Inc.
John K. McKeating 63 Former owner, Vision 2120 1996
David R. Doyle 52 Director, Vice President, Secretary 1996
and Treasurer of ONEX, Inc.
</TABLE>
7
<PAGE>
Meetings And Committees Of The Board
During the year ended December 31, 1998, the Board of Directors of the
Company met five (5) times, including teleconferences, in addition to taking a
number of actions by unanimous written consent. During 1998, each Director
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, David R.
Doyle and Alan G. Symons. The Audit Committee met four (4) times during 1998.
During 1998, the Compensation Committee of the Company was comprised of
Messrs. John K. McKeating, Robert C. Whiting 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 an annual retainer of $10,000. In addition, the Company
reimburses its Directors for reasonable travel expenses incurred in attending
Board and 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 board or
committee meeting attended, with committee chairs receiving an additional $1,000
per quarter.
Compensation Committee Report
The Compensation Committee met four (4) times during 1998,and during
one meeting 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 1,500,000 shares of the Company's
common stock have been reserved for issuance under the Plan. As of March 1,
1999, 65,336 shares were available for grant of options pursuant to the Plan.
The grants to senior executives of the Company and its subsidiaries are as
follows:
8
<PAGE>
<TABLE>
<CAPTION>
Name Total Options Options Granted in
Granted 1998
<S> <C> <C>
G. Gordon Symons 633,900 199,000
Alan G. Symons 320,900 56,000
Douglas H. Symons 172,800 35,000
Dennis G. Daggett (President 56,500 30,000
of IGF Insurance Company)
Roger C. Sullivan (Executive Vice 48,000 30,000
President of Superior Insurance
Company)
</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 Compensation Committee that
the total compensation earned by Company officers during 1998 achieves these
objectives and is fair and reasonable.
Consistent with that philosophy, 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.
The Company has entered into an employment agreement with Dennis G.
Daggett pursuant to which Mr. Daggett has agreed to serve as the President of
IGF Insurance Company. Pursuant to the terms of the agreement, Mr. Daggett is
entitled to a base salary of not less than $180,000 per year and may earn a
bonus in an amount ranging from 0 to 150% of his base salary, or a greater
amount as may be approved by the Board.
9
<PAGE>
The Company has entered into an employment agreement with Thomas F.
Gowdy pursuant to which Mr. Gowdy has agreed to serve as the Executive Vice
President of IGF Insurance Company. Pursuant to the terms of this agreement, Mr.
Gowdy is entitled to a base salary of not less than $140,000 per year and may
earn a bonus ranging in an amount from 0 to 150% of his base salary, or a
greater amount as may be approved by the Board.
The Company has entered into an employment agreement with Roger C.
Sullivan pursuant to which Mr. Sullivan has agreed to serve as the Executive
Vice President of Superior Insurance Company. Pursuant to the terms of this
agreement, Mr. Sullivan is entitled to a base salary of not less than $180,000
per year and may earn a bonus in an amount ranging from 0 to 50% of his base
salary or a greater amount as may be approved by the Board.
On October 14, 1998, the Company's Board of Directors, approved
repricing of all of the Company's outstanding stock options issued pursuant to
the Plan to a uniform exercise price of 6.3125 per share. Given the decline in
the Company's stock price during early October, 1998, the directors, upon advice
of the Compensation Committee, felt the re-pricing necessary to properly
incentivize management.
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.
COMPENSATION COMMITTEE
John K. McKeating, Chair
Robert C. Whiting
Douglas H. Symons
Compensation Committee Interlocks And Insider Participation
During 1998 the Company's Compensation Committee consisted of Messrs.
John K. McKeating, Robert C. Whiting and Douglas H. Symons. Neither Messrs.
Whiting nor Mr. McKeating 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 H. Symons and Alan G. 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 three (3) years.
10
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options Compensation
<S> <C> <C> <C> <C> <C>
G. Gordon Symons, 1998 $0 $0 633,900 $32,000(1)
Chairman 1997 $0 $0 434,900 $26,000(1)
1996 $0 $0 375,000 $27,999(1)
Alan G. Symons, 1998 $300,000 $0 320,900
Chief Executive 1997 $278,230 $200,000 264,900
Officer 1996 $142,746 $200,000 200,000
Douglas H. Symons, 1998 $300,000 $0 172,800
President and Chief 1997 $200,000 $82,971 137,800
Operating Officer 1996 $195,973 $200,000 120,000
Dennis G. Daggett, 1998 $186,923 $0 56,500
President, IGF 1997(1) $180,000 $270,000 26,500
Insurance Company 1996 $174,077 $150,000 20,000
Roger C. Sullivan, 1998 $204,451 $0 48,000
Executive Vice 1997 $169,612 $90,176 18,000
President, Superior 1996 $118,851 $27,217 10,000
Insurance Company
</TABLE>
1 Consulting 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 Named Executive Officers in 1998. 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.
11
<PAGE>
<TABLE>
<CAPTION>
Percentage
of Total
Options Potential Realized
Granted Exercise Value At Assumed
to Employ- Price Annual Rates of
Options ees During Per Expiration Stock Appreciation
Name Granted 1998 Share Date For Option Term
<S> <C> <C> <C> <C> <C> <C>
5% 10%
G. Gordon
Symons 199,000 42.98 $6.3125* 6-15-2008 $790,010.04 $2,002,040.04
Alan G.
Symons 56,000 12.09 $6.3125* 6-15-2008 $222,314.38 $563,388.15
Douglas H.
Symons 35,000 7.56 $6.3125* 6-15-2008 $138,946.49 $352,117.59
Dennis G.
Daggett 30,000 6.48 $6.3125* 6-15-2008 $119,096.99 $301,815.08
Roger C.
Sullivan 30,000 6.48 $6.3125* 6-15-2008 $119,096.99 $301,815.08
</TABLE>
* The original exercise price was $16.625 per share, which was the closing
price on June 15, 1998, the date of the grant. The options were later
repriced to $6.3125 per share on October 14, 1998.
OPTION EXERCISES AND YEAR-END VALUES
The following table shows stock options held by the Company's Named
Executive Officers during 1998. 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,
1998.
12
<PAGE>
<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING GRANTS AND VALUE AS OF DECEMBER 31, 1998
Value
Shares Realized Number of Shares Value of
Acquired at Underlying In-the-Money
on Exercise Unexercised Options Options
Name Exercise Date at 12-31-98 at 12-31-98 (1)
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
G. Gordon
Symons 0 $0.00 434,900 199,000 $407,718.75 $186,562.50
Alan G.
Symons 0 $0.00 154,964 165,936 $145,278.75 $155,565.00
Douglas H.
Symons 0 $0.00 85,930 86,870 $80,559.38 $81,440.63
Dennis G.
Daggett 0 $0.00 13,333 43,167 $12,449.69 $40,469.06
Roger C.
Sullivan 0 $0.00 6,667 41,333 $6,250.31 $38,749.69
</TABLE>
1 Amount reflecting gains on outstanding options are based on the December 31,
1998 closing NASDAQ stock price which was $7.25 per share.
OPTION REPRICING
The following table provides details concerning the repricing of options to
purchase shares of the Corporations stock. This repricing occurred on October
14, 1998.
<TABLE>
<CAPTION>
Number of Length of
Securities Market Price Original Option
Underlying of Stock at Term Remaining
Options/ Time of New at Date of
Repriced or Repricing or Exercise Repricing or
Name Date Amended Amendment Price Amendment
<S> <C> <C> <C> <C> <C>
G. Gordon Oct. 14, 1998 375,000 6.3125 6.3125 96 Months
Symons, Oct. 14, 1998 50,000 6.3125 6.3215 102 Months
Chairman Oct. 14, 1998 5,000 6.3125 6.3125 106 Months
Oct. 14, 1998 4,900 6.3125 6.3125 108 Months
Oct. 14, 1998 199,000 6.3125 6.3125 116 Months
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Alan G. Oct. 14, 1998 200,000 6.3125 6.3125 96 Months
Symons, Oct. 14, 1998 50,000 6.3125 6.3215 102 Months
Chief Oct. 14, 1998 10,000 6.3125 6.3125 106 Months
Executive Oct. 14, 1998 4,900 6.3125 6.3125 108 Months
Officer Oct. 14, 1998 56,000 6.3125 6.3125 116 Months
Douglas H. Oct. 14, 1998 120,000 6.3125 6.3125 96 Months
Symons, Oct. 14, 1998 5,000 6.3125 6.3215 102 Months
President, Oct. 14, 1998 10,000 6.3125 6.3125 106 Months
Chief Oct. 14, 1998 2,800 6.3125 6.3125 108 Months
Operation Oct. 14, 1998 35,000 6.3125 6.3125 116 Months
Officer
Dennis G. Oct. 14, 1998 20,000 6.3125 6.3125 96 Months
Daggett, Oct. 14, 1998 3,000 6.3125 6.3215 102 Months
President, Oct. 14, 1998 2,500 6.3125 6.3125 106 Months
IGF Oct. 14, 1998 1,000 6.3125 6.3125 108 Months
Insurance Oct. 14, 1998 30,000 6.3125 6.3125 116 Months
Co.
Roger C. Oct. 14, 1998 10,000 6.3125 6.3125 96 Months
Sullivan, Oct. 14, 1998 5,000 6.3125 6.3215 102 Months
Executive Oct. 14, 1998 2,000 6.3125 6.3125 106 Months
Vice Oct. 14, 1998 1,000 6.3125 6.3125 108 Months
President, Oct. 14, 1998 30,000 6.3125 6.3125 116 Months
Superior
Ins. Co.
</TABLE>
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 1998.
<TABLE>
<CAPTION>
Largest Loan
Name Date of Loan Balance During 1998 Present Balance
<S> <C> <C> <C>
G. Gordon Symons June 27, 1986 $115,807 $115,807
June 30, 1986 $156,495 $156,495
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Largest Loan
Name Date of Loan Balance During 1998 Present Balance
<S> <C> <C> <C>
Alan G. Symons June 30, 1986 $19,772 $6,617
February 24, 1988 $27,309 $27,309
March 19, 1998 $887,444 $0
October 15, 1998 $562,413 $0
Throughout 1998 $102,051 $0
Douglas H. Symons June 30, 1986 $15,000 $9,798
February 24, 1988 $2,219 $2,219
November 1, 1990 $68,050 $0
April 20, 1998 $260,358 $0
October 15, 1998 $594,517 $0
Throughout 1998 $22,533 $0
October, 1998 $600,000 $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 and are payable on demand and are interest free.
Loans made to Alan G. Symons in 1986 and 1988 were made to facilitate the
purchase of common stock of Goran. These loans are payable upon demand and are
interest free. The loan to Alan G. Symons dated March 19, 1998, bears interest
at the rate of 5.85% and is secured by his options to purchase stock in GGS
Management, Inc. This loan was repaid in April, 1999. The loan to Alan G. Symons
dated October 15, 1998, bears interest at the rate of 7.25% and the proceeds
were used to facilitate the exercise of options to purchase common stock of
Goran. This loan was repaid in April, 1999. The Company made various advances to
Alan G. Symons throughout 1998, primarily to facilitate the payment of interest
on a loan from an unrelated third party relating to the purchase of Company
stock at the time of the Company's Initial Public Offering ("IPO") in 1996. This
loan was repaid in April, 1999.
The loans to Mr. Douglas H. Symons in 1986 and 1988 were to facilitate the
purchase of common stock of Goran. Such loans are collateralized by pledges of
the common stock of Goran and are payable upon demand and are interest free. The
loans to Mr. Douglas H. Symons in November, 1990 bears interest at the rate of
prime plus 1%, the proceeds being used to facilitate the purchase of a primary
residence. This loan was repaid in April, 1999. The loan to Mr. Douglas H.
Symons dated April 20, 1998, bears interest at the rate of 5.85% and is secured
by the options of Mr. Douglas H. Symons to purchase shares in GGS Management,
Inc. The proceeds of this loan were used to help facilitate the exercise of
options to purchase stock in the Company. This loan was repaid in April, 1999.
The loan to Mr. Douglas H. Symons dated October 15, 1998, bears interest at the
rate of 7.25%. The proceeds of this loan were used to help facilitate the
exercise of options to purchase stock of Goran. This loan was repaid in April,
1999. There were certain advances totaling $22,533.00 made to Mr. Douglas H.
Symons throughout 1998 with such funds primarily used to pay interest on a loan
from an unrelated third party which was undertaken to enable Mr. Douglas H.
Symons to acquire stock of the Company at the time of the Company's IPO. This
loan was repaid in April, 1999.
15
<PAGE>
In October, 1998, an affiliate of Goran advanced $600,000 to Douglas H.
Symons on an interest free basis. The outstanding balance of this advance was
$300,000 at December 31, 1998 and was entirely repaid in January, 1999.
On October 24, 1997, the Company guaranteed a loan from an unrelated third
party to Mr. Dennis G. Daggett. The $290,000 loan is due February 10, 2001 and
carries a 7.75% interest rate.
PROPOSAL NO. 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
PricewaterhouseCoopers L.L.P. ("PWC") as independent auditors for the Company's
year ending December 31, 1999. PWC has served as auditors for the Company for
the year 1998 and worked with the Company in effecting its Initial Public
Offering. A representative of PWC 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.
CERTAIN RELATIONSHIPS/RELATED TRANSACTIONS
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.
Granite Re has a quota share reinsurance treaty with Pafco for nonstandard
automobile premiums written in the fourth quarter of 1998.
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. Such business was
discontinued effective January 1, 1999.
IGF reinsures a portion of its crop insurance with Granite Re. For year 1998,
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 1998,
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.
The Company paid $2,832,000, $1,034,000 and $692,000 in 1998, 1997 and
1996, respectively, for consulting and other services relative to the conversion
of the Company's new non-standard automobile operating system. The Company has
capitalized these costs as part of its new non-standard automobile operating
system. Approximately 90% of these payments are for services provided by
consultants and vendors unrelated to the Company. Stargate Solutions
("Stargate") manages the work for such unrelated consultants and vendors and, as
compensation for such work, has retained approximately 10% of the payments
referred to above in return for management services provided. During 1998,
Stargate was owned beneficially by certain Directors of the Company and a
relative of these Directors.
16
<PAGE>
During 1998, the Company paid $270,000 to Onex, Inc., primarily for
employee-search services. David R. Doyle is an officer and director of Onex. The
Company paid Onex $86,000 in 1997 for similar services.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Any shareholder of the Company wishing to have a proposal considered for
inclusion in the Company's 2000 proxy solicitation materials must set forth such
proposal in writing and file it with the Secretary of the Company on or before
December 11, 1999. In order to be considered in the 2000 Annual Meeting,
shareholder proposals not included in the Company 2000 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 2000 Annual Meeting, or, if the 2000 Annual Meeting is held prior to
March 31, 2000, 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 2000 Proxy
Solicitation materials or consideration at the 2000 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.
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
17
<PAGE>
