UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1999
Commission File Number: 1-12369
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1707115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6400 (U.S.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of June 30, 1999, there were 10,385,399 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
For The Quarter Ended June 30, 1999
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1999
(unaudited) and December 31, 1998 . ......................... 3
Unaudited Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 1999 and 1998............ 4-5
Unaudited Consolidated Statements of Stockholders'
Equity and Comprehensive Income for the Six Months Ended
June 30, 1999 and 1998....................................... 6
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998...................... 7
Condensed Notes to Unaudited Consolidated Financial
Statements................................................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 16
PART 2 OTHER INFORMATION............................................ 30
SIGNATURES........................................................... 31
NOTE: ALL ITEMS ARE IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE
DATA OR UNLESS OTHERWISE NOTED.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
ASSETS (unaudited)
<S> <C> <C>
Investments
Available for sale:
Fixed maturities, at market $190,617 $191,002
Equity securities, at market 14,912 13,264
Short-term investments, at amortized cost which approximates market 17,312 15,597
Mortgage loans, at cost 2,050 2,100
Other 998 890
------- -------
TOTAL INVESTMENTS 225,889 222,853
Investment in and advances to related parties 1,395 3,545
Cash and cash equivalents 14,860 14,800
Receivables, net of allowance for doubtful accounts 258,319 120,559
Reinsurance recoverable on paid and unpaid losses, net 103,454 71,640
Prepaid reinsurance premiums 127,329 31,172
Federal income taxes recoverable 8,625 12,672
Deferred policy acquisition costs 16,901 16,332
Deferred income taxes 6,786 5,146
Property and equipment, net of accumulated depreciation 20,798 18,863
Intangible assets 44,639 45,781
Other assets 8,365 6,074
------- -------
TOTAL ASSETS $837,360 $569,437
======= =======
LIABILITIES
Losses and loss adjustment expense reserves 213,721 $200,972
Unearned premiums 226,482 110,664
Reinsurance payables 175,044 25,484
Notes payable 13,435 13,744
Distributions payable on preferred securities 4,783 4,809
Other 20,545 16,769
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TOTAL LIABILITIES 654,010 372,442
------- -------
Commitments and contingencies:
Minority interest:
Preferred securities 135,000 135,000
------- -------
STOCKHOLDERS' EQUITY
Common stock 38,136 38,136
Additional paid-in capital 5,851 5,851
Unrealized gain (loss) on investments (1,597) 1,261
Retained earnings 5,960 16,747
------- -------
TOTAL STOCKHOLDERS' EQUITY 48,350 61,995
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $837,360 $569,437
======= =======
See condensed notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
<S> <C> <C>
Gross premiums written $173,870 $173,094
Less ceded premiums (98,083) (68,380)
------- -------
Net premiums written 75,787 104,714
Change in net unearned premiums (2,877) (5,756)
------- -------
Net premiums earned 72,910 98,958
Fee income 3,092 4,901
Net investment income 3,320 3,306
Net realized gain 366 843
------- -------
Total Revenues 79,688 108,008
------- -------
Loss and loss adjustment expenses 70,525 72,181
Policy acquisition and general and administrative expenses 19,652 23,088
Interest expense 105 49
Amortization of intangibles 651 510
------- -------
Total Expenses 90,933 95,828
------- -------
(Loss) earnings before income taxes and minority interest (11,245) 12,180
(Benefit) Provision for income taxes (3,576) 4,416
------- -------
Net (loss) earnings before minority interest (7,669) 7,764
Minority interest:
Distributions on preferred securities, net of tax 2,096 2,096
------- -------
Net (loss) earnings $(9,765) $ 5,668
======= =======
Net (loss) earnings per share - basic $(0.94) $0.55
==== ====
Net (loss) earnings per share - fully diluted $(0.94) $0.53
==== ====
Weighted average shares outstanding:
Basic 10,385 10,392
====== ======
Fully diluted 10,389 10,704
====== ======
See condensed notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Gross premiums written $325,892 $351,490
Less ceded premiums (174,806) (147,215)
------- -------
Net premiums written 151,086 204,275
Change in net unearned premiums (13,839) (36,833)
------- -------
Net premiums earned 137,247 167,442
Fee income 7,555 11,390
Net investment income 6,609 6,264
Net realized (loss) gain (1,016) 2,811
------- -------
Total Revenues 150,395 187,907
------- -------
Loss and loss adjustment expenses 127,012 125,386
Policy acquisition and general and administrative expenses 31,544 38,012
Interest expense 179 232
Amortization of intangibles 1,256 1,021
------- -------
Total Expenses 159,991 164,651
------- -------
(Loss) earnings before income taxes and minority interest (9,596) 23,256
(Benefit) Provision for income taxes (2,960) 8,438
------- -------
Net (loss) earnings before minority interest (6,636) 14,818
Minority interest:
Distributions on preferred securities, net of tax 4,151 4,226
------- -------
Net (loss) earnings $(10,787) $10,592
======= =======
Net (loss) earnings per share - basic $(1.04) $1.02
==== ====
Net (loss) earnings per share - fully diluted $(1.04) $0.99
==== ====
Weighted average shares outstanding:
Basic 10,385 10,419
====== ======
Fully diluted 10,400 10,715
====== ======
See condensed notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Shares Total
Common Stockholders' Retained
Stock Equity Earnings
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 10,451,667 $78,363 $31,511
Comprehensive income:
Net earnings 10,592 10,592
Change in unrealized gains (losses) on securities 2,004 --
------ ------
Comprehensive income 12,596 10,592
------ ------
Exercise of stock options 1,665 20 --
Cost of shares acquired (65,800) (1,130) (311)
---------- ------ ------
BALANCE AT JUNE 30, 1998 10,387,532 $89,849 $41,792
========== ====== ======
BALANCE AT DECEMBER 31, 1998 10,385,399 $61,995 $16,747
Comprehensive income:
Net earnings (loss) (10,787) (10,787)
Change in unrealized gains (losses) on securities (2,858) --
------ ------
Comprehensive income (13,645) (10,787)
---------- ------ ------
BALANCE AT JUNE 30, 1999 10,385,399 $48,350 $5,960
========== ====== =====
See condensed notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) for the period $(10,787) $10,592
Adjustments to reconcile net earnings to net cash provided
from operations:
Depreciation and amortization 3,265 2,453
Deferred income tax expense (97) 1,087
Net realized (gain) loss 1,016 (2,811)
Net changes in operating assets and liabilities:
Receivables (137,759) (146,802)
Reinsurance recoverable on paid and unpaid losses, net (31,814) (12,401)
Prepaid reinsurance premiums (96,158) (74,919)
Deferred policy acquisition costs (569) (6,878)
Other assets (2,027) 624
Losses and loss adjustment expenses 12,749 34,785
Unearned premiums 115,818 111,753
Reinsurance payables 149,560 118,872
Distributions payable on preferred securities (26) (18)
Federal income taxes 4,047 523
Other liabilities 3,513 585
------- -------
NET CASH PROVIDED FROM OPERATIONS 10,731 37,445
------- -------
Cash flow used in investing activities:
Net (purchases) sales of short-term investments (1,715) (2,349)
Purchases of fixed maturities (117,539) (94,207)
Proceeds from sales, calls and maturities of fixed maturities 110,935 85,536
Purchase of equity securities (2,808) (11,289)
Proceeds from sales of equity securities 2,491 11,409
Purchases of property and equipment (3,682) (6,545)
(Purchases) sales of other investments (68) (6)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (12,386) (17,451)
------- -------
Cash flow provided from/(used in) financing activities:
Cost of shares acquired -- (1,132)
Payments on notes payable (309) (4,147)
Loans from (repayments to) related parties 2,150 (3,548)
Other (126) 21
------- ------
NET CASH PROVIDED FROM/(USED IN) FINANCING ACTIVITIES 1,715 (8,806)
------- -------
Increase in cash and cash equivalents 60 11,188
Cash and cash equivalents, beginning of period 14,800 11,276
------- -------
Cash and cash equivalents, end of period $14,860 $22,464
======= =======
Note: Cash payments for interest were $179 and $49 for the six months ended
June 30, 1999 and 1998, respectively. Cash payments for taxes were $-0- and
$4,580 for first six months of 1999 and 1998, respectively.
See condensed notes to consolidated financial statements
</TABLE>
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Six Months Ended June 30, 1999
(,000 Omitted)
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for fair presentation
have been included. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999. Interim financial statements should be read in
conjunction with the Company's annual audited financial statements for
the year ended December 31, 1998.
The consolidated financial statements include the accounts of Symons
International Group, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany transactions and accounts have
been eliminated.
2. Subsequent Events
On August 12, 1999 the Company announced that it has retained Donaldson,
Lufkin and Jenrette ("DLJ") to advise the Company with respect to
whether it is in the best interest of the shareholders to consider a
sale of all or part of its insurance business. This announcement follows
the Company's announcement on June 8, 1999 that DLJ had been retained to
advise the Company with respect to the sale of its crop insurance
business.
The Company is exploring several options and has not identified the form
or timing of a possible sale. The sale may take the form of a sale of
either or both of the Company's primary business units, a sale of the
entire company, or another form.
The Company has held preliminary discussions with interested parties
regarding the potential separate sale of the crop and nonstandard
automobile lines as well as of the Company.
At this time the Company is unable to estimate the value of a sale as
the nature of a possible sale is unknown.
3. Certain Accounting Policies for Multi-Peril Crop Insurance ("MPCI")
A significant portion of the Company's gross premiums written and
earnings before income taxes within the crop insurance segment relate to
the MPCI program. MPCI is a government-sponsored program with accounting
treatment which differs in certain respects from the more traditional
property and casualty insurance lines. For statement of earnings
purposes under GAAP, gross premiums written consist of the aggregate
amount of MPCI premiums paid by farmers for buy-up coverage (MPCI
coverage in excess of catastrophic ("CAT") Coverage - the minimum
available level of MPCI Coverage), and any related federal premium
subsidies, but do not include MPCI premium on CAT Coverage. By contrast,
net premiums written do not include any MPCI premiums or subsidies, all
of which are deemed to be ceded to the Federal Crop Insurance
Corporation ("FCIC") as a reinsurer. The Company's profit or loss from
its MPCI business is determined after the crop season ends on the basis
of a complex profit sharing formula established by law and the FCIC. For
statement of earnings 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.
-8-
<PAGE>
Beginning in 1996, the Company instituted a policy of recognizing (i)
35% of its estimated annual 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 of annual
premium which takes into account actual gross premiums processed. If
an insufficient volume of policies have 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 an assessment
of current year crop conditions and other relevant factors. 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.
The Company also receives from the FCIC (i) an expense reimbursement
payment equal to a percentage of gross premiums written for each Buy-Up
Coverage policy it writes ("Buy-Up Expense Reimbursement Payment") and
(ii) an LAE reimbursement payment equal to a percentage of MPCI Imputed
Premiums for each CAT Coverage policy it writes (the "CAT LAE
Reimbursement Payment"). For 1999 and 1998, the Buy-Up Expense
Reimbursement Payment has been set at 24.5% and 27.0%, respectively, of
MPCI Premium. For 1999 and 1998, the LAE Reimbursement Payment has been
set at 11.0% and 13.0%, respectively, of MPCI Imputed Premiums for each
CAT Coverage policy the Company writes. The reduction in expense and LAE
reimbursement percentage in 1999 was due to the passing of legislation
by the United States Congress in June, 1998. Although the expense
reimbursement percentages were reduced, this legislation also provided
permanent funding for the crop insurance industry. In addition, this
legislation discontinued the Company's retention of a $60 fee for every
CAT policy written. The Company retained this policy fee in 1998.
For statement of earnings 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 statement of
earnings 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 Fee Income.
4. Intangible Assets
Intangible assets include goodwill from the acquisition of Superior
Insurance Company (Superior), additional goodwill from the acquisition
of the minority interest in GGS Management Holdings, Inc. (GGSH) and
North American Crop Underwriters (NACU), debt and preferred security
issuance costs and organizational costs.
5. Notes Payable
At June 30, 1999, the Company's IGF Insurance Company subsidiary (IGF)
maintained a revolving bank line of credit in the amount of $12,000 with
Brenton Bank. At December 31,1998, March 31, 1999 and June 30,1999 the
outstanding balance was $12,000,$1,989 and $11,767 respectively. This
line is collateralized by the crop-related uncollected premiums,
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<PAGE>
reinsurance recoverable on paid losses, 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 statutory
surplus. At June 30, 1999, IGF was in compliance with all covenants
associated with the line of credit, or had received proper waivers. IGF
has received a waiver from the bank with regard to the ratio of net
written premiums to surplus as of second quarter 1999.
The average interest rate on the line of credit was 6.96% during 1998
and 8.63% for the six months ended June 30, 1999.
Notes payable also includes a $1,000 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 each) assumed in the
acquisition of NACU due 2002-2006 with periodic payments at interest
rates ranging from 7% to 9.09%.
6. Regulatory Affairs
The Indiana Department of Insurance (IDOI) initiated a target
examination of Pafco General Insurance Company, and IGF Insurance
Company, on May 24, 1999. The scope of the examinations encompass loss
reserves, pricing, and reinsurance. There has been no action taken by
the IDOI as a result of the ongoing examination.
The Florida Department of Insurance (FDOI), has initiated a limited
scope audit of Superior Insurance Company, to begin on August 23, 1999.
The FDOI is to evaluate the Company's Year 2000 readiness.
7. Commitments and Contingencies
The Company and its subsidiaries are, at various times, named as
defendants in lawsuits relating to its business. Legal actions arise
from claims made pursuant to insurance policies, employment-related
matters, commercial disputes, and other matters. Unless specifically
stated otherwise, the Company believes that the ultimate disposition of
these lawsuits will not materially affect the Company's operations or
financial position.
In 1998, IGF issued insurance policies on certain agricultural business
interruption risks ("AgPI(R)"). Please see note 8. Certain of these
policyholders have recently instituted litigation or filed for
arbitration of their claim. In each instance, IGF has been named as a
defendant. To date, three lawsuits have been filed by a total of seven
policyholders and three policyholders have instituted arbitration.
Further, the Company (through its IGF subsidiary), has instituted two
declaratory actions against two policyholders to help determine the
Company's obligations with respect to such policyholders. The Company
feels it has a strong legal position with respect to these AgPI(R)
lawsuits and arbitrations. The Company is vigorously defending these
matters.
These lawsuits and arbitrations have been instituted after June 30, 1999
and, consequently, each matter is in an early stage of development. The
Company feels its financial reserves for these lawsuits and arbitrations
are sufficient to cover the resulting liability, if any, that may arise
from these matters. However, there can be no assurance that the
Company's total liability from AgPI(R) liability that may be in excess
of current AgPI(R) financial reserves will not be material to the
Company, taken as a whole.
The Company writes nonstandard insurance business through agents in
California where some of the agents charge administration fees on top of
the premium to these customers. The California Department of Insurance
(CDOI) in early 1998 indicated that such broker fees are part of premium
and has requested reimbursement to the policyholders by Superior. The
CDOI has indicated it may assess the Company to repay fees the agents
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<PAGE>
received from the insured. The Company did not receive any of these
broker fees and has carried on the insurance practice that is normal for
many of the insurance companies writing automobile insurance in
California. The total amount, if CDOI proceeds and requires all fees
returned with no recovery from agents, is $3 million. As a material
adverse development is not deemed probable, the Company has not accrued
any amount in its consolidated financial statements. Although the
assessment has not been formally made by the CDOI at this time, the
Company believes it will prevail and will vigorously defend any
potential assessment.
As part of an agreement by the Company to assume the multiple-peril and
crop hail operations of CNA Agriculture ("CNA") during 1998, the Company
agreed to allow CNA to retain a portion of the administrative and
operating expense reimbursement paid by the Federal Crop Insurance
Corporation (FCIC) to CNA under CNA's 1998 Standard Reinsurance
Agreement with FCIC. This retention by CNA was meant to compensate CNA
for certain direct overhead costs incurred by CNA prior to the transfer
of insurance operations to the Company.
CNA has retained $2.7 million of such reimbursements. The Company
disputes this level of expense reimbursement and contends CNA's
retention should only be $1.1 million. Thus, the Company believes it
should receive approximately $1.6 million of FCIC reimbursement proceeds
retained by CNA. Negotiations are in process to settle this dispute.
Given the dispute and uncertainty of its outcome, the Company has not
recorded any receivable for this matter.
8. Losses on AgPI(R) Product
In 1998,the Company within its Crop segment (IGF), offered a new and
unique crop insurance product called AgPI(R). AgPI(R) is business
interruption insurance that is primarily intended to protect businesses
that depend upon a steady flow of crop (or crops) to stay in business.
This product was sold to a variety of businesses involved in
agribusiness, including farmers, as well as grain elevator operators,
produce shippers, custom harvesters, cotton gins, agriculture chemical
dealers and other processing businesses whose income is heavily
dependent on a stable supply of raw product (i.e., cotton), or whose
product sales are negatively affected if crop yields fall (i.e., ag
chemical dealers).
A large number of policies were written through a third party
insurance company under a fronting arrangement. The Company
directly wrote or reinsured 157 AgPI(R) policies written in 1998, 111 of
which were purchased by California policyholders through a third party
carrier. The policy form requires that the county in which crops reside
must suffer a minimum level of crop loss before a loss recovery by a
policyholder is possible. After the county loss test is met, then the
policyholder must demonstrate an insurable economic loss on an
individual basis under the policy.
The Company recognized approximately $7.6 million in written premium
in 1998, of which $6 million was earned in 1998 with $1.6 million
being earned in the first quarter of 1999. The lack of National
Agricultural Statistical Service (NASS) and policyholder loss data,
coupled with a Company awareness of adverse weather conditions and
resultant crop damage in parts of the country with several AgPI(R)
policyholders, led the Company to establish reserves at December 31,
1998, equal to 100% of the AgPI(R) earned premium.
County loss data, as well as policyholder loss data, gradually
became known starting in late April 1999. As of May 28, 1999, the filing
date for the Company's first quarter 1999 Form 10-Q, it became apparent
that the Company was experiencing unexpected adverse loss development on
these policies and increased its incurred losses related to 1998
policies to $15 million. As of the filing date for this second quarter
1999 Form 10-Q, NASS data is complete, and the Company has received
policyholder data on nearly all policies to determine loss liability, if
any, under each of the 157 AgPI(R) policies. Based on the Company's
latest analysis, the estimated gross ultimate incurred loss settlement
and loss adjustment expense ("LAE") related to these policies totals $25
million. The Company recorded $6 million, $9 million, and $10 million of
loss and LAE in 1998, the first quarter and second quarter of 1999,
respectively.
As part of a reinsurance treaty entered into in the first quarter
of 1999, the Company retroceded the majority of this business to
reinsurers. The retrocession cover on this book of business is 62.0%
quota share reinsurance, of which 7.5% is retroceded to Granite
Reinsurance Company Ltd., an affiliate. In return for ceding 62.0% of
its gross written premium on these policies to the reinsurers, the
Company is entitled to a permanent cash recovery of up to 200% of
premium ceded to the reinsurers. The Company is also entitled to
receive, if the loss ratio on this business exceeds 200%, an additional
temporary cash advance on every dollar of loss up to a 300% loss ratio.
Any temporary cash advance received must be returned over time to the
reinsurers, with substantially all of the advance being repaid by July
31, 2001.
In accordance with the terms of the reinsurance treaty, the
Company recorded $4,668 of ceded gross written premium in the first
quarter of 1999. The portion of the reinsurance treaty covering 1998
AgPI(R) written business was deemed to be retroactive reinsurance
according to generally accepted accounting principles. Accordingly, in
the first quarter of 1999 the Company recorded a reinsurance recovery of
$9,336 and deferred a resulting gain of $4,668. The $4,668 deferred gain
was recognized as income in the second quarter of 1999, pursuant to the
recovery method of accounting as prescribed by GAAP.
The Company has tendered settlement payments to virtually all
policyholders with a demonstrable loss under the policy. The Company
believes that the claim payments tendered are consistent with policy
language and applicable state law. In the event that a policyholder
believes that the settlement offer is erroneous or insufficient
according to the policy form, the policy form requires binding
arbitration.
As of the date of this Form 10-Q, 128 policyholders have incurred an
indemnifiable loss according to company calculations. As of the date of
this Form 10-Q, 8 policyholders have accepted settlements and
released the Company from liability, 3 policyholders have filed for
arbitration, and 7 policyholders have instituted litigation
against the Company. The policyholders seeking arbitration are
requesting indemnification totaling the face amount of their policies
plus punitive damages. Arbitration hearings will likely not begin
until the year 2000 (See note 7).
Less than $0.1 million of 1999 gross written AgPI(R) premiums have been
written and assumed by the Company through June 30, 1999. The Company
has recorded loss and loss adjustment expenses equaling approximately
200% of premium for the 1999 written policies.
Based on the information presently available, the Company
believes that it has recognized, through loss and LAE payments and
eserves, its ultimate loss exposure related to the AgPI(R) product.
However as new information develops, there can be no assurance that the
Company's ultimate liability for AgPI(R) related losses will not be
materially greater than the $25 million in gross losses already recorded
$19,100 in 1999, $5,900 in 1998 in the consolidated financial statements
related to this product.
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9. Adverse Development on Prior Accident Year and Reserve Strengthening on
Current Accident Year Auto Loss and Loss Adjustment Expense Reserves
During the second quarter of 1999 the Company incurred $4.1 million of
loss and LAE on its nonstandard auto operation for losses occurring in
1998. At the end of 1998 the Company projected its unpaid loss and LAE
liabilities for nonstandard auto, net of reinsurance, to be $114.8
million. During the second quarter of 1999 a greater than expected
number of 1998 incurred claims were reported to the Company by
policyholders. The preponderance of those unanticipated claims involved
bodily injury liability. In addition to strengthening reserves for older
claims, the Company reexamined its projections for the first half of
1999 and strengthened its reserves for the current year by $5.0 million,
$2.5 million of which was for accidents occurring in the first quarter
of 1999. The Company has identified and is currently implementing
several strategies to improve its loss ratio.
10. Nonstandard Auto Reinsurance
The Company is currently exploring the possibility of entering into a
quota share treaty, which would cede a significant portion of the
company's auto gross written premiums. This treaty, if signed, would
have the impact of reducing net premiums written and bringing the ratio
of net premiums written to statutory basis surplus into compliance with
statutory guidelines.
-13-
<PAGE>
11. Segment Disclosures
The following tables show financial data by segment:
<TABLE>
<CAPTION>
For the three months ended
June 30,
1999 1998
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $66,072 $79,530
====== ======
Net premiums written $64,154 $69,154
====== ======
Net premiums earned $66,836 $70,498
Fee income 2,895 4,553
Net investment income 3,296 3,133
Net realized gain 366 673
------ ------
TOTAL REVENUES 73,393 78,857
------ ------
Losses and loss adjustment expenses 61,631 53,502
Policy acquisition and general and administrative expenses 23,609 18,681
------ ------
TOTAL EXPENSES 85,240 72,183
------ ------
Earnings (loss) before income taxes $(11,847) $ 6,674
====== ======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 92.2% 75.9%
Expense ratio, net of billing fees 31.0% 20.0%
----- ----
Combined ratio 123.2% 95.9%
===== ====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $107,524 $92,020
======= ======
Net premiums written $11,633 $35,560
====== ======
Net premiums earned $6,074 $28,460
Fee income 197 350
Net investment income (18) 112
Net realized capital gain (loss) -- 170
------ ------
TOTAL REVENUES 6,253 29,092
------ ------
Losses and loss adjustment expenses 8,894 18,679
Policy acquisition and general and administrative expenses(1) (4,654) 3,897
Interest and amortization of intangibles 246 50
------ ------
TOTAL EXPENSES 4,486 22,626
------ ------
Earnings before income taxes $ 1,767 $6,466
====== =====
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain.
(2) Includes premiums assumed from CNA in accordance with the Strategic
Alliance Agreement.
-14-
<PAGE>
<TABLE>
<CAPTION>
For the six months ended
June 30,
1999 1998
<S> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written $127,243 $169,506
======= =======
Net premiums written $137,840 $151,421
======= =======
Net premiums earned $132,233 $138,821
Fee income 7,417 8,708
Net investment income 6,460 5,934
Net realized gain (loss) (1,016) 2,641
------- -------
TOTAL REVENUES 145,094 156,104
------- -------
Losses and loss adjustment expenses 112,944 106,648
Policy acquisition and general and administrative expenses 43,204 36,804
------- -------
TOTAL EXPENSES 156,148 143,452
------- -------
Earnings (loss) before income taxes $(11,054) $ 12,652
======= =======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 85.4% 76.8%
Expense ratio, net of billing fees 27.1% 20.2%
---- ----
Combined ratio 112.5% 97.0%
===== ====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $198,247 $178,195
======= =======
Net premiums written $ 13,246 $ 52,854
======= =======
Net premiums earned $5,014 $ 28,621
Fee income 138 2,682
Net investment income 39 165
Net realized capital gain -- 170
------- -------
TOTAL REVENUES 5,191 31,638
------- -------
Losses and loss adjustment expenses 14,068 18,738
Policy acquisition and general and administrative expenses(1) (12,662) 250
Interest and amortization of intangibles 416 233
------- -------
TOTAL EXPENSES 1,822 19,221
------- -------
Earnings before income taxes $ 3,369 $ 12,417
======= =======
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain.
(2) Includes premiums assumed from CNA in accordance with the Strategic
Alliance Agreement.
-15-
<PAGE>
12. Earnings Per Share
Basic and diluted net earning (loss) per share are computed by
dividing net earnings (loss) as reported by the average number of
shares outstanding as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic:
Weighted-average common shares outstanding 10,385,000 10,392,000 10,385,000 10,419,000
========== ========== ========== ==========
Diluted:
Weighted-average common shares outstanding 10,385,000 10,392,000 10,385,000 10,419,000
Dilutive effect of stock options 4,000 312,000 15,000 296,000
---------- ---------- ---------- ----------
Average common shares outstanding
assuming dilution 10,389,000 10,704,000 10,400,000 10,715,000
========== ========== ========== ==========
</TABLE>
The Company has 1.5 million stock options outstanding as of June 30,
1999. Of these, 1.4 million are antidilutive because the exercise
price is below the average market price during the period. For the
three and six months ending June 30, 1999 there are 4,000 and 15,000
dilutive shares based on the treasury stock method. Due to the net
loss in 1999, fully diluted earnings per share is the same a basic
earnings per share.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Nonstandard Automobile Insurance Operations
The Company, through its wholly owned subsidiaries, Pafco General Insurance
Company ("Pafco") and Superior Insurance Company ("Superior"), is engaged in the
writing of insurance coverage on automobile physical damage and liability
policies for "nonstandard risks". Nonstandard insureds are those individuals who
are unable to obtain insurance coverage through standard market carriers due to
factors such as poor premium payment history, driving experience, record of
prior accidents or driving violations, particular occupation or type of vehicle.
The Company offers several different policies which are directed towards
different classes of risk within the nonstandard market. Premium rates for
nonstandard risks are higher than for standard risks. Since it can be viewed as
a residual market, the size of the nonstandard private passenger automobile
insurance market changes with the insurance environment and grows when the
standard coverage becomes more restrictive. Nonstandard policies have relatively
short policy periods and low limits of liability. Due to the low limits of
coverage, the period of time that elapses between the occurrence and settlement
of losses under nonstandard policies is shorter than many other types of
insurance. Also, since the nonstandard automobile insurance business typically
experiences lower rates of retention than standard automobile insurance, the
number of new policyholders underwritten by nonstandard automobile insurance
carriers each year is substantially greater than the number of new policyholders
underwritten by standard carriers.
Crop Insurance Operations
The four principal components of the Company's crop insurance business are (1)
Multi-Peril Crop Insurance ("MPCI"),(2) crop hail insurance, (3) private named
peril, and (4)fee based services to farmers. Crop insurance is purchased by
farmers to reduce the risk ofcrop 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
-16-
<PAGE>
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 1,625 independent agencies in 42 states.
Inaddition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary product which
combines the application and underwriting process for MPCI and hail coverages.
This product tends to produce less volatile loss ratios than the stand alone
product since the combined product generally insures a greater number of acres,
thereby spreading the risk of damage over a larger insured area. Approximately
60% of the Company's hail policies are written in combination with MPCI.
Although both crop hail and MPCI provide coverage against hail damage, under
crop hail coverages farmers can receive payments for hail damage which would not
be severe enough to require a payment under an MPCI policy. The Company believes
that offering crop hail insurance enables it to sell more policies than it
otherwise would.
In addition to crop hail insurance, the Company also sells insurance against
crop damage from other specific named perils. These products cover specific
crops and are generally written on terms that are specific to the kind of crop
and farming practice involved and the amount of actuarial data available. The
Company plans to seek potential growth opportunities in this niche market by
developing basic policies on a diverse number of named crops grown in a variety
of geographic areas and to offer these policies primarily to large producers
through certain select agents.
The fee income business is primarily services to farmers for global positioning
grid mapping of their farm and soil sampling to enhance the growing conditions
of the crops.
Agricultural Production Interruption Insurance ("AgPI(R)") is business
interruption insurance that is primarily intended to protect businesses that
depend upon a steady flow of crop (or crops) to stay in business. This product,
introduced in 1998, is sold to a variety of businesses involved in agribusiness,
including farmers, as well as grain elevator operators, produce shippers, custom
harvesters, cotton gins, agriculture chemical dealers and other processing
businesses whose income is heavily dependent on a stable supply of raw product
(i.e., cotton), or whose product sales are negatively affected if crop yields
fall (i.e., ag chemical dealers). As discussed later, the Company has
experienced significant losses on AgPI(R) policies sold in 1998.
Geo AgPLUS(TM) provides to the farmer measuring, gridding, and soil sampling
services combined with fertility maps and the software that is necessary to run
precision farming programs. Grid soil sampling, when combined 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.
-17-
<PAGE>
REVIEW OF CONSOLIDATED OPERATIONS
Net Earnings (Loss)
For the three and six months ended June 30, 1999, the Company recorded a net
loss of ($9,765) and ($10,787), or ($0.94) and ($1.04) per share (basic). This
is a decrease from net earnings for the three and six months ended June 30, 1998
of $5,668 and $10,592 or $0.55 and $1.02 per share (basic).
Income before taxes and distributions on preferred securities for the
nonstandard automobile segment showed a loss of ($11,847) and ($11,054) for the
three and six months ended June 30, 1999 compared to earnings of $6,674 and
$12,652 for the three and six months ended June 30, 1998. These losses were
driven primarily by an increase in loss and loss adjustment expense ("LAE")
reserves.
Income before taxes and distributions on preferred securities for the three and
six months ended June 30, 1999 in the crop segment was $1,767 and $3,369 which
compares to $6,466 and $12,417 for the same periods in 1998. The primary reason
for the decrease in 1999 as compared to 1998 was an adverse loss development on
AgPI(R) policies written in 1998 in the Crop Segment (See note 8).
Losses before tax and distributions on preferred securities for the corporate
segment are comparable to prior year, at ($1,165) and ($1,911) for the three and
six months ended June 30, 1999 and ($960) and ($1,813) for the same period in
1998. These losses consist primarily of amortization of intangibles and general
and administrative expenses.
Gross Premiums Written
Gross premiums written for the nonstandard automobile segment decreased 16.9%
and 24.9% for the three and six months ended June 30, 1999 compared to the three
and six months ended June 30, 1998. This represents a 5.2% decrease in premiums
in the first half of 1999 from the average premium volume in the last half of
1998. The primary reasons for this decline in volume has been the downsizing by
the Company of its nonstandard automobile business in certain competitive
markets, and the slowing of new business due to poor service during the
conversion by the Company to a new operating computer system. Management
believes that service has subsequently improved.
Gross premiums written for the crop segment increased 16.8% and 11.3% for the
three and six months ended June 30, 1999 compared to comparable periods in 1998.
Such increase was due to internal growth. Crop premiums (expressed in thousands)
for the three and six months ended June 30 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CAT imputed $14,470 $16,319 $30,782 $32,638
MPCI 78,748 46,654 141,028 107,297
Crop hail and named perils 28,776 37,873 57,123 63,365
AgPI(R) -- 7,493 96 7,533
------ ------- ------- -------
121,994 108,339 229,028 210,833
Less: CAT imputed (14,470) (16,319) (30,782) (32,638)
------- ------- ------- -------
$107,524 $92,020 $198,247 $178,195
======= ====== ======= =======
</TABLE>
Remaining other gross written premiums not reflected in nonstandard automobile
or crop segments represent commercial business which is ceded 100% to an
affiliate, Granite Reinsurance Company Ltd. Other gross written premiums were
$274 and $402 for the three and six months ended June 30, 1999 compared to
$1,544 and $3,789 for the same periods in 1998.
-18-
<PAGE>
Net Premiums Written
MPCI premiums are considered to be 100% ceded to the federal government for
accounting purposes. Quota share cession rates for other lines of insurance for
the three and six months ended June 30 are as follows:
1999 1998
---- ----
Nonstandard automobile 0% 10%
Crop hail 67% 25%
Named peril 50% 50%
AgPI(R) 62% 0%
Fee Income
Fee income decreased 36.9% and 33.7% for the three and six months ended June 30,
1999 as compared to the corresponding periods of the prior year. The decrease
was primarily due to the federal government retaining the CAT policy fee in
1999, versus Company retention of this fee in 1998. Fee income has also decrease
in the nonstandard auto segment due to decreases in gross written premium
volume.
Net Investment Income
Net investment income increased 0.4% and 5.5% for the three and six months ended
June 30, 1999 as compared to the corresponding periods of the prior year. Such
increase was due primarily to higher yields on invested assets caused by a shift
out of equity securities and into fixed income investments.
Loss and Loss Adjustment Expense
The loss ratio for the nonstandard automobile segment for the three and six
months ended June 30, 1999 was 92.2% and 85.4% of net premiums earned as
compared to 75.9% and 76.8% in 1998. During the second quarter of 1999 the
Company incurred $4.1 million of loss and loss adjustment expense on its
nonstandard auto operation for losses occurring in 1998. At the end of 1998 the
Company projected its unpaid loss and loss adjustment expense liabilities for
nonstandard auto, net of reinsurance, to be $114.8 million. During the second
quarter of 1999 a greater number of claims that occurred prior to year-end 1998
were reported than anticipated by the Company. The preponderance of those
unanticipated claims involved bodily injury liability. In addition to
strengthening reserves for older claims, the Company reexamined its projections
for the first half of 1999 and strengthened its reserves for the current year by
$5.0 million, $2.5 million of which was for accidents occurring in the first
quarter of 1999.
As noted in note 8 to the unaudited consolidated financial statements for the
six months ended June 30, 1999, in 1998 the Company sustained significant losses
on its AgPI(R) product, the quantification of which became known in 1999. In
1998, within the crop segment the Company directly sold and also reinsured the
underwriting risk on a new and unique crop insurance product called AgPI(R).
AgPI(R) is business interruption insurance that is primarily intended to protect
businesses that depend upon a steady flow of crop (or crops) to stay in
business. This product was sold to a variety of businesses involved in
agribusiness, including farmers, as well as grain elevator operators, produce
shippers, custom harvesters, cotton gins, agriculture chemical dealers and other
processing businesses whose income is heavily dependent on a stable supply of
raw product (i.e., cotton), or whose product sales are negatively affected if
crop yields fall (i.e., ag chemical dealers).
A large number of policies were written through a third party insurance company
under a fronting arrangement. The Company directly wrote or reinsured 157
AgPI(R) policies written in 1998, 111 of which were purchased by California
policyholders through a third party carrier. The policy form requires that the
county in which crops reside must suffer a minimum level of crop loss before a
loss recovery by a policyholder is even possible. After the county loss test is
met, then the policyholder must demonstrate an insurable economic loss on an
individual basis under the policy.
-19-
<PAGE>
The Company recognized approximately $7.6 million in written premium in 1998, of
which $6 million was earned in 1998 with $1.6 million being earned in the first
quarter of 1999. The lack of NASS and policyholder loss data, coupled with a
Company awareness of adverse weather conditions and resultant crop damage in
parts of the country with several AgPI(R) policyholders, led the Company to
establish reserves at December 31, 1998, equal to 100% of the AgPI(R) earned
premium.
County loss data, as well as policyholder loss data, gradually became known
starting in late April, 1999. As of May 28, 1999, the filing date for the
Company's first quarter, 1999, Form 10-Q, it became apparent that the Company
was experiencing unexpected adverse loss development on these policies, and
increased its incurred losses related to 1998 policies to $15 million. As of the
filing date for this second quarter 1999 Form 10-Q, county loss data is
complete, and the Company has received policyholder data on nearly all policies
to determine loss liability, if any, under each of the 157 AgPI(R) policies.
Based on the Company's latest analysis, the estimated gross ultimate incurred
loss settlement and loss adjustment expense ("LAE") related to these policies
totals $25 million. The Company recorded $6 million, $9 million, and $10 million
of loss and LAE in 1998, the first quarter and second quarter of 1999,
respectively. Losses for second quarter were partially offset by the recording
of a net gain of $4.67 million on a reinsurance treaty.
The Company believes that it has recognized, through loss and LAE payments and
reserves, its ultimate loss exposure related to the AgPI(R) product. However,
there can be no assurance that the Company's ultimate liability for AgPI(R)
related losses will not be materially greater than the $25 million in gross
losses already recorded related to this product.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses decreased to $19,652
and $31,544 or 27.0% and 23.0% of net premium earned for the three and six
months ended June 30, 1999 compared to $23,088 and $38,012 or 23.3% and 22.7% of
net premium earned in the corresponding periods of 1998. Overall expenses in the
first six months of 1999 versus the first six months of 1998 decreased by
$6,468. Within this decrease crop expenses decreased by $12,912 while
nonstandard auto expenses increased by $6,400.
The expense ratio for the nonstandard auto segment was 31.0% and 27.1% for the
second quarter and year-to-date in 1999 as compared to 20.0% and 20.2% in 1998.
The expense ratio increased primarily due to a reduction in ceding commission
income and increased salary expense. The reduction in ceding commission income
was due to the elimination of this income due to a commutation of a quota share
treaty. This ceding commission income was netted against auto expenses in the
prior year which reduced auto expenses in 1998. Salary and benefit expenses were
higher in 1999 in part due to increased use of temporary help and contract
labor.
Crop segment expenses include agent commissions, stop loss reinsurance costs and
operating expenses which are offset by MPCI Expense Reimbursements and MPCI
Underwriting Gain. The underwriting gain is an estimate until later in the year
when crops are harvested and losses are known. The estimated year to date gain
ratio in 1999 was 14% on gross premium; compared to 9% in 1998. The underwriting
gain increased in 1999 due to the fact that the crops covered by MPCI policies
are estimated to have average to above average yields this year. The 14%
estimate is in line with actual annual results over the past four years. The 9%
gain ratio for crop in the prior year was lower due to lower estimated crop
yields.
Interest Expense
Interest Expense primarily represents interest incurred by the Company's IGF
Insurance Company Subsidiary (IGF) since December 31, 1998 on a revolving bank
line of credit and three smaller notes assumed in the acquisition of North
American Crop Underwriters ("NACU").
-20-
Interest expense on the revolving bank line of credit was $105 and $148 for the
three and six months ended June 30, 1999. The balance of the $12,000 line of
credit was paid down for a large portion of the first six months. The balance of
the line of credit was $1,959 and $11,767 as of March 31, 1999 and June 30, 1999
respectively. The average interest rate on the line of credit was 6.83% during
the six months ended June 30, 1999.
The average balance of the other three interest bearing notes payable was $632
for the quarter. Other interest of $32 pertained to the other notes. Interest
rates on the three notes range from 7% to 9.9%. Total interest expense was $105
and $179 for the three and six months ended June 30, 1999.
Amortization of Intangibles
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest position in
GGS Management Holdings Inc. ("GGSH") and NACU, debt or preferred security
issuance costs and organizational costs. The increase in 1999 reflects the
effects of the goodwill associated with the July 1998 acquisition of NACU.
Provision (Benefit) for Income Taxes
Income tax expense was 31.8% and 30.8% of pre-tax income for the three and six
months ended June 30, 1999 compared to 36.3% in 1998. The decreased effective
tax rate at June 30, 1999 is due to a combination of estimated permanent
differences, of $1,138, between book and taxable income, coupled with a year to
date pre-tax loss rather than a pre-tax gain.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
Total investments as of June 30, 1999 and December 31, 1998 were $225,889 and
$222,853 respectively. Composition of investments is comparable between these
periods.
Cash and cash equivalents
Total cash and cash equivalent balances as of June 30, 1999 and December 31,
1998 were $14,860 and $14,800 respectively.
Investments in and Advances to Related Parties
Investments in and advances to related parties decreased from $3,545 at December
31, 1998, to $1,395 at June 30, 1999. The decrease was caused by repayment of
certain loans by company officers. The balance at June 30, 1999 is made up
primarily of a $1.3 million loan of securities to an affiliate, Granite Re.
Accounts Receivable net of Allowance For Doubtful Accounts
Receivables net of allowances for doubtful accounts as of June 30, 1999 and
December 31, 1998 were $258,319 and $120,559 respectively. June 30, 1999
receivables are more effectively compared to the June 30, 1998 receivables
balance of $238,532. Receivable balances are impacted by the cyclical nature of
the crop business and normally crop/hail receivables are high as of June 30.
Crop/hail receivables do not start to become due for payment until July. The
crop portion of receivable balances as of June 30, 1999 and June 30, 1998 was
$199,732 and $170,296 respectively. Crop Receivables increased 17% which is
expected due to an increase in year to date crop premiums written of 11% over
the prior year to date.
Nonstandard auto receivable balances net of allowance for doubtful accounts was
$58,587 and $68,236 respectively as of June 30, 1999 and June 30, 1998. The
balance of nonstandard auto receivables decreased 14% from the prior year. This
is expected due to a corresponding decrease in nonstandard net premiums written
year to date of 9% from the prior year to date.
-21-
<PAGE>
Reinsurance Recoverables and Prepaid Reinsurance Premiums
Reinsurance recoverables were $103,454 and $71,640 as of June 30, 1999 and
December 31, 1998 respectively. However the reinsurance recoverable balance is
more effectively compared to the June 30, 1998 balance of $106,233. This is
primarily due to the cyclical nature of the crop business. Of the total
reinsurance recoverable balance, $88,560 and $62,041 pertain to crop business
as of June 30, 1999 and 1998, respectively. Reinsurance recoverables are up in
1999 due to an increased percentage of ceded business in 1999 with regard to a
quota share treaty. Reinsurance recoverables on nonstandard auto decreased from
$44,193 to $14,894 for the period from June 30, 1998 to the current year to date
due to the commutation of a quota share treaty.
Prepaid reinsurance premiums were $127,329 and $31,172 as of June 30, 1999 and
December 31, 1998 respectively. This prepaid balance is more effectively
compared to the June 30, 1998 prepaid reinsurance balance of $111,526. The
prepaid reinsurance balance is affected also by the cyclical nature of the crop
business reinsured so prepaid balances are higher at June 30. Crop reinsurance
premiums totaled $126,341 and $90,253 as of June 30, 1999 and 1998,
respectively. Prepaid reinsurance premiums on nonstandard auto decreased from
$21,273 at June 30, 1998 to $988 at June 30, 1999 due to the commutation of a
quota share treaty arrangement in the second half of 1998.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs were $16,901 and $16,332 as of June 30, 1999
and December 31, 1998 respectively. Although these costs are comparable, the
Company feels the ratio of DAC to net unearned premium would be more comparable
using prior year to date comparisons. Deferred acquisition costs as of June 30,
1998 were $17,618. Deferred acquisition costs were primarily composed of
deferred acquisition costs on nonstandard auto of $15,255 and $15,668
respectively at June 30, 1999 and June 30, 1998, respectively. Deferred policy
acquisition costs for nonstandard auto as compared with nonstandard net unearned
premiums of $89,354 and $90,625 were 17.1% and 17.3% as of the above dates
respectively. Deferred acquisition costs for crop were $1,646 and $4,066
respectively at June 30, 1999 and 1998. Deferred policy acquisition costs
for crop as compared with net unearned premiums of $9,799 and $24,237 as of the
above dates were 16.8% and 16.8% respectively. As of June 30, 1999 and June 30,
1998 ceded deferred acquisition costs were $-0- and $2,116 respectively on
nonstandard auto. The ceded deferred costs are no longer applicable in 1999 due
to commutation of a quota share treaty.
Federal Income Taxes
Federal income taxes recoverable of $8,625 and $12,672 at June 30, 1999 and
December 31, 1998 are based on amounts recoverable from the 1996 and 1997 tax
year due to tax losses generated in 1998 and through June 30, 1999.
The deferred income tax asset balance of $6,786 as of June 30, 1999 has
increased from $2,565 at June 30, 1998 and $5,164 at December 31, 1998 because
of higher unearned premiums, changes in the unrealized gain or loss in
investments and an increase in loss reserve.
Fixed Assets
Property and Equipment, net of accumulated depreciation has increased $1,935
over year end 1998. This increase is primarily due to the capitalization of
various systems implementation and hardware costs, primarily in the nonstandard
auto segment.
Intangible Assets
The balance in the Intangible Assets has decreased from year end 1998 due to
amortization expense. Intangible assets include goodwill from the acquisition of
Superior, additional goodwill from the acquisition of the minority interest in
GGSH and NACU, debt or preferred security issuance costs and organizational
costs.
-22-
<PAGE>
Loss and Loss Adjustment Expense Reserves
Total loss and loss adjustment expense reserves increased from $200,972 as of
December 31, 1998, to $213,721 as of June 30, 1999. The total increase in loss
and loss adjustment expense reserves is approximately $12.7 million.
Nonstandard auto reserves increased $12.5 million during 1999. Of that increase
$5.3 million represented strengthening of prior year reserves. The remaining
$7.2 million increase in nonstandard auto reserves results from the fact that
accident year 1999 loss ratio is estimated to be approximately 2.0% higher than
for accident year 1998. Reserves for 1998 AgPI(R) losses increased from $5.9
million as of December 31, 1998 to $17.0 million as of June 30, 1999, as county
loss data and policyholder loss data gradually became known paid losses equal
$8.0 million for a total incurred of $25.0 million. These increases are offset
by a decrease in reserves for crop insurance, other than AgPI(R), reflecting
normal seasonal variation of crop insurance losses.
Unearned Premium
The unearned premium reserve increased by $115,818 from December 31,1998 to June
30,1999. Gross unearned premium was $226,482 and $110,664 as of June 30, 1999
and December 31, 1998. However, this unearned premium balance is more
effectively compared to the June 30, 1998 balance of $226,388 due to the
cyclical nature of the crop business. Unearned for the crop business is impacted
by the income recognition of crop/hail, which is based upon a 9 month life cycle
from January to October. Crop unearned as of June 30, 1999 and June 30, 1998 was
$136,141 and $114,490 respectively. Crop unearned increased by $21,651 or 18.9%
from June 30, 1998 to June 30, 1999. This was primarily due to an increase in
written premium of 11.2 % for the same period. Unearned on nonstandard auto
decreased $21,556 or 19.3% for the same period. This was primarily due to a
decrease in nonstandard premiums written of 26.3% for the same period. Unearned
for nonstandard auto was $90,341 and $111,897 as of June 30, 1999 and June 30,
1998.
Reinsurance Payables
Reinsurance payables increased by $149,560 from December 31, 1998 to June 30,
1999. Due to the cyclical nature of the crop business reinsurance payables as of
June 30, 1999 of $175,044 are more effectively compared to the June 30, 1998
balance of $154,564. Of the total reinsurance payables balance $175,011 and
$123,418 pertain to the crop business as of June 30, 1999 and June 30, 1998
respectively. Reinsurance payables on the nonstandard auto business decreased
from $31,146 to $32 between June 30, 1998 and June 30, 1999 due to commutation
of a quota share reinsurance treaty.
Notes Payable
At June 30, 1999, IGF maintained a revolving bank line of credit in the amount
of $12,000. At December 31, 1998, March 31, 1999, and June 30, 1999 the
outstanding balance was $12,000, $1,959, and $11,767 respectively. 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 June 30, 1998, IGF was in
compliance with all covenants associated with the line or had received proper
waivers.
The average interest rate on the line of credit was 6.96% during 1998 and 6.83%
for the six months ended June 30, 1999.
Notes payable also includes a $1,000 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 each) assumed in the acquisition of NACU due
2002-2006 with periodic payments at interest rates ranging from 7% to 9.09%.
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Other Liabilities
Other liabilities increased by $3,776 from December 31, 1998 to June 30, 1999.
However, payables as of June 30, 1998 of $21,015 are comparable to payables of
$20,545 as of June 30, 1999. The payables tend to be higher at June 30 due to
cyclical nature of the crop business and the related overall effect on cash flow
in the consolidated business.
Shareholders' Equity
Stockholders' Equity has decreased $13,645 from December 31, 1998. This decrease
is the result of a net loss of $10,787 for the six months ended June 30, 1999
and the increase in unrealized losses on investments, net of deferred taxes, of
$2,858.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated total assets of $837,360 at June 30, 1999 increased
$267,923 from $569,437 as of December 31, 1998. The primary reason for this
increase was an increase in receivable balances which are impacted by the
cyclical nature of the crop/hail business. Typically crop/hail receivables are
high as of June 30. Crop/hail receivables do not start to become due until July.
Net cash provided by operating activities decreased $26,714 to $10,731 for the
first six months of 1999 when compared to the same period in the prior year,
driven partially by a $21,379 decrease in net earnings. Cash and cash equivalent
increased slightly from the end of 1998 to $14,860. Repayment of officer loans
as well as cash generated from operations was used for the purchase of invested
assets as well as additional computer equipment and related software in the
Company's non-standard auto operations.
Overall, operating cash flow combined with the availability of short term
investments continues to be adequate to meet policyholders needs for claims.
As of June 30, 1999, the company had $17 million of short term investments
available to meet short term operating cash needs. This was an increase of $1.4
million and $5.8 million over the December 31, 1998 and June 30, 1998 balances
of short term investments.
The crop segment also has the ability to retain MPCI premium funds collected
October through December of 1999 till March of 2000 at a 15% interest rate if
needed.
YEAR 2000 COMPLIANCE
General
In the next year, many companies will face potentially serious risks associated
with the inability of existing data processing hardware and software to
appropriately recognize calendar dates beginning in the year 2000. Many computer
programs that can only distinguish the final two digits of the year entered may
read entries for the year 2000 as the year 1900 and compute payments, interest,
premiums, commissions, delinquencies and other matters based on the wrong date.
If a company's critical internal systems do not correctly recognize and process
data information beyond the year 1999, there could be a material adverse impact
on a company's business and operation.
The Company has four primary locations where Y2K issues have the potential to
significantly impact the Company's operations. These locations are Indianapolis,
Indiana; Atlanta, Georgia; Tampa, Florida, and Des Moines, Iowa. Given the
nature of the Company structure, the issues relating to Tampa will be grouped
together with those of the Company's Atlanta operations and will be referred to
as "Atlanta" issues.
The Company's location in Des Moines, Iowa primarily administers the Company's
crop insurance business which, on a premium volume basis, represents roughly 50%
of the Company's total business. The Company's corporate headquarters is located
in Indianapolis and the Company's Indianapolis location also houses non-standard
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automobile business operations which, on a premium volume basis, account for
roughly 25% of the Company's non-standard automobile business. The Company's
Atlanta location (including Tampa), administers the remainder of the Company's
non-standard automobile business.
The Year 2000 Project ("Project") addresses the inability of various computer
software and hardware (both internal and external to the Company) to distinguish
between the year 1900 and the year 2000. In 1996, the Company initiated an
effort to replace its hardware and software systems to reap the operational
efficiencies of state of the art processing systems. This effort came as a
result of the Company's decision to replace the mainframe system in Indianapolis
and wean the Company from a third party contractor processing arrangement in
Atlanta. As the Company began to prepare for Y2K issues during the time it was
in the midst of its operating systems conversion and upgrade, the Company set
forth on a course to identify Y2K items and issues, assign a priority for those
items identified, test solutions, and design contingency plans.
Readiness
Corporate Wide Infrastructure
The Company relies on third party vendors for many things, such as electric
utility supply, water, telephone service, banking services, investment
management, and reinsurance, among other things. The Company began inquiring of
such third party infrastructure vendors regarding their Y2K readiness in July,
1998. These inquiries took the form of written requests for responses from such
third party vendors which would detail their Y2K preparedness. The Company has
received written assurance from each of its material third party infrastructure
vendors that their respective Y2K preparations are complete and that the Company
should not anticipate a material disruption in service from such infrastructure
vendors.
Further, the Company has examined its internal infrastructure systems (e.g.
telephone system, HVAC, security systems) and has successfully completed the
necessary remediation of such internal infrastructure systems.
The Company has also prepared and implemented documented standards with respect
to all new equipment purchases and the Company now receives a letter of
certification from the manufacturers of such equipment that their products are
Y2K compliant.
Des Moines
The Company's Des Moines location has completed its Y2K Project and its
preparation is now complete.
Atlanta
The Company has replaced its policy administration and claims systems by
converting to Y2K compliant systems. These new policy administration and claims
systems are currently operational for all new business written by the Company's
Atlanta facility. There are, however, approximately 24,000 insurance policies
which are currently maintained on a non-Y2K compliant policy administration
system provided by an unrelated third party. The policies maintained on this
non-Y2K compliant system represent approximately 18% of the policy count
currently administered by the Company's Atlanta operations. Given the nature of
the policy term of these 24,000 insurance policies, the Company expects the
policies to be beyond their term as of December 31, 1999 and it is the Company's
intention that if such policies are quoted for renewals, if any, that such
renewals will be processed on Atlanta's Y2K compliant policy administration
system. As an interim step, the Company has arranged for such unrelated third
party to store inactive policy data while providing the Company access to such
data on a fee basis. A data warehouse is currently being developed by the
Company for such inactive policy data, with an expected completion date of June
1, 2000. Ongoing operations of the Company will not be affected by the
warehousing of such inactive policy data. Further, there are approximately 6,100
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<PAGE>
claims which are currently being administered on Atlanta's non-Y2K compliant
claims system. The claims which are currently being administered on Atlanta's
non-Y2K compliant claims system represent approximately 60% of Atlanta's total
pending claim count, which will decrease during the balance of 1999.
The Company's Atlanta operation must migrate data from its non-Y2K compliant
legacy systems (policy administration and claims) and the Company is currently
in the process of writing the program which will allow this conversion. The data
requirements of both the legacy system and the Company's new Y2K compliant
policy administration and claims system have been identified and the data
differences between such systems have also been identified. The Company is
currently developing the program logic to move claims information to its Y2K
compliant platform. The Company must complete the transfer logic and then test
and correct the results and output. The Company estimates that it will complete
the development of the data conversion logic by October 15, 1999 and the Company
has established an aggressive goal of completing the data conversion for the
Company's claims system to its Y2K compliant platform by November 30, 1999.
However, there can be no assurance that the Company will meet this target or
will have completed the Atlanta data conversion by December 31, 1999. The
ability of the Company to complete this conversion is dependent upon, among
other things, the availability of external resources which are primarily in the
form of third party programmers.
Indianapolis
The Company anticipated that the conversion of its non-Y2K compliant policy
administration system would be completed by June 30, 1999. However, in early
June, 1999, the Company determined that it would reap significant future
operational efficiencies by installing the Company's Y2K compliant policy
administration system from its Atlanta operations in Indianapolis. In addition
to significant operational efficiencies, the Company determined that it would
reap significant benefits from having all of its automobile insurance operations
on the same policy administration system. Therefore, the Company's prior effort
with respect to conversion of its Indianapolis policy administration system was
discontinued.
Given the fact that the Company's Indianapolis and Atlanta locations do not
service the same states, for the necessary policy administration conversions to
occur, variations which are unique to each state with which the Indianapolis
location deals must be separately programmed into the Y2K compliant policy
administration system being imported from the Company's Atlanta location.
Currently, programming is underway to add the various state-specific
requirements of those states with which the Indianapolis location deals. The
Company anticipates that, as soon as each states' programming is completed, it
will be brought on-line while programming continues on other Indianapolis
states. The Company believes that such state specific programming will be
completed (including testing) by October 31, 1999. The hardware necessary for
the Company's Indianapolis policy administration conversion has been acquired
and is Y2K compliant.
The Company has completed installation of its Y2K compliant Atlanta claims
system in its Indianapolis location and, as of August, 1998, began administering
all new claims in its Indianapolis location on this new Y2K compliant system.
The Company has also developed a program to allow its new Y2K compliant claims
system to access policy data from its non-Y2K compliant policy administration
system (which is in the process of being replaced). This program is currently in
the test phase. The Company believes that the program currently being tested to
allow the new Y2K compliant claims system to access old policy data will be
operational by September 30, 1999. There are currently approximately 2,300 open
claims out of a total of approximately 6,850 open claims that are currently
being administered by the Company's non-Y2K compliant Indianapolis legacy claims
system. Further, the Company is in the process of completing the necessary
programming to allow its new Y2K compliant claims system to administer those
claims which are currently being administered on the Company's non-Y2K compliant
claims system. The Company estimates that this programming will be completed
(including testing) by September 30, 1999.
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<PAGE>
The Company recognizes the challenges it faces regarding the completion of the
installation of the Atlanta policy administration system in Indianapolis, the
conversion of the Indianapolis policy administration data to a Y2K compliant
platform and the conversion of those claims which are currently maintained on a
non-Y2K compliant platform to the Company's new Y2K compliant claims system.
Recognizing those challenges, the Company is developing an alternative plan with
respect to its legacy systems, which includes the upgrading of its hardware,
operating software and completing the remediation of its current policy
administration software. The Company is currently proceeding with the
development both of its primary effort as well as this alternative. The Company
estimates that this alternative will be complete and operational by November 30,
1999. There can, however, be no assurance that the Company will have completed
any of the steps outlined with respect to the Indianapolis portion of the
Project by the dates noted or that it will have completed the necessary
Indianapolis Project by December 31, 1999.
Year 2000 Costs
The Company considers the costs associated with the Project to be material. The
Company estimates that, to date, it has spent approximately $7.0 Million towards
completion of the Project. Further, the Company estimates that approximately
$2.0 Million of additional funds will be required to complete the Project. The
Company anticipates that it will pay for these costs from current funds.
Risks
Given its state of preparedness, the Company does not feel that there are
material Y2K related risks with respect to either its Des Moines facility or the
services to be provided by third party infrastructure vendors. Further, the
Company does not feel that there is a material risk to its business or
operations from Y2K issues associated with internal infrastructure.
Atlanta
With respect to Atlanta, the most reasonably likely worst case scenario would
have the Company failing to complete the necessary data conversion from its
legacy claims systems to its Y2K compliant claims systems. If this were to
occur, this would require that the claims payments be handled manually and would
require a small addition to staff.
Indianapolis
The most reasonably likely worst case scenario involving the Company's
Indianapolis operations is that the Company is unable to complete the
installation of its Y2K compliant policy administration system and fail to
successfully convert policy administration and claims data from its non-Y2K
compliant legacy policy administration and claims systems, which the company
does not consider to be the case. If this were to occur, the Company would be
unable to process roughly 25% of its non-standard automobile insurance business
and it would lose the ability to administer existing policies in an automated
environment.
General
In the event that the Company's efforts are unsuccessful and/or that one or more
of the Company's critical internal systems should not properly recognize January
1, 2000 and subsequent dates, the following could occur, any of which could have
a material adverse impact on the operations of the Company;
Service to the Company's customers in the Indianapolis operations could
deteriorate to the point that a substantial number of the
Company's customers move their business to another company;
The Company may be unable to process its new business in the
Indianapolis operations or pay certain older claims in a cost
effective manner;
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<PAGE>
The Company may be unable to fulfill, on a timely basis, its obligations
to its customers, regulatory authorities, and or contingencies;
The Company may be unable to fulfill, on a timely basis, various
contractual obligations; and
The Company may suffer unintended, indirect consequences in that
efforts to deal with issues caused by the failure to complete the
Project may divert resources from other areas or phases of the
Company's operations.
Contingency Plans
Atlanta
The Company is currently assessing the feasibility of other alternatives to its
stated plan and is developing a contingency plan.
Indianapolis
The Company is currently assessing the feasibility of other alternatives and is
developing a contingency plan.
FORWARD LOOKING STATEMENTS
All statements, trend analyses, and other information herein contained 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.
-28-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation
arising in the ordinary course of business. The Company
believes that the ultimate resolution of these lawsuits will
not have a material adverse effect on its financial condition
or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages
attributable to these lawsuits and the estimated costs of
litigation.
(A) In 1998, the Company's IGF Insurance Company subsidiary
issued insurance policies on certain agricultural business
interruption risks ("AgPI(R)"). Please see note 8. Certain of
these policy holders have recently instituted litigation or
filed for arbitration of their claim. In each instance, the
Company's IGF Insurance Company subsidiary has been named as a
defendant. To date, three lawsuits have been filed by a total
of seven policyholders and three policyholders have instituted
arbitration. Further, the Company (through its IGF subsidiary),
has instituted two declaratory actions against two
policyholders to help determine the Company's obligations with
respect to such policyholders. The Company feels it has a
strong legal position with respect to these AgPI(R) lawsuits
and arbitrations and the Company is vigorously defending these
matters.
These lawsuits and arbitrations have been instituted after June
30, 1999 and, consequently, each matter is in an early stage of
development. The Company feels its financial reserves for these
lawsuits and arbitrations are sufficient to cover the resulting
liability, if any, that may arise from these matters. However,
there can be no assurance that the Company's total liability
from AgPI(R) liability that may be in excess of current AgPI(R)
financial reserves will not be material to the Company, taken
as a whole.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed an 8-K on June 1, 1999 regarding changes in
registrants certifying accountants after the Company filed it's
1998 annual report on Form 10-K. An 8-K/A was also filed on
June 1, 1999 regarding additional information on the Company's
changes in registrants certifying accountants. The Company
filed an 8-K on August 20, 1999 regarding the filing of an
amended 10-Q for the quarterly period ended March 31, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 20, 1999 By: /s/ Alan G. Symons
Alan G. Symons
Chief Executive Officer
Dated: August 20, 1999 By: /s/ Thomas R. Kaehr
Thomas R. Kaehr
Vice President, Treasurer and
Chief Financial Officer
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<NAME> Symons International Group
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<CASH> 14,860,000
<RECOVER-REINSURE> 103,454,000
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