UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number: 0-29042
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1707115
(State or other jurisdiction (I.R.S. Employer
of incorporattion or organizaiton) Identification No.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6400
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 May 1, 2000, there were 10,385,399 shares of Registrant's $1.00 par value
common stock issued and outstanding.
<PAGE>
FORM 10-Q INDEX
FOR THE QUARTER ENDED MARCH 31, 2000
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 2000
(unaudited) and December 31, 1999................................. 3
Unaudited Consolidated Statements of Earnings
for the Three Months Ended
March 31, 2000 and 1999........................................... 4
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 ....................... 5
Condensed Notes to Unaudited Consolidated Financial
Statements........................................................ 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk........ 21
PART II OTHER INFORMATION................................................. 21
SIGNATURES ............................................................. 23
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
ASSETS
Investments
Available for sale:
<S> <C> <C>
Fixed maturities, at market $158,303 $166,748
Equity securities, at market 12,918 13,425
Short-term investment, at amortized cost which approximates market 19,322 21,820
Mortgage loans, at cost 1,960 1,990
Other 996 945
Total Investments 193,499 204,928
Investment in and advances to related parties 1,008 1,462
Cash and cash equivalents 4,266 3,097
Receivables, net of allowance for doubtful accounts 125,492 86,450
Reinsurance recoverable on paid and unpaid losses, net 47,319 98,258
Prepaid reinsurance premiums 94,230 10,463
Federal income taxes recoverable -- 6,820
Deferred policy acquisition costs 12,490 13,920
Deferred income taxes -- --
Property and equipment, net of accumulated depreciation 21,248 21,936
Intangible assets 43,808 43,221
Other assets 9,178 9,256
TOTAL ASSETS $552,538 $499,811
LIABILITIES
Losses and loss adjustment expense reserves $170,332 $214,948
Unearned premiums 165,839 90,008
Reinsurance payables 82,563 35,850
Notes payable 3,735 16,929
Distributions payable on preferred securities 8,073 4,809
Other 17,384 27,247
TOTAL LIABILITIES 447,926 389,791
Commitments and contingencies:
Minority interest:
Company obligated mandatorily redeemable preferred stock of trust
subsidiary holding solely parent debentures 135,000 135,000
STOCKHOLDERS' (DEFICIT)
Common Stock 38,136 38,136
Additional paid-in capital 5,851 5,851
Unrealized gain (loss) on investments (4,928) (4,898)
Retained (deficit) (69,447) (64,069)
TOTAL STOCKHOLDERS' (DEFICIT) (30,388) (24,980)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $552,538 $499,811
See condensed notes to consolidated financial statements
</TABLE>
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Gross premiums written $144,219 $152,022
Less ceded premiums (106,180) (76,723)
Net premiums written 38,039 75,299
Change in net unearned premiums 7,936 (10,962)
Net premiums earned 45,975 64,337
Fee income 3,775 4,463
Net investment income 3,040 3,289
Net realized gain (loss) 365 (1,382)
Total Revenues 53,155 70,707
Loss and loss adjustment expenses 39,659 56,487
Policy acquisition and general and administrative expenses 14,390 11,892
Interest expense 203 74
Amortization of intangibles 530 605
Total Expenses 54,782 69,058
Earnings (loss) before income taxes and minority interest (1,627) 1,649
Provision (benefit) for income taxes 487 (491)
Net earnings (loss) before minority interest (2,114) 2,140
Minority interest:
Distributions on preferred securities 3,264 3,162
Net (loss) $(5,378) $(1,022)
Other comprehensive earnings
Net (loss) $(5,378) $(1,022)
Change in unrealized gains (losses) on securities (30) (1,380)
Comprehensive (loss) $(5,408) $(2,402)
Net (loss) per share - basic $(0.52) $(0.10)
Net (loss) per share - fully diluted $(0.52) $(0.10)
Weighted average shares outstanding :
Basic 10,385 10,385
Fully diluted 10,385 10,385
See condensed notes to consolidated financial statements
</TABLE>
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
Cash Flows from Operating Activities:
<S> <C> <C>
Net (loss) for the period $(5,378) $(1,022)
Adjustments to reconcile net earnings to net cash provided from
operations:
Depreciation and amortization 2,073 1,364
Deferred income tax (benefit) provision -- 3,319
Net realized (gain) loss (366) 1,382
Net changes in operating assets and liabilities:
Receivables (39,042) (68,479)
Reinsurance recoverable on paid and unpaid losses, net 50,939 10,085
Prepaid reinsurance premiums (83,767) (50,077)
Deferred policy acquisition costs 1,430 1,425
Other Assets (754) (3,907)
Losses and loss adjustment expenses (44,616) (23,166)
Unearned premiums 75,832 65,357
Reinsurance payables 46,713 77,168
Distribution payable on preferred securities 3,264 (3,250)
Federal income taxes 6,820 (6,141)
Other liabilities (9,679) 7,406
NET CASH PROVIDED FROM OPERATIONS 3,469 11,464
Cash flow used in investing activities:
Net (purchases) sales of short-term investments 2,498 (2,428)
Purchases of fixed maturities (75) (75,340)
Proceeds from sales, calls and maturities of fixed maturities 9,675 67,429
Purchase of equity securities (2,009) (944)
Proceeds from sales of equity securities 1,544 22
Purchases of property and equipment (716) (976)
Purchase of real estate -- (7)
(Purchases) sales of other investments (27) (243)
NET CASH FROM (USED IN) INVESTING ACTIVITIES 10,890 (12,487)
Cash flow provided from/(used in) financing activities:
Cost of shares acquired --
Payments on notes payable (13,194) (9,224)
Loans from (repayments to) related parties 4 (180)
NET CASH (USED IN) FINANCING ACTIVITIES (13,190) (9,404)
Increase (decrease) in cash and cash equivalents 1,169 (10,427)
Cash and cash equivalents, beginning of period 3,097 14,800
Cash and cash equivalents, end of period $4,266 $4,373
</TABLE>
See condensed notes to consolidated financial statements
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three Months Ended March 31, 2000
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements included in this report are the consolidated
financial statements of Symons International Group, Inc. and its
subsidiaries (the "Company"). The consolidated financial statements
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). In management's opinion,
these financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
results of operations for the interim periods presented. Pursuant to
SEC rules and regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
from these statements unless significant changes have taken place since
the end of the most recent fiscal year. For this reason, the
accompanying consolidated financial statements and notes thereto should
be read in conjunction with the financial statements and notes for the
year ended December 31, 1999 included in the Company's 1999 Annual
Report on Form 10-K. Results for any interim period are not necessarily
indicative of results to be expected for the year.
2. Supplemental Cash Flow Information
Cash payments of interest were $581,000 and $311,000 for the three
months ended March 31, 2000 and 1999, respectively. Cash received
related to refund Federal Income taxes was taxes were $6,586,000 and
$6,548,000 for the first three months of 2000 and 1999, respectively.
3. Notes Payable
IGF Insurance Company, the Company's subsidiary ("IGF"), has a
revolving bank line of credit (the "IGF Revolver"). During the first
quarter 2000 the maximum amount that could be borrowed under the IGF
Revolver was reduced from $15,000,000 to $8,000,000 and it was extended
through December 15, 2000. As of April 1, 2000, the entire line of
credit was available to IGF. This line is collateralized by receivables
and real property. The IGF Revolver contains certain covenants which
(i) restrict IGF's ability to accumulate common stock; (ii) set minimum
standards for investments and policyholder surplus; and (iii) limit the
ratio of net written premiums to statutory surplus. At March 31, 2000,
IGF was not in compliance with a minimum statutory surplus covenant;
however, IGF has received a waiver from the bank for the period ending
March 31, 2000. Although the Company believes it will be able to obtain
waivers from the bank as necessary in the future, there can be no
assurance thereof.
The average interest rate on the IGF Revolver was 6.75% for the three
months ended March 31, 1999 and 7.91% for the three months ended March
31, 2000.
Notes payable also includes a $1,000,000 note due 2001 on the purchase
of North American Crop Underwriters, Inc. ("NACU") at no interest. The
balance of notes payable at March 31, 2000 includes three smaller notes
(less than $300,000 each) assumed in the acquisition of NACU which have
various due dates from 2002 to 2006 with periodic payments at interest
rates ranging from 7% to 9.09%.
4. Preferred Securities
The preferred securities represent company-obligated mandatorily
redeemable preferred securities of a trust subsidiary (the "Preferred
Securities") holding solely parent debentures which 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 deferred the semi-annual interest payment that was
due February 2000. Under the terms of the indenture, the Company is
permitted to defer such payment for up to five years.
<PAGE>
The indenture for the Preferred Securities contains certain restrictive
covenants. Some of 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 (5.00) as of March 31, 2000, and will continue to
apply until the Company's consolidated coverage ratio exceeds the
amount set forth in the indenture. The Company is in compliance with
the additional restrictions and is not in default in its obligations
with the regard to the Preferred Securities.
5. Regulatory Affairs
As previously reported, Pafco General Insurance Company ("Pafco") has
agreed to an order under which the Indiana Department of Insurance
("IDOI") may monitor more closely the ongoing operations of Pafco due
to the risk-based capital ratio being below the Company action level
using the National Association of Insurance Commissioners ("NAIC")
guidelines and applicable law. This order remains in effect. Pafco's
inability or failure to comply with this order could result in the IDOI
requiring further reductions in Pafco's permitted premium writings or
in the IDOI instituting future proceedings against Pafco. The final
report has not yet been issued by the IDOI on its previously disclosed
target examination of Pafco, covering loss reserves, pricing and
reinsurance and no action was taken thereon.
Pafco has also agreed with the Iowa Department of Insurance ("IADOI")
to (i) limit its policy counts on automobile business in Iowa and (ii)
provide the IADOI with policy count information on a monthly basis
until June 30, 2000 and thereafter on a quarterly basis.
In addition Pafco has agreed to provide monthly financial information
to other departments of insurance in states in which it writes
business.
As previously disclosed, with regard to IGF and as a result of the
losses experienced by IGF in the crop insurance operations, IGF has
agreed with the IDOI to provide monthly financial statements to the
IDOI, consult monthly with the IDOI, and to obtain prior approval for
affiliated party transactions. IGF is currently in compliance with its
agreement to provide monthly financial statements to the IDOI.
IGF has agreed with the IADOI that it will not write any nonstandard
business, other than that which it is currently writing until such time
as IGF has: (i) increased surplus; (ii) a net written premium to
surplus ratio of less than three to one; and (iii) surplus reasonable
to its risk.
The Florida Department of Insurance ("FDOI") has concluded its
examinations of Superior Insurance Company ("Superior") with regard to
review of systems and year 2000 compliance. No significant action was
taken by the FDOI as a result of these examinations. The FDOI's
financial review of Superior for the year ended December 31, 1999 is
ongoing, and Superior is maintaining ongoing discussions with the FDOI
regarding reserve levels, financial review and reporting, and other
issues. Superior has also agreed with the Arizona Department of
Insurance to provide it with monthly financial statements.
<PAGE>
The Company's operating subsidiaries, their business operations, and
their transactions with affiliates, including the Company, are subject
to regulation and oversight by the IDOI, the FDOI, the insurance
regulators of other states in which the subsidiaries write business,
and in the case of IGF, the Federal Crop Insurance Corporation
("FCIC"). The Company is a holding company and all of its operations
are conducted by its subsidiaries. Regulation and oversight of
insurance companies and their transactions with affiliates is conducted
by state insurance regulators and, in the case of IGF, the FCIC,
primarily for the protection of policyholders and not for the
protection of other creditors or of shareholders. Failure to resolve
outstanding issues with the IDOI, the FDOI and other regulators in a
manner satisfactory to the Company could result in future regulatory
actions or proceedings that materially and adversely affect the
Company.
6. Commitments and Contingencies
As previously reported, a complaint for a class action alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 was filed against the Company and certain of its officers and
directors in the United States District Court for the Southern District
of Indiana. The Company intends to vigorously defend the claims brought
against it. No material developments have occurred since last reported.
As previously reported, the California Department of Insurance ("CDOI")
has advised the Company that it is reviewing a possible assessment
which could total $3,000,000. 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 will vigorously defend any potential assessment and believes it
will prevail. No material developments have occurred since last
reported.
As previously reported, IGF is a party to a number of pending legal
proceedings relating to a product sold in 1998 (AgPI) which has since
been discontinued. Approximately $22,400,000 was paid through March 31,
2000. A reserve of $12,100,000 remains. No material developments have
occurred since last reported.
As previously reported, two assertions have been made in Florida
alleging that service charges or finance charges are in violation of
Florida law. The plaintiffs are attempting to obtain class
certification in these actions. The Company believes that it has
substantially complied with the premium financing statute and intends
to vigorously defend any potential loss. No material developments have
occurred since last reported.
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 Company's 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.
The Company is a joint and several guarantor in a $7,250,000 debt
collateralized by operating assets held in an entity in which the
Company is a 50% owner. The estimated fair market value of the assets
approximates the debt.
7. Loss Development on Prior Accident Years
During the first quarter of 2000 the Company experienced favorable
development on its year end 1999 loss and loss adjustment expense
("LAE") reserves for the nonstandard auto operation in the amount of
$300,000. As the result of favorable settlement of outstanding claims
on surplus line policies, the Company experienced favorable development
of $100,000 and this amount is included in the results of the Company's
nonstandard auto segment. In total, the Company's results for
nonstandard auto include favorable development on prior accident years
of $400,000.
During the same time period the Company experienced favorable
development on its year end crop insurance reserves in the amount of
$600,000. Although the aggregate reserve development was favorable, the
Company experienced an adverse loss reserve development of $700,000 on
crop hail and named peril claims caused by claims reported late. This
was offset by a catastrophic coverage ("CAT") and multiple-peril crop
insurance ("MPCI") LAE reimbursement of $1,300,000 for the Company's
handling of 1999 MPCI and CAT claims.
8.
<PAGE>
Segment Disclosures
The Company has two reportable segments based on products: nonstandard
automobile insurance and crop insurance. The nonstandard automobile
segment offers personal nonstandard automobile insurance 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 the December 31, 1999 annual report
in "Nature of Operating 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. "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.
9. Reclassifications
Certain prior period amounts have been reclassified to conform with
current year presentation.
<PAGE>
<TABLE>
<CAPTION>
The following tables show financial data by segment (in thousands):
Three Months Ended
March 31,
2000 1999
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
<S> <C> <C>
Gross premiums written $59,569 $61,171
Net premiums written 30,469 73,687
Net premiums earned 43,041 65,396
Fee income 3,934 4,521
Net investment income 2,860 3,164
Net realized gain (loss) 365 (1,382)
TOTAL REVENUES 50,200 71,699
Losses and loss adjustment expense 37,219 51,313
Policy acquisition and general and administrative expenses 17,560 19,595
TOTAL EXPENSES 54,779 70,908
Earnings (loss) before income taxes $(4,579) $791
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio (2) 86.5% 78.5%
Expense ratio, net of billing fees (3) 31.7% 23.0%
Combined ratio (4) 118.2% 101.5%
CROP INSURANCE OPERATIONS:
Gross premiums written $84,360 $90,723
Net premiums written 7,570 $1,613
Net premiums earned 2,934 $(1,060)
Fee income (159) (59)
Net investment income 126 57
Net realized capital gain (loss) -- --
TOTAL REVENUES 2,901 (1,062)
Losses and loss adjustment expenses 2,440 5,174
Policy acquisition and general and administrative expenses(1) (3,792) (8,008)
Interest and amortization of intangibles 243 169
TOTAL EXPENSES (1,109) (2,665)
Earnings (loss) before income taxes $4,010 $1,603
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement and underwriting gain.
(2) Loss and LAE ratio: ratio of loss and LAE incurred during the period, as a percentage of net premium earned.
(3) Expense ratio, net of billing fees: ratio of policy acquisition and general and administrative expense less fee income, as a
percentage of net premium earned.
(4) Combined ratio: sum of the loss and LAE ratio plus the expense ratio net of billing fees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
Earnings (loss) before income taxes and minority interest:
<S> <C> <C>
Nonstandard automobile $(4,579) $791
Crop 4,010 1,603
Segment totals (569) $2,394
Corporate and other (1,058) (745)
Consolidated totals $(1,627) $1,649
March 31, December 31,
2000 1999
Segment assets:
Nonstandard automobile $258,323 $229,640
Crop 189,681 145,622
Corporate and other 104,534 124,549
Total assets of the crop business are subject to normal cyclical
fluctuations.
</TABLE>
9. 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
March 31,
(in thousands) 2000 1999
Basic:
<S> <C> <C>
Weighted-average common shares outstanding 10,385 10,385
Diluted:
Weighted-average common shares outstanding 10,385 10,385
Dilutive effect of stock options -- --
Average common shares outstanding assuming dilution 10,385 10,385
</TABLE>
The Company has 147,333 stock options outstanding as of March 31, 2000.
The weighted average common shares outstanding on a basic and a fully
diluted basis are the same because of the net losses in 1999 and 2000.
10. Subsequent Events
Effective April 1, 2000, the new and renewal nonstandard auto premium
written by IGF will no longer be reinsured by Pafco.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW OF THE COMPANY
Symons International Group, Inc. ("Company") owns insurance companies which
underwrite and market nonstandard private passenger automobile insurance and
crop insurance. The Company's principal insurance company subsidiaries are Pafco
General Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and
IGF Insurance Company ("IGF"). The Company is approximately a 67% subsidiary of
Goran Capital Inc. ("Goran").
Nonstandard Automobile Insurance Operations
Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty") and
Superior American Insurance Company ("Superior American") are engaged in the
writing of insurance coverage for automobile physical damage and liability
policies. 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 or 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 risk. 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 two principal components of the Company's crop insurance business are
multiple-peril crop insurance ("MPCI") and private named peril crop insurance,
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 generates revenue like other private insurers participating in 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 with the federal government. The Company may also pay
a portion of the aggregate loss, in respect of the business it writes, if the
losses exceed certain levels. The Company writes MPCI and crop hail insurance
through approximately 2,850 independent agencies in 46 states.
The Company's risk in the first two quarters of the year is affected to the
following facts: (1) the Company has a large exposure of crops planted in the
fall and winter (citrus and nursery in Florida, nursery in Texas, wheat in
Kansas), (2) the Company's crop revenue coverage ("CRC") risk which is tied to
commodity prices is quantified in July, November and December but is incurred
throughout the various growing seasons, (3) the preventative planting risk that
the Company incurs on its traditional spring crops, and (4) the planting of its
spring crops (corn and soybeans in the Midwest), the majority of which occurs
prior to the end of May of any given crop year. Also, MPCI policies are
continuous and automatically renew each year unless the insured notifies the
Company prior to March 15 of each year.
<PAGE>
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and involves no
federal participation. The Company also offers a proprietary product which
combines the application and underwriting process for MPCI and hail coverages -
HAILPLUS(TM) ("HAILPLUS"). 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 37% of the Company's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide coverage against
hail damage, the private crop hail coverages allow farmers to 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.
The Company has started three new business initiatives related to agriculture
risk management: agronomy services, price risk management, and carbon emission
reduction credits. Each will provide the opportunity to increase fee revenue.
Fee revenue provides the Company with limited risk and high profit margins from
its same base of operations and thus contributes to capital and surplus growth.
Fee revenue in total is not projected to be more than $2.0 million for 2000.
The crop insurance business is seasonal by geographic region; spring crops in
northern and midwestern states, fall crops in southern states such as fruit and
nuts, winter crops in coastal states such as California and summer cash crops
grown in all states. The Company also insures long term crops such as timber and
nurseries. While this seasonality is time specific for each crop, the associated
tasks of sales and marketing primarily occur before each respective crop growing
season. The customer support, applications and claims processing tasks are time
and event driven within the mid to later part of the growing season; many times
being finished after the growing season and harvest is completed. The bulk of
the loss adjustment activities for the spring and fall crops occur between May
and November. These same activities occur for winter crops, such as fruits, in
January and February, and for cash crops throughout the year.
Throughout the year the Company provides to its customers services such as
education, agronomy training, soil sampling, grid mapping for precision farming,
insurance advice and loss adjusting.
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS
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(s)," "plan," "estimate," "expect,"
"should," "intend," "will" 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 insurance operations such as weather-related
events, final harvest results, commodity price levels, governmental program
changes, new product acceptance and commission levels paid to agents; (iii)
factors affecting the Company's nonstandard automobile operations such as
premium volume and levels of operating expenses as compared to premium volume;
and (iv) the factors described in this section and elsewhere in this report.
<PAGE>
Losses Have Been Reported and May Continue
The Company has reported net losses on a quarterly basis since the third quarter
of 1998. Net losses for the quarter ended in March 31, 2000 totalled
($5,378,000). Losses for the first quarter of 2000 were primarily due to reduced
earnings in the nonstandard auto segment. Despite the losses, loss ratios
started to improve in the first quarter of the current year for nonstandard auto
over the prior quarter. Also, during the first quarter of 2000, the Company
experienced favorable development on its loss and loss adjustment expense
("LAE") reserves for accidents occurring in 1999 and prior years. Losses in the
current quarter for the nonstandard auto segment were primarily due to decreases
in premiums and fee income that exceeded operating expenses. The Company is
actively seeking rate increases and implementing other underwriting initiatives
and expense reductions which are likely to result in reduced premium volume this
year. The nonstandard auto business strategy is to retain only profitable
business and reduce expenses proportionately. For first quarter 2000 the crop
segment reported pre-tax earnings of approximately $4 million. The crop segment
business strategy is to continue focusing on MPCI and named peril insurance,
which is primarily crop hail insurance. Although the Company has taken a number
of actions to address the factors that have contributed to these past operating
losses, there can be no assurance that operating losses will not continue.
Recent and Further Regulatory Actions May Affect the Company's Future Operations
The Company's insurance company subsidiaries, their business operations, and
their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the Indiana Department of Insurance
("IDOI"), the Florida Department of Insurance ("FDOI"), the insurance regulators
of other states in which the insurance company subsidiaries write business and,
in the case of IGF, the Federal Crop Insurance Corporation ("FCIC"). Moreover,
the insurance company subsidiaries' losses, adverse trends and uncertainties
discussed in this report have been and continue to be matters of concern to the
domiciliary and other insurance regulators of the Company's insurance company
subsidiaries and have resulted in enhanced scrutiny and regulatory actions by
several regulators. The Company relies on payment of management fees from the
regulated insurance subsidiaries to support its cash flow needs, and continued
payment of those fees is subject to regulatory oversight. The primary purpose of
insurance regulation is the protection of policyholders rather than
stockholders. Failure to resolve issues with the IDOI, the FDOI, the FCIC, and
with other regulators (including the risk based capital levels of Pafco and
IGF), in a manner satisfactory to the regulation could impair the Company's
ability to execute its business strategies or result in future regulatory
actions or proceedings that otherwise materially and adversely affect the
Company's operations.
A.M. Best Rating May Adversely Affect the Company's Ability to Retain and Expand
its Business
The A.M. Best Company rates insurance companies based on factors of concerns to
policyholders. No changes in the ratings of the Company subsidiaries have
occurred since those reported previously. It is not likely that the ratings will
be improved unless the Company improves its future operating performance. One
factor in an insurer's ability to compete effectively is its A.M. Best rating.
There can be no assurance that the current or future ratings will not adversely
affect the Company's competitive position.
The Company is Subject to a Number of Pending Legal Proceedings
As previously reported and discussed elsewhere in this report, the Company is
involved in a number of pending legal proceedings. Most of these proceedings
remain in the early stages. Although the Company believes that many of the
allegations of wrongdoing are without merit and intends to vigorously defend the
claims brought against it, there can be no assurance that such proceedings will
not have a materially adverse effect on the Company's operations.
<PAGE>
The Terms of the Trust Preferred Securities May Restrict The Company's Ability
to Act
The Company has issued through a wholly owned trust subsidiary $135 million
aggregate principal amount in trust originated preferred securities ("Preferred
Securities"). The Preferred Securities have a term of 30 years with annual
interest payments of 9.5% paid semi-annually. The obligations of the Preferred
Securities are funded from the Company's nonstandard automobile management
company and dividend capacity from the crop insurance business. The Company
deferred the semi-annual interest payment that was due February 2000 and may
continue to defer such payments for up to five years as permitted by the
indenture for the Preferred Securities. Although there is no present default
under the indenture which would accelerate the payment of the Preferred
Securities, the indenture contains a number of convenants which may restrict the
Company's ability to act in the future. These covenants include restrictions on
the Company's ability to: incur or guarantee debt; make payment to affiliates;
repurchase its common stock; pay dividends on common stock; and make certain
investments other than investment grade fixed income securities. There can be no
assurance that compliance with these restrictions and other provisions of the
indenture for the Preferred Securities will not adversely affect the Company's
ability to improve its operating results.
REVIEW OF CONSOLIDATED OPERATIONS
Net Loss
For the three months ended March 31, 2000, the Company recorded a net loss of
$(5,378,000), or $(0.52) per share (basic and diluted). The net loss increased
over the same quarter in 1999 by $4,356,000 or $0.42 per share (basic and
diluted).
Income before taxes and distributions on Preferred Securities for the
nonstandard automobile segment showed a loss of $(4,579,000) for the three
months ended March 31, 2000 compared to earnings of $791,000 for the three
months ended March 31, 1999. These losses were driven primarily by a decrease in
net premiums earned.
Income before taxes and distributions on preferred securities for the three
months ended March 31, 2000 in the crop segment showed earnings of $4,010,000
which compares to earnings of $1,603,000 for the same period in 1999. The
increase in earnings was primarily due to a decrease in the net loss to net
premium retained ratios for crop hail and named peril in the first quarter of
2000 as compared to the same period in the prior year.
Losses before tax and distributions on preferred securities for the corporate
segment were $(1,058,000) for the three months ended March 31, 2000 and
$(745,000) for the same period in 1999. These losses consist primarily of
amortization of intangibles and general and administrative expenses. The losses
increased primarily due to a decrease in net premiums earned coupled with an
increase in policy acquisition and general and administrative expenses.
Gross Premiums Written
Gross premiums written for the nonstandard automobile segment decreased 2.6% for
the three months ended March 31, 2000 compared to the three months ended March
31, 1999. The primary reasons for this decline in volume are the downsizing by
the Company of its nonstandard automobile business in certain competitive
markets, rate increases and other underwriting initiatives intended to increase
profitablility.
Gross premiums written for the crop segment decreased 7.0% for the three months
ended March 31, 2000 compared to the comparable period in 1999. Such decrease
was due to lower than expected first quarter 2000 crop hail business. Crop
premiums (expressed in thousands) for the three months ended March 31 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
CAT imputed $12,250 $16,312
MPCI 69,934 62,280
Crop Hail and named perils 14,426 28,443
AgPI (1) -- --
96,611 107,035
Less: CAT imputed (12,250) (16,312)
$84,360 $90,723
(1) Represents discontinued product sold in 1998.
</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 ("Granite Re"). Other gross written
premiums were $290,000 for the three months ended March 31, 2000 compared to
$128,000 for the same periods in 1999 due to the effect of endorsements and
cancellations on a book of business in run off beginning in 1999.
Net Premiums Written
MPCI premiums are considered to be 100% ceded to the federal government for
accounting purposes and therefore no net written premiums result from MPCI
business. Quota share cession rates for other lines of insurance for the three
months ended March 31 are as follows:
2000 1999
Nonstandard automobile 22% 0%
Crop Hail 45% 62%
Named peril 50% 50%
To address writing ratio and other statutory surplus concerns, the Company ceded
a portion of its automobile business effective January 1, 2000. The reinsurer
has an A.M. Best rating of A++. Based on its 1999 results, IGF has decided to
retain more risk on the crop hail line of business resulting in a decrease in
the quota share cession rate.
Fee Income
Fee income declined 15.4% for the three months ended March 31, 2000 as compared
to the first quarter of 1999 due to the overall decrease in gross written
premium volume.
Net Investment Income
Net investment income decreased 7.6% for the three months ended March 31, 2000
as compared to the corresponding period of the prior year. This decrease was due
to a decrease in the size of the investment portfolio and lower yields on the
remaining investments.
Loss and Loss Adjustment Expense
The loss and LAE ratio for the Company's nonstandard auto segment for the three
months ended March 31, 2000 was 86.5% of net premiums earned as compared to
78.5% for the corresponding period in 1999 and 92.7% for the entire year of
1999. During the first quarter of 2000 the Company experienced favorable
development on its loss and LAE reserves for accidents occurring in 1999 and
prior. This reduced the nonstandard auto loss and LAE ratio for the quarter by
1.0%.
The loss and LAE ratio for the Company's crop insurance segment for the three
months ended March 31, 2000, was 83.2% of net premiums earned. The loss and LAE
ratio for 1999 is not meaninful due to unusual one time AgPI losses and related
reinsurance cots. During the first quarter of 2000 the Company experienced $0.6
million favorable development on its loss and LAE reserves for losses occurring
in 1999 and prior. This reduced the crop insurance loss and LAE ratio for the
quarter by 20.9%.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses were $14,390,000 and
$11,892,000 or 31.3% and 18.5% of net premium earned for the three months ended
March 31, 2000 and March 31, 1999, respectively. Overall expenses in the first
three months of 2000 versus the first three months of 1999 increased by
$2,498,000. Within this increase crop expenses increased by $4,216,000 while
nonstandard auto expenses decreased by $2,035,000.
The expense ratio for the nonstandard auto segment was 40.8% for the first
quarter of 2000 as compared to 30% in 1999. The expense ratio increased
primarily due to a 34.2% decrease in net premiums earned comparing March 31,
2000 to March 31, 1999. Nonstandard auto expenses were $17,560,000 and
$19,595,000 or a $2,035,000 decrease (10.4%) for the three month ended March 31,
2000 and March 31, 1999, respectively. The decrease in expenses is primarily
attributable to the ceding commission received from a quota share agreement
effective January 1, 2000.
<PAGE>
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 2000, as well as for 1999, was 13.6% on gross premium. The underwriting
gain increased in 2000 due to the fact that the crops covered by MPCI policies
are estimated to have average to above average yields this year. The 13.6%
estimate is in line with actual annual results over the past four years.
Provision (Benefit) for Income Taxes
The current provision primarily consists of a write off of a refund being denied
by the IRS offset by a refund received in the first quarter of 2000 relating to
a 1998 net operating loss. At March 31, 2000 the Company's net tax assets are
fully offset by a 100% valuation allowance which resulted in no tax benefit
being reflected for the three months ended March 31, 2000.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
Total investments as of March 31, 2000 and December 31, 1999 were $193.5 million
and $204.9 million, respectively. Composition of investments is comparable
between these periods. The Company's market risk exposure has not materially
changed since prior year end.
Cash and Cash Equivalents
Total cash and cash equivalent balances as of March 31, 2000 and December 31,
1999 were $4,266,000 and $3,097,000 million, respectively.
Investments in and Advances to Related Parties
Investments in and advances to related parties decreased from $1,462,000 at
December 31, 1999, to $1,008,000 at March 31, 2000. The balance at March 31,
2000 is made up primarily of a $0.7 million investment in nonredeemable,
nonvoting preferred stock of Granite Insurance Company and loans to Company
officers.
Accounts Receivable Net of Allowance For Doubtful Accounts
Receivables net of allowances for doubtful accounts as of March 31, 2000 and
December 31, 1999 were $125,492,000 and $86,450,000, respectively. The crop
portion of the net receivable balances as of March 31, 2000 and December 31,
1999 were $56,574,000 and $23,924,000, respectively. The fluctuation in the
balance is due to cyclicality of the crop business.
Nonstandard auto receivable balances net of allowance for doubtful accounts as
of March 31, 2000 and December 31, 1999 were $64,216,000 and $62,299,000,
respectively and are comparable.
Reinsurance Recoverables and Prepaid Reinsurance Premiums
Reinsurance recoverables were $47,319,000 and $98,258,000 as of March 31, 2000
and December 31, 1999, respectively. However the reinsurance recoverable balance
is more effectively compared to the March 31, 1999 balance of $61,555,000. This
is primarily due to the cyclical nature of the crop business. Of the total
reinsurance recoverable balance, as of March 31, 2000 and 1999, $25,756,000 and
$28,245,000, respectively pertain to crop business. The nonstandard auto
recoverables were $10,558,000 and ($1,353,000) for the periods ending March 31,
2000 and 1999, respectively. The nonstandard auto increase is attributable to a
quota share treaty agreement effective January 1, 2000.
Prepaid reinsurance premiums were $94,230,000 and $10,463,000 as of March 31,
2000 and December 31, 1999, respectively. This prepaid balance is more
effectively compared to the March 31, 1999 balance of $81,249,000. The prepaid
reinsurance balance is affected by the cyclical nature of the crop business
reinsured. Crop prepaid reinsurance premiums totaled $75,431,000 and $73,124,000
as of March 31, 2000 and 1999, respectively. Prepaid reinsurance premiums on
nonstandard auto totaled $17,826,000 and $463,000 as of March 31, 2000 and 1999,
respectively. The increase in nonstandard auto is attributable to a quota share
that was effective January 1, 2000.
<PAGE>
Deferred Policy Acquisition Costs
Deferred policy acquisition costs ("DAC") as of March 31, 2000 and December 31,
1999, were $12,490,000 and $13,920,000 respectively. Although these costs are
comparable, the Company believes the ratio of DAC to net unearned premium would
be more comparable using prior year to date comparisons. DAC as of March 31,
1999 was $14,907,000. DAC was primarily composed of DAC on nonstandard auto at
March 31, 2000 and 1999 of $11,550,000 and $14,372,000, respectively. The ceded
deferred costs on nonstandard auto at March 31, 2000 and 1999 were $3,124,000
and $0, respectively. DAC costs for nonstandard auto as compared with
nonstandard net unearned premiums of $66,792,000 and $90,531,000 were 17.3% and
15.9% as of the above dates, respectively. DAC for crop insurance at March 31,
2000 and 1999 was $940,000 and $535,000, respectively. In the last quarter of
1999 the company changed its method of calculating the auto deferred policy
costs by including investment income in the computation.
Federal Income Taxes
Federal income taxes recoverable were $0 and $6,800,000 at March 31, 2000 and
December 31, 1999. The 1999 balance consists of amounts recoverable from the
1997 tax year due to tax losses generated in 1999. All receivables were
collected during the first quarter of 2000.
The deferred income tax asset balance of $0 as of March 31, 2000 has decreased
from $2,600,000 at March 31, 1999 and $5,100,000 at December 31, 1998 because of
a 100% valuation allowance of all deferred tax assets.
Fixed Assets
Property and equipment, net of accumulated depreciation, decreased $688,000 over
year end 1999. This change is primarily due to disposals and depreciation.
Intangible Assets
The balance in the intangible assets decreased from year end 1999 due to
amortization expense. Intangible assets include goodwill from the acquisition of
Superior, additional goodwill from the acquisition of the minority interest in
Superior Insurance Group Management, Inc. and NACU, debt or Preferred Security
issuance costs and organizational costs.
Loss and Loss Adjustment Expense Reserves
Total loss and LAE reserves decreased from $214,948,000 as of December 31, 1999
to $170,332,000 as of March 31, 2000. The total decrease in loss and LAE
reserves is approximately $44.6 million.
Nonstandard auto reserves declined $7,800,000 during the first quarter of 2000;
this decrease is consistent with the declining volume in nonstandard auto
business. Reserves for crop insurance declined $34,800,000 during the first
quarter of 2000 due to the seasonal nature of the business. The remaining
reserve decrease of $2,000,000 resulted from favorable settlement of outstanding
claims on surplus line policies. Because most of the outstanding liabilities
from this business are reinsured, the favorable development has minimal impact
on the Company's net income.
Unearned Premium
The unearned premium reserve increased by $75,831,000 from December 31,1999 to
March 31, 2000. Gross unearned premium was $165,839,000 and $90,008,000 as of
March 31, 2000 and December 31, 1999, respectively. However, this unearned
premium balance is more effectively compared to the March 31, 1999 balance of
$176,021,000 due to the cyclical nature of the crop business. Crop unearned as
of March 31, 2000 and March 31, 1999 was $80,133,000 and $77,363,000,
respectively. Crop unearned increased by $2,770,000 or 3.6% from March 31, 1999.
This was primarily due to an increase in crop hail written premium for the same
period. Unearned on nonstandard auto decreased $6,262,000 or 6.9% for the same
period. This was primarily due to the decrease in nonstandard premiums written
for the respective quarter ended March 31, 2000. Unearned for nonstandard auto
was $84,733,000 and $90,995,000 as of March 31, 2000 and March 31, 1999.
Reinsurance Payables
Reinsurance payables increased by $46,714,000 from December 31, 1999 to March
31, 2000 due to the cyclical nature of the crop business. Crop payables
increased from year end by $19,551,000 through March 31, 2000. Nonstandard auto
increased by $24,854,000 from December 1999 due to a quota share agreement
effective January 1, 2000.
<PAGE>
Notes Payable
Notes payable include the IGF Revolver which on December 31, 1999 and March 31,
2000 had an outstanding balance of $15,000,000 and $0, respectively. This change
in the balance is due to the fact that IGF primarily depends upon the IGF
Revolver to meet its seasonal needs for liquidity. The average interest rate on
the IGF Revolver was 6.75% for the nine months ended March 31, 1999 and 7.91%
for the three months ended March 31, 2000.
Notes payable also include a $1,000,000 note due 2001 on the purchase of North
American Crop Underwriters, Inc. ("NACU") which bears no interest. The balance
of notes payable at March 31, 2000 consists of three smaller notes (less than
$300,000 each) assumed in the acquisition of NACU which have various due dates
from 2002 to 2006 with periodic payments at interest rates ranging from 7% to
9.09%.
Other Liabilities
Other liabilities decreased by $9,863,000 from December 31, 1999 to March 31,
2000. However, payables as of March 31, 2000 of $17,384,000 are more comparable
to payables of $25,602,00 as of March 31, 1999.
Stockholders' (Deficit)
Stockholders' deficit has increased $5,408,000 from December 31, 1999. This
increase is primarily the result of the net loss of $(5,378,000) for the three
months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 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,
payment of claims settlement costs, operating expenses (primarily management
fees), commissions to independent agents, 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. During 1999, the Company liquidated some investments to pay claims. The
Company historically has tried to maintain duration averages of 3.5 years.
However, the losses in 1999 and the first quarter of 2000 have caused the
Company to shorten the duration averages. The Company may incur a cost of
selling longer bonds to pay claims. Claim payments tend to lag premium receipts.
Due to losses, the Company has experienced a reduction in its investment
portfolio but to date has not experienced any problems meeting its obligations
for claims payments.
Cash flows in the Company's crop insurance subsidiary (which is primarily 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. Collected and
uncollected premiums are required to be paid in full to the FCIC by the Company,
with interest at 15%, if not paid by a specified date during the crop year.
The Company itself relies primarily on the payment of management fees from its
insurance subsidiaries as a source of cash flow. The Company has deferred the
semi-annual Preferred Securities interest payment because its nontandard auto
operations have not generated sufficient cash to both provide funding for these
interest payments and maintain sufficient cash liquidity for the nonstandard
auto operations.
<PAGE>
The trust indenture for the Preferred Securities contains certain restrictive
covenants. Certain of 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 in force.
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 (5.00) in March 31, 2000, and will continue to apply until the Company's
consolidated coverage ratio exceeds the amount set forth in the indenture.
The Company's consolidated total assets of $552,538,000 at March 31, 2000
increased $52,727,000 from the balance at December 31, 1999. The primary reason
for this increase was an increase in receivable balances and prepaid reinsurance
premiums which are impacted by the cyclical nature of the crop hail business.
As of March 31, 2000, the Company had $23,588,000 of cash, cash equivalents and
short-term investments available to meet short-term operating cash needs. This
was a decrease of $1,329,000 from the December 31, 1999 balance.
The Company's portfolio of fixed maturities reduced to $158,303,000 at March 31,
2000 from $166,748,000 and $196,916,000 at December 31, 1999 and March 31, 1999,
as a result of the sale of fixed maturities to fund operating losses.
Net cash provided from operating activities to March 31, 2000 aggregated
$3,469,000 compared to cash provided from operations of $11,464,000 for the
comparable period in 1999 due to the effect of operating losses offset by net
cash from changes in operating assets and liabilities.
Net cash provided from investing activities of $10,890,000 for the three months
ended March 31, 2000 compares to cash used in investing activities of
$12,487,000 for the comparable period in 1999. Such increase was due primarily
to a reduction in the purchases of fixed maturities.
Overall, operating cash flow for the Company and its insurance subsidiaries
combined with the availability of short term investments and the liquidation of
certain fixed maturity investments continues to be adequate to meet
policyholders needs for claims and other needs. The Company believes these cash
flows will continue to be adequate through year end.
The IGF Revolver has been extended through December 15, 2000. IGF relies upon
the IGF Revolver to meet seasonal needs for liquidity. The maximum amount that
may be borrowed on the IGF Revolver is $8,000,000.
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Information
related to Qualitative and Quantitative Disclosures about Market Risk was
included under Item 1. Business in the December 31, 1999 Form 10-K. No material
changes have occurred in market risk since this information was disclosed in the
December 31, 1999 Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any of the pending
legal proceedings previously reported by the Company in the
December 31, 1999 Form 10-K.
The Company's insurance subsidiaries are parties to other
litigation arising in the ordinary course of business. The
Company believes that the ultimate resolution of these
lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company,
through its claims reserves, reserves for both the amount of
estimated damages attributable to these lawsuits and the
estimated costs of litigation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On March 22, 2000, the Company received notice from Nasdaq -
Amex that the Listing Qualifications Panel (the "Panel") has
determined that the Company was not in compliance with certain
listing qualifications. On or before June 30, 2000, the
Company must make a filing with the SEC and Nasdaq - Amex
evidencing complete compliance with the required
qualifications including net tangible assets excluding
preferred securities, of at least $15,000,000, market value of
public float of at least $5,000,000 for a period of ten
consecutive days immediately thereafter, and a minimum $1.00
per share bid price requirement. In the event that the Company
fails to comply with any of the terms of these requirements,
the Company's securities will be delisted from The Nasdaq
National Market. The Company has appealed the decision of the
Panel and expects to receive a decision on the appeal in
September, 2000. It is unlikely that the Cmpany will meet all
of the listing requirements by June 30, 2000. In the event
that the Company's common stock is delisted, the company
expects that its common stock may then be traded on the OTC
Bulletin Board.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.8(2) Amendment Number Two dated
January 2, 2000 to the Employment
Agreement between IGF Insurance
Company and Thomas F. Gowdy dated
August 1, 1997.
Exhibit 10.15 The Employment Agreement between
Symons International Group, Inc.
and Goran Capital Inc. and Gene
Yerant dated December 10, 1999
effective January 10, 2000.
Exhibit 10.16 The Employment Agreement between
Symons International Group, Inc. and
Goran Capital Inc. and Gregg
Albacete effective January 26, 2000.
Exhibit 27 Financial Data Schedule. Submitted
in electronic format only.
(b) 8-K Reports:
During the first quarter of 2000, the Company filed no reports on Form
8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2000 By:______________________
Douglas H. Symons
Chief Executive Officer
Dated: May 15, 2000 By: ______________________
Bruce K. Dwyer
Vice President and
Chief Financial Officer
<PAGE>
AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT
This Amendment Number Two to Employment Agreement (this "amendment") is
made and entered into as of the 2nd day of January, 2000, by and between IGF
Holdings, Inc., an Indiana corporation, and Thomas F. Gowdy with respect to that
certain Employment Agreement executed April 9, 1996 and April 15, 1996 and that
certain Amendment thereto dated August 1, 1997 and that certain Assignment and
Assumption by and between IGF Insurance Company, an Indiana corporation, and IGF
Holdings, Inc. dated August 1, 1997 (collectively, the "Agreement").
WHEREAS, the parties desire to amend the Agreement as set forth herein.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Section 2.1 is hereby deleted in its entirety and there is inserted in
lieu thereof the following:
"2.1 Salary. During the term of this agreement, the
Company shall pay Executive a salary at the minimum
annual rate of One Hundred Sixty-Five Thousand
Dollars ($165,000). This salary shall be payable in
twenty-six (26) equal installment. Company may
increase this annual rate at its discretion but no
reduction of Executive's then current rate of pay
shall be made without his prior written consent."
2. Section 2.6 (b) is hereby amended as follows: The words "Seven
Hundred Fifty Dollars ($750)" are hereby deleted and there is
inserted in lieu thereof, "One Thousand Dollars ($1,000)".
3. The first sentence of Section 1.1 is hereby amended as follows:
The words "effective as of February 1, 1996 and continuing for a
period of thirty-six (36) months through January 31, 1999" are
hereby deleted and there is inserted in lieu thereof, "effective
as of January 1, 2000 and continuing for a period of thirty-six
(36) months through December 31, 2002".
4. There is hereby added to the end of the last sentence of Section
1.1 the following: "provided, however, that the Executive's
right to receive the amount of such severance payments shall be
offset by income to the Executive from other than the Company,
if any, during such twelve month period. Executive shall use his
best efforts to obtain gainful employment or earn income within
a reasonable area of Central Iowa with a similar position and
within 80% of his current compensation, during the term of such
severance period."
5. Section 3.4 is hereby added as follows, as amended:
"3.4 Change of Control. Notwithstanding any other
provisions of this Agreement, if (i) a Change of
Control shall occur; and (ii) within twelve (12)
months of any such Change of Control, Executive (a)
receives a Notice of Non-Renewal, (b) is terminated
for any reason other than for Cause, or (c) Company
(including its successors, if any) is in breach of
this Agreement, (each of which is a "Triggering
Event") then Executive shall continue to receive his
current salary (in bi-weekly payments) as severance
pay until the earlier to occur of:
(a) Executive shall commence employment
with a firm or entity other than the
Company such that his base salary is
within 80% of his current base
salary pursuant to this Agreement;
or
(b) The expiration of one (1) year from the date of the Triggering Event.
The receipt by Executive of payments pursuant to this
Section 3.4 is specifically conditioned, and no
payments pursuant to this Section 3.4 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 provision s of
this agreement pertaining to non-solicitation and
confidentiality) of this Agreement and has received
written notice from the Company specifying the
conduct constituting such breach and the section(s)
of this Agreement that are being breached. Further,
if such payments have already begun, the continuation
of payments to Executive pursuant to this Section 3.4
shall cease at the time Executive shall fail to
comply with the non solicitation and confidentiality
provision of Article 4 herein and has received
written notice from the Company specifying the
conduct constituting such breach and the section(s)
of this Agreement that are being breached. It is
expressly understood and agreed that the amount of
any payment to Executive required pursuant to this
Section 3.4 shall be offset (but not below zero) by
any base salary received by Executive during the
period called for in this Section 3.4 from a
subsequent employer.
"Change of Control" shall mean the inability of any one or
all collectively G. Gordon Symons, Alan G. Symons and
Douglas H. Symons to directly or indirectly cause the
election of a majority of the members of the Board of
Directors of Goran Capital Inc., Symons International Group,
Inc., IGF Holdings, Inc. or IGF Insurance Company or their
respective successors."
6. Section 4.1 is deleted in its entirety and inserted in lieu thereof the
following:
4.1 Non-solicitation.
During Executive's employment with the Company during
the term of this Agreement and for a period of one
(1) year from and after termination of that
employment, except for a termination without Cause,
Executive agrees that he will not; (a) directly or
indirectly, solicit any of the Company's employees
for the purpose of hiring them or inducing them to
leave employment with the Company; and (b) directly
solicit any person or entity that is, or was within
the then most recent 12-month period, a customer or
client of the company, whether for his own account or
for the account of any other individual, partnership,
firm, corporation or other entity, for the purpose of
selling that third party crop insurance that would
replace or supersede coverage then provided by the
Company to that third party. For purposes of
subsection 4.1 (b), the term "solicit" shall be
limited to sales efforts initiated by Executive and
shall not include any response by Executive to
inquiries made to him without invitation or
solicitation on his part of referrals made by others
to Executive where such referrals were not invited or
encouraged by Executive.
7. All references in this Agreement to Section 4.1 and/or a
non-competition covenant shall be deemed to apply only to new
Section 4.1 and its non-solicitation provision.
8. Section 5.3 is hereby amended as follows: Notice to Executive
shall be to:
Thomas F. Gowdy
6040 Nottingham
Johnston, IA 50131
Notice to the Company shall be to:
Alan G. Symons
Goran Capital
4720 Kingsway Drive
Indianapolis, IN 46205
9. Exhibit C is hereby deleted in its entirety and there is
inserted in lieu thereof Exhibit C as attached hereto. All
references in Exhibit C in the Agreement shall mean Exhibit C as
attached hereto.
10. Terms used herein and not otherwise defined shall have the meaning as
set forth in the Agreement.
11. Except as otherwise expressly set forth herein, the Agreement shall
continue in full force and effect.
12. Executive shall be employed as President of the Company and shall have
duties assigned to him as are customarily assigned to
the President of the Company by the Chief Executive officer of
the Company or members of the Board. The Executive shall carry
out his duties using this best efforts ensure the well being of
the Company. Any reduction in his title or scope of duties shall
constitute a termination without cause. To the extent that the
Agreement lists other titles and/or duties that shall be
superceded by this paragraph.
13. Notwithstanding any other provision of this Agreement, upon
termination or expiration of the Agreement for any reason,
Executive shall be entitled to not less than a one-year
severance payment and continuation of benefits and insurance for
12 months after the date his employment ends, based upon the
offset agreed upon in 4.
IGF Holdings, Inc.
By: _________________________________
Alan G. Symons, Chief Executive Officer
---------------------------------
Thomas F. Gowdy
<PAGE>
Exhibit C
Bonus Arrangement
The bonus shall be calculated based upon the Company's pre-tax profit before
management fees and bonuses to Executive. A minimum pre-tax profit target of Ten
Million ($10,000,000) must b e obtained for the year ended December 31, 2000 in
order for a bonus to be earned. The minimum pre-tax profit target will increase
ten percent (10%) per year for the life of the contract. By way of example, the
minimum pre-tax profit target for 2001 must be $11,000,000 for a bonus to be
earned. The bonus payable to Executive shall be seventy-five (75%) of base
salary.
Notwithstanding with the preceding paragraph, during the 36-month term of this
Agreement, a bonus of not less than $150,000 shall be paid to Executive as a
guaranteed amount. If the bonus paid under the first paragraph of this exhibit C
do not reach $150,000, the remaining amount will be paid to Executive or used to
offset any advances made to him by the company. To the extent such bonus
payments have not been sufficient to offset advances made to the executive prior
to the date of signing of this Agreement, will be considered discharged and paid
in full without tax consequence to the Executive (Thus, if any additional
amounts or "gross up" payments must be made to offset taxes, the Company shall
pay the amount necessary to the Executive prior to the tax filing due date of
the Executive.)
<PAGE>
EMPLOYMENT AGREEMENT
WHEREAS, Symons International Group, Inc. ("SIG") and Goran Capital
Inc. ("Goran") (collectively, SIG and Goran are referred to as the "Company")
consider it in their best interests to employ Gene S. Yerant ("you" or the
"Executive") upon the terms and conditions hereinafter set forth; and WHEREAS,
the Executive is an individual with substantial experience in the business of
nonstandard automobile insurance;
WHEREAS, the Company desires to employ an executive who will make a
significant contribution to effect profitability in its nonstandard automobile
insurance business; and
WHEREAS, the Executive desires 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 follow:
1. Employment
1.1 Term of Agreement. The Company agrees to employ the Executive
as Executive Vice President of Goran, Executive Vice President
of SIG, and President of Superior Insurance Group, Inc.
("Superior") effective as of January 10, 2000 and continuing
for a period of sixty (60) months through January 10, 2005
unless such employment is terminated pursuant to Section 3
below; provided, however, that the term of the Agreement shall
automatically be extended without further action of either
party for additional one-year periods thereafter unless, not
later than six months prior to the end of the effective term,
either the Company or the Executive shall have given written
notice that such party does not intend to extend this
Agreement (the "Term").
1.2 Terms of Employment. During the Term, you agree to be a
full-time employee of SIG and Goran serving in the positions
of Executive Vice President of SIG and Goran and President of
Superior 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 Executive
Vice President of SIG and Goran and President of Superior, 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
Board of Directors of the Company, which duties shall be
consistent with the position of Executive Vice President of
SIG and Goran, which shall grant Executive authority,
responsibility, title and standing comparable to that of an
executive vice president of a publicly held insurance company.
Nothing herein shall prohibit you from devoting your time to
civic and community activities or managing personal
investments, as long as the foregoing do not interfere with
the performance of your duties hereunder.
1.3 Director. The Company will appoint the Executive as a member
of the Board of Directors of SIG and Superior at their first
meeting(s) following the effective date of this Agreement. The
Companies will provide Officers and Directors Liability
insurance in an amount equal to $10 million. The Executive
agrees to resign as a director of SIG and Superior and other
affiliates of the Company upon the termination or expiration
of this Agreement.
2. Compensation, Benefits and Prerequisites
2.1 Salary: During the term of this Agreement, the Company shall
pay Executive a salary at the minimum annual rate of Five
Hundred Thousand Dollars ($500,000). The salary shall be
payable in bi-weekly equal installments.
2.2 Bonus Plan:
A. Bonus A. Based on Superior's GAAP combined ratios, including
billing fees being below 100% and gross written premium for
2000 being greater than $250,000,000. A bonus of $25,000 per
.25% improvement in combined ratio (as an example at 98%
combined ratio the bonus would equal $200,000). For the year
2001 the gross written premium must exceed $300,000,000 and
grow thereafter at 15% per annum. A guaranteed minimum bonus of
$125,000 is payable should the combined ratio be 101.5% or
better for the year 2000. The minimum is increased to $166,000
at combined ratio of 100% for the year 2000. The minimum is
increased to $250,000 should the combined ratio be better than
99% for the year 2000. All of the above adjusted to eliminate
prior years' development. Payment of the bonus is based on
audit and actuary report of combined ratio with deficit or
credit of reserves for year 2000 forward adjusting the bonus
paid.
Bonus A is payable by April 15 of the year following the year on
which the bonus is based. The year 2000 bonus is payable by
April 15, 2001. The year 2001 bonus is payable by April 15, 2002
and so on and so forth.
B. Bonus B. In addition to the foregoing, should Superior equal or
exceed the pre-tax profit as shown below in the year shown
below a lump sum bonus as shown will be payable.
Year Ended
December 31, PRE-TAX PROFIT AT SUPERIOR BONUS PAYABLE
2000 $25,893,000 $500,000
2001 $29,777,000 $500,000
2002 $34,243,000 $500,000
2003 $39,380,000 $500,000
2004 $45,287,000 $500,000
Bonus B is payable by April 15 of the year following
the year on which the bonus is based. The year 2000
bonus is payable by April 15, 2001. The year 2001
bonus is payable by April 15, 2002 and so on and so
forth.
2.3 Stock Options. Executive shall be eligible to participate in
the Company's stock option plan and will be granted 100,000
options for shares of Goran at the market price on the first
day of the Term. Executive's stock options shall be issued
pursuant to the Goran Capital Inc. Share Option Plan and a
Stock Option Agreement with respect thereto which shall be
substantially in the Form of Exhibit A attached hereto. These
options shall vest and become exercisable by the Executive
pro-rata over a five (5) year period from the date of grant.
However, should the Executive be terminated for other than
material cause, the options shall vest immediately and
Executive may exercise such options within four (4) weeks of
the date of termination of employment. In the event Executive
shall fail to exercise the options within four (4) weeks of
termination of employment, the options shall expire.
2.4 Privatization: Should the majority stockholders of Goran
complete a privatization of SIG and Goran, the Executive will
be entitled to an ownership interest in the new entity. The
Executive's ownership interest shall be in the form of stock
options in the parent holding company of Superior (the "New
Entity"). Executive will be entitled to options which equal
2.5% of the ownership interests of the New Entity. The
exercise price of the options in the New Entity shall be based
upon the value of the Company at the time of the
privatization. As a condition of the grant of such replacement
options, the options referred to in paragraph 2.3 shall be
canceled and any shares of stock of Goran which have
theretofore been issued upon the exercise of the options
referred to in paragraph 2.3 shall be exchanged for the
replacement options all as more fully set forth in the Stock
Option Agreement. The vesting period of such replacement
options will be over the remaining initial term of this
Agreement. The amount of the exercise price of such
replacement options shall be based upon a formula which shall
be the same formula utilized for valuing the options of other
executives of the Company in comparable positions, including
the president and chief operating officer of the Company.
Should the Company authorize and/or issue additional stock the
Executive will be issued additional stock sufficient to
maintain a 2.5% interest in the Company. There shall be no
dissolution of interest without the Executive's express
written consent.
In the event Executive elects or is required to sell his
vested options or shares to the Company or New Entity, the
price for each option or share shall be as determined by the
Company pursuant to the Company's plan for its Executives as
determined by the Board of Directors and which shall be
comparable to those of similar entities. Notwithstanding the
foregoing, the value of such options or shares shall be
determined in accordance with the same formula or price
utilized for valuing the options or shares of other executives
of the Company in comparable positions, including the
president and chief executive officer of the Company.
2.5 Employee Benefits: The Executive shall be entitled to
receive all benefits and prerequisites which are comparable
to those provided to other Executives of the Company and in
accordance with the policies of the Company.
2.6 Additional Perquisites: During the term of this Agreement,
the Company shall provide the Executive with:
A. A minimum of six (6) weeks paid vacation during each calendar year.
B. A monthly motor vehicle allowance equal to the value of a
luxury car or the Company will provide the Executive with a
luxury car (Defined as a BMW 740iL or its equivalent.) and
will reimburse for all operational expenses. Executive will be
entitled to trade the car in at the time the car has in excess
of 75,000 miles or four (4) years, whichever first occurs.
C. Monthly dues incurred by Executive at the country club and
city club of his choice located within reasonable geographic
limits of the corporate offices of the Company, including the
entrance fees to become a member of the country club and city
club.
2.7 Expenses: During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive
reimbursement from the Company (in accordance with the
policies and procedures in effect for the Company's Executive
employees) for all reasonable travel, entertainment and other
business expenses incurred by him in connection with his
services hereunder.
2.8 Insurance: The Company will allow the Executive to include in
his expense account the cost of personal insurance for up to
two (2) private cars, homeowner's insurance on his principal
residence in the city of employment of the Executive,
including $2 million umbrella liability.
2.9 401(k): Executive will be eligible for the SIG 401(k) plan in
accordance with the policies of the Company.
2.10 Hiring Bonus: The Company will pay Executive Two Hundred Fifty
Thousand Dollars ($250,000) upon commencement of employment.
Should the Executive leave the Company within the first twelve
(12) months of employment, including termination for material
cause, and excluding termination by the Company, the Executive
shall immediately reimburse the Company the sum of Twenty
Thousand Eight Hundred Dollars ($20,800) for each remaining
month of the first twelve (12) months of employment
2.11 Relocation Expense
A. Company will cover the direct costs of moving the Executive
and his family from Dallas, Texas to Indianapolis, Indiana,
including visits to Indianapolis, packing, moving costs,
insurance and unpacking.
B. Company will pay realtor fees up to 7% on the sale of the Dallas home.
C. Company will pay all closing costs on an Indianapolis home and buy
down the mortgage to 6.75% for a mortgage loan of up to $300,000.
D. Company will hire a relocation firm or give you a minimum
price on your home based on fair market value. If your Dallas
home does not sell within 120 days of the agreed move date,
the Company will purchase the home at the agreed fair market
value or the relocation firm will take it over. The Company
will help with any bridging loans required.
E. Company will reimburse the Executive for weekly travel to and from
Dallas until the relocation is complete.
3. Termination of Executive's Employment
3.1 Termination of Employment and Severance Pay. The Executive's
employment under this Agreement may be terminated by
either party at any time for any reason.
In the event Executive is terminated for any reason other than
for material cause, the Executive shall be entitled to receive
a continuation of his salary and benefits in effect under this
Agreement on the date of his employment termination for a
period of two (2) years provided that the Executive has not
breached the terms of this Agreement. Should the Executive be
terminated by the Company for other than material cause, all
of Executive's stock options shall immediately vest and
Executive shall be entitled to exercise the options within
four (4) weeks of termination. If Executive shall fail to
exercise the options within four (4) weeks of termination of
employment, the options shall expire. All bonuses that shall
have become earned as of the most recently preceding year end
shall be due and payable in accordance with the bonus payment
dates as set forth in Section 2.2 hereof. Bonuses, which would
have been earned for the year in which the Executive is
terminated, shall be paid pro rata to the date of termination.
Termination shall be effective as of the date specified by the
party initiating the termination in a written notice delivered
to the other party.
In the event this Agreement is not renewed by Company,
Employee shall be entitled to receive a continuation of his
salary and benefits in effect under this Agreement on the date
of non-renewal for a period of one (1) year from the date of
such non-renewal provided that the Executive has not breached
the terms of this Agreement.
Upon termination of employment by the Executive, for whatever
reason, the Executive will not be entitled to receive any
further salary, benefits or bonuses and all stock options
which have not then vested shall expire.
3.2 Change of Control. Notwithstanding any other provisions of
this Agreement, if (i) a Change of Control shall occur; and
(ii) within twelve (12) months of any such Change of Control,
(a) Company (including its successors, if any) shall require
Executive to perform his duties and obligations pursuant to
this Agreement in a location other than the city of employment
of Executive at the time of such Change of Control, or (b)
Company (including its successors, if any) shall materially
change the duties, authority or responsibilities of Executive
such that the same are materially inconsistent with the
duties, authority or responsibilities of Executive at the time
of such Change of Control, then Executive's employment under
this Agreement shall be deemed to have terminated for other
than material cause pursuant to Section 3.1 hereof, and
Executive shall be entitled to receive salary, benefits and
rights with respect to stock options as provided in such
Section 3.1.
"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 or their respective
successors.
3.3 Transition of Duties. Should the Executive terminate his
employment with the Company, the Executive will make himself
readily available to the Company for a reasonable period of
time, at the Company's discretion, to facilitate the
transition of information and knowledge to a new executive. At
the discretion of the Company, this period shall be a maximum
of six (6) weeks following notice of termination.
3.4 Material Cause: For purposes of this Agreement, "material
cause" shall mean only the following: (i) the committing of
any act by Executive which would be considered a criminal
offense (other than minor traffic violations) or conviction of
or admission to conversion of Company assets in an amount
greater than Five Thousand Dollars ($5,000)) under the laws of
either Indiana or the United States of America; (ii) the
failure by Executive to perform his material duties under this
Agreement (excluding nonperformance resulting from Executive's
disability) or disobedience to lawful directives from those
persons or bodies outlined in Section 1.2 which have the
authority to determine and direct Executive's work and
activities where such failure is not cured by Executive within
fifteen (15) days of his receipt of written notification from
Company specifying Executive's failure or breach and the steps
the Executive must take to cure that failure or breach;
however, during the fifteen (15) days the Company has the
option to put the Executive on leave of absence with pay; or
(iii) disability as provided in Section 3.5.
3.5 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
herein. Upon any such termination for disability, Executive
shall be entitled to such disability, medical, life insurance,
and other benefits as may be generally provided 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
deemed to be for material cause.
Non-Competition, Confidentiality and Trade Secrets
4.1 Agreement Not To Compete: Until the expiration of the term of
this Agreement or for a period of two (2) years after the date
that the Executive's employment with the Company terminates,
whichever period is the later, the Executive will not, unless
he receives prior written approval of the Board of Directors
of the Company, directly or indirectly engage in any of the
following actions:
A. Directly or indirectly, attempt to move or transfer
business greater than 5% of the aggregate amount of
gross sales, revenues or earnings before taxes of the
Company; or
B. Directly or indirectly hire, solicit for hire or
engage in an activity that would entice employees of
the Company to move to a competitor or to a company
or business where the Executive has become employed;
or
C. Intentionally cause material damage to the Company.
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 relating to the
Company or any of its affiliates, which you acquired during
your term of employment, 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. Material knowledge and
information you bring to the Company are specifically excluded
from this Agreement
5. Miscellaneous
5.1 Mutuality. This Agreement is mutually binding on Goran
and SIG.
5.2 Binding Effect. This Agreement is binding on all assignees and
/or successors of the Company.
5.3 Amendment. This Agreement may be amended only in writing,
signed by both parties.
5.4 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.
5.5 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 or to such other
address as shall be specified in writing:
<PAGE>
If to the Company, to:
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: Chief Executive Officer
If to Executive, to:
Mr. Gene S. Yerant
6515 Waggoner Drive
Dallas, TX 75230
5.6 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.
5.7 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.
5.8 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.
5.9 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.
5.10 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.
5.11 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 Sections.
<PAGE>
5.12 Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by You and such
officer as may be specifically designated by the Board. No
waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior
subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the _____ day of December, 1999.
GORAN CAPITAL INC.
By: _____________________________
Title: _____________________________
SYMONS INTERNATIONAL GROUP, INC.
By:__________________________________
Title:________________________________
GENE S. YERANT
("Executive")
- --------------------------
<PAGE>
EMPLOYMENT AGREEMENT
WHEREAS, Symons International Group, Inc.("SIG") and Goran Capital Inc.
("Goran") (collectively, SIG and Goran are referred to as the "Company")
consider it in SIG's best interests to employ Gregg Albacete ("You", "Your"or
"Executive"), upon the terms and conditions hereinafter set forth; and
WHEREAS, the Executive desires to be employed by SIG, 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. SIG agrees to employ Executive as Vice President
and Chief Information Officer effective as of January 26, 2000 and continuing
until January 26, 2003 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 (the "Term").
1.2 Terms of Employment. During the Term, You agree to be a full-time
employee of SIG serving in the position of Vice President and Chief Information
Officer of SIG and further agree to devote substantially all of Your working
time and attention to the business and affairs of SIG and, to the extent
necessary to discharge the responsibilities associated with Your position as
Vice President and Chief Information Officer of SIG 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 Chief Executive Officer or Executive Vice President of SIG, which duties
shall be consistent with the position of Vice President and Chief Information
Officer of SIG, 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. Nothing herein shall
prohibit You from devoting Your time to civic and community activities or
managing personal investments, as long as the foregoing do not interfere with
the performance of Your duties hereunder.
<PAGE>
1.3 Appointment and Responsibility. The Board of Directors of SIG
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 One Hundred Seventy Five
Thousand Dollars ($175,000). 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.
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 of up to Seventy-Five Thousand Dollars ($75,000) (subject to normal
withholdings) within sixty (60) business days from receipt by Company of its
consolidated, annual audited financial statements. Executive's bonus for the
year ended December 31, 2000 shall be in an amount not less than Thirty-Seven
Thousand Five Hundred Dollars ($37,500). Additional bonus amounts shall be
subject to the discretion of the Chief Executive Officer and Executive Vice
President of the Company.
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.
<PAGE>
2.4 Additional Prerequisites. During the term of this Agreement,
Company shall provide Executive with:
(a) Not less than four (4) weeks paid vacation during each
calendar year.
(b) An automobile allowance equal to the value of a Suburban, but
in no event in excess of seven hundred fifty dollars ($750.00)
per month.
2.5 Expenses. During the period of his employment hereunder, Executive
shall be entitled to receive reimbursement from the Company (in accordance with
the policies and procedures in effect for the Company's employees) for all
reasonable travel, entertainment and other business expenses incurred by him in
connection with his services hereunder.
2.6 Hiring Bonus. The Company will pay Executive Fifty Thousand Dollars
($50,000) upon commencement of employment. Should the Executive's employment
with the Company terminate within the first twelve (12) months of employment,
including termination for cause and excluding other termination by the Company,
the Executive shall immediately reimburse the Company the sum of Four Thousand
One Hundred Sixty-Six Dollars ($4,166) for each remaining month of the first
twelve (12) months of employment.
2.7 Relocation Expense.
(a) Company will cover the direct costs of moving Executive and
his family from Dallas, Texas to Indianapolis, Indiana,
including house-hunting visits to Indianapolis, packing and
unpacking of household goods, and insurance.
(b) Company will pay realtor fees of up to seven percent (7%) on the sale
of Executive's Dallas, Texas home.
(c) Company will pay all closing costs on an Indianapolis home.
(d) Company will reimburse Executive for temporary living expenses
in Indianapolis and weekly travel to and from Dallas, Texas
until the relocation is complete.
2.8 Stock Options. Executive shall be eligible to participate in the
Company's stock option plan and will be granted 10,000 options for shares of SIG
at the market price on the first day of the Term. Executive's stock options
shall be issued pursuant to the Symons International Group, Inc. 1996 Stock
Option Plan and a Stock Option Agreement with respect thereto which shall be
substantially in the form of Exhibit A attached hereto. The options shall vest
and become exercisable by the Executive pro-rata over a three (3) year period
from the date of grant.
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, he shall receive, as severance pay, an amount equal
to his salary for a period of one (1) year from the date of termination of
employment. 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 B.
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
(f) failure of the Executive to follow the written directive of
the Chief Executive Officer of Executive Vice President of the
Company such that the activities of the Executive are
detrimental to the business operations.
<PAGE>
3.3 Change of Control. Notwithstanding any other provisions of this
Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12)
months of any such Change of Control, (a) Company (including its successors, if
any) shall require Executive to perform his duties and obligations pursuant to
this Agreement in a location other than the city of employment of Executive at
the time of such Change of Control, or (b) Company (including its successors, if
any) shall materially change the duties, authority or responsibilities of
Executive such that the same are materially inconsistent with the duties,
authority or responsibilities of Executive at the time of such Change of
Control, then Executive's employment under this Agreement shall be deemed to
have terminated for other than cause pursuant to Section 3.1 hereof, and
Executive shall be entitled to receive salary and benefits as provided in such
Section 3.1. In addition, Executive's stock options shall vest immediately and
Executive may exercise such options within four (4) weeks of the date of
termination of employment. In the event Executive shall fail to exercise the
options within four (4) weeks of termination of employment, the options shall
expire.
A Change of Control shall mean the inability of the Symons
family to cause the election of a majority of the members of the Board of
Directors of Goran Capital Inc., Symons International Group, Inc. or their
respective successors.
3.4 Disability. So long as otherwise permitted by law, if Executive has
become permanently disabled from performing his duties under this Agreement, the
Company's Chairman of the Board, may, in his discretion, determine that
Executive will not return to work and terminate his employment as provided
below. Upon any such termination for disability, Executive shall be entitled to
such disability, medical, life insurance, and other benefits as may be provided
generally for disabled employees of Company during the period he remains
disabled. Permanent disability shall be determined pursuant to the terms of
Executive's long term disability insurance policy provided by the Company. If
Company elects to terminate this Agreement based on such permanent disability,
such termination shall be for cause.
3.5 Indemnification. Executive shall be indemnified by Company (and,
where applicable, its subsidiaries) to the maximum extent permitted by
applicable law for actions undertaken for, or on behalf of, the Company and its
subsidiaries.
4. Non-Competition, Confidentiality and Trade Secrets
4.1 Noncompetition. In consideration of the Company's entering into
this Agreement and the compensation and benefits to be provided by the Company
to You hereunder, and further in consideration of Your exposure to proprietary
information of the Company, You agree as follows:
(a) Until the date of termination or expiration of this Agreement for
any reason (the "Date of Termination") You agree not to enter
into competitive endeavors and not to undertake any commercial
activity which is contrary to the best interests of the Company
or its affiliates, including, directly or indirectly, becoming
an employee, consultant, owner (except for passive investments
of not more than one percent (1%) of the outstanding shares of,
or any other equity interest in, any company or entity listed
or traded on a national securities exchange or in an
over-the-counter securities market), officer, agent or director
of, or otherwise participating in the management, operation,
control or profits of (a) any firm or person engaged in the
operation of a business engaged in the acquisition of insurance
businesses or (b) any firm or person which either directly
competes with a line or lines of business of the Company
accounting for five percent (5%) or more of the Company's gross
sales, revenues or earnings before taxes or derives five
percent (5%) or more of such firm's or person's gross sales,
revenues or earnings before taxes from a line or lines of
business which directly compete with the Company.
Notwithstanding any provision of this Agreement to the
contrary, You agree that Your breach of the provisions of this
Section 4.1(a) shall permit the Company to terminate Your
employment for cause.
(b) If Your employment is terminated by You, or by reason of Your
Disability, by the Company for cause, or pursuant to a notice
of non-renewal of this Agreement, then for one (1) year after
the Date of Termination, You agree not to become, directly or
indirectly, an employee, consultant, owner (except for passive
investments of not more than one percent (1%) of the
outstanding shares of, or any other equity interest in, any
company or entity listed or traded on a national securities
exchange or in an over-the-counter securities market), officer,
agent or director of, or otherwise to participate in the
management, operation, control or profits of, any firm or
person which directly competes with a business of the Company
which at the Date of Termination produced any class of products
or business accounting for five percent (5%) or more of the
Company's gross sales, revenues or earnings before taxes at
which the Date of Termination derived five percent (5%) or more
of such firm's or person's gross sales, revenues or earnings
before taxes. It is expressly agreed and understood that this
Section 4.1(b) shall not apply to a public accounting or
consulting firm.
<PAGE>
(c) You acknowledge and agree that damages for breach of the
covenant not to compete in this Section 4.1 will be difficult
to determine and will not afford a full and adequate remedy,
and therefore agree that the Company shall be entitled to an
immediate injunction and restraining order (without the
necessity of a bond) to prevent such breach or threatened or
continued breach by You and any persons or entities acting for
or with You, without having to prove damages, and to all costs
and expenses (if a court or arbitrator determines that the
Executive has breached the covenant not to compete in this
Section 4.1, including reasonable attorneys' fees and costs, in
addition to any other remedies to which the Company may be
entitled at law or in equity. You and the Company agree that
the provisions of this covenant not to compete are reasonable
and necessary for the operation of the Company and its
subsidiaries. However, should any court or arbitrator determine
that any provision of this covenant not to compete is
unreasonable, either in period of time, geographical area, or
otherwise, the parties agree that this covenant not to compete
should be interpreted and enforced to the maximum extent which
such court or arbitrator deems reasonable.
4.2 Confidentiality. You shall not knowingly disclose or reveal to any
unauthorized person, during or after the Term, any trade secret or other
confidential information (as outlined in the 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.
<PAGE>
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
If to Executive, to:
Gregg Albacete
----------------------
----------------------
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.
<PAGE>
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 Mutuality. This Agreement is mutually binding on Goran and SIG.
5.11 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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the _____ day of January, 2000.
("Company")
GORAN CAPITAL INC.
By:________________________________
Title:______________________________
SYMONS INTERNATIONAL GROUP, INC.
By:________________________________
Title:______________________________
GREGG ALBACETE
("Executive")
------------------------------------
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Quarterly Report For Symons International Group Ended March 31, 2000.
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