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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the Fiscal Year Ended December 31, 1996
OR
/ / Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 [No Fee Required]
Commission File Number 0-16748
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INTERCARGO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3414667
(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
1450 American Lane
20th Floor
Schaumburg, Illinois 60173
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: 847-517-2990
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
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Common Stock, $1.00 Par Value
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in the definitive proxy statement incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate Market Value of Voting Stock held by nonaffiliates as of March 20,
1997: $50,177,462
Number of Shares of Common Stock outstanding as of March 20, 1997: 7,659,981
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report for 1996 (incorporated by reference
under Part II).
Portions of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders (incorporated by reference under Part III).
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<PAGE>
PART I
Item 1. Business.
The Company, through Intercargo Insurance Company ("IIC"), its U.S.
insurance company subsidiary, and Intercargo Insurance Company H.K. Limited, a
subsidiary of IIC, is engaged in the business of underwriting specialized
insurance coverages for international trade. This includes U.S. Customs bonds,
marine cargo insurance, professional liability insurance and property and
casualty insurance. U.S. Customs bonds guarantee payment of duties on imported
goods and marine cargo insurance protects shippers from loss or damage to goods
in transit. IIC's professional liability and property and casualty insurance is
marketed to customs brokers, freight forwarders, and other service firms engaged
in the international movement of cargo. Additionally, IIC markets contract
surety through independent agents.
In the United States, IIC's products are distributed primarily through a
wholly-owned subsidiary, International Advisory Services, Inc. ("IAS") and its
insurance agency subsidiaries under the trade name, Trade Insurance Services,
Inc.
IIC opened a branch office in London in April, 1994. This office
underwrites marine insurance through independent insurance brokers. In October,
1995, the Company acquired Eastern Insurance Limited, a Hong Kong licensed
insurer and renamed the company Intercargo Insurance Company H.K. Limited, and
commenced operations in May, 1996. The Hong Kong subsidiary underwrites marine
cargo and professional liability insurance through Trade Insurance Services and
independent brokers.
In December, 1995 the Company participated in an initial public offering by
the Company's Canadian subsidiary, Kingsway Financial Services, Inc.
("Kingsway") and as a result of this and the underwriters' overallotment
exercised in January 1996, the Company's ownership interest in Kingsway was
reduced from 100% to 47%. In October, 1996 Kingsway completed a secondary
public offering in which the Company also participated. As a result of this,
the ownership interest was further reduced to 31.5%. Kingsway underwrites
commercial nonstandard automobile insurance as its primary line. It also
provides property and casualty coverage in niche markets and specialized
insurance coverages for international trade. The Company no longer considers
Kingsway to be a subsidiary.
Unless the context otherwise requires, the term the "Company" shall mean
Intercargo Corporation and/or its subsidiaries.
U.S. CUSTOMS BONDS
U.S. Customs bonds guarantee that the importer will pay all attendant
duties and taxes at the time of entry of merchandise, pay any supplemental
duties assessed and observe the laws governing imports. U.S. Customs bonds are a
form of security required by the U.S. Customs Service ("Customs") from virtually
all importers of merchandise into the United States. U.S. Customs bonds
facilitate the flow of goods by permitting importers to take possession of such
goods prior to final determination of Customs duties and of related regulatory
issues.
U.S. Customs bonds are of two types, either continuous or single
transaction. The required bond amounts are set by Customs directives. Continuous
bond amounts are set on an annual basis at 10% of the duties, taxes and fees
paid by the importer to Customs in the previous calendar year. Single
transaction bond amounts are determined based on specific transactions or
entries to be secured. Most often, single transaction bonds are set at an
amount equal to the entered value plus estimated duties, taxes and fees.
<PAGE>
The average duty payment required on an import shipment, which is payable
by the importer within ten business days of entry, is approximately 4% to 5% of
the value of the shipment. However, if Customs disagrees with the importer's
classification or valuation of the shipment, the importer will be required to
pay additional duty. Customs also is authorized to assess fines and damages
against importers which fail to comply with certain import laws and regulations.
These laws and regulations include import quota restrictions, labeling laws,
Food and Drug Administration regulations and the regulations of other government
agencies. Although the importer remains liable for these adjustments, fines and
damages, Customs makes demand for payment upon the insurance company that issued
the bond in the event of a default by the importer.
The Company carefully evaluates the information available from its database
and operating experience in establishing its underwriting parameters. All U.S.
Customs bond risks must meet these parameters or be specifically approved by
designated underwriters. This evaluation is based on a number of factors
including the size of the U.S. Customs bond, the financial strength of the
importer, the type of transaction, the type of commodity, the commodity's
country of origin and the importer's loss history. The Company has developed a
database which integrates information received from production sources with
detailed information received from Customs on a weekly basis. The Company uses
this database extensively as it provides enhanced capabilities for underwriting
control and claims handling. The Company also enhances its underwriting
selectivity by declining business written through subproducers which have
historically failed to file complete documentation with Customs in a timely
manner and through its understanding of the laws and regulations which affect
imported cargo.
MARINE CARGO INSURANCE
A marine cargo policy issued by the Company insures the shipper or
consignee against physical loss or damage to cargo while in transit. The
Company's marine cargo policies provide coverage for general commercial and
industrial goods of all types, but exclude among other things, oil shipments and
bulk commodities (such as grain shipments). A small portion of the Company's
marine business also consists of overland carrier and warehouseman's cargo
liability insurance. Marine risks are underwritten based on a number of factors,
including type of commodity to be insured (susceptibility to theft and damage),
adequacy of packaging, country of origin and destination, extent and type of
coverage required, method of transportation and shipping practices and loss
experience of the shipper and consignee. The Company issues marine cargo
policies primarily for shipments from the U.S. to foreign ports, from foreign
ports to the U.S. and, to a limited extent, from one foreign port to another.
The Company, however, endeavors to avoid coverage for troubled parts of the
world.
Marine cargo policies are issued by the Company for an indefinite period of
time. The policy insures individual shipments for amounts up to the policy
limits at premium rates determined by the Company based upon the factors
mentioned above. Premium written on individual shipments is considered to be
earned when reported to the Company.
PROFESSIONAL LIABILITY INSURANCE
The Company provides professional liability coverage for customs brokers,
freight forwarders and other service firms engaged in the international movement
of cargo. Professional liability insurance policies protect insurers against
certain claims arising from the unintentional errors or omissions of their
operations that result in financial injury to their clients. These policies
exclude coverage for punitive damages and are issued on a "claims made" basis,
which means that claims involving alleged negligent acts must be reported during
the stated policy term. The Company's professional liability program has been
endorsed by the National Customs Brokers and Forwarders Association of America
since 1989.
The Company introduced a modified version of its professional liability
coverage in 1993. This coverage, referred to as international transit liability
(ITL) insurance, includes marine legal liability insurance in addition to
professional liability. IIC is the first U.S. based insurance company to offer
this type of coverage. The program was developed to compete in new international
markets. Unlike the traditional professional liability policy, this policy is
issued on an "occurrence" basis which means the covered proximate cause of loss
must occur during the policy period.
2
<PAGE>
OTHER PROPERTY AND CASUALTY INSURANCE
The Company markets commercial property and casualty products to customs
brokers, freight forwarders and other service firms engaged in the international
movement of cargo. The Company is authorized to write these coverages in 47
states. The product is designed to meet the specific requirements of the
broker/forwarder industry.
The Company's property and casualty and marine units offer a truckers
program which includes property and casualty coverage, miscellaneous trucking
bonds and cargo legal liability insurance.
CONTRACT BONDS
The Company sells bid, performance and payment bonds for construction and
other types of contracts. The Company also underwrites license and permit bonds,
miscellaneous financial guarantees, court bonds and specialty fidelity bonds.
The Company has developed what it believes is an industry leading data
processing system that enhances the quality of underwriting while reducing the
costs and time of processing business.
FOREIGN OPERATIONS
See note 14 of Notes to Consolidated Financial Statements for information
relating to revenues, operating income and identifiable assets related to the
Company's operations in the United Kingdom and Hong Kong, which information is
incorporated by reference from the Company's 1996 Annual Report to Stockholders.
MARKETING AND DISTRIBUTION
IAS has agency offices located in Atlanta, Boston, Charleston, Chicago,
Hong Kong, Houston, Los Angeles, Miami, New York, San Francisco, Seattle and
Toronto. Together with a network of subproducers, IAS acts as the principal
insurance agency for approximately 82% of the Company's U.S. insurance product
sales and for its marine cargo and professional liability insurance sold in
Canada. IAS's agency offices operate under the trade name, Trade Insurance
Services, Inc. In addition to IAS and its subproducers, the Company has
appointed independent agents.
IAS sells U.S. Customs bonds and marine cargo insurance primarily through
customs brokers, freight forwarders and other service firms engaged in the
international movement of cargo. These service firms act as subproducers for IAS
and are compensated on insurance business placed through IAS. Customs brokers
must be licensed by the U.S. Treasury Department to represent importers and
arrange for clearance of cargo through Customs. Many customs brokers are also
freight forwarders which arrange for the shipment of cargo both in the U.S. and
abroad. IAS also generates sales through conventional insurance agencies and
markets directly to large shippers of cargo.
IAS sells the Company's professional liability and property and casualty
insurance directly to customs brokers, freight forwarders, and other service
firms engaged in the international movement of cargo.
REINSURANCE
The Company follows the industry practice of reinsuring a portion of its
insured risks, paying to the reinsurer a portion of the premiums received on all
policies. Insurance is ceded principally to reduce the net liability on
individual risks and to protect against catastrophic losses. The Company
endeavors to place reinsurance with reinsurance companies which have been
approved by the U.S. Treasury (in the case of U.S. Customs bonds) and which have
been rated A by A.M. Best Company.
Excess of loss reinsurance on the Company's Customs bond business is
provided through contracts with four reinsurance companies: Munich American
Reinsurance Company ("Munich"), First Excess and Reinsurance Company, Employers
Reinsurance Company ("Employers Re") and Transatlantic Reinsurance
("Transatlantic").
3
<PAGE>
Excess of loss reinsurance is a form of reinsurance which indemnifies the ceding
insurer up to an agreed amount against all or a portion of the amount of loss in
excess of a specified retention. The Company now retains risks up to $500,000
per bond or per principal. Under the contracts, the reinsurers automatically
assume the risk of losses on the Company's bonds between $500,000 and $3,700,000
on any one principal. Bonds written for amounts greater than $3,700,000 must be
submitted to the reinsurers for acceptance on a case-by-case basis and the
Company may not fully reinsure all exposures above $3,700,000.
Excess of loss reinsurance on the Company's marine cargo insurance is
provided through a reinsurance treaty between the Company, Munich and Munich
Reinsurance Company. Under the contracts, Munich and Munich Reinsurance Company
automatically assume the risk of losses between $200,000 and $5,000,000 on any
one occurrence. In addition, the Company has a facultative treaty with Lloyd's
of London and several smaller participants which allows it to write policies in
excess of $5,000,000 up to a limit of $20,000,000.
The reinsurance on the Company's professional liability program is placed
with Employers Re. The Company retains $100,000 of the first $200,000 of loss on
any one policy or occurrence under a quota share arrangement. The reinsurer
provides reinsurance of $800,000 in excess of this first $200,000 and also
provides $2,000,000 additional capacity as needed.
Reinsurance on the Company's other property and casualty insurance consists
of quota share, excess of loss and surplus reinsurance. Surplus reinsurance
indemnifies the Company by ceding a percentage of premiums and losses based upon
total insured value. The Company's net retention is $100,000. Employers Re
provides excess of loss coverage for the workers compensation, commercial
automobile physical damage, and commercial general liability lines, and it
provides surplus reinsurance for commercial property. Excess of loss coverage
under truck liability and physical damage is provided by several reinsurers
including Continental Casualty Company, Great Lakes American Re, Kemper
Reinsurance Company, Security Insurance of Hartford, Trenwich America
Reinsurance, USF Re, Gerling Global Reinsurance Corp. and Republic Western
Insurance Company. USF Re also provides quota share coverage for truck
liability. Quota share reinsurers for the commercial umbrella liability
coverage include Security Insurance Company of Hartford, Kemper Reinsurance
Company, Continental Casualty Company, Underwriters Reinsurance Company, and
Sorema.
The reinsurance program to cover contract and miscellaneous bonds includes a
quota share treaty wherein the Company retains a 50% share of the first $250,000
in losses, while Kemper Reinsurance and Transatlantic Reinsurance provide the
remainder. Losses in excess of $250,000 up to $4,000,000 are ceded to several
reinsurers including Generali - U.S. Branch, Kemper Reinsurance, Republic
Western Reinsurance, Security Insurance of Hartford and Transatlantic
Reinsurance.
The ceding of reinsurance does not discharge the original insurer from its
primary liability to the policyholder. The ceding company is required to pay
losses even if the reinsurer fails to meet its obligations under the reinsurance
agreement. The Company also remains liable for losses which exceed the limits of
coverage afforded by its reinsurance agreements. In addition to the per
occurrence limits set forth above, the annual aggregate limit on the Company's
Customs bond reinsurance contract is $6.4 million and the annual aggregate
limits on the marine cargo reinsurance contract is $17.5 million.
LOSSES AND LOSS RESERVES
Claims on the Company's marine, professional liability, automobile, and
contract bond lines are adjusted by Company personnel. Claims on property and
casualty business are processed by a third party. Adjustment procedures include
verification of the coverage, investigation of the loss, evaluation of the
exposure and final settlement of the claim. The Company's general policy is to
adjust and settle claims as quickly as possible. For marine cargo claims,
salvage and subrogation are important factors in minimizing loss experience.
Substantially all U.S. Customs bond losses are paid to Customs as the party
indemnified by the bond. The Company receives periodic notices of importer
defaults from Customs in the normal course of business. Because of the nature of
the U.S. Customs bond business, the majority of claim notices received from
Customs typically do not
4
<PAGE>
result in actual claim payments by the Company because of payment by the
principal, adequate defenses of the principal or the Company with respect to the
claim or correction of a non-compliance situation.
The two major types of bond claims received from Customs are assessment of
additional duty and liquidated damages. The Company's claim adjustment
procedures for additional duty assessments include identifying the bond related
to the claim, obtaining supporting Customs' entry documentation, reviewing
Customs' assessment of higher duty and contacting the importer of record in an
attempt to secure payment. Claims for liquidated damages are more complex and
require the implementation of several claim adjustment procedures. By working
with the Customs broker that filed the import entry and produced the bond, the
Company seeks to correct the non-compliance situation. If compliance is not
achieved, the Company performs final adjustment procedures or makes payment. The
principal remains liable for all claims paid by the Company. The Company's
policy is to aggressively pursue the principal under rights of subrogation on
any bond that results in a claim payment.
In 1986, Customs began to automate its claims procedures, thus accelerating
the reporting of claims. The Company has responded by enhancing its own
automation of claims data. These enhancements, together with other improvements,
have enabled the Company to achieve greater claims resolution through more
timely pursuit of bond principals. Additionally, the Company has been preparing
for a fully automated interface with Customs. In January 1993, Customs issued a
Notice of Proposed Rulemaking Regarding the Automated Surety Interface ("ASI").
This notice provides the preliminary standards and procedures for ASI, allowing
the Company to move forward towards more efficient underwriting and processing.
On December 8, 1993 the Customs Modernization Act ("Mod Act") was enacted
as Title VI of the North American Free Trade Agreement Implementation Act
("NAFTA"). The Mod Act contains several provisions which may affect sureties.
These include changes in record keeping, interest, automation and liquidation
procedures. These changes in total may affect the Company either positively or
negatively depending on the final regulations and implementation.
The Company maintains reserves for the payment of losses and loss
adjustment expenses ("LAE") for all lines of business, on an undiscounted basis.
The determination of reserves for losses and LAE is dependent on receipt of
information regarding claims and the historical loss experience of the business.
Generally, there is a lag between the time losses are incurred and the time they
are reported to the Company.
The liability for losses and LAE is an estimate of the ultimate unpaid net
cost of all losses incurred through December 31 of each year. Since the
provision is necessarily based on estimates, the ultimate liability may be more
or less than such provision. These estimates include the anticipated recovery of
salvage and subrogation based on historical patterns. Case reserves for
individual claims are generally not established for the U.S. Customs bond
business because of the historical problems of attempting to establish case
reserves for small losses coupled with: (i) frequent errors in Customs claims,
(ii) lack of or erroneous documentation furnished to the Company by Customs, and
(iii) the experience of the Company that in excess of 90% of all claims
initially reported by Customs are either canceled or settled by the principal.
When there is sufficient evidence to document the validity of a claim, it is
promptly paid by the Company. As a result, the Company estimates its ultimate
losses on U.S. Customs bonds by projecting from its paid claim data. The
combination of paid loss projections and the length of time to ultimate
settlement adds a high degree of judgment to the reserving process. The reserves
established for bond losses are regularly evaluated and adjusted when conditions
in loss patterns indicate an adjustment is required. The reserves established
for marine losses and professional liability losses are periodically evaluated
against cases reported and adjustments to the reserves are recorded as deemed
appropriate. Reserves for the Company's automobile and commercial and property
and casualty lines are established on a case-by-case basis and include a
provision for claims incurred but not yet reported (IBNR). The individual case
reserves are reviewed periodically and adjusted as deemed necessary. The
following table presents Company reserve balances for the periods indicated (net
of ceded reinsurance):
5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1996 1995 1994
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid Losses and LAE at beginning of period,
net of reinsurance recoverables of $3,138, $3,830, and
$3,407 $33,155 35,006 26,289
Unpaid Losses and LAE of acquired entities
at the beginning of the period -- 1,300 --
------- ------- -------
Adjusted unpaid losses and LAE at the beginning
of the period 33,155 36,306 26,289
------- ------- -------
Provision for Losses and LAE for claims occurring during:
U.S., U.K. and Hong Kong operations
Current year 31,876 28,426 19,921
Prior years 431 2,090 1,808
Canadian operations
Current year -- 17,216 9,541
Prior years -- 4,014 329
------- ------- -------
Total 32,307 51,746 41,599
------- ------- -------
Less Losses and LAE payments for claims occurring during:
U.S., U.K. and Hong Kong operations
Current year (10,798) (9,492) (7,349)
Prior years (17,607) (12,049) (9,505)
Canadian operations
Current year -- (7,292) (11,289)
Prior years -- (8,863) (4,739)
------- ------- -------
Total (28,405) (37,696) (32,882)
Adjustment to deconsolidate Canadian operations -- (17,201) --
------- ------- -------
Unpaid Losses and LAE at end of period,
net of reinsurance recoverables of $9,980
$3,138 and $3,830 $37,057 33,155 35,006
======= ======= =======
</TABLE>
_______________
Any adjustments to reserves are reflected in operating results for the
period in which they are made.
6
<PAGE>
The following table presents development of total Company reserves and liability
paid for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and LAE $7,412 $9,414 $11,459 $12,584 $14,133 $25,867 $23,940 $26,289 $35,006 $33,155 $37,057
Cumulative amount of
liability paid through:
One Year Later 4,130 5,254 6,019 5,216 6,039 12,611 12,531 14,244 20,205 17,608
Two Years Later 7,307 8,803 8,826 8,748 10,893 18,471 17,711 22,819 25,890
Three Years Later 9,436 10,985 11,396 12,106 13,079 21,521 24,280 26,934
Four Years Later 11,203 12,963 14,375 13,525 13,782 28,746 25,908
Five Years Later 12,862 15,400 15,224 13,906 21,892 29,131
Six Years Later 14,805 16,108 15,488 14,179 22,223
Seven Years Later 15,106 16,318 15,766 14,432
Eight Years Later 15,181 16,517 15,830
Nine Years Later 15,134 16,478
Ten Years Later 15,018
Liability re-estimated as of:
One Year Later 7,666 10,080 11,629 13,592 13,367 26,551 25,728 28,426 41,110 33,586
Two Years Later 9,379 11,356 14,011 13,301 16,666 25,974 24,667 29,851 41,491
Three Years Later 10,631 13,974 14,502 16,273 15,613 25,060 23,289 31,883
Four Years Later 12,986 15,301 17,499 15,351 14,966 24,192 24,208
Five Years Later 14,618 17,782 16,656 14,790 14,765 24,536
Six Years Later 16,502 17,051 16,038 14,209 15,225
Seven Years Later 15,717 16,736 15,774 14,613
Eight Years Later 15,413 16,565 16,010
Nine Years Later 15,158 16,713
Ten Years later 15,210
Cumulative deficiencies
(Redundancies) $7,798 $7,299 $4,551 $2,029 $1,092 ($1,331) $268 $5,594 $6,485 $431
====== ====== ====== ====== ====== ====== ==== ====== ====== ====
</TABLE>
Generally accepted accounting principles (GAAP) require insurance liabilities on
the balance sheet be reported without reduction for anticipated recoverables
under reinsurance contracts. Statutory accounting practices continue to permit
reporting on a net basis. The following table sets forth the reconciliation of
GAAP reported reserves to reserves net of reinsurance as shown above.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
----------------------------
(dollars in thousands)
<S> <C> <C> <C>
Gross loss and loss adjustment expense reserves $47,037 $36,293 $38,836
Ceded to other insurance companies (1) 9,980 3,138 3,830
------- ------- -------
Net liability as stated above $37,057 $33,155 $35,006
======= ======= =======
</TABLE>
____________________________
(1) Before reduction for funds held from reinsurers
As indicated in the above tables, the Company has experienced adverse loss
development for policy years other than 1991. Reserve deficiencies for 1991 and
prior have developed primarily in the U.S. Customs bond line of business.
Historical reserve deficiencies resulted from several causes, including
modifications in the administrative procedures utilized by Customs in the claims
assessment and collection area; the previously described computerization of the
claims administration process by Customs; certain court decisions regarding
claims administration procedures that were decided favorably to Customs and
certain extraordinary losses experienced by the Company. The extraordinary
losses were related to a discontinued line of bond business for
7
<PAGE>
environmental and safety requirements for imported automobiles, a discontinued
program for travel agents and a Customs determination on certain steel
importations involving countervailing duty and anti-dumping issues. (In
accordance with Customs procedures operative at the time, these risks were
primarily secured by many single entry bonds.) The aggregate cumulative losses
on these items is approximately $5,500,000, net of reinsurance ceded. The
Customs regulations have been modified to restrict such aggregation of liability
in the future. Moreover, the database now permits the Company to track and
control such aggregations on a more timely basis.
In 1993, reserve estimates for professional liability developed greater
than originally estimated. The Company's experience with a certain segment of
its insured population has been identified as the source of the adverse
experience. Certain aspects of the Mod Act are expected to allow this group to
be able to limit its exposure to loss in the future. Coupled with enhanced
pricing and underwriting control, the Company believes these changes should
result in improved loss experience in this area.
As prior period reserve inadequacies became apparent, the Company took
several actions to strengthen its reserve posture by increasing its premium
rate, adjusting its current reserve practices and affecting lump sum increases
to the reserves.
During 1995, it became apparent that the estimated unpaid claims for
liabilities established at December 31, 1994 on Kingsway's business lines would
exceed initial expectations and loss reserves were increased accordingly by $4.0
million. In addition, the reserves reported to Kingsway by the Canadian Facility
Association Risk Sharing Pool as at December 31, 1994 increased substantially
during 1995. The Risk Sharing Pool was created by legislation in Ontario to
ensure the availability of automobile insurance to every motorist in Ontario.
Every insurer writing automobile insurance is required to share in these losses
in proportion to their business in the Province.
Also, during 1995, loss experience related to U.S. operations for 1994 and
prior suggested reserve increases amounting to $5.2 million were required for
the marine cargo, contract surety and other property and casualty lines. These
increases were offset by savings of $3.1 million on 1994 and prior U.S. Customs
bonds reserve estimates.
During 1996 further adverse development for prior years emerged. Increases
totaling $2.4 million were made in the contract surety, marine and professional
liability product lines. These increases were partially offset by reductions
totaling $814,000 to U.S. Customs bonds and other property and casualty reserve
estimates.
Claims experience tends to be dependent upon the frequency of claims versus
the severity of individual claims. Severity exposures are the subject of certain
excess of loss reinsurance treaties as described above. Until recent Customs'
automation, obtaining reliable information on the frequency of claims was
difficult and was further compounded by the historically long delays in Customs'
claims assessment and processing. Currently, Customs forwards a computer tape of
outstanding bills for additional duty and liquidated damages to the Company on a
weekly basis. This data is input to the Company's computer and used to initiate
claims handling procedures.
The Company's bond and marine cargo losses are generally tied to the value
of the goods as of the date of shipment and generally are not adversely affected
by inflation; however, LAE is subject to the effects of inflation. LAE is
composed primarily of hourly fee costs for attorneys, adjusters and survey
firms. Such professional services typically are subject to rate increases at the
discretion of the provider. While the Company makes every effort to control the
rates and hours of service, it is imperative to retain qualified personnel
familiar with the business of the Company and the insurance industry.
8
<PAGE>
COMPETITION
The insurance industry is highly competitive. The Company faces competition
from bond underwriters, marine and non-marine insurers and numerous other
insurance companies. These insurers vary in terms of size, quality, operating
histories and financial, marketing and management resources. Many of these
competitors are larger, have more agents and have substantially greater
financial resources than the Company.
The U.S. Customs bond business is highly specialized and requires
significant technical knowledge in order to properly underwrite and respond to
claims. Additionally, the automated processing systems which the U.S. Customs
Service has installed for its own use necessitate that surety companies also be
automated for claims. In addition to the ability to use the data tapes, and data
base information, the time frames available for collection and payment have been
shortened, requiring sureties to respond on a daily basis.
There are over 300 companies in the United States Department of the
Treasury's approved list of companies acceptable as sureties and reinsurers of
federal bonds including U.S. Customs bonds. While there is no reliable data
available from which to determine the amount or volume of U.S. Customs bonds
written by these companies, the Company believes that it and one of its
competitors, Washington International Insurance Company, are the dominant
underwriters for U.S. Customs bonds.
Many major insurance companies, agents and brokers compete for marine cargo
insurance business. The Company believes that its ability to compete in this
market is enhanced by its relationships with customs brokers and freight
forwarders.
The Company has few competitors in the U.S. for its professional liability
product and believes that it has the largest professional liability program in
the U.S. offering this type of coverage. In Canada, alternative coverages are
marketed by competitors in conjunction with a broad form marine and liability
policy. The Company developed a new form, the International Transit Liability
Policy ("ITL"), to be more compatible to Canadian market expectations. The
Company believes that its ability to provide prompt, efficient service to
customs brokers and freight forwarders, as well as its expertise and
understanding of the risks involved in those industries, provide a competitive
advantage over other carriers in both its professional liability lines and its
property and casualty lines.
REGULATION
U.S. Federal Regulation. U.S. Customs bonds are sold pursuant to federal
regulations requiring virtually every importer of goods into the United States
to post a bond. IIC currently maintains a Certificate of Authority as a surety
company qualified to write U.S. Customs bonds pursuant to federal law and
applicable regulations promulgated by the U.S. Department of Treasury (the
"Treasury"). The Treasury determines the maximum amount of risk retention per
bond for each qualified insurance company. IIC is qualified to write U.S.
Customs bonds and retain an aggregate up to $2,664,000 of liability on any one
bond.
Although no specific statutory requirements exist, the Treasury generally
recommends no greater than a three to one ratio of net premiums written to
statutory surplus for sureties licensed to write U.S. Customs bonds. The Company
continues to meet this guideline.
Insurance companies issuing U.S. Customs bonds and customs brokers selling
such bonds are extensively regulated by the Treasury, including an annual review
of their financial statements. As a result of extensive federal regulation, the
Company believes that under the McCarran Ferguson Act, its U.S. Customs bonds
business is exempt from state regulation. No state has taken any action to
require the Company's compliance with its licensure requirements with respect to
its U.S. Customs bond business.
State Regulation. The Company and its U.S. insurance subsidiary is subject
to regulation under the various state insurance laws where the subsidiary is
licensed, including each particular state's insurance holding company law
("Holding Company Law"). Such regulation is designed generally to protect
policyholders rather
9
<PAGE>
than investors and relates to such matters as the standards of solvency which
must be met and maintained; the licensing of insurers and their agents; the
nature of and examination of the affairs of insurance companies, which includes
periodic financial and market conduct examinations by regulatory authorities;
annual and other reports, prepared on a statutory accounting basis, required to
be filed on the financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums and losses; and
requirements regarding numerous other matters. In general, the Company's
insurance subsidiary must file rates for insurance directly underwritten with
the insurance department of each state in which it operates. Further, state
insurance statutes typically place limitations on the amount of dividends or
other distributions payable by domiciled insurance companies in order to protect
their solvency.
Holding Company Laws impose standards on certain transactions between
registered insurers and their affiliates, which include, among other things,
that the terms of the transactions be fair and reasonable and that the books,
accounts and records of each party be maintained so as to clearly and accurately
disclose the precise nature and details of the transactions. Holding Company
Laws also generally require that any person or entity desiring to acquire more
than a specified percentage (commonly 10%) of the Company's outstanding voting
securities is required first to obtain approval of the applicable state
insurance regulators.
The National Association of Insurance Commissioners (NAIC) facilitates the
regulation of multi-state companies through uniform reporting requirements,
standardized procedures for financial examinations, and uniform regulatory
procedures embodied in model acts and regulations. Current developments address
the reporting and regulation of the adequacy of capital and surplus. The NAIC
has finalized its risk-based capital model act for property/casualty companies.
At December 31, 1996, Intercargo Insurance Company's required risk-based capital
was $5,619,398; reported capital and surplus was $30,697,154.
INVESTMENT POLICY
The Company's investment policy requires that invested assets be comprised
of investment grade, fixed income securities of short to medium term. The
Company does not invest in real estate or real estate securities, "high yield"
bonds or derivatives. The Company's philosophy is to hold its investments to
maturity when feasible, but will redeploy assets when market conditions dictate.
Substantially all of the Company's investment portfolio is comprised of
investment grade securities issued by the U.S. Treasury, various federal
agencies, various state and local governments and major U.S. corporations.
EMPLOYEES
At December 31, 1996, the Company had 222 U.S. employees. Of these, 57 were
managerial personnel and 165 were clerical employees. Except for 18 part-time
employees, all such persons are employed on a full-time basis. The Company
believes that it enjoys favorable relations with its employees.
Item 2. Properties
The Company occupies leased space in Schaumburg, Illinois where its
principal executive offices are located. The Company shares its principal
executive offices with IAS. IAS has eleven individual leases in locations where
it maintains sales and service offices. IIC leases space in London where a
branch office is maintained. Intercargo Insurance Company H.K. Ltd. leases
office space in Hong Kong.
Item 3. Litigation
There are no pending material legal proceedings to which the Company or its
subsidiaries is a party or of which any of the properties of the Company or its
subsidiaries is subject, except for claims arising in the ordinary course of
business. In the ordinary course of business, the Company is involved in certain
litigation. In the opinion of management, the ultimate resolution of such
litigation will not have a material effect on the financial condition of the
Company.
10
<PAGE>
Item 4. Submission of Matter to a Vote of Security Holders
None.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information regarding the Market for Registrant's Common Equity and
Related Stockholder Matters is included in the Registrant's 1996 Annual Report
to Stockholders under the heading "Management's Discussion and Analysis--Market
Information," which is incorporated herein by reference.
Item 6. Selected Financial Data
The Selected Financial Data are contained in the Registrant's 1996 Annual
Report to Stockholders under the heading "Selected Financial Data," which is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Management's Discussion and Analysis of Financial Condition and Results
of Operations are contained in the Registrant's 1996 Annual Report to
Stockholders under the heading "Management's Discussion and Analysis," which is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and related notes required in
response to this item are contained in the Registrant's 1996 Annual Report to
Stockholders, which financial statements and notes are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 26, 1997, the Board of Directors of Intercargo Corporation (the
"Company"), upon the advice of its Audit Committee, elected to not retain KPMG
Peat Marwick LLP as its certifying accountant for fiscal year 1997. The
decision to change accountants was based upon a cost analysis of services
provided. There were no disagreements between management of the Company and the
former accountants on any matters of accounting principles or practices,
financial statement disclosures, or auditing scopes or procedures during the
Company's two most recent fiscal years and any subsequent interim period through
the date of dismissal. The accountant's reports on the financial statements of
the Company in the 1995 and 1996 fiscal years were unqualified, not modified as
to uncertainty, audit scope or accounting principles, and did not express any
adverse opinion or disclaimer of opinion.
In addition, on February 26, 1997, the Audit Committee recommended, and the
Board of Directors approved, the appointment of Ernst & Young LLP as the
Company's new independent accountants, effective for fiscal 1997, but subject to
ratification of the appointment by the stockholders of the Company at the annual
meeting of stockholders currently scheduled to be held on May 16, 1997. The
selection of Ernst & Young LLP was through a request for proposal process with
no consideration requested or made on the application of accounting principles,
the type of audit opinion that might be rendered on the financial statements, or
any other factor for reaching a decision as to accounting, auditing or financial
reporting issues.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information regarding Directors and Executive Officers of the
Registrant, reference is made to the Registrant's definitive proxy statement for
its annual meeting of stockholders to be held on May 16, 1997, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1996, which is incorporated herein by reference.
Item 11. Executive Compensation
12
<PAGE>
For information regarding executive compensation, reference is made to the
Registrant's definitive proxy statement for its annual meeting of stockholders
to be held on May 16, 1997, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1996, which is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
For information regarding security ownership of certain beneficial owners
and management, reference is made to the Registrant's definitive proxy statement
for its annual meeting of stockholders to be held on May 16, 1997, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1996, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
For information regarding certain relationships and related transactions,
reference is made to the Registrant's definitive proxy statement for its annual
meeting of stockholders to be held on May 16, 1997, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996 which
is incorporated herein by reference.
13
<PAGE>
INTERCARGO 10-K
---------------
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) For information concerning the following consolidated financial
statements of the Registrant, reference is made to the Registrant's
1996 Annual Report to Stockholders, which financial information is
incorporated herein by reference.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements for each of the years in the
three year period ended December 31, 1996.
(a)(2) The following consolidated financial statement schedules of the Company
listed below are contained in the index to Financial Statement
Schedules on page FS-1 herein:
Schedule I Summary of investments - other than investments in related parties
Schedule II Condensed financial information of registrant
Schedule IV Reinsurance
Schedule VI Supplemental information concerning property/casualty operations
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996
(c) Exhibits. See Exhibit Index immediately following financial statement
schedules.
(d) Financial statements, fifty percent or less owned persons
The following consolidated financial statement of Kingsway Financial
Services, Inc., of which the Registrant owns approximately 31.5%, are filed
herewith.
Independent Auditors Report.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations and Retained Earnings for
the years ended December 31, 1996 and 1995.
Consolidated Statements of Changes in Financial Position for the
years ended December 31, 1996 and 1995.
Notes to Consolidated Financial Statements for the years ended
December 31, 1996 and 1995.
14
<PAGE>
INTERCARGO CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditors' Report FS-2
SCHEDULES
Summary of Investments-Other than Investments in Related
Parties (Schedule I) FS-3
Condensed Financial Information of Registrant (Schedule II) FS-4
Reinsurance (Schedule IV) FS-7
Supplemental Information Concerning Property/Casualty
Insurance Operations (Schedule VI) FS-8
FS-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Intercargo Corporation:
Under date of February 21, 1997, we reported on the consolidated balance sheets
of Intercargo Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996, as
contained in the 1996 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1996. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated supplementary financial statement schedules as listed in
the accompanying index. These supplementary financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these supplementary financial statement schedules based on our
audits.
In our opinion, such supplementary financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 21, 1997
FS-2
<PAGE>
SCHEDULE I
INTERCARGO CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Amount at Which
Fair Shown in the
Type of Investment Cost (1) Value Balance Sheets
- ------------------ -------- ----- --------------
<S> <C> <C> <C>
(Available for Sale)
Fixed Maturities:
U.S. Government and Agency
obligations $20,870 20,397 20,397
State, municipal, and other tax
advantaged securities 14,193 14,495 14,495
Corporate securities 15,128 14,936 14,936
Other fixed maturity investments 1,758 1,739 1,739
------- ------ ------
Total fixed maturities 51,949 51,567 51,567
Equity securities 1,730 1,557 1,557
------- ------ ------
Total investments $53,679 53,124 53,124
======= ====== ======
</TABLE>
______________
(1) Investments in fixed maturities are reflected at cost, adjusted for
amortization of premium or accretion of discounts.
See notes to consolidated financial statements.
See accompanying report of independent auditors.
FS-3
<PAGE>
SCHEDULE II
INTERCARGO CORPORATION
CONDENSED BALANCE SHEETS (Registrant only)
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---------------------
<S> <C> <C>
ASSETS
Investment in affiliates $ 13,519 11,898
Cash and cash equivalents 1,235 1,180
Equipment, at cost less accumulated depreciation 607 569
Investments in subsidiaries 33,198 29,476
Notes receivable
Due from affiliates 8,260 8,260
Due from non-affiliates 108 209
Other assets 1,775 1,988
-------- ------
Total assets $ 58,702 53,580
======== ======
LIABILITIES
Accrued expenses and other liabilities $ 233 184
Federal income tax payable 722 40
Notes payable 9,735 9,735
-------- ------
Total liabilities 10,690 9,959
-------- ------
STOCKHOLDERS' EQUITY
Common stock -- $1 par value; authorized 20,000,000 shares;
issued and outstanding,7,659,981 shares in 1996 and
7,640,981 in 1995 7,660 7,641
Additional paid-in capital 24,180 24,104
Unrealized loss on foreign currency translation (978) (1,179)
Net unrealized gain (loss) on available-for-sale securities (366) 567
Retained earnings 17,516 12,488
-------- ------
Total stockholders' equity 48,012 43,621
-------- ------
Total liabilities and stockholders' equity $ 58,702 53,580
======== ======
</TABLE>
See notes to consolidated financial statements.
See accompanying report of independent auditors.
FS-4
<PAGE>
SCHEDULE II -- Continued
INTERCARGO CORPORATION
CONDENSED STATEMENTS OF INCOME (Registrant only)
(in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Revenues
Revenues from affiliates $ 12 17 70
Net investment and other income 3,151 1,261 665
------- ----- -----
Total 3,163 1,278 735
------- ----- -----
Expenses
Interest expense 715 937 367
General and administrative expense 681 481 1,034
------- ----- -----
Total 1,396 1,418 1,401
------- ----- -----
Operating gain (loss) 1,767 (140) (666)
Federal income tax benefit (expense) (601) 48 226
Equity in the operating earnings of subsidiaries,
net of income taxes 5,238 2,231 5,421
------- ----- -----
Net income $ 6,404 2,139 4,981
======= ===== =====
</TABLE>
See notes to consolidated financial statements.
See accompanying report of independent auditors.
FS-5
<PAGE>
SCHEDULE II -- Continued
INTERCARGO CORPORATION
CONDENSED STATEMENTS OF CASH FLOW (Registrant only)
(in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,404 2,139 4,981
Adjustments to reconcile net income to net cash
provided from operating activities:
Realized gains (2,394) (241) --
Equity in operating earnings of
subsidiaries, net of income tax (5,238) (2,231) (5,421)
Depreciation and amortization -- 2 219
Change in income tax accounts 682 (11) (173)
(Increase) decrease in notes receivable
Affiliates -- 1,850 (1,505)
Non-affiliates 101 251 382
Increase (decrease) in accrued expenses and
other liabilities 49 (62) 154
Other, net 197 (806) (1,356)
------- ------ ------
Net cash provided from (used in) operating activities (199) 891 (2,719)
------- ------ ------
Cash flows from investing activities:
Long-term fixed maturities:
Purchases -- -- --
Sales -- -- 796
Equity securities:
Sales -- -- 347
Net (purchases) sales of short-term maturities -- -- 2,993
Dividends received from subsidiary -- 250 --
Contribution of capital to subsidiary (3,000) (5,000) (3,600)
Sale of Kingsway common stock 4,573 4,107 --
(Purchase) Sale of equipment, net (38) 367 (458)
------- ------ ------
Net cash provided from (used in) investing activities 1,535 (276) 78
------- ------ ------
Cash flows from (used in) financing activities:
Proceeds from exercise of stock options 95 -- 50
Dividends paid to stockholders (1,376) (1,375) (1,375)
Proceeds from loans -- 1,410 325
------- ------ ------
Net cash provided from (used in) financing activities (1,281) 35 (1,000)
------- ------ ------
Net increase(decrease) in cash and cash equivalents 55 650 (3,641)
Cash and cash equivalents:
Beginning of the period 1,180 530 4,171
------- ------ ------
End of the period $ 1,235 1,180 530
======= ====== ======
</TABLE>
See notes to consolidated financial statements.
See accompanying report of independent auditors.
FS-6
<PAGE>
SCHEDULE IV
INTERCARGO CORPORATION AND SUBSIDIARIES
REINSURANCE
(dollars in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ------------------------------------------------------------------------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
- ------------------------------------------------------------------------------
Property and liability premiums
<S> <C> <C> <C> <C> <C>
Year ended:
December 31, 1996 $68,206 10,163 3,010 61,053 4.93%
December 31, 1995 $98,460 13,594 1,288 86,154 1.49%
December 31, 1994 $86,216 11,565 146 74,797 .20%
</TABLE>
See accompanying report of independent auditors.
FS-7
<PAGE>
SCHEDULE VI
INTERCARGO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(dollars in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H
- --------------------------------------------------------------------------------------------------------------------------
Claims and Claim
Reserves for Adjustment Expenses
Deferred Unpaid Claims Discount, Incurred Related to
Policy and Claim if any, Net (1) (2)
Affiliation with Acquisition Adjustment Deducted in Unearned Earned Investment Current Prior
Registrant Costs Expenses Column C Premiums Premiums Income Year Year
- --------------------------------------------------------------------------------------------------------------------------
Consolidated property-
casualty entities
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended:
December 31, 1996 $3,884 47,037 -- 17,617 61,053 6,364 31,877 431
December 31, 1995 4,898 36,293 -- 17,691 86,154 6,273 45,642 6,104
December 31, 1994 6,602 38,836 -- 31,586 74,797 4,378 39,462 2,137
</TABLE>
<TABLE>
<CAPTION>
Column A Column I Column J Column K
- ----------------------------------------------------------
Amortization Paid Claims
of Deferred and Claim
Affiliation with Policy Acq. Adjustment Premiums
Registrant Costs Expenses Written
- ----------------------------------------------------------
Consolidated property-
casualty entities
<S> <C> <C> <C>
Year ended:
December 31, 1996 $17,410 28,406 58,453
December 31, 1995 22,829 37,696 90,804
December 31, 1994 18,511 32,882 80,737
</TABLE>
See accompanying report of independent auditors.
FS-8
<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: March 31, 1997
INTERCARGO CORPORATION
By: /s/ James R. Zuhlke
------------------------------
James R. Zuhlke, President and
Chief Executive Officer
FS-9
<PAGE>
SIGNATURE DATE
- --------------------------------------- --------------
/s/ James R. Zuhlke March 31, 1997
- ---------------------------------------
James R. Zuhlke
Chairman of the Board; President,
Chief Executive Officer and a Director
(Principal Executive Officer)
/s/ Michael L. Sklar March 31, 1997
- ---------------------------------------
Michael L. Sklar
Director
/s/ Arthur J. Fritz, Jr. March 31, 1997
- ---------------------------------------
Arthur J. Fritz, Jr.
Director
/s/ Arthur L. Litman March 31, 1997
- ---------------------------------------
Arthur L. Litman
Director
/s/ Kenneth A. Bodenstein March 31, 1997
- ---------------------------------------
Kenneth A. Bodenstein
Director
/s/ Albert J. Gallegos March 31, 1997
- ---------------------------------------
Albert J. Gallegos
Director
/s/ Robert B. Sanborn March 31, 1997
- ---------------------------------------
Robert B. Sanborn
Director
/s/ Michael L. Rybak March 31, 1997
- ---------------------------------------
Michael L. Rybak
Chief Financial Officer, Vice President
(Principal Financial and Accounting
Officer)
FS-10
<PAGE>
EXHIBIT INDEX
Description
-----------
Exhibit
Number
- ------
3.1 Certificate of Incorporation of the Company, including amendments
thereto.(1)
3.2 Bylaws of the Company, including amendments thereto.(1)
4 Specimen Certificate of Common Stock.(2)
10.1 Form of Company's 1987 Non-Qualified and Incentive Stock Option
Plan.(1)
*10.2 Executive Incentive Compensation Plan.(3)
10.3 Secured Loan Agreement between the Company and LaSalle National
Bank dated June 4, 1993(4).
10.4 First Amendment dated January 1, 1995, to Secured Loan Agreement
between the Company and LaSalle National Bank dated June 4,
1993.(5)
10.5 Revolving Note dated June 4, 1993, executed by the Company in
favor of LaSalle National Bank.(4)
*10.6 Indemnification Agreements between the Company and the following
directors: Kenneth A. Bodenstein, Arthur L. Litman, Arthur J.
Fritz, Jr., Albert J. Gallegos and James R. Zuhlke.(3)
*10.7 Supplemental Life Insurance Policy for James R. Zuhlke.(3)
*10.8 Employment Agreement dated August 25, 1993, between the Company
and Robert S. Kielbas. (4)
*10.9 Employment Agreement dated August 12, 1996 between the Company
and Michael L. Rybak. (filed herewith)
*10.10 Supplemental Life Insurance Policy for Robert S. Kielbas.(5)
*10.11 Indemnification Agreement dated February 18, 1994 between the
Company and Robert B. Sanborn.(5)
*10.12 Indemnification Agreement dated August 12, 1996 between the
Company and Michael L. Rybak. (filed herewith)
10.13 Second Amendment dated June 4, 1995, to Secured Loan Agreement
between the Company and LaSalle National Bank dated June 4, 1993.
(filed herewith)
10.14 Third Amendment dated March 31, 1996, to Secured loan Agreement
between the Company and LaSalle National Bank dated June 4, 1993.
(filed herewith)
11 Statement regarding Computation of Per Share Earnings. (filed
herewith)
12 Statement regarding Computation of Ratios. (filed herewith)
13 Portions 1996 Annual Report to Stockholders incorporated by
reference. (filed herewith)
21 Subsidiaries of the Company. (filed herewith)
23 Consent of Independent Auditors. (filed herewith)
27 Financial Data Schedule. (filed herewith)
28 Information from reports furnished to State Insurance regulatory
authorities (filed separately in paper format). The Company's
Canadian subsidiaries are not required to file Schedules O and P
with the Ontario Insurance Commissioner. Accordingly, no such
schedules have been filed herewith.
___________________
(1) Filed with the Company's Registration Statement on Form S-18, Registration
No. 33-21270C and incorporated herein by reference.
(2) Filed with Amendment No. 1 to the Company's Registration Statement on Form
S-18, Registration No. 33-21270C and incorporated herein by reference.
(3) Filed with the Company's Registration Statement on Form S-2, Registration
No. 33-45658 and incorporated herein by reference.
(4) Filed with the Company's Form 10-K for the year ended December 31, 1993
and incorporated herein by reference.
(5) Filed with the Company's Form 10-K for the year ended December 31, 1994,
and incorporated herein by reference.
* Management contract or compensatory plan required to be filed as an exhibit
to this Annual Report on Form 10-K pursuant to Item 14(c) of Form 10-K.
FS-11
<PAGE>
KINGSWAY FINANCIAL SERVICES INC.
AUDITORS' REPORT
To the Shareholders of
Kingsway Financial Services Inc.
We have audited the consolidated balance sheets of Kingsway Financial Services
Inc. as at December 31, 1996 and December 31, 1995 and the consolidated
statements of operations and retained earnings and changes in financial position
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1996
and December 31, 1995 and the results of its operations and the changes in its
financial position for the years then ended in accordance with generally
accepted accounting principles.
KPMG
Chartered Accountants
Toronto, Canada
February 19, 1997
FS-12
<PAGE>
KINGSWAY FINANCIAL SERVICES INC.
APPOINTED ACTUARY'S REPORT
To the Shareholders of
Kingsway Financial Services Inc.
I have valued the policy liabilities in Kingsway Financial Services Inc.'s
consolidated balance sheets as at December 31, 1996 and December 31, 1995 and
the changes in policy liabilities reflected in its statements of operations for
each of the years then ended in accordance with accepted actuarial practice.
In my opinion, the valuations are appropriate and the consolidated financial
statements fairly present their results.
Claudette Cantin, F.C.A.S., F.C.I.A.
Tillinghast - Towers Perrin
February 19, 1997
FS-13
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at December 31
(In thousands of dollars)
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash $ 4,165 $ 1,363
Investments (note 3) 152,189 59,924
Accrued investment income 1,473 583
Financed premiums receivable 30,182 12,914
Accounts receivable 12,580 5,587
Due from reinsurers (notes 6 and 9) 27,154 6,967
Deferred policy acquisition costs 13,060 5,210
Deferred income taxes 1,668 691
Capital assets (note 4) 5,662 2,173
Goodwill 140 189
-----------------------
$ 248,233 $ 95,601
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 4,096 $ 1,350
Income taxes payable 1,779 55
Unearned premiums (note 6) 64,064 27,463
Unpaid claims (notes 6 and 9) 90,656 29,486
Deferred service charges 1,004 570
-----------------------
161,599 58,924
Shareholders' equity:
Share capital (note 5) 59,037 21,889
Share warrant (note I 1) 1,647 -
Retained earnings (note 10) 25,950 14,788
-----------------------
86,634 36,677
-----------------------
$ 248,233 $ 95,601
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Years ended December 31
($ in thousands, except per share amounts)
1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Gross premiums written $ 140,610 $ 60,049
----------------------
Net premiums written $ 134,121 $ 50,440
----------------------
Revenue:
Net premiums earned (note 6) $ 107,679 $ 46,063
Investment income 9,181 3,615
Premium finance income 1,868 1,298
----------------------
118,728 50,976
Expenses:
Claims incurred (notes 6 and 9) 69,889 30,638
Commissions and premium taxes (note 6) 21,523 7,882
General and administrative expenses 11,560 5,983
----------------------
102,972 44,503
Income before income taxes 15,756 6,473
Income taxes (note 8):
Current 5,095 3,034
Deferred (501) (328)
----------------------
4,594 2,706
Net income 11,162 3,767
Retained earnings, beginning of year 14,788 11,021
Retained earnings, end, of year $ 25,950 $ 14,788
----------------------
Earnings per share (note 5):
Basic $ 1.04 $ 0.61
Fully diluted $ 1.00 $ 0.61
- ------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN
FINANCIAL POSITION
<TABLE>
<CAPTION>
Years ended December 31
($ in thousands)
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net income $ 11,162 $ 3,767
Items not involving cash:
Amortization 465 244
Deferred income taxes (977) (328)
Gain on sale of capital assets (162) -
Net realized gain on sale of investments (2,616) (255)
Amortization of bond premiums and discounts (1,029) (2,190)
----------------------
6,843 1,238
Change in non-cash balances:
Accrued investment income (419) 72
Accounts receivable 6,346 120
Financed premiums receivable (17,268) (1,703)
Deferred policy acquisition costs (4,500) (1,125)
Due to brokers - (187)
Income taxes payable 1,725 (91)
Accounts payable and accrued liabilities 1,560 697
Due from reinsurers 6,633 (1,089)
Unearned premiums 18,857 5,024
Unpaid claims 24,882 8,100
Deferred service charges 433 (67)
----------------------
45,092 10,989
Financing activities:
Issuance of share capital, net 37,148 16,253
Share warrant (note 11) 1,647 -
Note payable to Intercargo - (2,500)
Decrease in bank demand loan (1,480) -
----------------------
37,315 13,753
Investing activities:
Purchase of investments (241,406) (144,061)
Proceeds from sale of investments 169,675 117,924
Purchase of subsidiary (note I 1) (4,343) -
Additions to capital assets (4,366) (809)
Proceeds on sale of capital assets 835 -
----------------------
(79,605) (26,946)
Increase (decrease) in cash during the year 2,802 (2,204)
Cash, beginning of year 1,363 3,567
----------------------
Cash, end of year $ 4,165 $ 1,363
</TABLE>
See accompanying notes to consolidated financial statements
FS-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All tabular figures are in $ thousands unless indicated other.
Kingsway Financial Services Inc. (the "Company") was incorporated under the
Business Corporations Act (Ontario) on September 19, 1989. On November 10,
1995, the Company filed articles of amendment deleting its "private company"
share restrictions. On December 18, 1995, the Company completed an Initial
Public Offering and its shares were listed on The Toronto Stock Exchange. Prior
to the Company issuing shares to the public, it was a wholly owned subsidiary of
Intercargo Corporation ("Intercargo"), a company listed on Nasdaq in the United
States. Intercargo owned approximately 3 1 % and 50% of the Company's shares at
December 31, 1996 and 1995 respectively.
1. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada and include the accounts of
the Company and its wholly owned subsidiaries, Kingsway General Insurance
Company ("Kingsway General") and York Fire & Casualty Insurance Company
("York").
The Company through its subsidiaries writes all classes of insurance, other than
life. Kingsway General is licensed in all provinces and territories in Canada,
and York is licensed in Ontario only.
(a) INVESTMENTS:
Fixed term investments are carried at amortized cost. Investments in common or
preferred shares are carried at cost. Gains and losses on disposal of
investments are determined and recorded as at the settlement date, and are
calculated on the basis of average cost.
(b) CAPITAL ASSETS:
Capital assets are carried at cost less accumulated amortization. Amortization
is provided on a declining balance basis at the following annual rates:
Asset
- ---------------------------------------
Buildings 5%
Computers and office equipment 30%
Automobiles 30%
Furniture 20%
- ---------------------------------------
FS-17
<PAGE>
(c) GOODWILL:
Goodwill arising on the purchase of the subsidiary company is recorded at cost
less accumulated amortization. Goodwill is amortized on a straight-fine basis
over ten years.
(d) DEFERRED POLICY ACQUISITION COSTS:
Deferred policy acquisition costs represent certain costs such as commissions
and premium taxes related to the acquisition of new and renewal premiums written
during the period and are expensed as the related premiums are recorded as
income. The method followed in determining the deferred policy acquisition
costs limits the deferral to its realizable value by giving consideration to
losses and expenses expected to be incurred as premiums are earned.
(e) PREMIUM REVENUE AND UNEARNED PREMIUMS:
The Company earns premium revenue evenly over the period covered by each
individual insurance contract. Unearned premiums represent the portion of
premiums written related to the unexpired portion of the policy at the year end.
The reinsurer's share of unearned premiums is recognized as amounts recoverable
using principles consistent with the Company's method for determining the
unearned premium liability.
(f) UNPAID CLAIMS:
The provision for unpaid claims includes adjustment expenses and represents an
estimate for the full amount of all expected costs, including investigation, and
the projected final settlements of claims incurred on or before the balance
sheet date. The provision does not take into consideration the time value of
money or make an explicit provision for adverse deviation except for statutory
automobile accident benefits claims which are discounted in accordance with
accepted actuarial practice as permitted by the Superintendent of Insurance
(Ontario). Expected reinsurance recoveries on unpaid claims are recognized as
amounts recoverable at the same time using principles consistent with the
Company's method for establishing the related liability. These estimates of
future loss activity are necessarily subject to uncertainty and are selected
from a wide range of possible outcomes. All provisions are periodically
reviewed and evaluated in the light of emerging claim experience and changing
circumstances. The resulting changes in estimates of the ultimate liability are
recorded as incurred claims in the accounting period in which they are
determined.
(g) REINSURANCE:
Net premiums earned and claims incurred a-re recorded net of amounts ceded to,
and recoverable from, reinsurers. Estimates of amounts recoverable from
reinsurers on unpaid claims are recorded separately from estimated amounts
payable to policyholders. Unearned premiums and deferred policy acquisition
costs are also reported before reduction for business ceded to reinsurers and
the reinsurer's portion is classified with amounts due from reinsurers.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the policy liabilities associated with the reinsured policy.
FS-18
<PAGE>
(h) INCOME TAXES:
Income taxes are accounted for using the deferral method of tax allocation.
Under this method, a provision for deferred income taxes arises as a result of
timing differences between income reported for financial statement purposes and
that reported for income tax purposes. The major differences relate to unpaid
claims and adjustment expenses, unearned premiums, investments in shares and
amortization of capital assets. The deferred income taxes balance is not
adjusted to reflect changes in income tax rates.
2. ROLE OF THE ACTUARY AND
EXTERNAL AUDITOR
ROLE OF THE ACTUARY
The actuary is appointed by the board of directors of the Company. With respect
to the preparation of the audited financial statements, the actuary is required
to carry out a valuation of the policy liabilities and to report thereon to the
Company's shareholders. The valuation is carried out in accordance with
accepted actuarial practice and regulatory requirements. The scope of the
valuation encompasses the policy liabilities as well as any other matter
specified in any direction that may be made by the Superintendent of Insurance
(Ontario). The policy liabilities consist of a provision for unpaid claims and
adjustment expenses on the expired portion of policies and of future obligations
on the unexpired portion of policies. In performing the valuation of these
policy liabilities, which are by their very nature inherently variable,
assumptions are made as to future loss ratios, trends, reinsurance recoveries,
external claims expenses and other contingencies, taking into consideration the
circumstances of the Company and the nature of the insurance policies.
The valuation is based on projections of future development relating to claims
and claims adjustment expenses. It is certain that actual claims and claims
adjustment expenses will not develop exactly as projected and may, in fact, vary
significantly from the projections. Further, the projections make no provision
for new classes of claims or claims categories not sufficiently recognized in
the claims database.
The actuary relies on data and related information prepared by the Company and
makes use of the work of the auditor with respect to the actuary's
responsibility for the data as set forth by the standards of the Canadian
Institute of Actuaries. The actuary's report outlines the scope of her
valuation and opinion.
ROLE OF THE AUDITOR
The external auditors have been appointed by the shareholders, pursuant to the
Insurance Act, Ontario. Their responsibility is to conduct an independent and
objective audit of the consolidated financial statements in accordance with
generally accepted auditing standards and to report thereon to the shareholders.
In carrying out their audit, the auditors make use of the work of the actuary
and her report on the policy liabilities of the Company. The auditors' report
outlines the scope of their audit and their opinion.
3. INVESTMENTS
The principal amounts, carrying amounts and fair values of investments are
summarized below:
FS-19
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
Principal Carrying Fair
Term to maturity amount amount value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS AND DEBENTURES
GOVERNMENT OF CANADA:
Due in one year or less $ 19,240 $ 19,220 $ 19,389
After one through five years 27,515 27,378 28,246
After five years 6,827 6,519 7,061
CANADIAN MUNICIPAL AND
PUBLIC AUTHORITIES:
After one through five years 100 104 104
CANADIAN CORPORATE:
Due in one year or less 5,629 5,643 5,647
After one through five years 6,661 7,088 7,227
After five years 6,177 6,248 6,428
OTHER INVESTMENTS DUE IN
ONE YEAR OR LESS:
Bankers' acceptances 500 492 495
Treasury bills 57,100 56,858 56,928
- ---------------------------------------------------------------------------
Sub-total 129,749 129,550 131,525
Preferred shares 13,767 14,378
Common shares 8,872 9,571
- ---------------------------------------------------------------------------
$152,189 $155,474
- ---------------------------------------------------------------------------
</TABLE>
FS-20
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
Principal Carrying Fair
Term to maturity amount amount value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS AND DEBENTURES
Government of Canada:
Due in one year or less $ 6,209 $ 6,034 $ 6,069
After one through five years 5,158 5,228 5,262
After five years 11,560 13,053 13,428
Canadian municipal and
public authorities:
Due in one year or less 441 445 445
After one through five years 1,000 932 942
Canadian corporate:
Due in one year or less 1,000 992 1,015
After one through five years 1,300 1,292 1,328
Other investments due in
one year or less:
Guaranteed Investment
Certificates 540 540 543
Bankers' acceptances 27,503 27,419 27,355
- ---------------------------------------------------------------------------
Sub-total 54,711 55,935 56,387
Preferred shares 1,839 1,852
Common shares 2,150 2,199
- ---------------------------------------------------------------------------
$ 59,924 $ 60,438
- ---------------------------------------------------------------------------
</TABLE>
The principal amounts and carrying amounts are known by contractual maturity.
Actual maturity may differ from contractual maturity because certain borrowers
have the right to call or prepay certain obligations with or without call or
prepayment penalties.
Fair values are considered to approximate quoted market values based on the
latest bid prices.
All of the Company's fixed term investments have fixed interest rates. As the
fair value and carrying amounts are not materially different, the effective
rates of interest are not materially different from the coupon rates. The
coupon rates for the Company's fixed term investments range from 3.5% to 10.9%
at December 31, 1996 and from 4.8% to 14.0% at December 31, 1995.
The Company limits its investment concentration in any one investee or related
group of investees to less than 5% of the Company's investments.
FS-21
<PAGE>
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
December 31, 1996
Accumulated Net book
Cost amortization value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,142 $ - $ 1,142
Buildings 3,605 262 3,343
Computers and
office equipment 962 388 574
Automobiles 367 124 243
Furniture 592 272 320
- --------------------------------------------------------------------
$ 6,668 $ 1,046 $ 5,622
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Accumulated Net book
Cost amortization value
- --------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 413 $ - $ 413
Buildings 1,409 160 1,249
Computers and
office equipment 525 247 278
Automobiles 272 145 127
Furniture 194 88 106
- --------------------------------------------------------------------
$ 2,813 $ 640 $ 2,173
- --------------------------------------------------------------------
</TABLE>
5. SHARE CAPITAL
Share capital consists of the following after giving retroactive effect to the
subdivisions of the Company's shares as noted below:
<TABLE>
<CAPTION>
December 31,
1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Authorized:
Unlimited number of common shares
Issued: 13,271,866
(1995-9,633,000)
common shares $ 59,037 $ 21,889
- -------------------------------------------------------------
</TABLE>
(a) On November 10,.1995, the Company filed articles of amendment deleting its
"private company" share restrictions, subdividing the Company's the Company's
outstanding common shares on a 3-for-1 basis, and on October 10, 1996 the
shareholders approved a resolution to subdivide the company's common stock on a
2-for-1 basis. The number of shares outstanding and earnings per share amounts
reflect these subdivisions on a retroactive basis.
FS-22
<PAGE>
(b) On December 6, 1995, 33,000 common shares were issued to certain employees
of the Company for nominal consideration.
(c) Pursuant to an underwriting agreement dated December 8, 1995, the Company
sold 3,600,000 common shares for gross proceeds of $18,000,000. Underwriters'
fees and expenses of the issue amounting to $1,747,000 have been deducted from
the Company's share capital.
(d) On January 15, 1996, pursuant to the underwriting agreement, the
underwriters exercised their over-allotment option to acquire an additional
360,000 common shares from the Company for gross proceeds of $1,800,000.
Underwriters' fees and expenses of the issue amounting to $112,000 have been
deducted from the Company's share capital.
(e) On February 29, 1996 pursuant to the agreement to purchase York, as
described in note 11, the Company issued 128,200 common shares for
consideration of $641,000.
(f) Pursuant to an underwriting agreement dated October 8, 1996, the Company
sold 3,150,000 common shares at $11.75 per share for gross proceeds of
$37,013,000. The Company's share of underwriters' fees and expenses of the
issue amounting to $2,194,000 was deducted from share capital.
(g) The Company has established a stock option incentive plan for directors,
officers and key employees of the Company. The maximum number of common shares
that may be issued under the plan is 600,000 common shares. The maximum number
of common shares available for issuance to any one person under the stock option
plan is 5% of the common shares outstanding at the time of the grant. The
exercise price is based on the market value of the shares at the time the option
is granted. At December 31, 1996 and December 31, 1995 options to purchase
258,334 and 129,000 common shares respectively, were outstanding. The exercise
price of the options ranges from $5 to $8 per share and the options expire in
the period from December 5, 2000 to July 18, 2001. During 1996, options to
acquire 666 shares were exercised at $5 per share.
(h) The weighted average number of shares outstanding for 1996 and 1995 were
10,724,000 and 6,130,480, respectively. On a fully diluted basis, the weighted
average number of shares outstanding for 1996 and 1995 were 11,200,200 and
6,130,480, respectively. The number of shares outstanding and earnings per
share amounts have been retroactively restated to reflect the sub-divisions
described in paragraph (a) above.
FS-23
<PAGE>
6. UNDERWRITING POLICY AND
REINSURANCE CEDED
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophe or other events that cause unfavorable under-writing
results by reinsuring certain levels of risk, in various areas of exposure, with
other insurers.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, the Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvency. The
amounts due from reinsurers substantially relate to a single reinsurers
The Company follows the policy of underwriting and reinsuring contracts of
insurance, which limits the net exposure of the Company to a maximum amount on
any one loss of $200,000 in the years ended December 31, 1996 and 1995, in the
event of a property or liability claim. In addition, the Company has obtained
catastrophe reinsurance which provides coverage in the event of a series of
claims arising out of a single occurrence to a maximum of 95% of $4,000,000
(U.S. dollars).
The amounts deducted from net earned premiums, claims incurred and commissions
and premium taxes for the years December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------
<S> <C> <C>
Net earned premiums $ 11,894 $ 8,961
Claims incurred 12,829 3,596
Commissions and
premium taxes 1,319 3,010
- -----------------------------------------------------
</TABLE>
7. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company enters into reinsurance
transactions with Intercargo which were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
- -----------------------------------------------------
<S> <C> <C>
Premiums ceded $ 2,193 $ 1,747
Claims incurred 1,623 823
Commission and
premium taxes 613 524
- -----------------------------------------------------
</TABLE>
The note payable to Intercargo was repaid on December 15, 1995. Interest paid
during the year ended December 31, 1995 was $227,000.
FS-24
<PAGE>
8. INCOME TAXES
The Company's provision for income taxes, compared to combined federal and
provincial statutory rates, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Income before taxation $ 15,756 $ 6,473
- ----------------------------------------------------------------
Statutory tax rate 44.5% 44.5%
- ----------------------------------------------------------------
Provision based on
statutory rate 7,011 2,880
- ----------------------------------------------------------------
Non-taxable investment income (248) (40)
Utilization of prior year tax losses (1,796) -
Other (373) (134)
- ----------------------------------------------------------------
$ 4,594 $ 2,706
- ----------------------------------------------------------------
</TABLE>
At December 31, 1996, the deferred tax effect of unclaimed tax reserves of a
subsidiary company amounting to approximately $10,000,000 (1995 - $Nil) have not
been recognized in these financial statements. These deductions are available
to reduce the amount of income taxes payable by the subsidiary in the future.
9. UNPAID CLAIMS
(a) Nature of unpaid claims and adjustment expenses:
The establishment of the provision for unpaid claims and adjustment expenses is
based on known facts and interpretation of circumstances and is therefore a
complex and dynamic process influenced by a large variety of factors. These
factors include the Company's experience with similar cases and historical
trends involving claim payment patterns, loss payments, pending levels of unpaid
claims, product mix or concentration, claims severity and claim frequency
patterns.
Other factors include the continually evolving and changing regulatory and legal
environment, actuarial studies, professional experience and expertise of the
Company's claim departments' personnel and independent adjusters retained to
handle individual claims, the quality of the data used for projection purposes,
existing claims management practices including claims handling and settlement
practices, the effect of inflationary trends on future claims settlement costs,
court decisions, economic conditions and public attitudes. In addition, time can
be a critical part of the provision determination, since the longer the span
between the incidence of a loss and the payment or settlement of the claims, the
more variable the ultimate settlement amount can be.
Accordingly, short-tail claims such as property claims, tend to be more
reasonably predictable than long-tailed claims, such as general liability and
automobile accident benefit claims.
FS-25
<PAGE>
Consequently, the process of establishing the provision for unpaid claims relies
on the judgment and opinions of a large number of individuals, on historical
precedent and trends, on prevailing legal, economic, social and regulatory
trends and on expectations as to future developments. The process of
determining the estimated provisions necessarily involves risks that the actual
results will deviate, perhaps substantially, from the best estimates made.
(b) Provision for unpaid claims and adjustment expenses: The provision for
unpaid claims and adjustment expenses does not take into account the time value
of money or make explicit provision for adverse deviation except for accident
benefit claims under automobile insurance policies. The provision for unpaid
claims recorded in the Company's balance sheet approximates the undiscounted
amount of those liabilities.
The Company has a concentration of business in automobile and property insurance
in the provinces of Ontario and Alberta. For the year ended December 31, 1996
and the year ended December 31, 1995, automobile premiums represented
approximately 68% and 63% respectively, and property premiums 23% and 28%
respectively, of gross premiums written. Of gross premiums written in 1996,
Ontario accounted for 69% (1995 - 60%) and Alberta 17% (1995 - 23%).
The Company's appointed actuary completes an annual evaluation of the adequacy
of policy liabilities at the end of each financial year. This evaluation
includes a re-estimation of the liability for unpaid claims relating to each
preceding financial year compared to the liability that was originally
established. The results of this comparison and the changes in the provision
for unpaid claims for the years ended December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
December 31
1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Unpaid claims -
Beginning of year - net $ 24,322 $ 16,988
Deficiency in estimated unpaid
claims, for claims occurring
in prior years 3,383 5,789
Net unpaid claims of York
at acquisition 18,889 -
Provision for claims occurring
in the current year 66,506 24,848
Claims paid during the year (47,958) (23,303)
- --------------------------------------------------------------------
Unpaid Claims - End of year - net 65,142 24,322
Reinsurers' share of unpaid claims 25,514 5,164
- --------------------------------------------------------------------
Provision for unpaid claims -
end of year $ 90,656 $ 29,486
- --------------------------------------------------------------------
</TABLE>
FS-26
<PAGE>
The deficiencies in 1995 and 1996 relating to prior year claims result from
unfavorable trends in severity (average cost per claim) on automobile claims.
This is largely due to higher than anticipated losses and medical cost inflation
for personal automobile injury under Bill 164 bodily injury claims and accident
benefits in Ontario for accident years 1993 and 1994 and increases in the
Company's share of unpaid claims reported by the insurance industry's risk
sharing pools.
The Company believes that its overall practices have been consistently applied
over many years, and that its provisions for unpaid claims have resulted in
reasonable approximations of the ultimate costs of claims incurred.
(c) The fair value of unpaid claims and adjustment expenses, gross and
recoverable from reinsurers, has been omitted because it is not practicable to
determine fair value with sufficient reliability.
10. STATUTORY REQUIREMENTS INSURANCE SUBSIDIARIES
The regulations of the Ontario Ministry of Financial Institutions require that
the insurance subsidiaries of the Company appropriate part of their retained
earnings for assets that are non-admitted for regulatory purposes. The amounts
appropriated amounted to $3,110,000 and $1,466,000 at December 31, 1996 and
1995, respectively.
The regulations also govern the payments of dividends from insurance
subsidiaries to the Company.
11. ACQUISITION OF YORK
On January 17, 1996, the Company entered into an agreement to purchase all of
the issued shares of York from Highbourne Capital Corporation, now named A & E
Capital Funding Inc. ("A & E"). The transaction closed on February 29, 1996.
The transaction has been accounted for by the purchase method with the results
of operations included in these financial statements from the date of
acquisition. Details of the acquisition are as follows:
FS-27
<PAGE>
Net assets acquired at assigned values at date of acquisition:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
<S> <C>
ASSETS:
Investments $17,051
Premiums receivable 8,875
Due from reinsurers 30,413
Accounts receivable 5,047
Other assets 4,225
- ----------------------------------------------------------
65,611
LIABILITIES:
Unpaid claims 35,423
Unearned premiums 17,743
Bank overdraft 1,480
Other liabilities 4,889
- ----------------------------------------------------------
59,535
- ----------------------------------------------------------
$ 6,076
CONSIDERATION GIVEN:
Cash $ 1,500
Issuance of common shares 641
Share warrant 3,935
- ----------------------------------------------------------
$ 6,076
- ----------------------------------------------------------
</TABLE>
The purchase price, which is expected to be approximately $ 3,788,000, is based
on the adjusted Regulatory Capital of York as at December 31, 1995. The policy
liabilities (unpaid claims, unearned premiums, deferred acquisition costs and
premium deficiencies) at December 31, 1995 are regularly re-evaluated based on
the changes in amounts of claims paid and estimated liabilities to be paid.
For the period from the date of acquisition of York to December 31, 1996 the
re-evaluation of the policy liabilities resulted in a decrease in the estimated
purchase price of $2,288,000 to $3,788,000. Accordingly the value ascribed to
the liability under the share warrant has been reduced to $1,647,000. Under the
purchase agreement the final re-evaluation will be made as of December 31, 1997.
At closing, the Company paid $1,500,000, and issued 128,200 common shares valued
at $5 per share (after giving effect to the 2-for-1 share subdivision described
in note 5(a) for an aggregate value equal to one-third of the purchase price. A
& E also received a warrant which entitles it to receive as of February 28,
1997, (and for 30 days thereafter), 164,700 common shares valued at $5 per share
having an aggregate value equal to $823,500 being one-half of the difference
between the adjusted purchase price (evaluated as at December 31, 1996) and the
amounts paid at closing.
FS-28
<PAGE>
The warrant further allows A & E to receive as of February 28, 1998, and for 30
days thereafter, that number of common shares valued at $ 5 per share equal to
the remaining balance of the adjusted purchase price evaluated as at December
31, 1997.
The maximum number of common shares which may be issued pursuant to the warrant
is 900,000 shares. Should the balance due to A & E at February 28, 1998 exceed
the value ascribed to the maximum number of shares which may be issued under the
warrant, the balance will be paid to A & E in cash within 30 days of February
28, 1998,
12. COMMITMENTS AND CONTINGENT LIABILITIES
On August 27, 1996, the Company entered into a $25 million operating credit
facility with a Canadian bank. Upon draw down of this facility, the Company has
an option to borrow at a floating rate equivalent to the bank's prime rate, or
for a fixed term at a fixed rate of a banker's acceptance plus I%. The facility
is unsecured. At December 31, 1996 there were no amounts outstanding under this
facility.
In connection with its operations, the Company and its subsidiaries are, from
time to time, named as defendants in actions for damages and costs allegedly
sustained by the plaintiffs. While it is not possible to estimate the outcome
of the various proceedings at this time, such actions have generally been
resolved with minimal damages or expense in excess of amounts provided and the
Company does not believe that it will incur any significant additional loss or
expense in connection with such actions.
13. FAIR VALUE DISCLOSURE
The fair value of financial assets and liabilities, other than investments (note
3) and unpaid claims (note 9) approximate their carrying amounts.
14. FINANCIAL STATEMENT PRESENTATION
These financial statements have been reclassified to reflect the retroactive
application of new disclosure and presentation standards relating to financial
instruments and measurement uncertainty. As a result, the amounts shown in the
balance sheets relating to unpaid claims are shown on a gross basis with the net
amount due from reinsurers shown as an asset. The amounts relating to unearned
premiums and deferred policy acquisition costs have also been reclassified and
are shown on a gross basis with the reinsurer's portion included with the net
amount due from reinsurers on the balance sheets.
FS-29
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into as of the 12th day August, 1996, by
and between INTERCARGO CORPORATION, a Delaware corporation ("Intercargo"), and
MICHAEL L. RYBAK, an individual residing in the State of Illinois ("Employee").
Other capitalized terms shall have the respective meanings set forth in Section
15 and elsewhere herein.
WITNESSETH
----------
WHEREAS, Intercargo wishes to employ Employee under the terms and
conditions as set forth herein; and
WHEREAS, the Employee is willing to accept such employment on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, it is hereby agreed as follows:
1. Employment. Intercargo hereby employs the Employee, and the
Employee hereby accepts employment with Intercargo, on the terms and conditions
set forth in this Agreement.
2. Employment Period. The term of Employee's employment shall be for a
one year period and shall commence as of August 12, 1996 and shall continue on a
month to month basis thereafter, unless this Agreement is terminated pursuant to
Section 14 hereof.
3. Duties. Employee shall serve as the Chief Financial Officer of
Intercargo and will, under the direction of Intercargo's Board of Directors and
President, faithfully and to the best of his ability perform the duties of a
Chief Financial Officer as assigned and revised by Intercargo's Board of
Directors and President from time to time. The Employee agrees to devote his
entire working time, energy and skills to such employment during the Employment
Period, and shall not render any services of a business, commercial or
professional nature to any person or organization other than Intercargo or be
engaged in any other business activity, without the prior written consent of
Intercargo's Board of Directors and/or the President. All duties to be rendered
hereunder shall be performed at such place or places as the President and/or
Board of Directors of Intercargo shall in good faith require.
The Employee represents and warrants that he is not a party to or bound by
any agreement or contract or subject to any restrictions, particularly, but
without limitation, in connection with any previous employment, which prevents
the Employee from entering into and performing his obligations under this
Agreement.
4. Compensation. During the Employment Period, the Employee shall be
compensated for his services as follows:
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(a) Base Salary. The Employee shall receive an annual base salary
for the calendar year 1996 in the amount of One Hundred Twenty Thousand and
00/100 Dollars ($120,000.00), payable in accordance with Intercargo's
payroll schedule for all employees. If the Employment Period is extended
as provided for in Section 2, this base salary will be increased, on a pro
rata basis, beginning monthly at the beginning of each month commencing as
of August 12, 1996.
(b) Employee Benefits. The Employee shall be entitled to
participate in all employee benefit plans maintained by the Company,
including but not limited to, group hospitalization, medical and disability
plans, if applicable.
5. Employee Expenses. During the Employment Period, and following the
submission by Employee of the documentation necessary for deduction by
Intercargo on its Federal and State income tax returns of reasonable or
necessary expenditures incurred in the performance of Employee's duties
hereunder and the prior approval of such expenses by the President, Employee
shall be entitled to be reimbursed for such reasonable and necessary expenses,
including, but not limited to, expenses for entertainment, travel, meals, hotel
accommodations, professional seminars, and related use of the telephone.
6. Vacation. During the Employment Period, Employee shall be entitled
to vacations with pay in accordance with Intercargo's regular vacation policies
in effect from time to time.
7. No Competing Business. Employee hereby agrees that during the
Employment Period and for a period of two (2) years following termination of the
Employment Period, regardless of whether this Agreement is terminated for Cause,
or as a result of the natural termination of the Employment Period, except as
permitted by Section 10 of this Agreement, the Employee will not directly or
indirectly own, manage, operate, control, invest or acquire an interest in, or
otherwise engage or participate in (whether as a proprietor, partner,
stockholder, director, officer, employee, joint venture, investor, sales
representative or other participant in) any Competitive Business in Intercargo's
Market, without regard to (a) whether the Competitive Business has its office or
other business facilities within Intercargo's Market, (b) whether any of the
activities of the Employee referred to above itself occurs or is performed
within Intercargo's Market or (c) whether the Employee resides, or reports to an
office, within Intercargo's Market.
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<PAGE>
8. No Interference with the Business.
(a) Business Relationships. Employee hereby agrees that during
the Employment Period, and for a period of two (2) years following the
expiration of the Employment Period, except as permitted by Section 10 of
this Agreement, Employee will not directly or indirectly solicit, induce or
influence any sales representative, supplier, lender, lessor or any other
person which has a business relationship with Intercargo, or which had on
the date of this Agreement a business relationship with Intercargo, to
discontinue, reduce the extent of, discourage the development of or
otherwise harm such relationship with Intercargo.
(b) Customers. Employee hereby agrees that during the Employment
Period and during the remaining term as extended pursuant to any extension
options of Intercargo of any contracts between Intercargo and any customers
of Intercargo, to the extent such contracts extend beyond the Employment
Period, that Employee will not directly or indirectly attempt to induce any
such customers to terminate such contracts or otherwise divert from
Intercargo any trade or business being conducted by such customers with
Intercargo pursuant to such contracts; and, during the Employment Period
and for two (2) years following the expiration thereof, Employee will not
directly or indirectly solicit from, or otherwise agree to provide any
services to any customer to which Intercargo has provided any services
during the two years next preceding the termination of the Employment
Period, or any party whose identity or potential as a customer was
confidential or learned by the Employee during the Employment Period.
(c) Employees. Employee hereby agrees that during the Employment
Period and for a period of two (2) years following the expiration of the
Employment Period, except as permitted by Section 10 of this Agreement,
Employee will not (i) directly or indirectly recruit, solicit or otherwise
induce or influence any employee or sales agent of Intercargo to
discontinue such sales, employment or agency relationship with Intercargo,
or (ii) employ, seek to employ or cause any Competitive Business to employ
or seek to employ as a sales representative or employee for any Competitive
Business in Intercargo's Market, any person who is then (or was at any time
within six months prior to the date the Employee or the Competitive
Business employs or seeks to employ such person) employed by Intercargo.
9. No Disclosure of Confidential Information. The Employee hereby
agrees that he will not knowingly, directly or indirectly, disclose to anyone,
or use or otherwise exploit for the Employee's own benefit or for the benefit of
anyone other than Intercargo, any Confidential Information, except as permitted
by Section 10 of this Agreement.
10. Permitted Activities. The restrictions set forth in Sections 7, 8
and 9 of this Agreement shall not apply to Permitted Activities or to actions
taken by the Employee during the time the Employee may be employed by Intercargo
to the extent, but only to the extent, that such actions are (i) necessary in
connection with such employment, and (ii) expressly approved in writing by the
Board of Directors.
11. Inventions and Other Intellectual Property. Employee hereby agrees
that any design, invention or copyright materials made or created in the course
of his employment shall be the property of Intercargo. Employee further agrees
that at Intercargo's request and expense, he will execute any deeds or documents
necessary to transfer any such design, invention, copyright or trademark
materials to Intercargo and to cooperate with Intercargo or its nominee in
perfecting Intercargo's title (or the title of Intercargo's nominee) in such
materials. During the Employment Period, Employee shall keep Intercargo
informed of the development of all
3
<PAGE>
designs, inventions or copyright materials made, conceived or reduced to
practice by Employee, in whole or in part, alone or with others, which either
result from any work Employee may do for, or at the request of Intercargo, or
are related to Intercargo's present or contemplated activities, investigations,
or obligations.
12. Reduction of Restrictions by Court Action. If the length of time,
type of activity, geographic area or other restrictions set forth in the
restrictions of Sections 7, 8 or 9 are deemed unreasonable in any court
proceeding, the parties hereto agree that the court may reduce such restrictions
to ones it deems reasonable to protect the substantial investment of Intercargo
in its business and the goodwill attached thereto.
13. Remedies. Employee understands that Intercargo will not have an
adequate remedy at law for the material breach or threatened breach by Employee
of any one or more of the covenants set forth in this Agreement and agrees that
in the event of any such material breach or threatened breach, Intercargo may,
in addition to the other remedies which may be available to it:
(a) declare forfeited any monies otherwise payable to the Employee
as of the date of such breach under the terms of Section 4 of this
Agreement, and otherwise cease all payments and obligations under this
Agreement; and/or
(b) file a suit in equity to enjoin Employee from the breach or
threatened breach of such covenants.
14. Termination. The Employment Period shall terminate upon the first
to occur of:
(a) the Employee's death,
(b) the Disability of Employee,
(c) the termination of the Agreement by the President of
Intercargo for Cause,
(d) after the first anniversary hereof upon 30 days notice.
Termination of the Employment shall not relieve the Employee of his
obligations under Sections 7, 8 and 9 hereof, notwithstanding that Employee's
compensation and this Agreement shall otherwise terminate.
In the event of the termination of Employee's employment with the Employer
for the reasons outlined in Sections (a), (b) (c) or (d), the Employee shall
receive from the Employer all accrued but unpaid compensation due under Section
4 herein.
15. Definitions. As used in this Agreement, terms defined in the
preamble and recitals of this Agreement shall have the meanings set forth
therein and the following terms shall have the meanings set forth below:
"Board of Directors" shall mean the Board of Directors of Intercargo.
"Cause" shall include, without limitation, (i) the inability of the
Employee to perform his duties due to a legal impediment such as, without
limitation, the entry against the Employee of an injunction, restraining order
or other type of judicial judgment, decree or order which would prevent or
hinder the Employee from performing his duties; (ii) a breach of any of the
restrictions
4
<PAGE>
or covenants set forth in Sections 7, 8, 9, 11 and 12 hereof; (iii) the failure
to follow Intercargo's reasonable instructions with respect to the performance
of the Employee's duties; (iv) failure to comply with the normal and customary
methods of operation for Intercargo as reasonably determined by the President of
Intercargo, (v) excessive absenteeism, flagrant neglect of work, serious
misconduct, conviction of a felony, fraud, disclosure of any proprietary
information of Intercargo without the consent of Intercargo, or aiding a
competitor of Intercargo to the detriment of Intercargo.
"Competitive Business" shall mean any person or entity engaged in a
business similar to Intercargo's Line of Business.
"Confidential Information" shall mean trade secrets, customer and supplier
lists, marketing arrangements, business plans, projections, financial
information, training manuals, pricing manuals, product and service development
plans, market strategies, internal performance statistics and other
competitively sensitive information belonging to and concerning Intercargo and
which is material to Intercargo and not generally known by or available to the
public, whether or not in written or tangible form, as the same may exist at any
time during the Employment Period or during prior periods in which Employee was
employed by Intercargo.
"Control" shall mean, with respect to any person, the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.
"Disability" shall mean any illness, disability or incapacity of such a
character as to render Employee unable to perform his duties hereunder (which
determination shall be made by the Board of Directors) for a total period of
ninety (90) days, whether or not such days are consecutive, during any
consecutive twelve (12) month period.
"Employment Period" shall mean that period of time set forth in Section 2
of this Agreement.
"Intercargo's Line of Business" shall mean and include any products or
services manufactured, developed or distributed at any time during the
Employment Period by Intercargo. For purposes of this Agreement, such business
shall be deemed to be conducted with any person, institution, association or
entity to which sales or negotiations therefor (whether or not sales resulted)
have been made, products delivered or services performed, or to or from which
advertising, solicitation or other communications have been directed or received
during the previous three years.
"Intercargo's Market" shall mean those states or countries in which
Intercargo is doing business at any time during the Employment Period.
"Permitted Activities" shall mean (i) owning not more than 5% of the
outstanding shares of any one or more publicly-held Competitive Business which
has shares listed for trading on a securities exchange registered with the
Securities and Exchange Commission or through the automated quotation system of
a registered securities association, (ii) owning capital stock of Intercargo,
and (iii) serving as an officer, director or employee of Intercargo.
5
<PAGE>
16. Notices. All notices, demands or other communications required or
provided hereunder shall be in writing and shall be deemed to have been given
and received when delivered in person or transmitted by facsimile transmission
(telecopy), cable, or telex to the respective parties, or seven (7) days after
dispatch by registered or certified mail, postage prepaid, addressed to the
parties at the addresses set forth below or at such other addresses as such
parties may designate by notice to the other parties:
If to Intercargo: Intercargo Corporation
Attn: James R. Zuhlke
1450 East American Lane
20th Floor
Schaumburg, IL 60173
with a copy to: Michael Sklar
Rudnick & Wolfe
203 North LaSalle Street
Suite 1800
Chicago, IL 60601-1293
If to Employee: Michael Rybak
c/o Intercargo Corporation
1450 East American Lane
20th Floor
Schaumburg, IL 60173
17. Assignment. Neither party to this Agreement may assign or delegate
any of its rights or obligations hereunder without first obtaining the written
consent of the other party. However, this Agreement shall be binding upon and
inure to the benefit of any successor of Intercargo and any such successor shall
be deemed substituted for Intercargo under the terms of this Agreement. As used
in this Agreement, the term "successor" shall include any person, persons, firm,
partnership, corporation, or company which at any time, whether by merger,
purchase, or otherwise, acquires all or substantially all of the assets or
business of Intercargo and assumes Intercargo's obligations hereunder.
18. Amendment and Modification. No amendment or modification of the
terms of this Agreement shall be binding upon either party unless reduced to
writing and signed by Employee and a duly appointed officer of Intercargo.
19. Governing Law. The provisions of this Agreement shall be construed
in accordance with the internal laws and not the choice of laws provisions of
the State of Illinois.
20. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which shall be deemed the original without reference to
the others.
21. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions and portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
6
<PAGE>
22. Waiver. The failure of either party to insist, in any one or more
instances, upon performance of the terms or conditions of this Agreement shall
not be construed as a waiver or relinquishment of any right granted hereunder or
of the future performance of any such term, covenant or condition.
23. Headings. Headings of the paragraphs in this Agreement are for
reference purposes only and shall not be deemed to have any substantive effect.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the day and year first above written.
____________________________
Michael L. Rybak
INTERCARGO CORPORATION
By:__________________________
Its:__________________________
7
<PAGE>
RIDER TO EMPLOYEMENT AGREEMENT
------------------------------
THIS RIDER is made this 12th day of August, 1996 by and between Intercargo
Corporation ("Employer") and Michael L. Rybak ("Employee").
RECITALS
A. The Employer and Employee entered into an employment agreement dated August
12, 1996 relative to the Employee's employment at Intercargo Corporation. a)
B. The Employer and Employee wish to amend the terms of the Employment
Agreement pursuant to the terms of this Rider as follows:
1. It is agreed that Michael Rybak shall start with three weeks
vacation and enter the vacation entitlement schedule as if he were
a five year employee.
All other terms of the Employment Agreement shall remain the same. Where the
terms of this Rider conflict with the terms of the Employment Agreement, this
Rider shall govern.
____________________________
Michael L. Rybak
INTERCARGO CORPORATION
By:__________________________
Its:__________________________
8
EXHIBIT 10.12
INDEMNIFICATION AGREEMENT
This Agreement is made this 12th day of August, 1996, by and between
Intercargo Corporation, a Delaware corporation and its subsidiaries (the
"Company") and Michael Rybak, ("Officer").
WITNESSETH:
WHEREAS, the Company has been advised that there can be no assurance that
directors' and officers' liability insurance will continue to be available to
the Company and Officer, and believes that it is possible that the cost of such
insurance, if obtainable, may not be acceptable to the Company; and
WHEREAS, Officer is unwilling to serve, or continue to serve, the Company
as an Officer without assurances that adequate liability insurance,
indemnification or a combination thereof is, and will continue to be, provided;
and
WHEREAS, the Company, in order to induce Officer to continue to serve the
Company, has agreed to provide Officer with the benefits contemplated by this
Agreement; and
WHEREAS, as a result of the provision of such benefits, Officer has agreed
to serve or to continue to serve as an Officer of the Company.
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including the Officer's
continued service to the Company, the Company and Officer hereby agree as
follows:
1. Definitions. The following terms, as used herein, shall have the
following respective meanings:
"Covered Amount" means losses and expenses which, in type or amount,
are not insured under any directors' and officers' liability insurance
maintained by the Company from time to time.
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<PAGE>
"Covered Act" means any breach of duty, neglect, error,
misstatement, misleading statement, omission or other act done or
wrongfully attempted by Officer or any of the foregoing alleged by any
claimant or any claim against Officer solely by reason of him being an
Officer of the Company.
"Determination" means a determination, based on the facts known at
the time, made by:
i. A majority vote of a quorum of disinterested directors; or
ii. Independent legal counsel in a written opinion prepared at the
request of a majority of a quorum of disinterested directors;
or
iii. A majority of the disinterested stockholders of the Company;
or
iv. A final adjudication by a court of competent jurisdiction.
"Determined" shall have a correlative meaning.
"Excluded Claim" means any payment for Losses or Expenses in
connection with any claim:
i. Based upon or attributable to Officer gaining in fact any
personal profit or advantage to which Officer is not entitled; or
ii. For an accounting of profits in fact made from the purchase or
sale by Officer of securities of the Company within the meaning of Section
16 of the Securities Exchange Act of 1934 as amended, or similar provisions
of any state law; or
iii. Resulting from Officer's knowingly fraudulent, dishonest or
willful misconduct; or
iv. The payment of which by the Company under this Agreement is
not permitted by applicable law; or
v. Which are not within the Covered Amount.
"Expenses" means any reasonable expenses incurred by Officer as a
result of a claim or claims made against him for Covered Acts including,
without limitation, counsel fees and costs of investigative, judicial or
administrative proceedings or appeals.
"Loss" means any amount which Officer is legally obligated to pay as
a result of a claim or claims made against him for Covered Acts including,
without limitation, damages and judgments and sums paid in settlement of a
claim or claims.
2. Indemnification. The Company shall indemnify Officer and hold him
harmless from the Covered Amount of any and all Losses and Expenses subject, in
each case, to the further provisions of this Agreement.
3. Excluded Coverage.
a. The Company shall have no obligation to indemnify Officer for
and hold him harmless from any Loss or Expense which has been Determined to
constitute an Excluded Claim.
b. The Company shall have no obligation to indemnify Officer and
hold him harmless for any Loss or Expense to the extent that Officer is
indemnified by the Company pursuant to the Company's bylaws or otherwise
indemnified.
4. Indemnification Procedures.
a. Promptly after receipt by Officer of notice of the
commencement of or the threat of commencement of any action, suit or proceeding,
Officer shall, if indemnification with respect thereto may be sought from the
Company under this Agreement, notify the Company of the commencement thereof.
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<PAGE>
b. If, at the time of the receipt of such notice, the Company has
directors' and officers' liability insurance in effect, the Company shall give
prompt notice of the commencement of such action, suit or proceeding to the
insurers in accordance with the procedures set forth in the respective policies
in favor of Officer. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of Officer, all Losses
and Expenses payable as a result of such action, suit or proceeding in
accordance with the terms of such policies.
c. To the extent the Company does not, at the time of the
commencement of or the threat or commencement of such action, suit or
proceeding, have applicable directors' and officers' liability insurance, or if
a Determination is made that any Expenses arising out of such action, suit or
proceeding will not be payable under the directors' and officers' liability
insurance then in effect, the Company shall be obligated to pay the Expenses of
any such action, suit or proceeding in advance of the final disposition thereof;
and the Company, if appropriate, shall be entitled to assume the defense of such
action, suit or proceeding with counsel satisfactory to Officer, upon the
delivery to Officer of written notice of its election so to do. After delivery
of such notice, the Company will not be liable to Officer under this Agreement
for any legal or other Expenses subsequently insured by Officer in connection
with such defense other than reasonable Expenses of investigation, provided that
Officer shall have the right to employ its counsel in any such action, suit or
proceeding, but the fees and expenses of such counsel incurred after delivery of
notice from the Company of its assumption of such defense shall be at Officer's
expense, provided further that if (i) the employment of counsel by Officer has
been previously authorized by the Company, (ii) Officer shall have reasonably
concluded that there may be a conflict of interest between the Company and
Officer in the conduct of any such defense, or (iii) the Company shall not, in
fact, have employed counsel to assume the defense of such action, the fees and
expenses of counsel shall be at the expense of the Company.
d. All payments on account of the Company's indemnification
obligations under this Agreement shall be made within sixty (60) days of
Officer's written request therefor unless a Determination is made that the
claims giving rise to Officer's request are Excluded Claims or otherwise not
payable under this Agreement, provided that all payments on account of the
Company's obligations under Paragraph 4(c) of this Agreement prior to the final
disposition of any action, suit or proceeding shall be made within twenty (20)
days of Officer's written request therefor and such obligation shall not be
subject to any such Determination but shall be subject to Paragraph 4(e) of this
Agreement.
e. Officer agrees that he will reimburse the Company for all
Losses and Expenses paid by the Company in connection with any action, suit or
proceeding against Officer in the event and only to the extent that a
Determination shall have been made by a court in a final adjudication from which
there is no further right of appeal that the Officer is not entitled to be
indemnified by the Company for such Expenses because the claim is an Excluded
Claim or because Officer is otherwise not entitled to payment under this
Agreement.
5. Settlement. The Company shall have no obligation to indemnify
Officer under this Agreement for any amounts paid in settlement of any action,
suit or proceeding effected without the Company's prior written consent. The
Company shall not settle any claim in any manner which would impose any
obligation on Officer without Officer's written consent. Neither the Company
nor Officer shall unreasonably withhold their consent to any proposed
settlement.
6. Rights Not Exclusive. The rights provided hereunder shall not be
deemed exclusive of any other rights to which the Officer may be entitled under
any bylaw, agreement, vote of stockholders or of disinterested directors or
otherwise, both as to action in his official capacity and as to action in any
other capacity by holding such office, and shall continue after the Officer
ceases to serve the Company as a Officer.
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<PAGE>
7. Enforcement.
a. Officer's right to indemnification shall be enforceable by
Officer notwithstanding any adverse Determination. In any such action, if a
prior adverse Determination has been made, the burden of proving that
indemnification is required under this Agreement shall be on Officer. The
Company shall have the burden of proving that indemnification is not required
under this Agreement if no prior adverse Determination shall have been made.
b. In the event that any action is instituted by Officer under
this Agreement, or to enforce or interpret any of the terms of this Agreement,
Officer shall be entitled to be paid all court costs and expenses, including
reasonable counsel fees, incurred by Officer with respect to such action, unless
the court determines that each of the material assertions made by Officer as a
basis for such action were not made in good faith or were frivolous.
8. Severability. In the event that any provision of this Agreement is
determined by a court to require the Company to do or to fail to do any act
which is in violation of applicable law, such provision shall be limited or
modified in its application to the minimum extent necessary to avoid a violation
of law, and, as so limited or modified, such provision and the balance of this
Agreement shall be enforceable in accordance with their terms.
9. Choice of Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware.
10. Continuation of Indemnification. All agreements and obligations of
the Company contained herein shall continue during the period that Officer is an
Officer of the Company and shall continue thereafter so long as Officer shall be
subject to any possible Loss or Expense by reason of the fact that Officer was
an Officer of the Company.
11. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Officer, who shall execute all documents and take all actions
reasonably requested by the Company to implement such right of subrogation.
12. Successor and Assigns. This Agreement shall be (i) binding upon
all successors and assigns of the Company (including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law), and (ii) shall be binding on and inure to the benefit of the
heirs, personal representatives and estate of Officer.
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<PAGE>
13. Amendment. No amendment, modification, termination or cancellation
of this Agreement shall be effective unless made in writing signed by each of
the parties hereto.
IN WITNESS WHEREOF, the Company and Officer have executed this Agreement as
of the day and year first above written.
INTERCARGO CORPORATION
___________________________________
James R. Zuhlke
Chairman of the Board
President and Chief Executive Officer
___________________________________
Michael Rybak
Officer
5
EXHIBIT 10.13
SECOND AMENDMENT TO SECURED LOAN AGREEMENT
------------------------------------------
This Second Amendment, dated as of June 4, 1995 (the "Second Amendment"),
to that certain Secured Loan Agreement, dated as of June 4, 1993, between
Intercargo Corporation, a Delaware Corporation, and LaSalle National Bank
(hereinafter the "Original Agreement"), as amended pursuant to the First
Amendment to the Original Agreement, dated January 1, 1995 (the "First
Amendment") (together the Original Agreement, as amended by the First Amendment,
shall be deemed the "Agreement").
W I T N E S S E T H:
--------------------
WHEREAS, the Company and the Bank desire to amend certain provisions of the
Agreement.
NOW, THEREFORE, the Company and the Bank hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have
the meanings given in the Agreement.
2. The definition of "Revolving Note Maturity Date" in Section 1.1 of the
Agreement shall be amended by deleting the same and substituting therefor
the following language:
"Revolving Note Maturity Date" means the earlier to occur of (I) January 1,
1997, or (ii) the date on which the outstanding balance under the Revolving
Loan (as may be amended from time to time) equals Ten Million Dollars
($10,000,000.00)."
3. Exhibit B to the Agreement, "Term Note", shall be amended by deleting the
same and substituting therefor the Term Note attached hereto as Attachment
1.
4. Article VIII to the Agreement is hereby amended by the addition of the
following Section 8.27:
"Section 8.27 Sale of the Company's Securities. Not sell or otherwise
transfer any shares of the Company's or any subsidiaries' capital stock or
any options or warrants with respect thereto (collectively, "Sales"),
except in accordance with the following:
(i) proceeds of all Sales from and after the date hereof, by the
Company or a subsidiary, as the case may be, in an aggregate amount less
than or equal to Five Million dollars ($5,000,000.00) may be retained by
the Company or such Subsidiary;
(ii) fifty percent (50%) of the proceeds of all Sales from and after
the date hereof, by the Company or a Subsidiary in an aggregate amount
greater than Five Million Dollars ($5,000,000.00) and less than or equal to
Fifteen Million dollars ($15,000,000.00) shall be immediately transferred
to Bank as an optional prepayment of Loans pursuant to Section 5.1 of the
Agreement; and
(iii) proceeds of all Sales from and after the date hereof, by the
Company or a Subsidiary in excess of
1
<PAGE>
Fifteen Million Dollars ($15,000,000.00) may be retained by the Company or
such Subsidiary."
5. In consideration of the Bank entering into this Second Amendment, upon the
execution hereof, the Company shall pay the Bank an amount equal to
Twenty-Three Thousand four Hundred Sixty-Two and no/100ths Dollars
($23,462.00).
6. The Company represents and warrants to the Bank that the execution and
delivery of this Second Amendment and the consummation of the transactions
contemplated hereby do not constitute a breach of, nor default under, any
document, instrument or agreement to which the Company is a party and that
no Event of Default exists as of the date hereof.
7. Except as amended by this Second Amendment, all of the terms, covenants and
conditions of the Agreement are ratified, approved and confirmed and shall
remain in full force and effect. The Agreement, together with this Second
Amendment, shall constitute the Agreement between the Company and the Bank.
IN WITNESS WHEREOF, this Second Amendment has been duly executed as of the
day and year specified at the beginning hereof.
INTERCARGO CORPORATION,
a Delaware Corporation
By: /s/ Lawrence P. Goecking
-----------------------------
Its: Treasurer
-----------------------------
LASALLE NATIONAL BANK
By:
-----------------------------
Its:
-----------------------------
2
EXHIBIT 10.14
THIRD AMENDMENT TO SECURED LOAN AGREEMENT
-----------------------------------------
This Third Amendment, dated as of March 31, 1996 (the "Third Amendment")
to that certain Secured Loan Agreement, dated as of June 4, 1993, between
Intercargo Corporation, a Delaware corporation, and LaSalle National Bank
(hereinafter the "Original Agreement"), as amended pursuant to the First
Amendment to the Original Agreement, dated January 1, 1995 (the "First
Amendment"), the Second Amendment to the Original Agreement, dated as of
June 4, 1995 (the "Second Amendment") (together, the Original Agreement, as
amended by the First Amendment and the Second Amendment, shall be deemed the
"Agreement").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Bank desire to amend certain provisions of the
Agreement.
NOW, THEREFORE, the Company and the Bank hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Agreement.
2. Section 1.1 of the Agreement is hereby amended by adding therefor the
following definitions:
""Amended and Restated Revolving Note" shall mean that certain
$15,000,000 Amended and Restated Revolving Note of the Company of even date
herewith. All references in the Agreement to the Revolving Note shall mean
the Amended and Restated Revolving Note.
"Applicable Margin" means the rate specified below, subject to quarterly
adjustments:
When Following Status Exists Applicable Margin
for any Determination Date for LIBOR Portion is:
Level I Status 1.75%
Level II Status 1.90%
Notwithstanding the foregoing, if the Consolidated Net Income of the
Company and its Subsidiaries for the 1996 fiscal year equals or exceeds that set
forth in the Company's 1996 Fiscal Year budget (a copy of which is attached
hereto as Annex 1) and the Company is otherwise in compliance with its covenants
and other obligations in the Agreement, the "Applicable Margin" for all
applicable periods thereafter (commencing on the next applicable Determination
Date, estimated at April 30, 1997) shall mean the rate specified below, subject
to quarterly adjustments:
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When Following Status Exists Applicable Margin
for any Determination Date for LIBOR Portion is:
Level I Status 1.5%
Level II Status 1.65%
"Determination Date" means the date on or before the date that is thirty
(30) Business Days after the date on which the Company is obligated to deliver a
Compliance Certificate to the Bank pursuant to Section 8.1 hereof.
"Interest Period" shall mean, with regard to any LIBOR Loan, successive
one, two, three or six months periods as selected from time to time by the
Company by notice given to the Bank not less than three Business Days prior to
the first day of each respective Interest Period; provided, however, that: (i)
each such Interest Period occurring after the initial Interest Period shall
commence on the day on which the next preceding Interest Period expires, (ii)
whenever the last day of any Interest Period would otherwise occur on a day
other than a Business Day, the last day of such Interest Period shall be
extended to occur on the next succeeding Business Day, provided, however, that
if such extension would cause the last day of such Interest Period to occur in
the next following calendar month, then the last day of such Interest Period
shall occur on the immediately preceding Business Day; and (iii) the final
Interest Period shall be such that its expiration occurs on or before the
Revolving Note Maturity Date.
"Level I Status" means for any Determination Date, that as of the close of
the accounting period with reference to which such Determination Date was set,
that both
(i) the ratio determined pursuant to Section 8.21(e) hereof equals or
exceeds 3.00:1.00; and
(ii) the ratio determined pursuant to Section 8.21(b) hereof is less than
or equal to 0.25:1.00.
"Level II Status" means for any Determination Date, that as of the close of
the accounting period with reference to which such Determination Date was set,
that either
(i) the ratio determined pursuant to Section 8.21(e) hereof is less than
3.00:1.00; or
(ii) the ratio determined pursuant to Section 8.21(b) hereof is greater
than 0.25:1.00.
"LIBOR" shall mean a rate of interest equal to the per annum rate of
interest at which U.S. dollar deposits in an amount comparable to the amount of
the relevant LIBOR Loan and for a period equal to the relevant Interest Period
are offered generally to the Bank (rounded upward if necessary, to the nearest
1/16 of 1.00%) in the London Interbank Eurodollar market at 11:00 a.m. (London
time) two Business Days prior to the commencement of each Interest Period, or as
LIBOR is otherwise determined by the Bank in its sole and absolute discretion,
such rate to remain fixed for such Interest Period. The Bank's determination of
LIBOR as provided above shall be conclusive, absent manifest error.
"LIBOR Loan" or "LIBOR Loans" shall mean that portion, and collectively
those portions, of the aggregate outstanding principal balance of the Revolving
Loans that will bear interest at LIBOR plus the Applicable Margin, per annum, of
which at any time and from time to time, the Company may identify no more than
five (5) separate Revolving Loans which will bear interest based on LIBOR, of
which any particular LIBOR
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Loan must be in an amount equal to $1,000,000.00 or a higher amount in
$100,000.00 increments.
"Reference Rate Loan" or "Reference Rate Loans" shall mean that portion,
and collectively, those portions of the aggregate outstanding principal balance
of the Revolving Loans that will bear interest at the Reference Rate, of which
any particular Reference Rate Loan must be in an amount equal to $10,000.00 or a
higher integral multiple of $5,000.00.
"Regulatory Change" shall mean the introduction of, or any change in any
applicable law, treaty, rule, regulation or guideline or in the interpretation
or administration thereof by any governmental authority or any central bank or
other fiscal, monetary or other authority having jurisdiction over the Bank of
its lending office."
3. The definition of "Tangible Net Worth" in Section 1.1 of the Agreement
shall be amended by deleting same and substituting therefore the following
language:
""Tangible Net Worth" means at any time the Company's, and
its Subsidiaries', consolidated net worth determined in
accordance with GAAP after excluding therefrom (i) Foreign
Currency Adjustments; and (ii) the aggregate amount of any
intangible assets of the Company and its Subsidiaries,
including without limitation, covenants not to compete,
prepayments (but expressly without excluding from such
consolidated net worth prepaid reinsurance premiums),
deferred changes, goodwill, franchises, licenses, patents,
trademarks, trade names, copyrights, service marks and
brand names."
4. The Agreement is hereby amended by deleting the following definitions:
"Term Loan," "Term Loan Commitment" and "Term Note" from Section 1.1
thereof and by deleting reference to such terms throughout the Agreement.
5. The definition of "Revolving Note Maturity Date" in Section 1.1 of the
Agreement shall be amended by deleting the same and substituting therefor
the following language:
""Revolving Note Maturity Date" means December 1, 2001."
6. The Agreement is amended by deleting the definition of "Business Day" from
Section 1.1 thereof and substituting the following: "Business Day" shall
mean (i) for all purposes other than as covered by clause (ii) hereof, any
day, other than a Saturday, Sunday, a day that is a legal holiday under the
laws of the State of Illinois or any other day on which banking
institutions located in Chicago, Illinois are authorized or required by law
or other governmental action to close; and (ii) with respect to
determinations in connection with, and payments of principal and interest
in LIBOR Loans, any day which is a Business Day described in clause (i) and
which is also a day for trading by and between banks in U.S. dollar
deposits in the London Interbank Eurodollar Market."
7. The Agreement is hereby amended by deleting Section 2.1 and adding the
following in its place and stead:
"Bank's Revolving Loan Commitment". On the terms and subject to the
conditions set forth in this Agreement, the Bank agrees to make revolving
loans (such loans herein, collectively, called "Revolving Loans" and,
individually, called a "Revolving Loan") to the Company from time to time
before the "Revolving Note Maturity Date," in such aggregate amounts as the
Company may, from time to time, request but not exceeding the amounts and
with respect to the time period set forth below (and subject to reduction
pursuant to the remaining provisions of this Agreement):
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Aggregate Amount of
Revolving Loans On or Before
--------------- ------------
$15,000,000.00 12/31/96
$13,750,000.00 01/01/97
$12,500,000.00 07/01/97
$11,250,000.00 01/01/98
$10,000,000.00 07/01/98
$ 8,750,000.00 01/01/99
$ 7,500,000.00 07/01/99
$ 6,250,000.00 01/01/00
$ 5,000,000.00 07/01/00
$ 3,750,000.00 01/01/01
$ 2,500,000.00 07/01/01
$ -0- Revolving Note
Maturity Date
On the terms and subject to the conditions set forth in this Agreement, the
Company shall have the right to repay and reborrow any of the Revolving Loans.
The Bank's commitment to make Revolving Loans is herein called the "Revolving
Credit Commitment."
8. Sections 2.2 and 3.2 of the Agreement are hereby deleted.
9. Section 2.3 of the Agreement is hereby amended by deleting the initial two
sentences of said Section and by the addition of the following at the
beginning of such Section:
"Each Revolving Loan may be advanced either as a Reference Rate Loan
or a LIBOR Loan, provided, however, that at any time and from time to time,
the Company may identify no more than five (5) Revolving Loans which may be
LIBOR Loans. A request for a Reference Rate Loan must be (i) received by
no Later than 11:00 a.m. Chicago, Illinois time, on the day it is to be
funded, and (ii) in an amount equal to $10,000.00 or a higher integral
multiple of $5,000.00. A request for a LIBOR Loan must be (i) received by
no later than 11:00 a.m. Chicago, Illinois time, three days before the day
it is to be funded, and (ii) in an amount equal to $1,000,000.00 or a
higher amount in $100,000.00 increments. If for any reason the Company
shall fail to select timely an Interest Period for an existing LIBOR Loan,
then such LIBOR Loan shall be immediately converted to a Reference Rate
Loan on the last Business Day of the then existing Interest Period, all
without demand, presentment, protest or notice of any kind, all of which
are hereby waived by the Company. The proceeds of each Reference Rate Loan
or LIBOR Loan shall be made available at the office of the Bank by credit
to the account of the Company or by other means requested by the Company
and acceptable to the Bank.
The Bank is authorized to rely on the telephonic, telecopy or
telegraphic loan requests which the Bank believes in its good faith
judgment to emanate from a properly authorized representative of the
Company, whether or not that is in the fact the case. The Company does
hereby irrevocably confirm, ratify and approve all such advances by the
Bank and does hereby indemnify the Bank against losses and expenses
(including court costs, attorneys' and paralegals' fees) and shall hold the
Bank harmless with respect thereto."
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10. The Agreement is hereby amended by the addition of the following Section
2.4 - 2.6:
"2.4 Eurodollar Advances and Conversions. Provided no Event of
Default has occurred and is continuing, Company shall have the option,
subject to the other provisions of this Agreement, to (i) request that any
Revolving Loan or any portion of a Revolving Loan hereunder be a LIBOR Loan
by giving telephonic notice to Bank at least three (3) Business Days prior
to the day any LIBOR Loan is to be made hereunder specifying the applicable
Interest Period; provided that Company gives Bank written confirmation by
facsimile of its telephone notice prior to the day any LIBOR Loan is to be
made hereunder, and (ii) convert on any Business Day, all or any portion of
the outstanding principal amount of any Revolving Loan or portion thereof
from one type of interest rate Revolving Loan to another type of interest
rate Revolving Loan by giving at least three (3) Business Days prior
telephonic notice to Bank thereof; provided that Company gives Bank written
confirmation of its telephonic notice by facsimile prior to the day any
such conversion is made herunder. Notwithstanding the foregoing, no LIBOR
Loan may be converted into a Reference Rate Loan pursuant to this Section
2.4 except effective on the last day of the Interest Period applicable
thereto.
2.5 LIBOR Unavailability. If the Bank determines in good faith
(which determination shall be conclusive, absent manifest error) prior to
the commencement of any Interest Period that (i) U.S. dollar deposits of
sufficient amount and maturity for funding any LIBOR Loan are not available
to the Bank in the London Interbank Eurodollar market in the ordinary
course of business, or (ii) by reason of circumstances affecting the London
Interbank Eurodollar market, adequate and fair means do not exist for
ascertaining the rate of interest to be applicable to the relevant LIBOR
Loan, the Bank shall promptly notify the Company thereof and, so long as
the foregoing conditions continue, Revolving Loans may not be advanced as a
LIBOR Loan thereafter. In addition, at the Company's option, each existing
LIBOR Loan shall be immediately (i) converted to a Reference Rate Loan on
the last Business Day of the then existing Interest Period, or (ii) due and
payable on the last Business Day of the then existing Interest Period,
without further demand, presentment, protest or notice of any kind, all of
which are hereby waived by the Company.
2.6 Regulatory Change. In addition, if, after the date hereof, a
Regulatory Change shall, in the reasonable determination of the Bank, make
it unlawful for the Bank to make or maintain the LIBOR Loans, then the Bank
shall promptly notify the Company, and Revolving Loans may not be advanced
as a LIBOR Loan thereafter. In addition, at the Company's option, each
existing LIBOR Loan shall be immediately (i) converted to a Reference Rate
Loan on the last Business Day of the then existing Interest Period or on
such earlier date as required by law, or (ii) due and payable on the last
Business Day of the then existing Interest Period or on such earlier date
as required by law, all without further demand, presentment, protest or
notice of any kind, all of which are hereby waived by the Company. Further,
the Company shall pay to the Bank, on demand, such additional amounts as
the Bank shall, from time to time, determine are sufficient to compensate
and indemnify the Bank for such increased cost or reduced amount."
11. Sections 4.1 and 4.2 of the Agreement are hereby deleted and the following
shall be inserted in its place and stead:
"4.1 Interest Rates on Loan. The Company hereby promises to pay
interest on the unpaid
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principal amount of the Revolving Loan for the period commencing on the
date of the Revolving Loan until the Revolving Loan is paid in full at a
rate per annum equal to the Reference Rate from time to time in effect,
plus (a) in the case of the Reference Rate Loans, at the Reference Rate,
and (b) in the case of the LIBOR Loans, at LIBOR plus the Applicable
Margin, provided, however, that in the event that any principal of the
Revolving Loan is not paid when due (whether by acceleration or otherwise)
or upon the occurrence of an Event of Default, the unpaid principal amount
of the Revolving Loan shall bear interest after the due date of such
principal until such principal is paid at a rate per annum equal to the
Reference Rate (whether or not such Revolving Loan is a Reference Rate Loan
or a LIBOR Loan), plus two and one-half percent (2½%).
4.2 Interest Payment Dates. Accrued interest on Reference Rate
Loans shall be payable in arrears, monthly on the first Business Day of
each month and through maturity. Accrued and unpaid interest on the unpaid
principal balance of the LIBOR Loans shall be payable on the last Business
Day of each Interest Period, commencing on the first such date to occur
after the date hereof, on the date of any principal repayment of a LIBOR
Loan and on the Revolving Note Maturity Date. After maturity (whether by
acceleration or otherwise) accrued and unpaid interest on the Reference
Rate Loans and the LIBOR Loans shall be payable on demand."
12. Article V of the Agreement is hereby amended by adding therefor the
following Section 5.2, Mandatory Prepayments:
"Section 5.2 Mandatory Prepayments.
(a) The Company covenants and agrees that if at any time the sum of
the then unpaid Revolving Loans shall exceed the Revolving Credit
commitment as then determined and computed, or if any other mandatory
prepayment event shall occur, the Company shall immediately pay over to the
Bank, without demand or notice, the amount of such excess as a mandatory
prepayment of such obligations under the Revolving Loan."
(b) The principal balance of the LIBOR Loans may not be prepaid in
whole or in part at any time. If, for any reason, a LIBOR Loan is paid
prior to the last Business Day of any Interest Period, the Company agrees
to indemnify the Bank against any loss (including any loss on redeployment
of the funds repaid), cost or expense incurred by the Bank as a result of
such prepayment.
(c) In addition, if the Company chooses not to convert any LIBOR
Loan to a Reference Rate Loan as provided in Sections 2.4 and 2.5, then
such LIBOR Loan shall be immediately due and payable on the last Business
Day of the then existing Interest Period or on such earlier date as
required by law, all without further demand, presentment, protest or notice
of any kind, all of which are hereby waived by the Company.
(d) All outstanding Revolving Loans shall be immediately due and
payable on the Revolving Note Maturity Date.
13. Article VIII to the Agreement is hereby amended by the deletion of Section
8.27 and the insertion of the following Section 8.27 in its place and
stead:
"Section 8.27 Sale of the Company's Securities. Not sell or
otherwise transfer any shares of the Company's or any Subsidiaries' or any
of Kingsway General Issuance Company's
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("Kingsway") capital stock or any options or warrants with respect thereto
(collectively, "Sales"), except in accordance with the following:
(i) proceeds of all Sales from and after the date hereof, by the
Company, a Subsidiary or of Kingsway, as the case may be, in
an aggregate amount less than or equal to Five Million Dollars
($5,000,000.00) may be retained by the Company or such
Subsidiary;
(ii) fifty percent (50%) of the proceeds of all Sales from and
after the date hereof, by the Company, a Subsidiary or of
Kingsway in an aggregate amount greater than Five Million
Dollars ($5,000,000.00) and less than or equal to Twenty
Million Dollars ($20,000,000.00) shall be immediately
transferred to Bank as a mandatory prepayment of Revolving
Loans pursuant to Section 5.2 of the Agreement;
(iii) proceeds of all Sales from and after the date hereof, by the
Company, a Subsidiary or of Kingsway in excess of Twenty
Million Dollars ($20,000,000.00) may be retained by the
Company or such Subsidiary; and
(iv) The Revolving Credit Commitment shall be reduced by the amount
of any payment required to be made to Bank as a mandatory
prepayment pursuant to the terms of this Section 8.27 (the
"Sale Prepayment").
(I) In the event the Sale Prepayment equals or exceeds
$2,500,000, (A) the Revolving Credit Commitment then in
effect (set forth in Section 2.1 hereof) shall be
reduced by the amount of Sale Prepayment, provided,
however, that the Revolving Credit Commitment (as
reduced) shall remain in effect and shall not be reduced
at the next two scheduled reductions (as set forth in
Section 2.1 hereof) to the Revolving Credit Commitment,
and (B) thereafter, on the date of each scheduled
reduction therefrom, the Revolving Credit Commitment
shall be reduced by an additional One Million Two
Hundred Fifty Thousand and no/100ths Dollars
($1,250,000.00) until the Revolving Credit Commitment
shall be reduced to $0.
(II) In the event the Sale Prepayment equals or exceeds
$1,250,000 but is less than $2,500,000, (A) the
Revolving Credit Commitment then in effect shall be
reduced by the amount of the Sale Prepayment, provided,
however, that the Revolving Credit Commitment (as
reduced) shall remain in effect and shall not be reduced
at the next scheduled reduction to the Revolving Credit
Commitment, and (B) on the next scheduled date for a
reduction in the Revolving Credit Commitment, the
Revolving Credit Commitment shall be reduced by the
difference between the amount of the Sale Prepayment and
$1,250,000, and (C) thereafter, on the date of each
scheduled reduction therefrom, the Revolving Credit
Commitment shall be reduced by an additional $1,250,000
until the Revolving Credit Commitment shall be reduced
to zero, whereupon the Revolving Loans shall be due and
payable in full.
(III) In the event the Sale Prepayment is less than $1,250,000
(A) the Revolving Credit Commitment then in effect shall
be reduced by the amount of the Sale Prepayment, (B) on
the next scheduled date for a reduction in the Revolving
Credit Commitment, the Revolving Credit Commitment shall
be reduced by the difference between the
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amount of the Sale Prepayment and $1,250,000, and (C)
thereafter, on the date of each scheduled reduction
therefrom, the Revolving Credit Commitment shall be
reduced by an additional $1,250,000 until the Revolving
Credit Commitment shall be reduced to zero whereupon the
Revolving Loans shall be due and payable in full.
(v) As an example of the provisions of this Section 8.27, if Sales
occur on June 1, 1996 in the amount of Fifteen Million and
no/100ths Dollars ($15,000,000.00), the following would occur:
(A) The Company would retain $10,000,000.00 (representing
$5,000,000.00 plus 50% of the excess between
$5,000,000.00 and $20,000,000.00);
(B) $5,000,000.00 (representing 50% of the excess between
$5,000,000.00 and $20,000,000.00) would be immediately
transferred to the Bank as a mandatory prepayment; and
(C) the Revolving Credit Commitment set forth in Section 2.1
would be adjusted as follows:
Aggregate Amount of
Revolving Loans On or Before
--------------- ------------
$10,000,000.00 01/01/97
$10,000,000.00 07/01/97
$ 8,750,000.00 01/01/98
$ 7,500,000.00 07/01/98
$ 6,250,000.00 01/01/99
$ 5,000,000.00 07/01/99
$ 3,750,000.00 01/01/00
$ 2,500,000.00 07/01/00
$ 1,250,000.00 01/01/01
$ 0.00 07/01/01"
14. The Agreement is hereby amended by deleting Section 8.21(a) and adding the
following in its respective place and stead:
"(a) Not permit or suffer the sum of (i) the consolidated
statutory surplus as required to be shown on the Statutory Financial
Statements of Intercargo Insurance Company, plus (ii) the fair
market value of any of those U.S. Treasury Bills, Permitted
Commercial Paper or certificates of deposit issued by the Bank, if
any, as are hereafter pledged to the Bank by the Company as
additional Collateral and maintained thereafter on deposit with the
Bank, to fall below Eighteen Million Dollars ($18,000,000.00) (the
"Section 8.21(a) Target") at December 31, 1995 or during the twelve
(12) months period thereafter. The Section 8.21(a) Target shall
increase by One Million Dollars ($1,000,000.00) at each fiscal year
end commencing December 31, 1996 and thereafter, provided, however,
that any such increase to the Section 8.21(a) Target shall be
postponed if, prior to such fiscal year end, Intercargo Insurance
Company shall make a
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dividend payment to the Company in the amount of One Million Dollars
($1,000,000.00) and Company shall then pay such amount to Bank as a
mandatory prepayment pursuant to Section 5.2 hereof.
15. The Agreement is hereby amended by deleting the second and third sentence
of Section 8.21(d). Section 8.21(d) shall now read as follows:
"8.21(d) Not permit or suffer the combined net written premium of
Intercargo Insurance Company for any four (4) consecutive calendar
quarterly periods to exceed 2.5 times the combined statutory surplus
of Intercargo Insurance Company as required to be shown on its
Statutory Financial Statements."
16. Section 8.21(e) of the Agreement is hereby amended by deleting same and
substituting therefore the following language:
"8.21(e) Not permit or suffer for any four (4) consecutive calendar
quarter periods, the ratio of (x) the sum of (A) with regard to
Subsidiaries which are regulated by state or province insurance
commissions, the maximum dividend or distribution which said
Subsidiaries may legally make to the Company during the applicable
fiscal period pursuant to the applicable rules, regulations,
procedures and laws of all such applicable insurance commissions of
any state or province plus (B) if such Subsidiary is not regulated
by such state or province insurance commissions ("Non-Insurance
Subsidiaries"), the Net Income of Non-Insurance Subsidiaries after
eliminating intercompany items and adding back interest,
depreciation and amortization expense plus (C) the "value of
Kingsway capital stock" (as herein defined) held by the Company as
of the end of such fiscal period, to (y) the sum of the Company's
interest and required principal payments under the Loans (including
but not limited to any required prepayments or other obligations of
Company hereunder) or pursuant to any other Indebtedness of the
Company, to be at any time less than 1.25:1. For purposes hereof,
the "value of Kingsway capital stock" shall be the closing price for
Kingsway shares on the Canadian exchange on which Kingsway shares
are traded and listed."
17. The Agreement is hereby amended by deleting Section 8.21(f).
18. Exhibit B to the Agreement, "Term Loan", is hereby deleted in its entirety.
19. In consideration of the Bank entering into this Third Amendment, upon the
execution hereof, the Company shall pay the Bank an amount equal to
Twenty-Five Thousand Dollars ($25,000.00).
20. Except as amended by this Third Amendment, all of the terms, covenants and
conditions of the Agreement are ratified, approved and confirmed and shall
remain in full force and effect. The Agreement, together with this Third
Amendment, shall constitute the Agreement between the Company and the Bank.
21. Company and Bank further acknowledge and agree that the Amended and
Restated Revolving Note evidences a rollover of indebtedness heretofore
outstanding and that Bank has not and does not, by accepting the amendments
thereto or otherwise, release any Collateral or security interest or other
encumbrance on the assets and property which Bank now holds.
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22. Upon demand by Bank therefor, the Company shall reimburse Bank for all
costs, fees and expenses incurred by Bank or for which Bank becomes
obligated, in connection with the negotiation, preparation and conclusion
of this Third Amendment, including without limitation, reasonable
attorneys' fees, costs and expenses, search fees, title insurance policy
fees, costs and expenses, filing and recording fees and all taxes payable
in connection with this Third Amendment.
23. Company hereby acknowledges, agrees and affirms that it possesses no
claims, defenses, offsets, recoupment or counterclaims of any kind or
nature against or with respect to the enforcement of the Agreement, the
Amended and Restated Note and any amendments thereto (collectively, the
"Claims"), nor does the Company now have knowledge of any facts that would
or might give rise to any Claims. If facts now exist which would or could
give rise to any Claim against or with respect to the enforcement of the
Agreement, the Revolving Note, as amended by the amendments thereto, the
Company hereby unconditionally, irrevocably and unequivocally waives and
fully releases any and all such Claims as of such Claims were the subject
of a lawsuit, adjudicated to final judgment from which no appeal would be
taken and therein dismissed with prejudice.
24. All of the provisions of the Agreement, including without limitation, the
right to declare principal and accrued interest due for any cause specified
in the Agreement, shall remain in full force and effect except as herein
expressly modified and they are hereby reaffirmed, ratified and confirmed
in their entirety and incorporated by reference as if fully set forth
herein. The Agreement and all rights and powers created thereby and
thereunder are in all respects ratified and confirmed. From and after the
date hereof, the Agreement shall be deemed to be amended and modified as
herein provided, but, except as so amended and modified, the Agreement
shall continue in full force and effect and the Agreement, the First
Amendment, the Second Amendment and this Amendment shall be read, taken and
construed as one and the same instrument.
25. THIS AMENDMENT HAS BEEN DELIVERED FOR ACCEPTANCE BY BANK IN CHICAGO,
ILLINOIS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE
OF ILLINOIS. COMPANY HEREBY (i) IRREVOCABLY SUBMITS, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED IN CHICAGO, ILLINOIS, OVER ANY ACTION OR PROCEEDING TO
ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AMENDMENT;
(ii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT COMPANY MAY EFFECTIVELY DO
SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH
ACTION OR PROCEEDING IN ANY SUCH COURT; (iii) AGREES THAT, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY
OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED
BY LAW; AND (iv) TO THE EXTENT PERMITTED BY APPLICABLE LAW, AGREES NOT TO
INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST BANK OR ANY OF BANK'S
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER
ARISING OUT OF OR RELATING TO THIS AMENDMENT IN ANY COURT OTHER THAN ANY
STATE OR FEDERAL COURT LOCATED IN COOK COUNTY, ILLINOIS. NOTHING IN THIS
SECTION SHALL AFFECT OR IMPAIR BANK'S RIGHT TO SERVE LEGAL PROCESS IN ANY
MANNER PERMITTED BY
10
<PAGE>
LAW OR BANK'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE COMPANY
OR COMPANY'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
TO THE EXTENT PERMITTED BY LAW, THE COMPANY AND BANK EACH HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AMENDMENT OR ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY
IN CONNECTION HEREWITH. THE COMPANY HEREBY EXPRESSLY ACKNOWLEDGES THAT
THIS WAIVER IS A MATERIAL INDUCEMENT FOR BANK TO MAKE THE LOANS.
26. This Amendment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. To induce Bank
to enter into this Third Amendment, the Company hereby represents and
warrants to Bank that:
(a) the execution and delivery of this Amendment, and the
performance by the Company of its obligations under this Agreement and the
Amended and Restated Revolving Note are within the Company's corporate
powers, have been duly authorized by all necessary corporate action, have
received all necessary governmental approval (if any shall be required) and
do not and will not contravene or conflict with any provisions of law or
the Articles of Incorporation or corporate By-Laws or the Company or of any
agreement binding upon the Company;
(b) this Amendment, the Amended and Restated Revolving Note, and
each other instrument executed by the Company concurrently herewith is the
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with their terms, except as enforcement thereof may
be subject to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and to the general principles of equity (regardless of whether
such enforcement is sought in a proceeding in equity or at laws);
(c) all of the representations and warranties of the Company made
in the Agreement are true and correct as of the date hereof, except where
such representation or warranty specifically relates to an earlier date;
and
(d) no Event of Default or Unmatured Event of Default under the
Agreement exists.
27. Concurrently herewith (and as a condition to this Amendment becoming
effective), the Company shall execute and deliver or cause to be executed
and delivered the Amended and Restated Revolving Note, in form and
substance satisfactory to Bank and its counsel.
28. The Company hereby represents that it has been represented by competent
counsel of its choice in the negotiation and execution of this Third
Amendment; that it has read and fully understood the terms hereof and
intends to be bound hereby. This Third Amendment has been thoroughly
reviewed by counsel for the Company and in the event of an ambiguity or
conflict in the terms hereof, there shall be no presumption against Bank as
the drafter hereof.
29. The parties agree that the effective date of this Third Amendment shall be
March 31, 1996.
11
<PAGE>
IN WITNESS WHEREOF, this Third Amendment has been duly executed as of the
day and year specified at the beginning hereof.
INTERCARGO CORPORATION,
a Delaware corporation
By: ____________________________
Its: _________________________
LASALLE NATIONAL BANK
By: ____________________________
Its:__________________________
12
EXHIBIT 11
Intercargo Corporation and Subsidiaries
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Primary earnings per common share:
Average common shares outstanding 7,645,578 7,640,981 7,639,646
Shares assumed to be repurchased under the
treasury stock method at average market prices
of $10.321, $9.302 and $13.043, respectively (1) 11,011 22,656 22,096
--------------------------------------
Total 7,656,589 7,667,637 7,661,742
--------------------------------------
Net income $6,404,000 2,139,000 4,981,000
--------------------------------------
Per common share amount $ 0.84 0.28 0.65
======================================
Fully diluted earnings per common share:
Average common shares outstanding 7,645,578 7,640,981 7,639,646
Shares assumed to be repurchased under the
treasury stock method at the average market
prices of $10.321, $9.302, and $13.043, respectively (1) 11,011 26,656 22,096
--------------------------------------
Total 7,656,589 7,667,637 7,661,742
--------------------------------------
Net income $6,404,000 2,139,000 4,981,000
--------------------------------------
Per common share amount $ 0.84 0.28 0.65
======================================
</TABLE>
(1) Earnings per share are computed based upon the weighted average number of
common stock and common stock market equivalents outstanding during each
year.
EXHIBIT 12
Intercargo Corporation and Subsidiaries
Statement Regarding Computation of Ratios
The Combined Ratio, as Computed on a GAAP basis, is the ratio of total
underwriting expenses to insurance premium income.
U.S. & U.K. OPERATIONS
BONDS
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $22,030 $25,846 85.2
1995 20,631 24,700 83.5
1994 18,507 23,019 80.4
1993 21,015 19,739 106.5
1992 18,742 17,720 105.8
</TABLE>
MARINE
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $27,050 $26,826 113.5
1995 25,942 20,808 124.7
1994 17,125 14,996 114.2
1993 10,430 12,154 85.8
1992 8,001 10,773 74.3
</TABLE>
PROFESSIONAL LIABILITY
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 4,000 $ 2,644 151.3
1995 4,920 3,069 160.3
1994 4,645 2,377 195.4
1993 2,945 1,681 175.2
1992 2,747 2,090 131.5
</TABLE>
OTHER
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 7,621 $ 5,631 135.3
1995 8,073 5,498 146.8
1994 3,573 3,362 106.3
1993 1,092 772 156.2
1992 927 566 165.2
</TABLE>
1
<PAGE>
TOTAL BONDS, MARINE, PROFESSIONAL LIABILITY AND OTHER
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $60,701 $60,947 105.2
1995 59,566 54,075 110.2
1994 43,850 43,754 100.2
1993 35,482 34,346 103.6
1992 30,417 31,149 97.7
</TABLE>
CANADIAN OPERATIONS
AUTO
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $ -- $ -- --
1995 22,289 24,046 92.7
1994 23,819 25,646 92.9
1993 7,850 8,863 88.6
1992 7,402 9,302 79.6
</TABLE>
PROPERTY
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $ -- $ -- --
1995 8,333 7,647 109.0
1994 5,008 5,084 98.5
1993 2,508 2,059 121.8
1992 1,509 1,154 130.7
</TABLE>
OTHER
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $ -- $ -- --
1995 284 386 73.6
1994 239 313 76.4
1993 220 225 97.8
1992 -- -- --
</TABLE>
2
<PAGE>
TOTAL AUTO, PROPERTY, AND OTHER
<TABLE>
<CAPTION>
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
- --------------------------------------------------------------
<S> <C> <C> <C>
1996 $ -- $ -- --
1995 30,906 32,079 96.3
1994 29,066 31,043 93.6
1993 10,578 11,147 94.9
1992 8,911 10,456 85.2
</TABLE>
3
EXHIBIT 13
KEY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 68,241 94,186 80,885 50,712 46,376
- ------------------------------------------------------------------------------------------------------
Operating income $ 3,618 3,918 7,261 2,818 6,544
- ------------------------------------------------------------------------------------------------------
Net income $ 6,404 2,139 4,981 2,138 4,379
- ------------------------------------------------------------------------------------------------------
Total assets $ 133,710 116,166 128,423 114,841 87,753
- ------------------------------------------------------------------------------------------------------
Total stockholder's equity $ 48,012 43,621 39,921 38,527 29,619
- ------------------------------------------------------------------------------------------------------
(per share amounts)
Net income from continuing operations $ 0.84 0.28 0.65 0.30 0.68
- ------------------------------------------------------------------------------------------------------
Dividends $ 0.18 0.18 0.18 0.17 0.08
- ------------------------------------------------------------------------------------------------------
Combined ratio (1) 104.6% 103.6% 97.5% 101.5% 94.5%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Combined ratios have been computed, for all years, on a GAAP basis (see
Management's Discussion and Analysis).
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company, through its subsidiaries, is engaged in the business of
underwriting specialty insurance coverages for international trade. This
includes U.S. customs bonds, marine cargo insurance, professional liability
insurance, and property and casualty insurance. The Company has subsidiaries in
Hong Kong and a branch office in the United Kingdom. Until December 18, 1995,
the Company was the sole parent company of Kingsway Financial Services, Inc.
("Kingsway"), an underwriter of automobile, and property and casualty insurance
in Canada. On December 18, 1995 Kingsway sold 1.8 million shares of its common
stock in an initial public offering. The Company participated in that
transaction as a selling shareholder, reducing its equity interest in Kingsway
from 100% to 50%. In January, 1996, as a result of the exercise of the
underwriters' over allotment option, the Company's equity in Kingsway was
reduced to 46.99%. In October, 1996, Kingsway conducted a secondary offering in
which the Company participated. As a result of this, the Company's equity in
Kingsway was further reduced to 31.5%.
In accordance with generally accepted accounting principles, Kingsway's
financial position is not consolidated with the Company's at December 31, 1995.
For financial statement purposes the Company has consolidated its 100% equity in
Kingsway's 1995 results of operations through December 18, 1995. Thereafter this
investment has been accounted for by the equity method.
The following chart compares certain 1996 information to information for 1995
and 1994 restated as if Kingsway had not been consolidated at any time during
1995 and 1994.
Comparison of Selected Data
(in thousands)
<TABLE>
<CAPTION>
Proforma Proforma
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Insurance premium income $61,053 $54,075 $43,754
Total revenues 68,241 58,594 47,507
Losses and loss
adjustment expenses 32,307 30,517 21,729
Other underwriting expenses 14,138 10,993 9,102
Total expenses 64,623 59,199 44,583
Operating income 3,618 (605) 2,924
Equity in net income of investee 3,454 2,663 2,412
-------------------------------
</TABLE>
Three significant factors in evaluating insurance company performance are earned
premiums, loss ratios, and combined ratios. Earned premiums represent
2
<PAGE>
the recognized revenue, calculated on a daily pro rata basis, of premiums paid
to the Company. The loss ratio is a comparison of claims paid by the Company
plus changes in the level of claim reserves as a percentage of earned premiums.
The combined ratio is a comparison of claims costs plus other expenses as a
percentage of premium earnings.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's total revenue for the year ended December 31, 1996 decreased to
$68.2 million, or 27.6%, from $94.2 million for the year ended December 31,
1995, which was an increase of 16.4% over the $80.9 million in 1994. Included
in the 1995 amounts are revenues of $35.6 million attributable to Kingsway prior
to its deconsolidation. Revenues in 1996 increased 16.5%, or $9.6 million after
excluding the effects of Kingsway in 1995.
In 1996, net premium written in U.S. operations increased 4.4% to $54.6 million
from $52.3 million in 1995. The 1995 level of net written premium had increased
16.5% to $52.3 million from $44.9 million in 1994. Surety (U.S. Customs bonds
and contract surety bonds) net premium written decreased 9.5% in 1996 to $23.2
million from $25.6 million in 1995. Gross premiums written for contract surety
bonds were $1.5 million or 14.4% lower in 1996 than 1995. Market conditions for
this product line were such that the Company did not consider the pricing
adequate for the risk being undertaken and, therefore, the Company chose to
curtail premium writings. Affecting the level of net written premium in the
contract bond line in 1996 was an increase of 192% or $2.8 million in ceded
premiums. This was a result of certain changes in reinsurance contracts
implemented April 1, 1996, to reduce the volatility in this product line.
Professional liability net premium written in 1996 declined 24.3% or $646
thousand to $2.0 million dollars after having increased 77.5% in 1995 as
compared to 1994. The decrease in 1996 was attributable to an increase in
premiums ceded in 1996 of $1.7 million. Approximately $1.4 million of this was
due to retrospective reinsurance premiums applicable to the development of prior
period coverages. Marine net premium written in 1996 increased 27.8% to $23.8
million, reflecting the seventh consecutive annual increase. In 1995 marine
premium increased similarly, at a rate of 26.2% to $18.6 million. Other
property and casualty net premium written increased 4.0% in 1996 to $5.6
million. In 1995 other property and casualty net premiums written had increased
25.3%. The decline in the rate of growth was due to the discontinuation of farm
coverages and to more selective underwriting in a competitive pricing
environment. Net written premium in the U.K. in 1996 increased 16.2% to $3.6
million as the Company continues to establish itself in the London market. The
operation in Hong Kong, op ened in May 1996, contributed $211 thousand in net
written premium.
Earned premium on a consolidated basis for 1996 shows a decline of $25.1 million
to $61.1 million from $86.2 million in 1995. The 1995 level was an increase of
$11.4 million from the 1994 amount of $74.8 million. Included in
3
<PAGE>
the 1995 earned premiums is $32.1 million attributable to Kingsway. Earned
premium in 1996 increased 12.9% or $7.0 million after excluding the effects of
Kingsway on 1995 earned premium. Surety earned premium increased $1.1 million,
U.S. marine increased $5.3 million, other property and casualty increased $133
thousand, while professional liability decreased $425 thousand in 1996 (see
"Results by Line"). Also in 1996, U.K. marine earned premium increased $700
thousand to $3.6 million from $2.9 million in 1995. Hong Kong operations
contributed $106 thousand in net earned premium. In 1995, earned premium from
U.S. and U.K. operations increased 23.6% to $54.1 million over 1994. Surety
earned premium increased $1.7 million, marine increased $5.8 million,
professional liability increased $700 thousand and other property and casualty
increased $2.1 million in 1995 over 1994. Canadian earned premiums increased
3.3% in total to $32.1 million in 1995.
In 1996, net investment income increased $91 thousand over 1995, or 1.5% to $6.4
million. The 1995 net investment income of $6.3 million includes $2.5 million
related to Kingsway while it was still part of the consolidation. 1996 net
investment income increased $2.6 million or 68% from the 1995 results after
excluding the Kingsway net investment income from the 1995 amount. Included in
the 1996 investment income is $2.4 million in gains from the sale of Kingsway
stock. Investment income in 1995 includes $244 thousand in gains on the sale of
Kingsway stock. The remainder of the increase in investment income in 1996 is
attributable to an increase in the level of invested assets. Net investment
income in 1995 had increased $1.9 million over 1994, or 43.3% to $6.3 million.
Investment income excluding Kingsway and gains from the sale of Kingsway shares
had increased 20.4% to $3.5 million in 1995, due primarily to an increase in
investment balances.
The company's investment policy requires that assets be comprised primarily of
investment grade, fixed income securities of short to medium-term maturity. The
length of maturity is intended to approximate the structure of the Company's
liabilities. As a result of the Company's investment policy, which does not
permit significant levels of equity securities but does include a significant
level of securities with interest exempt from federal income tax, the Company's
yield on its investment portfolio has tended to be lower than that of the
insurance industry in general. It is the Company's general practice to hold its
investments to maturity, but it will recognize its positions where market
changes allow the redeployment of assets at no loss the Company. The Company's
current position in Kingsway has a market value at December 31, 1996 of $50
million. The Company is reviewing the strategic alternatives relating to this
investment. The Company does not invest in real estate, high yield securities
or derivatives.
In 1996, loss and loss adjustment expenses declined 37.6% to $32.3 million from
$51.7 million in 1995. Included in the 1995 amount is $21.2 million
attributable to Kingsway. 1996 loss and loss adjustment expenses increased 5.9%
or $1.8 million after excluding the effects of Kingsway on 1995 loss and loss
adjustment
4
<PAGE>
expenses. Loss and loss adjustment expenses had increased 24.4% in 1995 from
$41.6 million in 1994. The rate of increase for 1996 was less than the rate of
increase in earned premiums, reflecting improved loss ratios in most product
lines. Incurred losses on the marine product increased 11.5% to $16.5 million.
The marine loss ratio declined in 1996 to 71.0% from 82.6% in 1995 as a result
of improved claims frequency over the last eight months of the year and
enhancements to administrative systems which have enabled the Company to better
monitor individual accounts and take corrective actions more quickly. Surety
loss and loss adjustment expenses in 1996 increased to $7.5 million from $5.6
million in 1995. Contract surety bond loss and loss adjustment expenses in 1996
decreased $279 thousand or 7.8%, but the loss ratio increased to 46.9% from
46.2% reflecting continued weakness in this product line. While the loss ratio
for U.S. customs bonds deteriorated in 1996 to 22.1% from 12.0% in 1995, the
ratio in 1994 was 23.2%. In 1996, loss and loss adjustment expenses for
professional liability decreased 17.1% from 1995 as the loss ratio declined to
102.7% from 106.7%. In 1996, retrospective reinsurance premiums applicable to
prior period coverages of $1.4 million were incurred. Excluding this would
result in a loss ratio of 89.2% in 1996 for professional liability. The
improvement in the loss ratio reflects system enhancements that have enabled
improved analysis, leading to more appropriate pricing for covered risks under
the professional liability program. In 1996, losses for the other property and
casualty lines decreased 21.2% while the related loss ratio declined to 77.8% fr
om 101.0%. As with other product lines, system enhancements have enabled better
and more frequent detailed reviews of experience, leading to swifter action on
adverse developments.
Incurred losses for U.K. operations increased 38.5% to $1.8 million in 1996 from
$1.3 million in 1995. This increase partially reflects the 24.7% increase in
earned premium during 1996. The remainder of the increase can be attributed to
the loss ratio increase in 1996 to 49.5% from 44.1% in 1995.
In 1995, loss and loss adjustment expenses increased 24.4% to $51.7 million from
$41.6 million in 1994. In 1995, loss and loss adjustment expenses related to
U.S. operations increased 37.0% to $29.2 million from $21.3 million in 1994.
Adverse development in loss and loss adjustment expense reserves for marine,
other property and casualty, and contract surety bonds unfavorably affected 1995
calendar year loss ratios in these lines.
Canadian incurred loss and loss adjustment expenses increased $1.3 million in
1995 or 6.8%. Adverse development relating to prior periods was the primary
cause of this increase over the 1994 levels.
Acquisition and other issue costs decreased 23.7% to $17.4 million in 1996 from
$22.8 million in 1995. Included in the 1995 amount is $6.0 million attributable
to Kingsway. Acquisition and other issue costs increased 3.2% or $544 thousand
after excluding the effects of Kingsway on 1995 costs. This increase is due to
increased premium volume. The magnitude of the increase was reduced
5
<PAGE>
by the continuing change in the commission structure as product pricing moves to
a net rate structure. U.S. policy acquisition costs in 1995 increased due to
increased premium volume and to limitations on the ability to capitalize
acquisition costs due to high loss ratios on certain lines. Canadian
acquisition and other issue costs increased in 1995 consistent with the change
in premium volume and mix.
Other underwriting expenses decreased 3.9% in 1996 to $14.1 million from $14.7
million in 1995. Included in the 1995 amount is $3.7 million in other
underwriting expenses attributable to Kingsway. Other underwriting expenses
increased $3.1 million or 28.6% in 1996 after excluding the effects of Kingsway
on the 1995 expenses. Agency operations expenses increased $1.0 million in 1996
primarily due to an increase in the allowance for doubtful accounts amounting to
$527 thousand. U.S. insurance company operations for 1996 showed an increase in
other underwriting expenses of $2.0 million, primarily due to higher levels of
salary and other employee costs. These higher employee costs were related to
the development of a customer service center and to the start-up of operations
in Hong Kong. Hong Kong insurance operations, which began in 1996, had other
underwriting expenses of $710 thousand. 1995 other underwriting expenses
increased 14.9% to $14.7 million from $12.8 million in 1994. Excluding the
effects of Kingsway, the 1995 increase was 20.8%.
Combined ratios on a GAAP basis are presented here as the Company feels this
provides a conservative and consistent representation of the operational
performance as a whole. Canadian (i.e. Kingsway) operations are shown
separately. A combined ratio of less than 100% generally indicates an
underwriting profit. Many of the large property and casualty companies which
sell standard commercial and personal lines of insurance have historically
posted combined ratios well in excess of 100%. No assurance is made that loss
and loss adjustment expense accruals upon which the Company's combined ratios
are based may not prove to vary significantly from the ultimate results.
6
<PAGE>
U.S. AND U.K. OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Other
Surety Marine Professional Liability Property &Casualty
------------------------------------------------------------------------------------------------------------
Year Premium Combined Premium Combined Premium Combined Premium Combined
Earned Ratio (%) Earned Ratio (%) Earned Ratio (%) Earned Ratio (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $25,846 85.2 $26,826 113.5 $2,644 151.3 $5,631 135.3
1995 24,700 83.5 20,808 124.7 3,069 160.3 5,498 146.8
1994 23,019 80.4 14,996 114.2 2,377 195.4 3,362 106.3
1993 19,739 106.5 12,154 85.8 1,681 175.2 772 156.2
1992 17,720 105.8 10,773 74.3 2,090 131.5 566 165.2
</TABLE>
<TABLE>
<CAPTION>
Year Total
----------------------
Premium Combined
Earned Ratio (%)
<S> <C> <C>
1996 $60,947 105.2
1995 54,075 110.2
1994 43,754 100.2
1993 34,346 103.6
1992 31,149 97.7
</TABLE>
CANADIAN OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Other
Auto Property Property & Casualty Total
------------------------------------------------------------------------------------------------------------------
Year Premium Combined Premium Combined Premium Combined Premium Combined
Earned Ratio (%) Earned Ratio (%) Earned Ratio (%) Earned Ratio (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 --- --- --- --- --- --- --- ---
1995 $24,046 92.7 $7,647 109.0 $386 73.6 $32,079 96.3
1994 25,646 92.9 5,084 98.5 313 76.4 31,043 93.6
1993 8,863 88.6 2,059 121.8 225 97.8 11,147 94.9
1992 9,302 79.6 1,154 130.7 --- --- 10,456 85.2
</TABLE>
7
<PAGE>
RESULTS BY LINE
Underwriting results for 1996 in the Company's surety business declined
marginally, following a slight decline in 1995. The combined ratio in 1996 of
85.2% is up slightly from the 1995 ratio of 83.5%. The contract surety bond
loss ratio increased to 46.9% in 1996 from 46.2% in 1995. These levels are up
considerably from the 1994 loss ratio of 25.8%. Earned premiums for 1996
decreased 9.1% to $7.0 million from $7.7 million in 1995, which was an increase
from $5.9 million in 1994. The Company is conducting a review of the strategic
fit of contract bonds with the Company's other products, and the options that
may be available to limit the Company's exposure to volatility. U.S. Customs
bonds results deteriorated only slightly in 1996 despite an increase in the loss
ratio to 22.1% from 12.0% in 1995. The 1995 results for U.S. Customs bonds
improved over 1994 as a result of favorable loss developments. Earned premiums
for Customs bonds increased 11.0% to $18.8 million in 1996 compared to $17.0
million in 1995.
Marine earned premium in 1996 grew $6.0 million or 28.9%. Earned premium in
1995 grew $5.8 million. The 1996 and 1995 marine underwriting results were
negatively affected by adverse developments on claims incurred prior to each of
those years. However, the business has been improving, demonstrated by an
improvement in the loss ratio in 1996 to 71.0% from 82.6% in 1995 and
improvement in the combined ratio to 113.5% in 1996 from 124.7% in 1995. Also,
claim frequency has been steadily improving since the second quarter of 1996.
Improved administrative systems are now allowing the Company to better monitor
results and to act more quickly on negative trends.
8
<PAGE>
Other property and casualty lines show an increase in earned premium of 2.4% or
$133,000 in 1996 while 1995 earned premium of $5.5 million was an increase of
$2.1 million or 63.5% over 1994. The loss ratio for 1996 of 77.8% was an
improvement over the 1995 ratio of 101.0%. This helped to reduce the combined
ratio in 1996 to 136.2% from 146.8% in 1995.
The professional liability program 1996 earned premium declined to $2.6 million
from $3.1 million in 1995 due primarily to higher levels of reinsurance premium
ceded. The 1995 year showed an increase of 29.1% from the 1994 earned premium
of $2.4 million. The improvement in the 1996 loss ratio to 102.7% from 106.7%
in 1995 and the improvement in the 1996 combined ratio to 152.1% from 160.3% in
1995 reflects rate actions taken by the Company as the result of improved
analytical capabilities.
9
<PAGE>
INFLATION AND OTHER FACTORS
Periods of inflation have varying effects on the Company and other companies in
the insurance industry. Because premium rates for the Company's U.S. Customs
bond and marine cargo insurance products are usually tied to the value of cargo
being imported or exported, an increase in price levels may result in revenue
increases. In periods of inflation, the property and casualty industry
generally experiences higher losses, loss adjustment expenses and operating
costs. In contrast, the Company's U.S. Customs bond and marine cargo premiums
and losses are tied to the value of goods as of the date of shipment and
generally are not adversely affected by inflation.
The value of the dollar relative to other world currencies also affects the
Company's U.S. Customs bond and marine cargo business. When the dollar is
strong relative to other world currencies, imports generally increase and U.S.
Customs bond volume increases. When the dollar is weak relative to other world
currencies, exports generally increase and marine cargo insurance volume
increases.
10
<PAGE>
U.S. AND CANADIAN FEDERAL INCOME TAXES
The Company's effective tax rates for the years 1996, 1995 and 1994 were 18.4%,
47.7% and 31.4%, respectively. The effective tax rate differs from the U.S.
federal corporate tax rate due to the Company's investments in tax exempt
securities, changes in the valuation of deferred tax assets and, for the 1995
and 1994 years when Kingsway was a consolidated subsidiary, the Canadian tax
rate differential (see accompanying Notes to Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
The capacity of an insurance company to underwrite insurance is based upon
maintaining liquidity and capital resources sufficient to pay claims and
expenses as they become due. The Company has historically generated adequate
capital resources to support its current operations. This position is further
enhanced by its investment policy which emphasizes high quality, short to medium
term investments. The primary sources of the Company's liquidity are funds
generated from insurance premiums, investment income, and proceeds from
investment maturities. The Company's position in Kingsway, with a market value
at December 31, 1996 of appoximately $50 million, is also a potential source of
liquidity. The principal application of such funds are payments of losses and
loss adjustment expenses, investments, reinsurance, and operating expenses.
Cash flow from operations amounted to $6.3 million in 1996 compared to $5.1
million in 1995 and $12.8 million in 1994. The increase in 1996 is commeasurate
with the increase in premiums. Increased loss levels coupled with a leveling of
premium growth account for the decline in 1995.
Proceeds from the sale of Kingsway common stock amounting to $4.6 million in
1996 were used to increase the statutory capital and surplus of IIC and for
general corporate purposes. In 1995 proceeds from the sale of Kingsway common
stock amounting to $4.1 million were similarly used.
The Company maintains a $15.0 million line of credit which has been used to
facilitate the integration of IAS operations and other general purposes. As of
December 31, 1996, the Company has utilized $9.7 million of this available line.
In December 1994, borrowings totaling $4.3 million were made to increase the
statutory capital and surplus of IIC and Kingsway. The Kingsway contribution
made in the form of a note, was repaid in December 1995, with proceeds from the
sale of Kingsway stock. The Company does not have any material commitments for
capital expenditures.
11
<PAGE>
DIVIDENDS
The Company paid dividends of $0.18 per share, or $1.4 million in 1996 and 1995
and 1994. Any future dividends will depend upon the earnings and financial
position of the Company's principal operating subsidiary, IIC, as well as legal
and contractual restrictions. In addition, the insurance laws of Illinois, the
domicile of IIC, require that dividends be paid only out of earned surplus, and
are limited to the greater of 10% of statutory surplus or statutory net income,
as defined. The Company's line of credit restricts dividend payments to 25% of
consolidated net income of the Company for the four quarters prior to payment.
MARKET INFORMATION
The Company's common stock, par value $1.00, is traded on the Nasdaq National
Market under the symbol ICAR. The table shown on the left contains the range of
high and low closing sale prices of the common stock of the Company as reported
by Nasdaq for each calendar quarter for the last two fiscal years.
HOLDERS
The number of holders of record of Company common stock on March 14, 1997, was
approximately 121. Certain information made available to the Company from
Automatic Data Processing (ADP) and other broker dealers holding securities in
street name indicates there are approximately 2,100 beneficial owners of the
Company's common stock.
Quarter High Low
- ------- ---- ---
4th 1996 9.13 7.75
3rd 1996 9.25 8.25
2nd 1996 9.75 8.38
1st 1996 11.50 7.50
4th 1995 14.75 8.25
3rd 1995 14.75 11.00
2nd 1995 11.75 9.00
1st 1995 9.75 8.00
12
<PAGE>
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INTERCARGO CORPORATION:
We have audited the consolidated balance sheets of Intercargo Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Intercargo
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 21, 1997
13
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CATPTION>
At December 31,
1996 1995
------------------
(in thousands)
<S> <C> <C>
ASSETS
Investments
Fixed maturities available-for-sale, at fair value $ 51,567 44,769
Equity securities, at fair value 1,557 3,474
Investee at cost plus cumulative undistributed
earnings (fair value: $50,327 in 1996 and
$17,590 in 1995) 13,519 11,898
---------------------
Total investments 66,643 60,141
Cash and cash equivalents 18,492 16,478
Premiums receivable 16,231 14,920
Accrued investment income 833 804
Deferred policy acquisition costs 3,884 4,898
Reinsurance recoverable on loss and loss expenses:
Paid claims 96 1,192
Unpaid claims 9,980 2,964
Prepaid reinsurance premiums 4,549 2,089
Notes receivable 672 349
Income tax recoverable - 1,092
Deferred income tax 2,375 822
Equipment, at cost less accumulated depreciation 2,276 1,738
Goodwill 2,091 2,468
Other assets 5,588 6,211
---------------------
Total assets $133,710 116,166
=====================
LIABILITIES
Losses and loss adjustment expenses $ 47,037 36,293
Unearned premiums 17,617 17,691
Funds held by Company 491 748
Supplemental duty deposits 2,358 2,669
Accrued expenses and other liabilities 8,460 5,409
Notes payable 9,735 9,735
---------------------
Total liabilities 85,698 72,545
---------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock--$1 par value; authorized 20,000,000
shares; issued and outstanding, 7,659,981 shares in 1996
and 7,640,981 in 1995 7,660 7,641
Additional paid-in capital 24,180 24,104
Net unrealized loss on foreign currency translation (978) (1,179)
Net unrealized gain (loss) on available-for-sale securities (366) 567
Retained earnings 17,516 12,488
---------------------
Total stockholders' equity 48,012 43,621
---------------------
Total liabilities and stockholders' equity $133,710 116,166
=====================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
REVENUES
Insurance premium income $61,053 86,154 74,797
Net investment income 6,364 6,273 4,378
Commission income 686 531 433
Other income 138 1,228 1,277
------------------------------
Total 68,241 94,186 80,885
------------------------------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 32,307 51,746 41,599
Policy acquisition and other issue costs 17,410 22,829 18,511
Other underwriting expenses 14,138 14,706 12,801
Interest expense 768 987 512
Litigation settlement expense - - 201
------------------------------
Total 64,623 90,268 73,624
------------------------------
Operating income 3,618 3,918 7,261
Income tax expense 668 1,868 2,280
------------------------------
Net income before equity in net income
of investee 2,950 2,050 -
Equity in net income of investee 3,454 89 -
------------------------------
NET INCOME $6,404 2,139 4,981
==============================
Average number of shares of common
stock and equivalents outstanding 7,657 7,668 7,662
NET INCOME PER SHARE $ 0.84 0.28 0.65
==============================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized Net
Gain (Loss) Unrealized
Additional on Foreign Gain Stock-
Number Common Paid-in Currency (Loss) on Retained holders'
of Shares Stock Capital Translation Securities Earnings Equity
--------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 7,631 $7,631 24,064 (1,375) 89 8,118 38,527
Cumulative effect of the
implementation of SFAS
No. 115 1,166 1,166
Net income 4,981 4,981
Change in foreign
currency translation (627) (627)
Change in unrealized gain (loss)
on available-for-sale
securities (2,801) (2,801)
Dividends paid to
stockholders
($0.18 per share) (1,375) (1,375)
Employee stock options
exercised 10 10 40 50
- --------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 7,641 7,641 24,104 (2,002) (1,546) 11,724 39,921
Net income 2,139 2,139
Change in foreign
currency translation 823 823
Change in unrealized gain (loss)
on available-for-sale
securities 2,113 2,113
Dividends paid to stockholders
($0.18 per share) (1,375) (1,375)
- --------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 7,641 7,641 24,104 (1,179) 567 12,488 43,621
Net income 6,404 6,404
Change in foreign
currency translation 201 201
Change in unrealized gain (loss)
on available-for-sale securities (933) (933)
Dividends paid to stockholders
($0.18 per share) (1,376) (1,376)
Employee stock options exercised 19 19 76 95
- --------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 7,660 $7,660 24,180 (978) (366) 17,516 48,012
==========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,404 2,139 4,981
Adjustments to reconcile net income to net cash
provided from operating activities:
Realized gains (2,379) (415) (43)
Depreciation and amortization 1,546 702 680
Amortization of premiums (discounts) on investments 102 52 (422)
Undistributed earnings of affiliate (3,454) (2,662) -
Increase in premiums receivable (1,311) (5,417) (4,598)
Decrease (increase) in deferred policy acquisition costs 1,014 (420) (1,387)
Increase in reinsurance balances (8,380) (1,406) (1,868)
Decrease (increase) in notes receivable (323) 2,297 433
Change in income tax accounts 20 (1,453) 948
Increase in other assets (56) (1,171) (924)
Increase in liability for losses and
loss adjustment expenses 10,744 9,571 9,140
Increase (decrease) in unearned premiums (74) 1,831 5,116
Increase (decrease) in funds held (257) 480 300
Decrease in supplemental duty deposits (311) (478) (938)
Increase in accounts payable and accrued expenses 3,051 850 1,482
Other, net (16) 626 (82)
----------------------------------
Net cash provided from operating activities 6,320 5,126 12,818
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities available-for-sale:
Purchases (27,314) (21,957) (20,102)
Sales 13,332 8,080 5,005
Maturities and calls 5,370 4,563 5,715
Equity securities:
Purchases (502) - (1,472)
Sales 2,140 4,191 2,743
Calls 185 - 187
Net sales (purchases) of short-term investments 510 (260) 4,721
Purchase of subsidiary - (1,499) -
Subsidiary cash at purchase date - 170 -
Sale of Kingsway common stock 4,573 4,107 -
Decrease in cash due to deconsolidation of Kingsway - (3,964) -
Purchase of property and equipment, net (1,319) (814) (1,191)
----------------------------------
Net cash used in investing activities (3,025) (7,383) (4,394)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) notes payable - 1,099 (2,312)
Proceeds from the exercise of stock options 95 - 50
Dividends paid to stockholders (1,376) (1,375) (1,375)
----------------------------------
Net cash used in financing activities (1,281) (276) (3,637)
----------------------------------
Net increase (decrease) in cash and cash equivalents 2,014 (2,533) 4,787
Cash and cash equivalents:
Beginning of the period 16,478 19,011 14,224
----------------------------------
End of the period $18,492 16,478 19,011
==================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
Notes to Consolidated Financial Statements
(1) ORGANIZATION
Intercargo Corporation is an insurance holding company incorporated in the State
of Delaware whose wholly owned subsidiaries at December 31, 1996, consist of
Intercargo Insurance Company (IIC), International Advisory Services, Inc. (IAS),
Intercargo International Limited (IIL), and TRM Insurance Services, Inc. (TRM).
IIL's name was changed from Interocean Company, Ltd. in 1995.
IIC is a property and casualty insurer based in the United States, which
primarily writes U.S. Customs bonds, marine cargo, professional liability and
other property and casualty insurance. IIC conducts business in the United
Kingdom through a branch office operation. Its products are sold to importers
and exporters through customs brokers, freight forwarders, and other service
firms engaged in the international and domestic movement of cargo.
In October, 1995, IIC purchased the stock of Eastern Insurance Company (H.K.), a
Hong Kong licensed insurance company for $1.5 million. The company was renamed
Intercargo Insurance Company H.K. Limited (IIC - H.K.). The acquisition is
accounted for by the purchase method, and accordingly, the operations of IIC -
H.K. are included in the Company's financial statements from the date of
acquisition. In connection with the acquisition, the Company has recorded an
intangible asset of $2.7 million related to IIC - H.K.'s license to operate as
an insurance company in Hong Kong. IIC owned 100% of Oceanic Insurance and
Surety Company (Oceanic). In December 1995, the Illinois Department of
Insurance approved a plan of merger which merged all of Oceanic's assets and
liabilities into IIC.
On December 18, 1995, Kingsway Financial Services (Kingsway), a then wholly
owned subsidiary of the Company, sold 1.8 million shares of its common stock in
a public offering. The Company sold 600 thousand of its 3.0 million Kingsway
shares in that transaction thereby reducing its equity interest in Kingsway to
50% at December 31, 1995. The Company's consolidated results of operations for
1995 include 100% of Kingsway's results of operations through December 18, 1995.
The Company's financial position reflects the remaining 50% interest in Kingsway
on the equity method of accounting at December 31, 1995.
On January 15, 1996, the Company sold 60 thousand additional shares of Kingsway
stock as part of the over allotment option from the initial public offering.
This reduced the Company's ownership percentage to approximately 47%. On
October 18, 1996, the Company participated in a secondary offering of Kingsway
stock by selling 250 thousand shares, which along with the new shares issued by
Kingsway, reduced its equity interest in Kingsway to approximately 31%. The
Company's financial position reflects the remaining 31% interest in Kingsway on
the equity method of accounting at December 31, 1996.
18
<PAGE>
The Company primarily operates in the business of underwriting property and
casualty insurance. Business placed by the insurance agency subsidiaries with
insurance companies unrelated to the Company is not significant, and therefore,
the Company believes property and casualty insurance is its only reportable
business segment.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(b) Investment Valuations
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires that investments in all debt securities and
those equity securities with readily determinable market values be classified
into one of three categories: held-to-maturity, trading, or available-for-sale.
Held-to-Maturity Securities:
Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and carried at amortized cost.
Except for declines that are other than temporary, changes in the fair value are
not reflected in the financial statements. The Company holds no debt securities
in this category.
19
<PAGE>
Trading Securities:
Debt and equity securities purchased for short-term resale are classified as
trading securities. Unrealized gains and losses are included in earnings. The
Company holds no debt or equity securities in this category.
Available-for-Sale Securities:
All other debt and equity securities not included in the above categories are
classified as available-for-sale and reported at fair value. Unrealized gains
and losses are excluded from earnings and reported in a separate component of
stockholders' equity net of deferred income taxes. All of the Company's equity
securities and debt securities are classified as available-for-sale.
Prior to the adoption of SFAS No. 115, the Company classified all of its debt
securities as held-to-maturity which were carried at amortized cost. Investments
in equity securities were carried at fair value with unrealized appreciation or
depreciation included in stockholders' equity. In conjunction with the adoption
of SFAS No. 115, all of the Company's debt securities were deemed as
available-for-sale. Unrealized holding gains on adoption amounted to $1.2
million, net of tax. The adoption of SFAS No. 115 had no effect on net income as
the amount was credited directly to stockholders' equity.
Gains and losses on sales of investments are computed on the specific
identification method and are reflected in net income. Fair values are based
upon quoted market prices or values obtained from independent pricing sources.
(c) Investment in Investee
The Company does not recognize into income its equity share of changes in an
investee's reported net assets resulting from an investee's issuance of stock.
Unconsolidated investees between 20% and 50% owned are accounted for under the
equity method of accounting.
(d) Cash and Cash Equivalents
Cash includes $170 thousand on deposit with Hong Kong regulatory authorities at
December 31, 1995. Cash equivalents consist of investments with an original or
remaining maturity of three months or less at purchase.
(e) Premium Trust Funds
Premiums collected from insureds but not yet remitted to insurance carriers are
restricted as to use by laws in certain states in which IAS operates. The amount
of cash and cash equivalents so restricted was $4.6 million at December 31,
1996.
(f) Premiums Receivable
Current accounts receivable are stated net of allowances for uncollectible
accounts of approximately $1.1 million and $605 thousand at December 31, 1996
and 1995, respectively.
20
<PAGE>
(g) Policy Acquisition Costs
Policy acquisition costs are costs such as commissions and certain other
underwriting and agency expenses which vary with and are directly related to the
production of business. Such costs are deferred to the extent recoverable from
future earned premiums and are amortized ratably over the terms of the related
policies. Costs deferred and amortized over the past three years are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
--------------------------
<S> <C> <C> <C>
Deferred policy acquisition
costs, beginning of period $ 4,898 6,602 5,215
Deferred:
Direct commissions 11,136 17,766 15,636
Premium taxes 1,026 2,536 2,234
Other direct underwriting
expenses 6,479 6,740 4,894
Ceding commissions (2,245) (3,201) (2,866)
------------------------------
Net deferred 16,396 23,841 19,898
Amortized (17,410) (22,829) (18,511)
Adjustment due to
deconsolidation of Kingsway - (2,716) -
------------------------------
Deferred policy acquisition
costs, end of period $ 3,884 4,898 6,602
==============================
</TABLE>
(h) Federal Income Tax
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change is
enacted.
(i) Goodwill and Other Intangible Assets
Goodwill is the excess of the fair value of consideration paid for companies
acquired over the fair value of the related net assets acquired. Goodwill is
amortized using the straight-line method over periods not exceeding 20 years.
Intangible assets relate to the acquisition of licenses, customer lists,
non-compete agreements, and employment agreements and are amortized using the
straight-line method over periods not exceeding 20 years.
(j) Liability for Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses represents estimates of
the ultimate unpaid cost of all claims incurred, including claims incurred but
not yet
21
<PAGE>
reported. These estimates are based upon historical experience of the business
written by the Company and other direct writers reinsured by the Company,
adjusted for current trends. Management believes that the provision for losses
and loss adjustment expenses is adequate to cover the ultimate liability;
however, such estimates may be more or less than the amount ultimately paid when
the claims are settled. Reinsurance recoverables on unpaid losses and ceded
unearned premiums are reported as assets instead of netting these against
related reserves (see note 4).
(k) Premium Recognition
Insurance premiums are recognized as revenue ratably over the terms of the
policies. Unearned premiums are computed on the daily pro rata basis.
22
<PAGE>
(l) Foreign Exchange
Assets and liabilities relating to foreign operations are translated to U.S.
dollars using current exchange rates. Revenues and expenses are translated to
U.S. dollars using the average exchange rate as determined on a yearly basis.
Translation adjustments for financial reporting in U.S. dollars are reflected as
a separate component of stockholders' equity.
(m) Commission Income
The Company recognizes commission income when the premiums are billed to the
customer, or the effective date of the policy, whichever is later.
(n) Stock-Based Compensation
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 (APB No. 25) and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized as the exercise prices of the options and stock
appreciation rights equaled the market prices at the grant dates. The effect of
recording compensation cost for the Company's stock-based compensation plans
based on SFAS No. 123's fair value method results in net income and earnings per
share that are not materially different from amounts reported. The Company does
not expect its net income and earnings per share to be materially different
under SFAS No. 123 than under APB No. 25 in future periods.
(o) Earnings Per Share
Earnings per share are computed based upon the weighted average number of shares
of common stock and common stock equivalents (to the extent dilutive)
outstanding each year. Common stock equivalents consist of shares issuable under
the Company's stock option plan.
(p) Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the current presentation.
23
<PAGE>
(3) INVESTMENTS
Amortized cost, unrealized gains and losses, and estimated fair value of
investments as of December 31, 1996 and 1995, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
<S> <C> <C> <C> <C>
(Available-for-Sale)
Fixed maturities:
U.S. Government and Agency obligations $20,870 49 (522) 20,397
State, municipal, and other tax advantaged
securities 14,193 325 (23) 14,495
Corporate securities 15,128 23 (215) 14,936
Other fixed maturity investments 1,758 1 (20) 1,739
---------------------------------------------
Total fixed maturities 51,949 398 (780) 51,567
Equity securities 1,730 3 (176) 1,557
---------------------------------------------
Total $53,679 401 (956) 53,124
=============================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
<S> <C> <C> <C> <C>
(Available-for-Sale)
Fixed maturities:
U.S. Government and Agency obligations $13,670 111 (42) 13,739
State, municipal, and other tax advantaged
securities 19,776 689 (20) 20,445
Corporate securities 9,545 275 (8) 9,812
Other fixed maturity investments 774 - (1) 773
---------------------------------------------
Total fixed maturities 43,765 1,075 (71) 44,769
Equity securities 3,618 11 (155) 3,474
---------------------------------------------
Total $47,383 1,086 (226) 48,243
=============================================
</TABLE>
24
<PAGE>
Amortized cost and estimated fair value for fixed maturities held as of December
31, 1996, summarized by maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-----------------------
<S> <C> <C>
Due in one year or less $ 1,075 1,079
Due after one year through five years 12,529 12,655
Due after five years through ten years 30,164 29,648
Due after ten years 8,181 8,185
------- ------
$51,949 51,567
======= ======
</TABLE>
Excluding sales of Kingsway shares, gross gains realized on the sale of
investments were $238 thousand, $390 thousand, and $187 thousand in 1996, 1995,
and 1994 respectively. Gross losses from the sale of investments were $171
thousand, $28 thousand, and $144 thousand in 1996, 1995, and 1994 respectively.
Investment securities carried at $ 9.5 million and $9.6 million at December 31,
1996 and 1995, respectively, were on deposit or pledged to governmental
authorities as required by law.
The sources of net investment income are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
------------------------
<S> <C> <C> <C>
Income from fixed maturities
in excess of one year $3,183 3,064 2,699
Income from short-term
investments and cash equivalents 844 2,421 828
Income from other sources - 74 379
Income from equity issues 104 641 699
Gain on sale of Kingsway common stock 2,394 244 -
Investment expenses (161) (171) (227)
--------------------------
Net investment income $6,364 6,273 4,378
==========================
</TABLE>
At December 31, 1996, the net unrealized loss on available-for-sale securities
was net of a deferred tax benefit of $189 thousand. At December 31, 1995, the
net unrealized gain on available-for-sale securities was net of a deferred tax
liability totaling $292 thousand.
(4) REINSURANCE
In the normal course of business, the Company assumes and cedes reinsurance with
other insurers. Reinsurance is ceded primarily to limit losses from large
exposures and to permit recovery of a portion of direct losses; however, such a
transfer does not relieve the originating insurance company of contingent
liability.
The majority of the Company's ceded reinsurance is placed with a limited number
of reinsurers; however, the Company evaluates the financial condition of
25
<PAGE>
its reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from insolvencies. A contingent liability exists
to the extent that the Company's reinsurers are unable to meet their contractual
obligations. Management makes provision for uncollectible reinsurance when
warranted and is of the opinion that no additional liability will accrue to the
Company with respect to this contingency.
26
<PAGE>
The effects of reinsurance on premiums written, premiums earned, and loss and
loss adjustment expenses incurred for the three years ended December 31, 1996,
1995, and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
Direct Ceded Assumed Net
------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
- ----------------------------
Premiums written $ 67,933 12,514 3,034 58,453
Premiums earned $ 68,206 10,163 3,010 61,053
Loss and loss adjustment expenses incurred $ 45,500 14,910 1,717 32,307
Year ended December 31, 1995
- ----------------------------
Premiums written $103,396 14,001 1,409 90,804
Premiums earned $ 98,460 13,594 1,288 86,154
Loss and loss adjustment expenses incurred $ 58,431 7,208 523 51,746
Year ended December 31, 1994
- ----------------------------
Premiums written $ 92,047 11,561 251 80,737
Premiums earned $ 86,216 11,565 146 74,797
Loss and loss adjustment expenses incurred $ 49,140 7,540 (1) 41,599
</TABLE>
5) FEDERAL INCOME TAX
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Current $1,740 2,308 2,639
Deferred (1,072) (440) (359)
-------------------------------------
$ 668 1,868 2,280
=====================================
Tax (benefit) on unrealized gain (loss) on
investments $ (189) 292 (800)
=====================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred tax asset at December 31, 1996 and 1995, were (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
-----------------
<S> <C> <C>
Deferred tax assets:
Loss reserves $1,453 1,257
Unearned premium reserves 881 1,061
Future benefit of net operating losses 1,476 1,476
Unrealized investment loss 189 -
Other 503 550
Less: valuation allowance (738) (1,476)
-----------------
Deferred tax assets 3,764 2,868
-----------------
Deferred tax liabilities:
Deferred policy acquisition costs (1,255) (1,617)
Unrealized investment gain - (292)
Depreciation (128) (128)
Other (6) (9)
-----------------
Deferred tax liabilities (1,389) (2,046)
-----------------
Net deferred tax asset $2,375 822
=================
</TABLE>
27
<PAGE>
The valuation allowances of approximately $738 thousand and $1.5 million at
December 31, 1996 and 1995, respectively, pertain solely to net operating losses
(NOL) of IAS. These NOLs are considered to have arisen in separate return
limitation years (SRLY) and under Federal tax law can only be utilized against
future taxable income generated by IAS. Valuation allowances have been
established to reduce the deferred tax asset related to the pre-acquisition NOLs
of IAS to the amount that, based upon available evidence, is, in management's
judgment, more likely than not to be realized. The NOL carryforwards at December
31, 1996, begin expiring in 2002.
Income taxes paid (net of taxes recovered) were ($108) thousand, $3.2 million,
and $1.6 million in 1996, 1995, and 1994, respectively. The actual Federal
income tax expense for 1996, 1995, and 1994 differed from the "expected" tax
expense for those years as described below (in thousands). "Expected" tax
expense is computed by applying the U.S. Federal corporate tax rate of 34% to
operating income.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Computed expected tax $1,230 1,332 2,469
Foreign tax rate differential 131 475 451
Tax exempt interest and dividend
received deduction (323) (487) (577)
Realization of pre-merger operating
loss benefit - - (212)
Foreign source income 207 106 (98)
Deferred tax valuation allowance (738) 357 (491)
Other 161 85 738
----------------------------
$ 668 1,868 2,280
============================
</TABLE>
The Company and its U.S. subsidiaries file a consolidated tax return. Federal
income tax expenses are calculated on an entity basis and are allocated
accordingly.
Foreign income not expected to be taxed in the United States has arisen because
Kingsway is not subject to U.S. income taxes. For 1995 and 1994, pre-tax income
includes $4.5 million and $4.3 million, respectively, attributable to Kingsway.
Included in 1995 and 1994 income tax expense is $1.9 million related to such
income. Kingsway's income has been subject to Canadian federal and provincial
income taxes at the cumulative corporate rate of 44.5% in 1995, and 44.3% in
1994. Temporary differences relating to Kingsway arising from tax law for
Canadian insurance companies are similar to those of the U.S. subsidiaries.
(6) RELATED PARTY TRANSACTIONS
Certain of the Company's reinsurers are affiliated insurance companies. The
28
<PAGE>
Company ceded to these affiliates premiums written of $649 thousand, $524
thousand, and $381 thousand in 1996, 1995, and 1994 respectively. Current and
former employees of the Company are indebted to the Company for loans
29
<PAGE>
outstanding. At December 31, 1996 and 1995, employee indebtedness amounted to
$72 thousand and $140 thousand, respectively. The loans receivable are current
as to principal and interest at December 31, 1996.
(7) LITIGATION
In July 1993, the Company settled a lawsuit in which the Company and its
Chairman of the Board, James R. Zuhlke, were named defendants. The suit sought
to recover damages for the return of insurance premiums purportedly written by
G. Nicholas Brueggen on behalf of Binford Insurance Company. The lawsuit, which
sought damages up to $3 million, was settled by the payment of $875 thousand in
full satisfaction of all claims. Other costs related to the matter amounted to
$439 thousand. In July, 1994, the Company obtained a judgment of $1.4 million
against Mr. Brueggen and an associate which is not reflected in the financial
statements.
During 1994, the Company settled litigation in the amount of $201 thousand for
which there is no continuing liability.
There are no other significant pending legal proceedings to which the Company or
its subsidiaries is a party or of which any of the properties of the Company or
its subsidiaries is subject, except for claims arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of such
litigation will not have a material effect on the financial condition of the
Company.
(8) RECONCILIATIONS TO STATUTORY ACCOUNTING
The Company's insurance subsidiaries are required to file statutory financial
statements with insurance regulatory authorities. Accounting principles used to
prepare these statutory financial statements differ from financial statements
prepared on the basis of generally accepted accounting principles.
Reconciliations of combined net income and statutory capital and surplus as
determined using statutory accounting principles to the amounts included in the
accompanying financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Statutory net income of insurance subsidiaries $2,645 2,634 2,510
Increases (decreases):
Net income (loss) from
non-insurance operations 3,323 (564) 822
Deferred policy acquisition
costs (U.S. operations) (1,034) 420 1,590
Deferred income taxes 1,072 440 177
Provision for uncollectible balances 139 (705) -
Consolidating eliminations
and other adjustments, net 259 (86) (118)
---------------------------
Consolidated net income
as reported herein $6,404 2,139 4,981
===========================
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995
-----------------------
<S> <C> <C>
Statutory capital and surplus of insurance
subsidiaries $30,697 26,639
Increases (decreases):
Non-insurance net assets
(liabilities) 6,955 7,859
Non-admitted assets and other
statutory adjustments, net 3,738 2,146
Deferred policy acquisition
costs (U.S. operations) 3,864 4,898
Costs in excess of net assets
of purchased businesses 2,091 2,468
Deferred income taxes 2,375 822
Unrealized loss on foreign
currency translation (978) (1,179)
Adjustment to GAAP
fair values (281) 681
Consolidating eliminations
and other adjustments (449) (713)
-----------------------
Stockholders' equity as reported herein $48,012 43,621
=======================
</TABLE>
The statutory surplus and capital of the Company's U.S. insurance subsidiary is
sufficient to satisfy current regulatory requirements. Dividend payments to the
Company from its insurance subsidiary are restricted by insurance laws as to the
amount that may be paid without prior approval of insurance regulatory
authorities. Under the insurance regulations of Illinois, IIC's state of
domicile, ordinary dividends are limited to the greater of 10% of statutory
surplus or statutory net income, as defined, for the prior twelve month period.
The estimated dividend distribution which can be made to the Company by its
subsidiary in 1997 based on these regulatory guidelines is approximately $3.1
million.
The Company's U.S. insurance subsidiary, IIC, is required to file annual
statements with insurance regulatory authorities which are prepared on an
accounting basis prescribed or permitted by such authorities. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices differ from state to state, may differ from company to company within
a state, and may change in the future. Furthermore, the NAIC has a project to
codify statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices. That
project will likely change the definition of what comprises prescribed versus
permitted statutory accounting practices, and may result in changes to the
accounting policies that insurance enterprises use to prepare their statutory
31
<PAGE>
financial statements. IIC does not currently use permitted statutory accounting
practices which could have a significant impact on its statutory financial
statements.
32
<PAGE>
(9) UNAUDITED INTERIM FINANCIAL INFORMATION
(in thousands, except per share data),
<TABLE>
<CAPTION>
Three months ended
March 31 June 30 Sept 30 Dec 31
-----------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues $15,903 17,896 14,334 20,108
----------------------------------------
Net income from operations $564 646 (138) 1,878
Net income from investee 552 1,108 809 985
----------------------------------------
Net income 1,116 1,754 671 2,863
========================================
Net income per share $0.15 0.23 0.09 0.37
========================================
1995
Revenues $23,166 24,126 23,103 23,791
----------------------------------------
Net income from operations $2,075 2,075 1,628 (3,728)
Net income from investee - - - 89
----------------------------------------
Net income $2,075 2,075 1,628 (3,639)
========================================
Net income per share $0.27 0.27 0.21 (0.47)
========================================
</TABLE>
During the fourth quarter of 1996, the Company realized an after tax gain of
$1.6 million from the sale of a portion of its investment in Kingsway. Also
during the fourth quarter of 1996, the Company increased its surety reserves
$570 thousand on a pre-tax basis for prior period development.
During the fourth quarter of 1995, the Company, on a pre-tax basis, increased
its provision for loss and loss adjustment expenses by approximately $4.0
million, wrote-off approximately $600 thousand of deferred acquisition costs
deemed unrecoverable related to its professional liability business, and
recorded $400 thousand in charges for contingently non-recoverable reinsurance
on programs terminated in 1993.
(10) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
On July 28, 1987, the Company's stockholders approved the Company's 1987
Non-Qualified and Incentive Stock Option Plan (Option Plan). A total of 600
thousand shares of common stock were authorized for issuance under the Option
Plan upon exercise of incentive stock options and non-qualified stock options.
On November 13, 1989, options were granted which were exercisable at $5.00 per
share, totaling 54 thousand shares. During 1991, an additional 44 thousand
options were granted with an exercise price of $14.50 per share. On November
12, 1992, an additional 33 thousand options were granted at $14.00 per share as
the exercise price. During 1993, options granted at $5.00 per share were
exercised, resulting in the issuance of 5 thousand new shares.
On May 19, 1994, an additional 4 thousand options were granted at $10.25 per
share as the exercise price. On November 10, 1994, 29 thousand options were
granted at $8.00 per share as the exercise price. During 1994, options granted
at $5.00 per share were exercised, resulting in the issuance of 10 thousand new
shares. On August 22, 1995, 6,000 options were granted at an exercise price of
$11.75. On November 10, 1995, 36,000 options were granted at an exercise
33
<PAGE>
price of $13.25. No options were exercised in 1995.
On August 7, 1996, 6,000 options were granted at an exercise price of $8.33.
During 1996, options granted at $5.00 per share were exercised, resulting in the
issuance of 19 thousand new shares.
There are vested and non-vested options outstanding to purchase 163 thousand
shares of stock at prices ranging from $5.00 to $14.50 at December 31, 1996.
The Company also has 30 thousand stock appreciation rights outstanding at
December 31, 1996 with exercise prices ranging from $8.25 to $9.25 per share.
(11) COMMITMENTS
The Company has obligations under long-term operating leases for its office
premises in the United States, Hong Kong, and the United Kingdom. The future
minimum lease payments are as follows (in thousands):
1997 $1,221
1998 1,067
1999 1,011
2000 934
2001 866
2002 and thereafter 101
------
$5,200
======
34
<PAGE>
Included in other underwriting expenses is rental expense of $1.5 million, $1.3
million, and $1.1 million for 1996, 1995, and 1994, respectively.
The Company has indemnification agreements with each of the Company's directors
whereby the Company has agreed to indemnify each director from certain losses
and expenses. Certain amounts are excluded from the Company's indemnification
obligation, including any illegal payments or fraudulent, dishonest, or willful
misconduct. In addition, the directors have agreed to reimburse the Company for
all losses and expenses paid by the Company in connection with any action, suit,
or proceeding in which a court in a final adjudication decides that the director
is not entitled to indemnification.
(12) CAPITALIZATION
In March 1993, the Company obtained a $10.0 million revolving bank line of
credit. In March 1996, this revolving line was increased to $15.0 million. At
December 31, 1996 and 1995, the outstanding balance on the line of credit
amounted to approximately $9.7 million. The aggregate amount of the commitment
is reduced as set forth below:
Aggregate Amount
of Loan Commitment On or Before
------------------ ------------
$15,000,000 12/31/1996
$13,750,000 01/01/1997
$12,500,000 07/01/1997
$11,250,000 01/01/1998
$10,000,000 07/01/1998
$ 8,750,000 01/01/1999
$ 7,500,000 07/01/1999
$ 6,250,000 01/01/2000
$ 5,000,000 07/01/2000
$ 3,750,000 01/01/2001
$ 2,500,000 07/01/2001
$ 0 12/01/2001
Interest on the revolving loans is adjustable to either the bank prime rate or
LIBOR plus 1.65% at the option of the Company at each interest period. Debt
service on the revolving line of credit is limited to interest only payable
monthly.
The proceeds from the line of credit borrowings were used to cure deficiencies
in IAS's premium trust fund accounts and to increase the capital and surplus of
the Company's insurance subsidiaries. The line of credit and the term loan are
collateralized by the Company's stock of IIC and Kingsway.
Under the terms of the loan agreement, the Company must maintain tangible net
worth, as defined (based on generally accepted accounting principles), of at
least
35
<PAGE>
$29.5 million at December 31, 1996 (increasing $2.5 million per year,
thereafter), maintain statutory net worth of IIC at certain levels, and limit
dividends to 25% of consolidated net income for the prior four quarters.
The Company paid interest expense of $768 thousand, $987 thousand, and $512
thousand in 1996, 1995, and 1994, respectively.
36
<PAGE>
(13) SUPPLEMENTAL DUTY DEPOSITS
Supplemental duty deposits are security deposits held by IAS until the insured
bond principal (Depositor) has settled duty charges imposed by U.S. Customs.
Under the terms of the agreement with the Depositor, the Depositor is not
entitled to a refund of its deposit until it has provided competent written
legal evidence that the conditions of each and every bond connected with the
deposit have been fully satisfied.
IAS considers its liability to the Depositor to have expired after seven years
if the Depositor has not met the conditions necessary to receive a refund under
the terms of the deposit agreement. The expiration of the liability for these
deposits was $33 thousand, $31 thousand, and $119 thousand in 1996, 1995, and
1994, respectively, and is reflected in the accompanying consolidated statements
of income.
(14) FOREIGN OPERATIONS
Revenues, operating income, and identifiable assets included in the accompanying
consolidated financial statements related to foreign operations as of and for
the years ended December 31, 1996, 1995, and 1994, were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
-------------------------
(dollars in millions)
<S> <C> <C> <C>
Revenues $4.0 35.9 32.6
Operating income $0.4 4.6 3.9
Identifiable assets $8.3 3.4 42.9
</TABLE>
(15) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense reserves are based on long-range projections
which are subject to uncertainty. Uncertainty regarding reserves of a given
accident year is gradually reduced as new information emerges each succeeding
year, allowing more reliable reevaluations of such reserves. While management
believes that reserves as of December 31, 1996, are adequate, uncertainties in
the reserving process could cause such reserves to develop favorably or
unfavorably as new or additional information emerges. Any adjustments to
reserves are reflected in the operating results of the periods in which they are
made. Movements in reserves which are small relative to the amount of such
reserves could significantly impact future reported earnings of the Company.
37
<PAGE>
Activity related to unpaid loss and loss adjustment expenses (LAE) follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Unpaid Losses and LAE at the beginning
of the period, net of reinsurance recoverables
of $3,138, $3,830, and $3,407 $33,155 35,006 26,289
Unpaid Losses and LAE of acquired
entities at the beginning of the period - 1,300 -
----------------------------------
Adjusted unpaid losses and
LAE at the beginning of
the period 33,155 36,306 26,289
----------------------------------
Provision for Losses and
LAE for claims occurring during:
Current year 31,876 45,642 39,462
Prior years 431 6,104 2,137
----------------------------------
Total 32,307 51,746 41,599
----------------------------------
Less Losses and LAE payments for claims
occurring during:
Current year (10,798) (17,491) (18,638)
Prior years (17,607) (20,205) (14,244)
----------------------------------
Total (28,405) (37,696) (32,882)
----------------------------------
Adjustment due to deconsolidation
of Kingsway - (17,201) -
----------------------------------
Unpaid Losses and LAE at the end of period,
net of reinsurance recoverables of $9,980,
$3,138, and $3,830 $37,057 33,155 35,006
==================================
</TABLE>
During 1995, it became apparent that the estimated unpaid claims for liabilities
established at December 31, 1994 on Kingsway's business lines would exceed
initial expectations and loss reserves were increased accordingly by $4.0
million. Also, during 1995, loss experience related to U.S. operations for 1994
and prior years suggested reserve increases amounting to $5.2 million were
required for the marine cargo, contract surety and other property and casualty
lines. These increases were offset by savings of $3.1 million on 1994 and prior
U.S. customs bonds reserve estimates.
During 1995, it became apparent that the estimated upaid claims for liabilities
established at December 31, 1994 on Kingsway's business lines would exceed
initial expectations and loss revenues were increased accordingly by $4.0
million. Also, during 1995, loss experience related to U.S. operations for 1994
and prior years suggested reserve increases amounting to $5.2 million were
required for the marine cargo, contract surety and other property and casualty
lines. These increases were offset by savings of $3.1 million on 1994 and prior
U.S. customs bonds reserve estimates.
(16) EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan covering substantially all
employees. The plan provides for Company contributions at the discretion of the
board of directors. For 1996, 1995 and 1994, the Company contributed $0.50 for
each $1.00 contributed by the participants up to 5% of employee compensation.
The Company's cost of this plan was $116 thousand, $94 thousand, and $88
thousand in 1996, 1995 and 1994, respectively.
(17) FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and
38
<PAGE>
other transaction costs have not been considered in estimating fair value. As a
number of the Company's significant assets and liabilities are not considered
financial instruments, the disclosures that follow do not reflect the fair value
of the Company as a whole.
The estimated fair values of the Company's financial instruments at December 31,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-----------------------
<S> <C> <C>
Assets:
Fixed maturities $51,567 51,567
Equity securities 1,557 1,557
Investment in investee 13,519 50,327
Cash and cash equivalents 18,492 18,492
Premiums receivable 16,231 16,231
Reinsurance recoverable on paid claims 96 96
Notes receivable 672 672
Liabilities:
Funds held by Company 491 491
Supplemental duty deposits 2,358 2,358
Notes payable 9,735 9,735
</TABLE>
The estimated fair values of the Company's financial instruments at December 31,
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-----------------------
<S> <C> <C>
Assets:
Fixed maturities $44,769 44,769
Equity securities 3,474 3,474
Investment in investee 11,898 17,590
Cash and cash equivalents 16,478 16,478
Premiums receivable 14,920 14,920
Reinsurance recoverable on paid claims 1,192 1,192
Notes receivable 349 349
Income tax recoverable 1,092 1,092
Liabilities:
Funds held by Company 748 748
Supplemental duty deposits 2,669 2,669
Notes payable 9,735 9,735
</TABLE>
Fixed maturities, equity securities, and the investment in investee are valued
at quoted market prices, where available, or from independent pricing sources.
Cash and cash equivalents, premiums receivable, reinsurance recoverable on paid
claims, funds held, and supplemental duty deposits are valued at their carrying
value due to their short-term nature. The carrying value of notes receivable
and notes payable approximates fair value as the notes bear floating rates of
interest.
(18) FOREIGN CURRENCY TRANSLATION
39
<PAGE>
The net assets of the Company's foreign operations are translated into U.S.
dollars using exchange rates in effect at each year end. An analysis of this
account for the respective years ended December 31 follows (amounts in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Beginning amount of cumulative translation
adjustments $(1,179) (2,002) (1,375)
Included in Kingsway's basis at sale 189 319 -
Aggregate adjustment for the period resulting
from translation adjustments 12 504 (627)
--------------------------------
Net aggregate translation included in equity 201 823 (627)
--------------------------------
Ending amount of cumulative translation
adjustments $ (978) (1,179) (2,002)
--------------------------------
Canadian foreign exchange rate at end of year 0.72970 0.73290 0.71290
British foreign exchange rate at end of year 1.71250 1.55300 1.56500
Hong Kong foreign exchange rate at end of year 0.12930 0.12930 0.12925
</TABLE>
(19) INVESTMENT IN KINGSWAY
Kingsway is a property and casualty insurance holding company based in Canada
which primarily writes and assumes commercial and other automobile insurance
considered to be non-standard, and other specialty insurance for commercial
properties through its 100% owned subsidiaries, Kingsway General Insurance
Company and York Fire & Casualty Insurance Company. Included in the Company's
consolidated retained earnings is undistributed net income from Kingsway of
approximately $9.3 million and $7.6 million at December 31, 1996 and December
31, 1995 respectively.
The following presents summary financial data for Kingsway as of December 31,
1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996 (in thousands).
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------
<S> <C> <C>
Assets:
Investments $111,052 43,918
Other assets 70,084 20,434
-------------------
Total assets $181,136 64,352
===================
Liabilities:
Unpaid claims $ 66,152 17,826
Unearned premiums 46,747 17,531
Other liabilities 5,020 2,115
-------------------
Total liabilities $117,919 37,472
Shareholders' equity 63,217 26,880
-------------------
Total liabilities and shareholders' equity $181,136 64,352
===================
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------------------------
<S> <C> <C> <C>
Revenues:
Net premiums earned $78,972 33,617 31,043
Other revenues 8,103 3,585 2,441
-----------------------------
Total revenues 87,075 37,202 33,484
-----------------------------
Expenses:
Claims incurred 51,257 22,360 19,870
Other expenses 24,263 10,118 9,276
-----------------------------
Total expenses 75,520 32,478 29,146
-----------------------------
Income before income taxes 11,555 4,724 4,338
Income taxes 3,369 1,975 1,926
-----------------------------
Net income $ 8,186 2,749 2,412
=============================
</TABLE>
41
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
STATE OR JURISDICTION
SUBSIDIARY OF INCORPORATION
- ---------- ----------------
Intercargo Insurance Company Illinois
Intercargo Insurance Company H.K. Limited Hong Kong
Intercargo International Limited British Virgin Islands
International Advisory Services, Inc. (1) Illinois
TRM Insurance Services, Inc. Illinois
(1) International Advisory Services has nine subsidiaries all known as Trade
Insurance Services, Inc. and operating as insurance agencies. These are
located in various states as well as one location each in Canada and Hong
Kong.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Intercargo Corporation:
We consent to incorporation by reference in registration statement No. 333-11867
on Form S-8 of Intercargo Corporation of our report dated February 21, 1997,
relating to the consolidated balance sheets of Intercargo Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1996, and all related schedules,
which report appears in the December 31, 1996 annual report on Form 10-K of
Intercargo Corporation.
KPMG Peat Marwick LLP
Chicago, Illinois
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 51,567
<DEBT-CARRYING-VALUE> 51,567
<DEBT-MARKET-VALUE> 51,567
<EQUITIES> 1,557
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 66,643
<CASH> 18,492
<RECOVER-REINSURE> 10,076
<DEFERRED-ACQUISITION> 3,884
<TOTAL-ASSETS> 133,710
<POLICY-LOSSES> 47,037
<UNEARNED-PREMIUMS> 17,617
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,735
0
0
<COMMON> 7,660
<OTHER-SE> 40,352
<TOTAL-LIABILITY-AND-EQUITY> 133,710
61,053
<INVESTMENT-INCOME> 3,903
<INVESTMENT-GAINS> 2,461
<OTHER-INCOME> 824
<BENEFITS> 32,307
<UNDERWRITING-AMORTIZATION> 17,410
<UNDERWRITING-OTHER> 14,906
<INCOME-PRETAX> 3,618
<INCOME-TAX> 668
<INCOME-CONTINUING> 2,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,404
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
<RESERVE-OPEN> 33,155
<PROVISION-CURRENT> 31,876
<PROVISION-PRIOR> 431
<PAYMENTS-CURRENT> 10,798
<PAYMENTS-PRIOR> 17,607
<RESERVE-CLOSE> 37,057
<CUMULATIVE-DEFICIENCY> 431
</TABLE>
