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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, 1997
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.
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Aggregate Market Value of Voting Stock held by nonaffiliates as of March 16,
1998: $101,543,499 Number of Shares of Common Stock outstanding as of March
16, 1998: 7,699,981
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report for 1997 (incorporated by reference
under Part II).
Portions of the Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders (incorporated by reference under Part III).
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<PAGE>
PART I
Statements made in this document that present information that is not
historic, including among other things, anticipated financial performance,
sources and extent of liquidity and capital, anticipated business activities,
business prospects, new products and markets, and business relationships are
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations
thereon, or comparable terminology. There are numerous risks and uncertainties
that could cause actual results to differ materially from those in the
forward-looking statements.
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. Distribution through other channels is being expanded.
IIC opened a branch office in London in April, 1994. This office
underwrites marine cargo 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%. In August 1997 the
Company sold 4,018,180 of its remaining total holdings in Kingsway of
4,180,000 shares, thereby reducing its ownership interest to less than 1%. 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
<PAGE>
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.
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 these firms against certain claims arising from the unintentional
errors or omissions of their operations that result in financial injury to
their clients. These policies
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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.
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 48 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 1997 Annual Report
to Stockholders.
MARKETING AND DISTRIBUTION
IAS has agency offices located in 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 53% of the Company's gross written
premiums. 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
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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: American
Re-Insurance Company ("American Re"), First Excess and Reinsurance Company,
Employers Reinsurance Company ("Employers Re") and Transatlantic Reinsurance
("Transatlantic"). 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, American Re and
Munich Reinsurance Company ("Munich Re"). Under the contracts, American Re
and Munich Re 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 $25,000,000.
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 and commercial general liability lines, and it provides surplus
reinsurance for commercial property. Excess of loss coverage under truck
liability is provided by several reinsurers including Continental Casualty
Company ("Continental Casualty"), Great Lakes American Reinsurance Co. ("Great
Lakes Re"), Kemper Reinsurance Company ("Kemper Re"), Trenwick America
Reinsurance, USF Re, Gerling Global Reinsurance Corp., Hartford Fire Insurance
Company ("Hartford"), and Republic Western Insurance Company ("Republic").
USF Re, Great Lakes Re and Kemper Re also provide quota share coverage for
truck liability. Quota share reinsurers for the commercial umbrella liability
coverage include Security Insurance Company of Hartford, Kemper Re,
Continental Casualty, Underwriters Reinsurance Company, and Sorema.
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<PAGE>
Through the end of 1997 the reinsurance program to cover contract and
miscellaneous bonds included a quota share treaty wherein the Company retained
a 50% share of the first $250,000 in losses, while Kemper Re, Hartford Re,
Republic and Transatlantic provided the remainder. Effective January 1, 1998
this quota share program was discontinued. Losses in excess of $250,000 up to
$6,000,000 are ceded to these same reinsurers.
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 limit 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 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 the 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,
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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):
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1996 1995
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid Losses and LAE at beginning of period,
net of reinsurance recoverables of $9,980, $3,138, and
$3,830 $ 37,057 $ 33,155 $ 35,006
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 37,057 33,155 36,306
-------- -------- --------
Provision for Losses and LAE for claims occurring during:
U.S., U.K. and Hong Kong operations
Current year 34,260 31,876 28,426
Prior years 585 431 2,090
Canadian operations
Current year -- -- 17,216
Prior years -- -- 4,014
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Total 34,845 32,307 51,746
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Less Losses and LAE payments for claims occurring during:
U.S., U.K. and Hong Kong operations
Current year (10,896) (10,798) (9,921)
Prior years (17,621) (17,607) (11,620)
Canadian operations
Current year -- -- (7,570)
Prior years -- -- (8,585)
-------- -------- --------
Total (28,517) (28,405) (37,696)
Adjustment to deconsolidate Canadian operations -- -- (17,201)
-------- -------- --------
Unpaid Losses and LAE at end of period,
net of reinsurance recoverables of $11,970
$9,980 and $ 3,138 $ 43,385 $ 37,057 $ 33,155
======== ======== ========
</TABLE>
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Any adjustments to reserves are reflected in operating results for the
period in which they are made.
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The following table presents development of total Company reserves and
liability paid for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and LAE $ 9,414 $11,459 $12,584 $14,133 $25,867 $23,940 $26,289 $35,006 $33,155 $37,057 43,385
Cumulative amount of
liability paid through:
One Year Later 5,254 6,019 5,216 6,039 12,611 12,531 14,244 20,205 17,608 17,622
Two Years Later 8,803 8,826 8,748 10,893 18,471 17,711 22,819 25,890 23,825
Three Years Later 10,985 11,396 12,106 13,079 21,521 24,280 26,934 28,244
Four Years Later 12,963 14,375 13,525 13,782 28,746 25,908 28,254
Five Years Later 15,400 15,224 13,906 21,892 29,131 26,694
Six Years Later 16,108 15,488 14,179 22,223 29,599
Seven Years Later 16,318 15,766 14,432 22,382
Eight Years Later 16,517 15,830 14,590
Nine Years Later 16,478 15,937
Ten Years Later 16,493
Liability re-estimated
as of:
One Year Later 10,080 11,629 13,592 13,367 26,551 25,728 28,426 41,110 33,586 37,642
Two Years Later 11,356 14,011 13,301 16,666 25,974 24,667 29,851 41,491 34,193
Three Years Later 13,974 14,502 16,273 15,613 25,060 23,289 31,883 41,286
Four Years Later 15,301 17,499 15,351 14,966 24,192 24,208 31,394
Five Years Later 17,782 16,656 14,790 14,765 24,536 23,542
Six Years Later 17,051 16,038 14,209 15,225 23,947
Seven Years Later 16,736 15,774 14,613 14,644
Eight Years Later 16,565 16,010 14,302
Nine Years Later 16,713 15,829
Ten Years later 16,501
Cumulative deficiencies
(Redundancies) $ 7,087 $ 4,370 $ 1,718 $ 511 ($1,920) ($398) $ 5,105 $ 6,280 $ 1,038 $ 585
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</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.
December 31,
1997 1996 1995
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(dollars in thousands)
Gross loss and loss adjustment
expense reserves $55,355 $47,037 $36,293
Ceded to other insurance companies (1) 11,970 9,980 3,138
------- ------- -------
Net liability as stated above $43,385 $37,057 $33,155
======= ======= =======
- ----------------------------
(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 and 1992. Reserve
deficiencies for 1990 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
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losses experienced by the Company. The extraordinary losses were related to a
discontinued line of bond business for 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.
During 1997, $3.0 million was added to loss and loss adjustment
expense reserves across several lines. Loss and loss adjustment expense
reserves are estimated using a range of values. The overall reserves carried
by the Company have been within such ranges. Management nevertheless
considered it prudent to further strengthen these reserves so as to provide
greater margins in the event of adverse development arising from unanticipated
events.
Claims experience tends to be dependent upon the frequency of claims
and 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.
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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.
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.
In past years the Company had few competitors in the U.S. for its
professional liability product. Recently more competitors have emerged with a
similar product. 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 $2,830,000 of
liability on any one bond.
10
<PAGE>
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 are
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 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. Certain of
these regulations address the reporting and regulation of the adequacy of
capital and surplus. At December 31, 1997, Intercargo Insurance Company's
required risk-based capital was $7,542,284; reported capital and surplus was
$34,356,961.
Foreign Regulation. In the U.K. the Company is subject to regulation
by the Insurance Division, Department of Trade and Industry. In Hong Kong,
the Company is subject to regulation by the Office of the Commissioner of
Insurance under the Insurance Companies Ordinance and related amendments.
Violations of the provisions under which these foreign locations operate can
lead to various regulatory actions, up to and including the loss of the
ability to operate.
11
<PAGE>
INVESTMENT POLICY
The Company's investment policy requires that fixed income invested
assets be comprised of investment grade 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, 1997, the Company had 199 U.S. employees. Except for
26 part-time employees, all such persons are employed on a full-time basis.
The Company has 4 employees in its U.K. operations and 8 in Hong Kong. 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.
During the month of January 1998, the president of IAS resigned and
with several other employees formed Avalon Risk Management, Inc. Avalon's
announced purpose is to compete with IAS in the marketing and distribution of
transportation related insurance and surety products. The Company has filed
suit in the Chancery Division of the Circuit Court of Cook County, Illinois
against the ex-president, Avalon and certain of the defecting employees
alleging breach of fiduciary duty, theft of confidential information and other
unlawful activities, and seeking injunctive relief and damages. The action is
in the early stages of litigation, discovery is just commencing, and its
outcome at this point is not certain.
Item 4. Submission of Matter to a Vote of Security Holders
None.
12
<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 1997 Annual
Report to Stockholders under the headings "Management's Discussion and
Analysis--Market Information," and "Management's Discussion and Analysis--
Holders" which is incorporated herein by reference.
Item 6. Selected Financial Data
The Selected Financial Data are contained in the Registrant's 1997
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 1997 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 1997 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
For information regarding changes in and disagreements with
accountants on accounting and financial disclosure, reference is made to the
Registrant's definitive proxy statements for its annual meeting with
stockholders to be held on May 15, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997
which is incorporated herein by reference.
13
<PAGE>
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 15, 1998, which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, which is incorporated herein by reference.
Item 11. Executive Compensation
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 15, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997,
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 15, 1998,
which will be filed with the Securities and Exchange Commission within 120
days after December 31, 1997, 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 15, 1998, which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997 which is incorporated herein by reference.
14
<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
1997 Annual Report to Stockholders, which financial information is
incorporated herein by reference.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements for each of the years in
the three year period ended December 31, 1997.
Report of Ernst & Young LLP, Independent Auditors.
(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, 1997
(c) Exhibits. See Exhibit Index immediately following financial statement
schedules.
15
<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:
We have audited the consolidated balance sheet of Intercargo Corporation and
subsidiaries as of December 31, 1996, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1996. These consolidated financial
statements are incorporated by reference in the annual report on Form 10- K
for the year 1997. 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 for 1996 and 1995. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules 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 the results of their
operations and their cash flows for each of the years in the two- year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned 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, 1997
(in thousands)
Amount at Which
Fair Shown in the
Type of Investment Cost (1) Value Balance Sheets
- ------------------ -------- ----- ----------------
(Available for Sale)
Fixed Maturities:
U.S. Government and Agency
obligations $23,139 23,195 23,195
State, municipal, and other tax
advantaged securities 20,774 21,297 21,297
Corporate securities 14,649 14,884 14,884
Other fixed maturity investments 1,252 1,300 1,300
------- ------- -------
Total fixed maturities 59,814 60,676 60,676
Equity securities 1,833 4,234 4,234
------- ------- -------
Total investments $61,647 64,910 64,910
======= ======= =======
______________
(1) Investments in fixed maturities are reflected at cost, adjusted for
amortization of premium or accretion of discounts.
See notes to consolidated financial statements.
FS-3
<PAGE>
SCHEDULE II
INTERCARGO CORPORATION
CONDENSED BALANCE SHEETS (Registrant only)
(dollars in thousands)
December 31,
------------------
1997 1996
------------------
ASSETS
Investment in equity securities $ 3,050 $ -
Investment in affiliate - 13,519
Cash and cash equivalents 32,459 1,235
Equipment, at cost less accumulated
depreciation 513 607
Investments in subsidiaries 36,502 33,198
Notes receivable
Due from affiliates 8,260 8,260
Due from non-affiliates 83 108
Federal income tax recoverable 275 -
Other assets 1,311 1,775
------- -------
Total assets $82,453 $58,702
======= =======
LIABILITIES
Accrued expenses and other liabilities $ 252 $ 233
Federal income tax payable - 722
Notes payable - 9,735
------- -------
Total liabilities 252 10,690
------- -------
STOCKHOLDERS' EQUITY
Common stock -- $1 par value;
authorized 20,000,000 shares;
issued and outstanding, 7,699,981
shares in 1997 and 7,659,981 in 1996 7,700 7,660
Additional paid-in capital 24,400 24,180
Unrealized gain (loss) on foreign
currency translation 23 (978)
Net unrealized gain (loss) on
available-for-sale securities 2,153 (366)
Retained earnings 47,925 17,516
------- -------
Total stockholders' equity 82,201 48,012
------- -------
Total liabilities and
stockholders' equity $82,453 $58,702
======= =======
See notes to consolidated financial statements.
FS-4
<PAGE>
SCHEDULE II -- Continued
INTERCARGO CORPORATION
CONDENSED STATEMENTS OF INCOME (Registrant only)
(in thousands)
December 31,
-----------------------------
1997 1996 1995
-----------------------------
Revenues
Revenues from affiliates $ - 12 17
Net investment and other income 1,349 757 1,020
Realized investment gains 48,987 2,394 241
-------- ------ ------
Total 50,336 3,163 1,278
-------- ------ ------
Expenses
Interest expense 488 715 937
General and administrative expense 2,576 676 481
-------- ------ ------
Total 3,064 1,391 1,418
-------- ------ ------
Operating gain (loss) 47,272 1,772 (140)
Income tax benefit (expense) (18,972) (606) 48
Equity in the operating earnings
of subsidiaries and affiliate,
net of income taxes 3,488 5,238 2,231
-------- ------ ------
Net income $ 31,788 6,404 2,139
======== ====== ======
See notes to consolidated financial statements.
FS-5
<PAGE>
SCHEDULE II -- Continued
INTERCARGO CORPORATION
CONDENSED STATEMENTS OF CASH FLOW (Registrant only)
(in thousands)
December 31,
-------------------------
1997 1996 1995
-------------------------
Cash flows from operating activities:
Net income $31,788 6,404 2,139
Adjustments to reconcile net income to net cash
provided from operating activities:
Realized gains (48,987) (2,394) (241)
Equity in operating earnings of
subsidiaries and affiliate, net of income tax (3,488) (5,238) (2,231)
Depreciation and amortization 175 -- 2
Change in income tax accounts 18,826 682 (11)
Decrease in notes receivable:
Affiliates -- -- 1,850
Non-affiliates 25 101 251
Increase (decrease) in accrued expenses and
other liabilities 19 49 (62)
Other, net (1,289) 197 (806)
------- ------ ------
Net cash provided from (used in) operating
activities (2,931) (199) 891
------- ------ ------
Cash flows from investing activities:
Dividends received from subsidiary -- -- 250
Contribution of capital to subsidiaries (4,050) (3,000) (5,000)
Sale of Kingsway common stock (net of taxes of
$18,500 in 1997) 49,140 4,573 4,107
(Purchase) sale of equipment, net (81) (38) 367
------- ------ ------
Net cash provided from (used in) investing
activities 45,009 1,535 (276)
------- ------ ------
Cash flows from (used in) financing activities:
Proceeds from exercise of stock options 260 95 --
Dividends paid to stockholders (1,379) (1,376) (1,375)
Proceeds from (payment of) loans (9,735) -- 1,410
------- ------ ------
Net cash provided from (used in) financing
activities (10,854) (1,281) 35
------- ------ ------
Net increase in cash and cash equivalents 31,224 55 650
Cash and cash equivalents:
Beginning of the period 1,235 1,180 530
------- ------ ------
End of the period $32,459 1,235 1,180
======= ====== ======
See notes to consolidated financial statements.
FS-6
<PAGE>
SCHEDULE IV
INTERCARGO CORPORATION AND SUBSIDIARIES
REINSURANCE
(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
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and liability premiums
Year ended:
December 31, 1997 $67,802 14,548 4,156 57,410 7.24%
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%
</TABLE>
FS-7
<PAGE>
SCHEDULE VI
INTERCARGO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated property-
casualty entities
Year ended:
December 31, 1997 $2,939 55,355 -- 17,948 57,410 4,911 34,260 585
December 31, 1996 $3,884 47,037 -- 17,617 61,053 3,985 31,877 431
December 31, 1995 4,898 36,293 -- 17,691 86,154 5,858 45,642 6,104
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
Year ended:
December 31, 1997 $14,289 28,517 57,193
December 31, 1996 $17,410 28,405 58,453
December 31, 1995 22,829 37,696 90,804
</TABLE>
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 27, 1998
INTERCARGO CORPORATION
By: /s/ Stanley A. Galanski
----------------------------------
Stanley A. Galanski, President and
Chief Executive Officer
<PAGE>
Signature Date
- ------------------------------------ --------------
/s/ Stanley A. Galanski March 27, 1998
- -----------------------------------
Stanley A. Galanski
President, Chief Executive Officer
and a Director
(Principal Executive Officer)
/s/ Michael L. Sklar March 27, 1998
- -----------------------------------
Michael L. Sklar
Director
/s/ Arthur J. Fritz, Jr. March 27, 1998
- -----------------------------------
Arthur J. Fritz, Jr.
Director
/s/ Arthur L. Litman March 27, 1998
- -----------------------------------
Arthur L. Litman
Director
/s/ Kenneth A. Bodenstein March 27, 1998
- -----------------------------------
Kenneth A. Bodenstein
Director
/s/ Albert J. Gallegos March 27, 1998
- -----------------------------------
Albert J. Gallegos
Director
/s/ Robert B. Sanborn March 27, 1998
- -----------------------------------
Robert B. Sanborn
Director
/s/ George Weise March 27, 1998
- -----------------------------------
George Weise
Director
/s/ Michael L. Rybak March 27, 1998
- -----------------------------------
Michael L. Rybak
Chief Financial Officer, Vice President
(Principal Financial and Accounting Officer)
<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 [Intentionally Blank]
10.4 [Intentionally Blank]
10.5 [Intentionally Blank]
*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.(6)
*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.(6)
10.13 [Intentionally Blank]
10.14 [Intentionally Blank]
10.15 Employment agreement dated July 7, 1997 between Company and
Stanley A. Galanski. (filed herewith)
11 Statement regarding Computation of Per Share Earnings. (filed
herewith)
12 Statement regarding Computation of Ratios. (filed herewith)
13 Portions 1997 Annual Report to Stockholders incorporated by
reference. (filed herewith)
21 Subsidiaries of the Company. (filed herewith)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (filed
herewith)
23.2 Consent of Independent Auditors. (filed herewith)
27 Financial Data Schedule. (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.
(6) Filed with the Company's Form 10-K for the year ended December 31,
1996 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.
Exhibit 10.15
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made the 7th day of July, 1997, between INTERCARGO CORPORATION,
a Delaware Corporation (hereinafter referred to as "Intercargo") and STANLEY
A. GALANSKI (hereinafter referred to as the "Employee").
WHEREAS, Intercargo is an insurance holding company which itself or
through its related or affiliated entities, sells and/or underwrites surety
bonds (including U.S. Customs Bonds), marine cargo insurance, errors and
omissions insurance and other lines, and through its own agency and various
sub-producers sells the said insurance products of Intercargo and of its
related or affiliated entities and of other insurance companies, and engages
in such other lawful business which it may pursue from time to time:
WHEREAS, Employee wishes to be employed by Intercargo to perform
management and executive services for it and its subsidiaries; and
WHEREAS, Employee is willing to be employed by Intercargo, and Intercargo
is willing to employ Employee, on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions contained herein, Intercargo and Employee covenant and agree as
follows:
1. Employment. Intercargo hereby employs Employee, and Employee hereby
accepts and agrees to employment as President and Chief Executive Officer of
Intercargo and its subsidiary, Intercargo Insurance Company.
2. Duties. Employee shall have such duties, responsibilities and
authority customarily and by law associated with the office of President and
Chief Executive Officer including rendering such administrative, sales,
marketing and other executive
<PAGE>
services to Intercargo and its subsidiaries and such other duties which may be
assigned to him from time to time by the Board of Directors of Intercargo
(hereinafter "Board of Directors"), and shall faithfully, industriously, and
to the best of his ability, experience and talent, perform all duties that may
be required of and from him. Such duties shall be rendered at the premises of
Intercargo and at such other place or places as Intercargo shall in good faith
require or as the interests, needs, business and opportunities of Intercargo
shall require. Employee agrees to devote his best efforts and substantially
all of his business time and attention (except for permitted vacation periods
and reasonable periods of illness) to the business and affairs of Intercargo
and its subsidiaries.
3. Directorships. Employee agrees to serve on the Board of Directors
of Intercargo and Intercargo Insurance Company. Further, if requested by the
Board of Directors, Employee agrees to serve as a director or senior executive
of any other subsidiary or affiliate of Intercargo.
4. Term. The term of this Agreement (the "Term") shall commence on the
date hereof and, subject to the terms and conditions contained herein, shall
continue for a period of one (1) year. Thereafter, should Employee wish to
remain employed and should Intercargo wish to continue to employ Employee,
this Agreement shall continue and have full force and effect, except that
either party may terminate the Agreement with 14 days' written notice to the
other party. Assuming that the provisions of paragraph 7 are met, Employee
shall be entitled to 12 month's pay following receipt of Intercargo's written
notice to Employee that it is terminating his employment.
5. Compensation. For all the services to be rendered by Employee
hereunder, Intercargo agrees to pay Employee:
2
<PAGE>
(a) Base Salary.
-----------
(i) An annual salary of Two Hundred Sixty Thousand Dollars
($260,000.00), payable periodically in accordance with Intercargo's
regular compensation payment schedule;
(ii) Employee shall be entitled to an annual salary review
beginning in January 1998; however, whether Employee shall receive any
increase in salary is in the sole discretion of the Board of Directors.
(b) Bonus.
-----
(i) 1997: Provided that Employee commences full-time employment no
later than July 31, 1997, Employee is guaranteed a $25,000 bonus for
calendar year 1997, payable on or about January 15, 1998.
After 1997: If in effect, Employee shall be eligible to participate
in any Executive Incentive Compensation Plan for calendar years 1998 and
beyond. Otherwise, except as provided in subparagraph (b)(i) above,
whether Employee shall receive a bonus at any time shall be in the sole
discretion of the Board of Directors.
(c) Employee Benefits. Employee shall be entitled to benefits under and in
accordance with the terms and conditions of any pension or profit sharing
plan, disability income plan, group insurance plan, hospital and surgical
benefit plan, or any other incentive, retirement or employee benefit plan for
which senior executive employees of Intercargo generally are eligible. Nothing
herein, however, shall be construed to either create an employee benefit if
none presently
3
<PAGE>
exists or prevent the alteration or termination of an employee benefit for
similarly situated employees of Intercargo.
(d) Vacation: Time Off. Employee shall be entitled to take such holidays
and sick leave as Intercargo may reasonably determine, consistent with the
performance of his duties hereunder and the then current policies of
Intercargo in respect to such matters. Notwithstanding any current policies of
Intercargo with respect to vacation, however, Employee shall be entitled to
four weeks vacation "annually." Annually shall defined by the contract year
(e.g., July 7, to the following July 7). Employee may "carry over" up to two
weeks of unused vacation days to the following contract year. In no event,
however, shall Employee be entitled to accumulate a total of more than two
weeks of time from prior contract years.
(e) Expenses. Intercargo agrees to pay reasonable expenses of Employee
incurred in connection with Employee's execution of his duties hereunder. The
Board of Directors shall establish a policy for the determination of what
constitutes "reasonable expenses" incurred in relation to Employee's business
and shall be guided by the permissibility of deductions pursuant to the
Internal Revenue Code of 1986, as amended from time to time and regulations
and rulings thereunder.
(f) Automobile. Employee shall be entitled to an auto allowance of $1,000
per month.
(g) Other: Employee shall be entitled to use of an Intercargo owned
country club membership.
4
<PAGE>
(h) Moving Allowance; Employee shall be entitled to reimbursement for up
to three trips to Chicago for Employee and his spouse to familiarize
themselves with the city and locate a new residence. Employee shall also be
entitled to reimbursement for brokerage commission and reasonable legal
expense in selling his existing residence in New Jersey and for mortgage costs
(points) and reasonable legal expense in purchasing a new home in the Chicago
area. Employee shall also be entitled to reimbursement for reasonable and
necessary family transportation, moving cost for furniture and possessions and
for his (and if necessary his family's) temporary accommodations, if required
when his family moves, subject to Employee's presentment of appropriate
documentation. In the event that Intercargo terminates Employee for any
reason, Employee shall be entitled to reimbursement from Intercargo for
brokerage commission and reasonable legal expense in selling his Illinois
residence.
(i) Stock Options. Pursuant to Intercargo Corporation's Non-Qualified and
Incentive Stock Option Plan dated July 28, 1987, as amended, (the "Plan"),
Employee shall be issued an award agreement dated as of the date of this
Agreement (the "Award Agreement"), granting Employee the option rights to
acquire 20,000 shares of common stock of Intercargo ("Common Stock"). The
Award Agreement shall provide that the stock options exercise rights shall
vest at a rate of 4,000 shares on each of the following dates provided that
Employee remains employed by Intercargo, on July 7 in the years 1998, 1999,
2000, 2001, and 2002, and may otherwise be exercisable thereafter within the
maximum period allowed by applicable law and the terms of the Plan. The
purchase price for a share of Common Stock under the Award Agreement shall be
based on the
5
<PAGE>
closing market price on July 7, 1997, when Employee first commences
employment. The Award Agreement may provide for such other terms and
conditions as the Board of Directors deems necessary or appropriate, but which
are not inconsistent with this sub-paragraph (j). Subject to approval of the
Board of Directors at the time, which approval shall not be unreasonably
withheld, two more Award Agreements granting stock options to acquire up to
20,000 shares of Common Stock (per Award Agreement) shall be provided to
Employee on the first and second anniversary respectively of the date of this
Agreement, provided that on such anniversaries continuing improvement in
operating results of Intercargo have been achieved.
6. TERMINATION OF EMPLOYMENT.
(a) Termination For Cause; Resignation, Death. Except as provided
elsewhere in this Employment Agreement, if, prior to the expiration of the
Term of this Agreement, Employee voluntarily resigns (but not including a
resignation for Good Reason, as defined herein), dies, or is terminated by
Intercargo For Cause, Intercargo shall pay Employee any base salary and bonus
payments (if any) earned by not yet paid to Employee (or, if applicable, to
his estate) only through and including the date of such resignation, death, or
termination For Cause, and Employee will not be entitled to Termination Pay
but will otherwise be entitled to exercise any stock options whose exercise
rights have vested. In the event bonus calculations are based upon periodic
performance, the bonus payment shall be deferred until completion of such
period and the bonus payable will be ratably adjusted for that portion of the
relevant period during which Employee was employed.
6
<PAGE>
(b) Disability. If Employee becomes Permanently Disabled prior to the
expiration of the Term of this Agreement, employee shall be deemed to have
voluntarily resigned form his employment hereunder as of the date the
disability is deemed permanent as defined in section (c)(ii) below.
(c) Definitions.
(i) For Cause. The Company shall be entitled to terminate the
employment of Employee For Cause if any of the following shall occur:
(A) Employee engages in fraudulent or dishonest conduct or
is found to have engaged in nondisability substance abuse;
(B) Employee is found by a court of competent jurisdiction
rendering a final judgment to have materially breached Section 9 or
10 hereof or admits in writing or in sworn testimony to conduct
constituting such a breach; or
(C) The imposition of any restriction or limitation by any
governmental authority having jurisdiction over the Employee to
such an extent that he cannot engage in professional practice for
which he was employed and such restriction or limitation is not
removable or, if removable, is not removed within 30 days following
imposition.
(ii) Permanently Disabled. As used herein, the term, "Permanently
Disabled" shall have the meaning set forth in the long term disability
program of Intercargo in effect from time to time during the Term of this
Agreement. If, at any time during the term hereof, no long term disability
program is in effect for employees of Intercargo, the term
7
<PAGE>
"Permanently Disabled" shall mean injury or illness, mental or physical,
which materially interferes with ability of the Employee to provide the
services described in Section 2 herein for any consecutive eight week
period or for an aggregate of three months out of a twelve-month period
commencing with the onset of such illness or disability. Intercargo shall
provide Employee with timely written notice if it discontinues its long
term disability program.
(iii) Good Reason. Intercargo shall at all times during the term of
this Employment Agreement provide Employee with all of the rights,
responsibilities, and perquisites that come with being President and Chief
Executive Officer of Intercargo and it shall allow Employee to discharge
all of his Duties as set forth in paragraph 2 hereof. If, during the term
of this Agreement, without the prior written consent of Employee,
Intercargo (a) shall reduce or attempt to reduce the rights,
responsibilities, or perquisites and Duties of Employee generally,
including but not limited to (i) removal of Employee from his current
position of President and Chief Executive Officer to some lesser position,
or (ii) causing Employee to relocate his home or business location from
Illinois, absent Employee's written consent, or (iii) causing Employee to
report to some person or entity other than Intercargo's Board of
Directors, or (iv) the taking of such other action which can reasonably be
interpreted to have the effect of materially reducing Employee's
responsibilities or authority, or (b) shall be subject to a Change of
Control (as such term is defined below), then Employee may tender his
written resignation for Good Reason.
8
<PAGE>
For purposes of this Employment Agreement, a "Change of Control" shall be
deemed to have occurred if any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934) other than Orion
Capital Corporation or its affiliates is or becomes a "beneficial owner" (as
defined in Rule 13d-3 under such Act), directly or indirectly, of securities
of Intercargo representing 50% or more of the combined voting power of
Intercargo's then outstanding securities.
7. TERMINATION PAY. Except for termination of Employee For Cause or
due to Employee becoming Permanently Disabled or dying, Employee shall be
entitled to his annual salary as set forth in paragraph 5(a)(1) (or, if he has
received an increase in his annual salary, his then current annual salary),
for a period of 12 months after termination of this Agreement, payable
periodically in accordance with Intercargo's regular compensation schedule,
beginning on the first pay period following Employee's separation from
employment; provided, however, that said payments shall immediately cease and
no money shall be due and owing to Employee if at any time during the twelve
month period he is found by a court of competent jurisdiction rendering a
final judgment to be in breach of any paragraph of this Agreement, including
paragraphs 10 and 11 or admits in writing or in sworn testimony to conduct
constituting such a breach. Notwithstanding the provisions of paragraph 6(a)
and of this paragraph, Employee shall be entitled to Termination Pay under
this paragraph in the event that he resigns for Good Reason. Notwithstanding
the provisions of paragraph 6(a) and of this paragraph, Employee shall be
entitled to an accelerated vesting of all stock options granted under the
initial Award Agreement or any subsequent Award Agreement in the event that he
9
<PAGE>
resigns for Good Reason, which vesting shall be deemed to occur on the same
date that Employee tenders notice to Intercargo of his intent to resign.
8. PROPERTY RIGHTS. For purposes of this paragraph 8 and paragraphs 9
through 14, the term Intercargo shall include Intercargo and all related and
affiliated entities, and references to Intercargo shall also be deemed
references to such related and affiliated entities as the context may require.
(a) All information determined by the facts and applicable law to be
confidential which relates to the business of Intercargo, which shall include,
but not be limited to policy forms, agency and sub-producer relationships,
product and financial plans, information on pricing and customers, fees and
services provided therefore, shall be treated as confidential by Employee both
during and after the termination of Employee's employment.
(b) All data, whether written or electronically stored, computer
print-outs and other records and written material prepared or compiled by
Employee or furnished to Employee while in the employ of Intercargo and which
relate to the business of Intercargo are the property of Intercargo, and shall
be the sole and exclusive property of Intercargo and none of such data,
computer printouts or other records, or copies thereof, shall be retained by
Employee upon separation of his employment for any reason.
9. CONFIDENTIALITY: NON-SOLICITATION OF EMPLOYEES: NON-DISPARAGEMENT.
From and after the date hereof, (a) Employee will maintain in confidence and
will not, directly or indirectly, use, publish or otherwise disclose to any
competitor or other third party, except as required by law or as may be
expressly permitted by Intercargo, any trade secrets, confidential,
proprietary, and other non-public
10
<PAGE>
information of a similar nature belonging to Intercargo or to which Intercargo
has any rights, except to the extent, if any, that any such information is or
becomes generally known or is readily ascertainable by proper means
("Confidential Information"), whether or not such confidential Information is
in written or electronic form, or exists as "know how" or as knowledge gained
through his employment by Intercargo. Such Confidential Information includes,
but is not limited to, proprietary technical and business information relating
to any non-public financial information, business or product plans or costs,
existing or prospective customers or customer lists, pricing data or other
terms of sales, customer requirements, buying history or underwriting or risk
assessment information, the identity of agents or customers or prospective
agents or customers, products, coverages, the terms of any reinsurance,
fronting or other agreements of Intercargo, subject to the same exception
stated in the preceding sentence; (b) Employee will not solicit or induce,
either directly or through others, any employees of Intercargo to terminate
such relationship, or make contact with any such employees with the principal
purpose of violating this section; and (c) Employee shall not disparage the
business, employees, officers or directors of Intercargo. All duties and
obligations set forth herein shall be in addition to those which exist by
common law or statue. Employee's obligations under this Agreement with respect
to Confidential Information shall extend to information belonging to any
client, vendor or customer of Intercargo and their agents and employees, where
such information is considered by such client, vendor or customer of
Intercargo and by their agents and employees to be Confidential.
10. NON-COMPETITION: NON-SOLICITATION OF CUSTOMERS AND AGENTS. (a)
Employee shall not for 12 months following his separation from Intercargo for
any reason ("Restricted Period"), call upon, any person, entity or business
who was
11
<PAGE>
an existing or prospective customer or agent of Intercargo at any time during
the period commencing sixty (60) months prior to Employee's separation from
Intercargo's employment through the end of the Restricted Period for the
purpose of selling to or through such customers or agents any custom bonds,
contract sureties, errors and omissions insurance for freight forwarders,
cargo insurance, general property/casualty insurance for freight forwarders
and intermodel trucking, and any other distinct insurance coverage or surety
bond product which is first offered for sale by Intercargo during the term of
this Agreement, provided that Intercargo provides Employee with a list of all
such persons, entities or businesses and all such coverages or bonds at the
time of separation. The term "existing or prospective customers" of Intercargo
as used in this paragraph shall be defined and construed to mean any and all
persons, corporations, partnerships, firms, associations, businesses or other
entities for whom or through whom Intercargo engages in the business of
providing insurance, surety bonds or conducting related business or for whom
or through whom Intercargo actively sought or seeks to engage in such business
during the period commencing sixty (60) months prior to Employee's separation
from Intercargo's employment through the end of the Restricted Period and
shall include agents and subagents of Intercargo notwithstanding that such
persons or entities may have been induced to become customers and/or agents
and given their patronage to Intercargo by the efforts and solicitations of
Employee, or someone on his behalf.
(b) Employee shall not, during the Restricted Period, directly or
indirectly, own an interest in, manage, operate, join, control, lend money or
render financial or other assistance to or participate in or be connected
with, as an officer, employee, partner, agent, stockholder, consultant,
independent contractor or otherwise, any individual,
12
<PAGE>
partnership, firm, corporation, proprietorship, association or other business
organization or entity (i) which competes with the business of Intercargo, as
described in subparagraph (a) hereof or this paragraph 10, or (ii) which, in
pursuit of its business directly or indirectly causes, aids or supports the
diversion of the business of Intercargo to competitors.
The restrictions in this paragraph 10 shall be limited to any county of
any state of the United States or any comparable jurisdiction of any foreign
country in which Intercargo, directly or through subsidiaries during the Term
of this Agreement or the Restricted Period, has been or is engaged in the
business described in the Recitals or this paragraph.
11. EMPLOYEE ACKNOWLEDGMENT. Employee has carefully considered the
nature and extent of the restrictions upon him and the rights and remedies
conferred upon Intercargo under this Agreement, and hereby acknowledges and
agrees that the same is reasonable in time and territory, are designed to
eliminate competition which otherwise would be unfair to Intercargo, do not
stifle the inherent skill and experience of Employee, do not operate as a bar
to Employee's sole means of support, are fully required to protect the
legitimate interest of Intercargo and do not confer a benefit upon Intercargo
disproportionate to the detriment of the Employee.
12. EXTENSION OF DURATION. In addition to the remedies Intercargo may
seek and obtain pursuant to paragraph 14 hereof, the restrictions of
paragraphs 10 and 11 shall be extended by any and all periods during which the
Employee shall have been found by a court possessing personal jurisdiction
over Employee to have been in violation of the covenants in paragraphs 10 and
11.
13
<PAGE>
13. JUDICIAL MODIFICATION. The parties hereby agree that if the scope
or enforceability of the covenants in paragraphs 10 and 11 hereof are in any
way disputed at any time, a court or other trier of fact may modify and
enforce said covenants to the extent that it believes them to be reasonable
under circumstances existing at that time.
14. INJUNCTIVE RELIEF. Employee acknowledges that compliance with the
restrictive covenants herein is necessary to protect the business and good
will of Intercargo, and that a breach of these restrictions will cause
irreparable damage to Intercargo for which monetary damages may not be
adequate. Consequently, Employee agrees that in the event that he breaches or
threatens to breach any of the restrictive covenants contained herein,
Intercargo shall be entitled to both (i) a temporary, preliminary and/or
permanent injunction in order to prevent the continuation of such harm, and
(ii) money damages insofar as they can be determined. Notwithstanding any of
the foregoing, nothing in this Agreement, shall be construed to prohibit
Intercargo or Employee from also pursuing any other remedy, the parties having
agreed that all remedies are to be cumulative. As money damages for the period
of time during which Employee violates the restrictive covenants, Intercargo
shall be entitled to recover the amount of fees, compensation or other
remuneration earned by Employee as a result of any such breach.
15. NOTICES. Any and all notices required or permitted to be given
under this Agreement will be sufficient if furnished in writing, sent by
personal delivery, telex, telecopier or certified mail, return receipt
requested, to the applicable address set forth below (or such other address as
may from time to time be designated by notice by any party hereto for such
purpose):
14
<PAGE>
To Employee: Stanley A. Galanski
6535 R.F.D.
Long Grove, IL 60047
With a copy to: Dickie, McCamey & Chilcote, P.C.
Two PPG Place, Suite 400
Pittsburgh, Pennsylvania 15222
Attn: Leland P. Schermer
To Intercargo: Intercargo Corporation
Attn: Board of Directors
1450 East American Lane, 20th Floor
Schaumburg, Illinois 60173
With a copy to: Rudnick & Wolfe
203 North LaSalle Street, Suite 1800
Chicago, Illinois 60601
Attn: Michael L. Sklar
Notice shall be deemed given, if by personal delivery, on the date of such
delivery or, if by telex or telecopy, on the business day following receipt of
answer back or telecopy confirmation or, if by certified mail, on the date
shown on the applicable return receipt.
16. MISCELLANEOUS.
(a) Except for other documents referenced in this Agreement, this written
Agreement contains the sole and entire Agreement between the parties, and
supersedes any and all other agreements between them.
(b) The waiver by either party of a breach of any provision of this
Agreement, shall not operate as, or be construed a waiver of any subsequent
breach thereof. No waiver or modification of this Agreement or of any
covenant, condition or limitation herein contained shall be valid unless in
writing and duly executed by the party to be charged therewith.
(c) In case any one or more of the provisions contained in this Agreement
shall for any reason be held to be invalid, illegal or unenforceable in
15
<PAGE>
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision thereof and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
(d) In any action, special proceedings or other proceedings that may be
brought arising out of, in connection with, or by reason of this Agreement,
the laws of the State of Illinois shall be applicable and shall govern to the
exclusion of the law of any other forum, without regard to the jurisdiction in
which the action or special proceeding may be instituted.
(e) The section headings contained herein are inserted for ease of
reference only and shall not control of affect the meaning or construction of
the provisions hereof.
(f) This Agreement shall be binding on and inure to the benefit of the
respective parties and their respective heirs, legal representatives,
successors and assigns.
16
<PAGE>
IN WITNESS WHEREOF, Intercargo has hereunto caused this Agreement to be
executed by its duly authorized officers and the Employee has hereunto set his
hand, all being done in duplicate originals with one being delivered to each
party on the 7th Day of July, 1997.
Executed at Schaumburg, IL on the date first above written.
INTERCARGO CORPORATION EMPLOYEE:
By
---------------------------------------
STANLEY A. GALANSKI
17
EXHIBIT 11
Intercargo Corporation and Subsidiaries
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic earnings per common share:
Average common shares outstanding 7,670,759 7,645,578 7,640,981
Net income $ 31,788,000 6,404,000 2,139,000
------------ --------- ---------
Per common share amount $ 4.14 0.84 0.28
============ ========= =========
Diluted earnings per common share:
Average common shares outstanding 7,670,759 7,645,578 7,640,981
Incremental shares from assummed conversions
at the average market prices of
$11.319, $8.771, and $10.321, respectively 6,702 11,011 26,656
------------ --------- ---------
Total 7,677,461 7,656,589 7,667,637
------------ --------- ---------
Net income $ 31,788,000 6,404,000 2,139,000
------------ --------- ---------
Per common share amount $ 4.14 0.84 0.28
============ ========= =========
</TABLE>
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.
BONDS
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
------ ------- ------- -----
1997 $16,869 $17,947 94.0
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
MARINE
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
------ ------- ------- -----
1997 $31,504 $27,906 112.9
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
PROFESSIONAL LIABILITY
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
------ ------- ------- -----
1997 $ 5,585 $ 3,206 174.2
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
<PAGE>
OTHER
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
------ ------- ------- -----
1997 $10,869 $ 8,351 130.2
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
TOTAL BONDS, MARINE, PROFESSIONAL LIABILITY AND OTHER
Year Total Insurance Combined
Ended Underwriting Premium Ratio
Dec. 31 Expenses Income %
------ ------- ------- -----
1997 $64,827 $57,410 112.9
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
EXHIBIT 13
KEY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended December 31,1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 112,159 68,241 94,186 80,885 50,712
--------- ------- ------- ------- -------
Operating income $ 46,141 3,705 4,050 7,359 2,829
--------- ------- ------- ------- -------
Net income $ 31,788 6,404 2,139 4,981 2,138
--------- ------- ------- ------- -------
Total assets $ 165,412 133,710 116,166 128,423 114,841
--------- ------- ------- ------- -------
Total stockholder's equity $ 82,201 48,012 43,621 39,921 38,527
--------- ------- ------- ------- -------
(per share amounts)
Net income from continuing operations $ 4.14 0.84 0.28 0.65 0.30
--------- ------- ------- ------- -------
Dividends $ 0.18 0.18 0.18 0.18 0.17
--------- ------- ------- ------- -------
Combined ratio (1) 112.9% 104.6% 103.6% 97.5% 101.5%
--------- ------- ------- ------- -------
</TABLE>
(1) Combined ratios have been computed, for all years, on a GAAP basis
(see Management's Discussion and Analysis).
<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 a subsidiary
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 47.0%. 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 August, 1997 Kingsway conducted
another secondary offering in which the Company participated. As a result of
this, the Company's equity in Kingsway was reduced to less then 1%.
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 had been accounted for by the equity method until
August 25, 1997.
The following chart compares certain 1997 and 1996 information to information
for 1995 restated as if Kingsway had not been consolidated at any time during
1995.
Comparison of Selected Data
(in thousands)
Proforma
1997 1996 1995
--------------------------
Insurance premium income $ 57,410 $61,053 $54,075
Total revenues 112,159 68,241 58,594
Losses and loss
adjustment expenses 34,845 32,307 30,517
Other underwriting expenses 16,427 14,051 10,993
Total expenses 66,018 64,536 59,199
Operating income 46,141 3,705 (605)
Equity in net income of investee 3,357 3,454 2,663
--------------------------
<PAGE>
Three significant factors in evaluating insurance company performance are
earned premiums, loss ratios, and combined ratios. Earned premiums represent
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, 1997 increased
64.5% to $112.2 million from $68.2 million for the year ended December 31,
1996, which was a decrease of 27.6% from the $94.2 million for the year ended
December 31, 1995. 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 1997, net premium written in U.S. operations decreased 4.0% to $52.4
million from $54.6 million in 1996. The 1996 level of net premium written had
increased 4.4% to $54.6 million from $52.3 million in 1995. Surety (U.S.
Customs bonds, contract and miscellaneous surety bonds) net premium written
decreased 28.0% in 1997 to $16.7 million from $23.2 million in 1996. Gross
premiums written for the U.S. Customs bonds were $3.1 million or 17.4% lower
in 1997 than 1996. This was due to the move to rates which are net of
brokers' commissions, and to competitive pressures on overall price
structures. Gross premiums written for contract and miscellaneous surety bonds
were $2.4 million or 27.7% lower in 1997 than 1996. During the first half of
1997 the Company was reviewing the strategic position of the contract and
miscellaneous surety line. During that period of evaluation marketing and
sales efforts remained static, and some sales momentum was lost. The Company
subsequently determined that these products can be viable and should remain a
part of the overall product portfolio. Sales and marketing efforts were then
reinvigorated. It is anticipated that this renewed emphasis will benefit
future gross premium production. In addition, beginning in 1998 the Company
has discontinued its 50% quota share reinsurance treaty on the contract and
miscellaneous surety line, which will serve to increase net premiums written.
Marine net premium written in 1997 of $23.7 million was essentially flat as
compared to the net written premium of $23.8 million in 1996, reflecting
market pressures on price levels. Marine net written premium in 1996
increased 27.8% to $23.8 million. Other property and casualty net written
premium increased 62.0% in 1997 to $9.1 million primarily due to the effects
of a program providing liability coverage on cranes. In 1996, other property
and casualty net written premium increased 4.0% to $5.6 million. The pricing
environment for the property and casualty market in general remains highly
competitive. Professional liability net written premium in 1997 increased
48.2% or $971 thousand to $3.0 million after having declined 24.3% or $646
thousand in 1996 as compared to 1995. Significant rate actions taken late in
1996 and extending into 1997 contributed to the increase in 1997. Also, 1996
<PAGE>
net premiums written were negatively impacted by $1.4 million in retrospective
reinsurance premiums applicable to the development of prior period coverages.
Net written premium in the U.K. in 1997 increased 17.3% to $4.5 million. In
1996, net written premium had increased 16.2% to $3.6 million. The Company is
continuing to establish itself in the London market. Operations in Hong Kong,
opened in May 1996, contributed $310 thousand of net written premium in 1997
as compared to $211 thousand in 1996.
Earned premium on a consolidated basis for 1997 shows a decline of $3.6
million, or 6.0%, to $57.4 million from $61.1 million in 1996. The 1996 level
was a decline of $25.1 million to $61.1 million from $86.2 million in 1995.
Included in 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 decreased $7.9 million, U.S. marine earned premium increased $242
thousand, other property and casualty earned premium increased $2.7 million,
while professional liability earned premium increased $351 thousand in 1997
(see "Results by Line"). In 1996, surety earned premium increased $1.1
million, U.S. marine increased $5.3 million, other property and casualty
increased $133 thousand and professional liability decreased $425 thousand.
In 1997, U.K. marine earned premium increased $739 thousand to $4.3 million
from $3.6 million in 1996. In 1996, U.K. marine earned premium increased $700
thousand to $3.6 million from $2.9 million in 1995. Hong Kong operations in
1997 generated $311 thousand in earned premium as compared to $106 thousand in
1996.
In 1997, realized investment gains increased $46.5 million over 1996 to $48.9
million from $2.4 million. In 1997 the Company sold 4,018,000 of its shares in
Kingsway out of its total holdings of 4,180,000 shares. This gave rise to a
gain, net of related expenses, of $49.4 million in 1997. In 1996 net realized
investment gains were $2.4 million as compared to $.4 million in 1995, an
increase of $2 million. Net realized investment gains for 1996 include a gain
from the sale of Kingsway stock in that year of $2.4 million.
Net investment income was $4.9 million in 1997 as compared to $4.0 million in
1996, an increase of $900 thousand. The increase is attributable to the
increase in the fixed income portion of the investment portfolio and to
investment income on the proceeds from the Kingsway sale, offset somewhat by a
decline in average yield due to the general decline in interest rates. In
1996, net investment income decreased $1.9 million over 1995, to $4.0 million
from $5.9 million. The 1995 net investment income includes $2.5 million
related to Kingsway while it was still part of the consolidated financial
statements.
The company's investment policy requires that assets be comprised primarily of
<PAGE>
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 to
the Company. The Company does not invest in real estate, high yield
securities or derivatives.
In 1997, loss and loss adjustment expenses increased $2.5 million, or 7.9%,
to $34.8 million from $32.3 million in 1996. During 1997, $3.0 million was
added to loss and loss adjustment expense reserves across several lines. Loss
and loss adjustment expense reserves are estimated using a range of values.
The overall reserves carried by the Company have been within such ranges.
Management nevertheless considered it prudent to further strengthen these
reserves so as to provide greater margins in the event of adverse development
arising from unanticipated events. Had this action not been taken, loss and
loss adjustment expenses would have decreased $500 thousand, or 1.5%, in 1997
from 1996. 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 expenses. The surety loss ratio in 1997 declined
slightly to 28.4% from 28.8% in 1996. This was due primarily to the decline
in the loss ratio for contract bonds to 37.3% from 46.9% due to enhanced
underwriting efforts. In 1996, the contract bond loss ratio had deteriorated
to 46.9% from 46.2%. The marine loss ratio in 1997 improved to 69.8% from
71.0% in 1996 and 82.5% in 1995. In 1997, the marine reserves were increased
by $1.9 million so as to further strengthen reserves as previously discussed.
Had this not been done, the 1997 loss ratio would have been 63.0%. The
improvement reflects the Company's continuing efforts to monitor individual
accounts and take swift corrective actions when indicated. In 1997, loss and
loss adjustment expenses for professional liability increased $979 thousand to
$3.7 million. The loss ratio for this line in 1997 increased to 117.0% from
102.7% in 1996. In 1996, the loss and loss adjustment expenses had declined
17.1% from 1995 as the loss ratio declined to 102.7% from 106.7%. In 1997,
the professional liability reserves were increased by $570 thousand so as to
further strengthen reserves as previously discussed. Had this not been done,
the 1997 loss ratio would have been 103.1%. Strong rate actions taken late in
1996 and extending into 1997 have worked to improve the loss and loss expense
ratio. The Company will continue to seek more appropriate pricing for covered
risks under the professional liability program. In 1997, loss and loss
adjustments expenses for the other property and casualty lines increased $2.1
million, or 49.0%, to $6.5 million. This is reflective of the 48.3% increase
in earned premiums, as the loss ratio of 78.1% in 1997 was only marginally
higher than the 77.8% loss ratio in 1996. Also, the Company had increased the
other property and casualty loss
<PAGE>
reserves by $490 thousand so as to further strengthen reserves as previously
discussed. Had this not been done the loss ratio would have been 72.3% in
1997.
Incurred losses for U.K. operations increased $943 thousand, or 53.0% in 1997
to $2.7 million from $1.8 million. This increase partially reflects the
increase in earned premiums during 1997 of 20.6%. In 1997 the loss ratio
increased to 62.8% from 49.5% as the result of reserve additions. In 1996
incurred losses for U.K. operations increased 38.5% to $1.8 million 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.
Hong Kong operations at this time do not as yet have significant activity,
with earned premiums of $311 thousand and incurred losses of $156 thousand for
1997.
Acquisition and other issue costs decreased $3.2 million, or 18.1%, to $14.2
million in 1997 from $17.4 million in 1996. This partially reflects the 6.0%
decrease in earned premium in 1997. Contributing also to the decrease has
been the continuing change in the commission structure as pricing for certain
products moved to a rate structure net of brokers' commissions. 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 was due
to increased premium volume. The magnitude of the increase was reduced by the
continuing change in the commission structure noted previously.
Other underwriting expenses increased $2.3 million or 16.3% in 1997 to $16.4
million from $14.1 million in 1995. Insurance company operations in 1997
showed an increase of $3.2 million. This was due to an increase in insurance
company bad debt expense in 1997 over 1996 of $2.0 million as the result of
the financial failure of certain producers. Also, salary and related benefits
increased $972 thousand due in part to approximately $450 thousand associated
with changes in management during 1997. Agency operations expenses decreased
approximately $909 thousand. Bad debt expense in the agency operations for
1997 was $504 thousand less than 1996 as collection efforts were enhanced.
Salary expense in 1997 was down $261 thousand from 1996 due to staffing
changes. Other underwriting expenses decreased 4.1% in 1996 to $14.1 million
from $14.6 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
<PAGE>
costs were related to the development of a customer service center. Hong Kong
insurance operations began in 1996. Other underwriting expenses for Hong Kong
insurance operations for 1997 and 1996 were $723 thousand and $710 thousand,
respectively. Operations in the U.K., which began in 1994, had other
underwriting expenses of $687 thousand; $693 thousand; and $869 thousand in
1997, 1996 and 1995, respectively.
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.
<PAGE>
OPERATIONS EXCLUDING CANADA
(dollars in thousands)
<TABLE>
<CAPTION>
Other
Surety Marine Professional Liability Property & Casualty Total
--------------------------------------------------------------------------------------------------------------------
Premium Combined Premium Combined Premium Combined Premium Combined Premium Combined
Year Earned Ratio (%) Earned Ratio (%) Earned Ratio (%) Earned Ratio (%) Earned Ratio (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $17,947 94.3 $27,906 113.2 $ 3,206 174.9 $ 8,351 130.6 $57,410 113.3
1996 25,846 85.2 26,826 113.5 2,644 151.3 5,631 135.3 60,947 105.2
1995 24,700 83.5 20,808 124.7 3,069 160.3 5,498 146.8 54,075 110.2
1994 23,019 80.4 14,996 114.2 2,377 195.4 3,362 106.3 43,754 100.2
1993 19,739 106.5 12,154 85.8 1,681 175.2 772 156.2 34,346 103.6
</TABLE>
CANADIAN OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Other
Auto Property Property & Casualty Total
--------------------------------------------------------------------------------------------
Premium Combined Premium Combined Premium Combined Premium Combined
Year Earned Ratio (%) Earned Ratio (%) Earned Ratio (%) Earned Ratio (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 --- --- --- --- --- --- --- ---
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
</TABLE>
1996 and prior excludes U.K. and Hong Kong.
<PAGE>
RESULTS BY LINE
Underwriting results for 1997 in the Company's surety business declined, as
the combined ratio rose to 94.0% in 1997 from 85.2% in 1996 and 83.5% in 1995.
U.S. Customs bonds results deteriorated in 1997 as the expense ratio component
increased to 64.1% in 1997 from 50.9% in 1996. Expenses declined in 1997 to
$9.3 million from $9.6 million in 1996; however, earned premium over which
these costs are spread declined $4.3 million, or 23.0%, to $14.5 million in
1997 from $18.8 million in 1996. Earned premiums for U.S. Customs bonds
increased 11.0% to $18.8 million in 1996 compared to $17.0 million in 1995.
Contract surety bond underwriting results improved as the combined ratio for
1997 is 109.5% as compared to 118.0% in 1996 and 116.3% in 1995. The loss
ratio improved to 37.3% in 1997 from 46.9% in 1996 and 46.2% in 1995. This
improvement in 1997 is the result of improved underwriting practices and the
identification and rehabilitation of producers and accounts with excessive
losses.
Marine earned premium grew $1.1 million or 4.0% in 1997 to $27.9 million.
Earned premium in 1996 grew $6.0 million or 28.9%. Increased competition and
market pricing pressures combined to reduce growth in 1997. Despite these
pressures, the combined ratio improved slightly in 1997 to 112.9% from 113.5%
in 1996 and 124.7% in 1995. The loss ratio in 1997 improved to 69.8% from
71.0% in 1996 and 82.6% in 1995. The Company is continuing its efforts to
better monitor results so as to quickly identify and act on negative trends,
and to use prudent underwriting practices.
Other property and casualty lines show an increase in earned premium in 1997
of $2.7 million, or 48.3%, in 1997 as compared to 1996, while 1996 premium
<PAGE>
increased $133 thousand or 2.4% versus 1995. Earned premium in 1997 includes
$4.0 million related to a crane liability program which has been discontinued
due to a lack of available reinsurance protection. The loss ratio for 1997 of
78.1% was a marginal deterioration from the 1996 loss ratio of 77.8%. The 1995
loss ratio was 101.0%. The other property and casualty lines continue to be
subject to a very competitive market with attendant pressures on price and
growth.
Professional liability 1997 earned premium increased $562 thousand or 21.3% ,
to $3.2 million from $2.6 million in 1996. 1996 earned premium decreased to
$2.6 million from $3.1 million in 1995. The 1997 increase was due primarily
to rate actions. Despite these actions the loss ratio in 1997 rose to 117.0%
from 102.7% in 1996 and 106.7% in 1995.
<PAGE>
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company uses software that has been developed internally as well as that
developed by third party vendors. Most of the internally developed software
had addressed the year 2000 issue during development. The remaining
internally developed software is currently being modified and is expected to
be compliant by the middle of 1998. Costs associated with this endeavor are
not expected to exceed $100 thousand and have been considered part of the
normal software maintenance activities.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to third parties' failure to remediate their own year 2000 issues.
These vendors are in various stages of evaluating their year 2000 issues.
Costs to the Company for updates on these third parties' software are included
in the normal fees that are part of the contract for such software. However,
there can be no guarantee that the systems of these other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the company's systems.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification
plans and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
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.
<PAGE>
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. The company's foreign operations expose the Company to changes in
the relative value of the U.S. dollar to the local currencies. (Refer to
Foreign Operations in Notes to the Consolidated Financial Statements.)
<PAGE>
U.S. AND CANADIAN FEDERAL INCOME TAXES
The Company's effective tax rates for the years 1997, 1996 and 1995 were
38.4%, 20.4% and 49.4% 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 allowance related to deferred tax assets,
the differential in book and tax bases of assets disposed (including the
disposal of Kingsway), and for 1995 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 principal application of such funds are payments
of losses and loss adjustment expenses, investments, reinsurance, and
operating expenses.
Cash flow from operations amounted to $575 thousand in 1997 compared to $6.3
million in 1996 and $5.1 million in 1995. The decrease in 1997 is due to
higher levels of reinsurance balances recoverable decreases in various
liabilities, including accounts payable. The increase in 1996 is commensurate
with the increase in premiums.
Gross proceeds from the sale of Kingsway common stock amounting to $67.7
million in 1997 were used to extinguish debt, increase the statutory capital
and surplus of IIC, finance short term investment and general corporate
purposes, including payment of related income taxes on the gain from sale of
$18.6 million. At December 31, 1997 there remained approximately $32 million
of these proceeds available for future use. Proceeds from the sale of
Kingsway common stock amounting to $4.6 million in 1996 and $4.1 million in
1995 were used to increase the statutory capital and surplus of IIC and for
general corporate purposes.
The Company has discontinued its $15 million line of credit in light of its
current high level of available internal funds.
The Company does not have any material commitments for capital expenditures.
FINANCIAL INSTRUMENTS AND MARKET RISK
A financial instrument is cash or a contract that imposes or conveys a
contractual obligation or right to deliver or receive cash or another
financial instrument. Included at Note 17 of the Notes to Consolidated
Financial Statements is information summarizing the Company's financial
instruments and their estimated fair values. As indicated in the Note, the
fair values of the Company's financial instruments approximate their carrying
values.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which are effective for fiscal years beginning after
December 15, 1997. The Company believes that the implementation of these
statements will not have a material effect on its results of operations or
financial statement disclosures.
<PAGE>
DIVIDENDS
The Company paid dividends of $0.18 per share, or $1.4 million in 1997 and
1996 and 1995. Any future dividends will depend upon the earnings and
financial position of the Company and its 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 the prior year's
statutory surplus or statutory net income, as defined.
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 right 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 11, 1998, was
approximately 101. 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 771 beneficial owners of the
Company's common stock.
Quarter High Low
------- ---- ---
4th 1997 14.13 12.88
3rd 1997 14.25 10.38
2nd 1997 12.00 9.13
1st 1997 10.13 8.50
4th 1996 9.13 7.75
3rd 1996 9.25 8.25
2nd 1996 9.75 8.38
1st 1996 11.50 7.50
<PAGE>
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTERCARGO CORPORATION
We have audited the consolidated balance sheet of Intercargo Corporation as
of December 31, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1997.
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 audit. The consolidated balance sheet of Intercargo Corporation
as of December 31, 1996 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996 were audited by other auditors whose report dated
February 21, 1997 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intercargo
Corporation at December 31, 1997 and the consolidated results of its
operations and its cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 23, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
At December 31,
1997 1996
--------------------
(in thousands)
ASSETS
Investments
Fixed maturities available-for-sale, at fair value $60,676 $51,567
Equity securities, at fair value 4,234 1,557
Investee at cost plus cumulative undistributed
earnings (fair value: $50,327 in 1996) - 13,519
--------------------
Total investments 64,910 66,643
Cash and cash equivalents 49,400 18,492
Premiums receivable 15,677 16,231
Accrued investment income 1,023 833
Deferred policy acquisition costs 2,939 3,884
Reinsurance recoverable on loss and loss expenses:
Paid claims 1,137 96
Unpaid claims 11,970 9,980
Prepaid reinsurance premiums 5,119 4,549
Notes receivable 99 672
Income tax recoverable 1,365 -
Deferred income tax 2,226 2,375
Equipment, at cost less accumulated depreciation 1,933 2,276
Goodwill 1,991 2,091
Other assets 5,623 5,588
--------------------
Total assets $165,412 $133,710
====================
LIABILITIES
Losses and loss adjustment expenses $55,355 $47,037
Unearned premiums 17,948 17,617
Funds held by Company 372 491
Supplemental duty deposits 2,016 2,358
Accrued expenses and other liabilities 7,520 8,460
Notes payable - 9,735
--------------------
Total liabilities 83,211 85,698
--------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock--$1 par value; authorized 20,000,000
shares; issued and outstanding, 7,699,981 shares
in 1997 and 7,659,981 in 1996 7,700 7,660
Additional paid-in capital 24,400 24,180
Net unrealized gain (loss) on foreign currency
translation 23 (978)
Net unrealized gain (loss) on available-for-sale
securities 2,153 (366)
Retained earnings 47,925 17,516
--------------------
Total stockholders' equity 82,201 48,012
--------------------
Total liabilities and stockholders' equity $165,412 $133,710
====================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1997 1996 1995
------------------------------------
(in thousands, except per share data)
REVENUES
Insurance premium income $ 57,410 61,053 86,154
Net investment income 4,911 3,985 5,858
Realized investment gains 48,871 2,379 415
Commission income 675 686 531
Other income 292 138 1,228
--------------------------
Total 112,159 68,241 94,186
--------------------------
LOSSES AND EXPENSES
Losses and loss adjustment expenses 34,845 32,307 51,746
Policy acquisition and other issue costs 14,258 17,410 22,829
Other underwriting expenses 16,427 14,051 14,574
Interest expense 488 768 987
--------------------------
Total 66,018 64,536 90,136
--------------------------
Operating income 46,141 3,705 4,050
Income tax expense 17,710 755 2,000
--------------------------
Net income before equity in net income
of investee 28,431 2,950 2,050
Equity in net income of investee 3,357 3,454 89
--------------------------
NET INCOME $31,788 6,404 2,139
==========================
NET INCOME PER SHARE-BASIC AND DILUTED $ 4.14 0.84 0.28
==========================
See accompanying Notes to Consolidated Financial Statements.
<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, 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
- -----------------
Net income 31,788 31,788
Change in foreign
currency translation 1,001 1,001
Change in unrealized gain (loss)
on available-for-sale securities 2,519 2,519
Dividends paid to stockholders
($0.18 per share) (1,379) (1,379)
Employee stock options exercised 40 40 220 260
--------------------------------------------------------------------------------
Balance at
December 31, 1997 7,700 $7,700 24,400 23 2,153 47,925 82,201
- ----------------- ================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
---------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $31,788 6,404 2,139
Adjustments to reconcile net income to net cash
provided from operating activities:
Realized gains (48,871) (2,379) (415)
Depreciation and amortization 1,521 1,546 702
Amortization of premiums on
investments 48 102 52
Undistributed earnings of affiliate (3,357) (3,454) (2,662)
Increase in premiums receivable (52) (1,311) (5,417)
Decrease (increase) in deferred policy
acquisition costs 946 1,014 (420)
Increase in reinsurance balances (3,602) (8,380) (1,406)
Decrease (increase) in notes receivable 116 (323) 2,297
Change in income tax accounts 15,390 20 (1,453)
Increase in other assets (793) (56) (1,171)
Increase in liability for losses and
loss adjustment expenses 8,318 10,744 9,571
Increase (decrease) in unearned premiums 332 (74) 1,831
Increase (decrease) in funds held (120) (257) 480
Decrease in supplemental duty deposits (342) (311) (478)
Increase (decrease) in accounts payable
and accrued expenses (519) 3,051 850
Other, net (228) (16) 626
---------------------------
Net cash provided from operating
activities 575 6,320 5,126
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities available-for-sale:
Purchases (30,380) (27,314) (21,957)
Sales 18,908 13,332 8,080
Maturities and calls 3,478 5,370 4,563
Equity securities:
Purchases (498) (502) -
Sales 822 2,140 4,191
Calls 188 185 -
Net sales (purchases) of short-term
investments (1) 510 (260)
Purchase of subsidiary (1,050) - (1,499)
Subsidiary cash at purchase date 813 - 170
Sale of Kingsway common stock (net of taxes of
of $18,500 in 1997) 49,140 4,573 4,107
Decrease in cash due to deconsolidation
of Kingsway - - (3,964)
Purchase of property and equipment, net (233) (1,319) (814)
---------------------------
Net cash provided from (used in)
investing activities 41,187 (3,025) (7,383)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) notes payable (9,735) - 1,099
Proceeds from the exercise of stock options 260 95 -
Dividends paid to stockholders (1,379) (1,376) (1,375)
---------------------------
Net cash used in financing
activities (10,854) (1,281) (276)
---------------------------
Net increase (decrease) in cash and cash
equivalents 30,908 2,014 (2,533)
Cash and cash equivalents:
Beginning of the year 18,492 16,478 19,011
---------------------------
End of the year $49,400 18,492 16,478
===========================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Intercargo Corporation (the Company) is an insurance holding company
incorporated in the State of Delaware whose wholly owned subsidiaries at
December 31, 1997 consist of Intercargo Insurance Company (IIC), International
Advisory Services, Inc. (IAS), and Intercargo International Limited (IIL).
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 was 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.
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.
On August 25, 1997 a two-for-one stock split increased the Company's shares of
Kingsway to 4.2 million. The Company then sold 4.0 million shares reducing
its ownership interest to less than 1%. The Company no longer considers
Kingsway to be a subsidiary.
<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.
<PAGE>
(b) Investment Valuations
All fixed maturities and equity securities are classified as
available-for-sale and reported at fair value. Unrealized gains and losses are
excluded from earnings and reported as a separate component of stockholders'
equity net of deferred income taxes.
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 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 $5.4 million and $4.6
million at December 31, 1997, and 1996, respectively.
(f) Premiums Receivable
Premiums receivable are stated net of allowances for uncollectible accounts of
approximately $1.0 million and $1.1 million at December 31, 1997 and 1996,
respectively.
(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):
Year ended December 31,
1997 1996 1995
--------------------------
Deferred policy acquisition
costs, beginning of period $ 3,884 4,898 6,602
Deferred:
Direct commissions 8,964 11,136 17,766
Premium taxes 1,065 1,026 2,536
Other direct underwriting
<PAGE>
expenses 6,043 6,479 6,740
Ceding commissions (2,759) (2,245) (3,201)
-------- -------- --------
Net deferred 13,313 16,396 23,841
Amortized (14,258) (17,410) (22,829)
Adjustment due to
deconsolidation of Kingsway - - (2,716)
-------- -------- --------
Deferred policy acquisition
costs, end of period $ 2,939 3,884 4,898
======== ======== ========
(h) Federal Income Tax
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
bases of 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 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.
<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 reported
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
equaled the market prices at the grant dates. The effect of recording
compensation cost for the Company's stock-based compensation plans based on
the fair value method in Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) 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
The Company adopted SFAS No. 128 "Earnings Per Share" in 1997. There was no
effect on previously reported earnings per share amounts. Basic earnings per
share are computed based upon the weighted average numbers of share of common
stock outstanding each year. Diluted 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.
The computations of basic and diluted earnings per share are presented below
(in thousands for net income):
Year ended December 31,
1997 1996 1995
-------------------------------
Basic earnings per share:
Net income $31,788 6,404 2,139
Average common shares
outstanding 7,670,759 7,645,578 7,640,981
-------------------------------
Per common share amount $4.14 0.84 0.28
===============================
Diluted earnings per share:
Net income $31,788 6,404 2,139
Average common shares
outstanding 7,670,759 7,645,578 7,640,981
<PAGE>
Incremental shares from
assumed conversions at
average market price 6,702 11,011 26,656
-------------------------------
7,677,461 7,656,589 7,677,637
-------------------------------
Per common share amount $4.14 0.84 0.28
===============================
(p) Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the current presentation.
<PAGE>
(3) INVESTMENTS
Amortized cost, unrealized gains and losses, and estimated fair value of
investments as of December 31, 1997 and 1996, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
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 $23,139 137 (81) 23,195
State, municipal, and other tax advantaged
securities 20,774 538 (15) 21,297
Corporate securities 14,649 257 (22) 14,884
Other fixed maturity investments 1,252 48 1,300
-----------------------------------------
Total fixed maturities 59,814 980 (118) 60,676
Equity securities 1,833 2,428 (27) 4,234
-----------------------------------------
Total $61,647 3,408 (145) 64,910
=========================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
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>
<PAGE>
Amortized cost and estimated fair value for fixed maturities held as of
December 31, 1997, summarized by maturity, are as follows (in thousands):
Estimated
Amortized Fair
Cost Value
--------------------
Due in one year or less $2,797 2,808
Due after one year through five years 14,700 14,870
Due after five years through ten years 36,369 36,795
Due after ten years 5,948 6,203
------- ------
$59,814 60,676
======= ======
Investment securities carried at $ 9.4 million and $9.5 million at December
31, 1997 and 1996, respectively, were on deposit or pledged to governmental
authorities as required by law.
The sources of net investment income are as follows (in thousands):
Year ended December 31,
1997 1996 1995
------------------------
Fixed maturities in excess
of one year $3,470 3,001 2,931
Short-term investments and
cash equivalents 1,611 976 2,421
Other sources - - 74
Equity securities 141 169 603
Investment expenses (311) (161) (171)
-----------------------
Net investment income $ 4,911 3,985 5,858
=======================
The sources of net realized gains are a follows (in thousands):
Year ended December 31,
1997 1996 1995
------------------------
Gain on sale of Kingsway
common stock $49,443 2,394 244
Fixed maturities:
Gross gains 94 228 142
Gross losses (178) (46) (9)
Equity securities:
Gross gains -- 10 42
Gross losses (32) (75) (4)
Other (456) (132) --
------------------------
Realized investment gains $48,871 2,379 415
=======================
At December 31, 1997 and 1995, the net unrealized gains on available-for-sale
securities were net of deferred tax liabilities of $1.1 million and $292
thousand, respectively. At December 31, 1996, the net unrealized loss on
available-for-sale securities was net of a deferred tax benefit of $189
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 its reinsurers and monitors concentrations of credit risk to minimize its
exposure
<PAGE>
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.
<PAGE>
The effects of reinsurance on premiums written, premiums earned, and loss and
loss adjustment expenses incurred for the three years ended December 31, 1997,
1996, and 1995, are as follows (in thousands):
Direct Ceded Assumed Net
-------------------------------
Year ended December 31, 1997
- ----------------------------
Premiums written $67,603 14,909 4,499 57,193
Premiums earned $67,802 14,548 4,156 57,410
Loss and loss adjustment expenses incurred $42,641 8,730 934 34,845
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
5) FEDERAL INCOME TAX
The components of income tax expense are as follows (in thousands):
Year ended December 31,
1997 1996 1995
--------------------------
Current $18,859 1,827 2,440
Deferred (1,149) (1,072) (440)
--------------------------
$17,710 $ 755 2,000
==========================
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax asset at December 31, 1997 and
1996, are as follows (in thousands):
December 31,
1997 1996
----------------
Deferred tax assets:
Loss reserves $1,701 1,453
Unearned premium reserves 865 881
Future benefit of net operating losses 968 1,476
Unrealized investment loss - 189
Foreign tax credit 1,235 -
Other 233 503
Less: valuation allowance (617) (738)
----------------
Deferred tax assets 4,385 3,764
----------------
Deferred tax liabilities:
Deferred policy acquisition costs (919) (1,255)
Unrealized investment gain (1,109) -
Depreciation (128) (128)
Other (3) (6)
----------------
Deferred tax liabilities (2,159) (1,389)
----------------
Net deferred tax asset $2,226 2,375
================
<PAGE>
The valuation allowance of approximately $617 thousand at December 31, 1997
pertains to foreign tax credits. The valuation allowance of approximately
$738 thousand at December 31, 1996, pertains to net operating losses (NOLs) 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. The valuation allowance related to the NOLs
was reduced to zero in 1997. Valuation allowances have been established to
reduce the deferred tax asset related to the foreign tax credits and 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 foreign
tax credit carryforwards begin expiring in 2000 and the NOL carryforwards
begin expiring in 2002.
Income taxes paid (net of taxes recovered) were $20.6 million, ($88) thousand,
and $3.2 million in 1997, 1996, and 1995, respectively. The actual income tax
expense for 1997, 1996, and 1995 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 35% in 1997 and
34% in 1996 and 1995 to operating income.
Year ended December 31,
1997 1996 1995
--------------------------
Computed expected tax $16,149 1,260 1,377
State taxes 662 57 87
Difference between book and tax
bases of Kingsway investment 6,313 - -
Foreign tax rate differential 176 131 475
Tax exempt interest and dividend
received deduction (329) (323) (487)
Foreign source income 288 207 106
Deferred tax valuation allowance (121) (738) 357
Tax credits (5,618) - -
Other 190 161 85
-----------------------
$17,710 755 2,000
=======================
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, pre-tax income
includes $4.5 million attributable to Kingsway. Included in 1995 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. Temporary differences relating to Kingsway
arising from tax law for Canadian insurance companies are similar to those of
the U.S. subsidiaries.
<PAGE>
(6) RELATED PARTY TRANSACTIONS
Certain of the Company's reinsurers are affiliated insurance companies. The
Company ceded to these affiliates premiums written of $414 thousand, $649
thousand, and $524 thousand in 1997, 1996, and 1995, respectively.
<PAGE>
(7) COMMITMENTS AND CONTINGENCIES
There are no significant 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 opinion of management, the ultimate
resolution of such litigation will not have a material effect on the financial
condition of the Company.
During the month of January 1998, the president of IAS resigned and with
several other employees formed Avalon Risk Management, Inc. Avalon's
announced purpose is to compete with IAS in the marketing and distribution of
transportation related insurance and surety products. The Company has filed
suit in the Chancery Division of the Circuit Court of Cook County, Illinois
against the ex-president, Avalon and certain of the defecting employees
alleging breach of fiduciary duty, theft of confidential information and other
unlawful activities, and seeking injunctive relief and damages. The action is
in the early stages of litigation, discovery is just commencing, and its
outcome at this point is not certain.
(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):
Year ended December 31,
1997 1996 1995
-------------------------
Statutory net income (loss) of
insurance subsidiaries $(1,312) 2,645 2,634
Increases (decreases):
Net income (loss) from
non-insurance operations 32,512 3,323 (564)
Deferred policy acquisition
costs (933) (1,034) 420
Deferred income taxes 1,149 1,072 440
Provision for uncollectible balances 4 139 (705)
Consolidating eliminations
and other adjustments, net 368 259 (86)
-----------------------
Consolidated net income
as reported herein $31,788 6,404 2,139
=======================
<PAGE>
Year ended December 31,
1997 1996
-----------------------
Statutory capital and surplus of insurance
subsidiaries $34,357 30,697
Increases (decreases):
Non-insurance net assets 35,578 6,955
Non-admitted assets and other
statutory adjustments, net 1,888 3,738
Deferred policy acquisition costs 2,931 3,864
Costs in excess of net assets
of purchased businesses 1,991 2,091
Deferred income taxes 2,226 2,375
Unrealized gain (loss) on foreign
currency translation 23 (978)
Adjustment to GAAP
fair values 3,249 (281)
Consolidating eliminations
and other adjustments (42) (449)
---------------
Stockholders' equity as reported herein $82,201 48,012
===============
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 1998 based on these regulatory guidelines is
approximately $3.4 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 financial statements. IIC does not currently use permitted
statutory accounting practices which could have a significant impact on its
statutory financial statements.
<PAGE>
(9) UNAUDITED INTERIM FINANCIAL INFORMATION
(in thousands, except per share data),
Three months ended
March 31 June 30 Sept 30 Dec 31
----------------------------------
1997
Revenues $14,981 15,140 63,220 18,817
---------------------------------
Net income from operations $828 608 26,978 17
Net income from investee 967 1,436 954 0
---------------------------------
Net income $1,795 2,044 27,932 17
=================================
Net income per share $0.23 0.27 3.64 0.00
=================================
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
=================================
The above results are consistent with previously reported amounts, except that
results for the third quarter of 1997 were revised to match additional tax
liabilities associated with the gain from the sale of Kingsway shares in that
quarter with the related revenue. The Company previously reported 1997 third
quarter net income of $30,032 thousand and net income per share of $3.91.
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.
(10) STOCK OPTIONS
On July 28, 1987, the Company's stockholders approved the Company's 1987
Non-Qualified and Incentive Stock Option Plan (Option Plan). The Option Plan
has been extended through May 15, 2007. 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.
Activity related to stock options is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------------------------------------------------
<S> <C> <C> <C> <C> <C > <C>
Options outstanding at the
beginning of the period 160,000 $11.60 188,000 $11.03 148,500 $10.51
Options granted (at fair value) 44,400 10.72 6,000 8.33 42,000 13.04
Options exercised (40,000) 6.50 (19,000) 5.00 0 0.00
Options forfeited (65,000) 14.11 (15,000) 11.50 (2,500) 14.00
---------------------------------------------------
Options outstanding at the
end of the period 99,400 $11.62 160,000 $11.60 188,000 $11.03
===================================================
Options exercisable at the
end of the period 27,000 94,000 113,000
===================================================
</TABLE>
<PAGE>
Options outstanding and options exercisable at December 31, 1997 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------------------------------------------
$8.00 -- 14.50 99,400 4.9 years $11.62 27,000 $12.81
(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):
1998 $882
1999 691
2000 649
2001 580
2002 85
2003 14
------
$2,901
======
<PAGE>
Included in other underwriting expenses is rental expense of $1.7 million,
$1.5 million, and $1.3 million for 1997, 1996, and 1995, respectively.
(12) CAPITALIZATION
At December 31, 1996, the Company had a $15.0 million revolving bank line of
credit. The outstanding balance on the line of credit amounted to
approximately $9.7 million. In August 1997, this balance was extinguished
using a portion of the proceeds from the Company's sale of a significant part
of its holdings in Kingsway. The revolving line of credit has been
discontinued.
The Company paid interest of $489 thousand, $768 thousand and $987 thousand in
1997, 1996 and 1995, respectively.
<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.
(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, 1997, 1996, and 1995, were as
follows:
December 31,
1997 1996 1995
---------------------
(dollars in millions)
Revenues $4.6 4.0 35.9
Operating income $(.6) 0.4 4.6
Identifiable assets $9.2 8.3 3.4
(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, 1997 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.
<PAGE>
Activity related to unpaid loss and loss adjustment expenses (LAE) follows (in
thousands):
Year Ended December 31,
1997 1996 1995
--------------------------
Unpaid Losses and LAE at the beginning
of the period, net of reinsurance recoverables
of $9,980, $3,138, and $3,830 $37,057 33,155 35,006
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 37,057 33,155 36,306
-------------------------
Provision for Losses and
LAE for claims occurring during:
Current year 34,260 31,876 45,642
Prior years 585 431 6,104
-------------------------
Total 34,845 32,307 51,746
-------------------------
Less Losses and LAE payments for claims
occurring during:
Current year (10,896) (10,798) (17,491)
Prior years (17,621) (17,607) (20,205)
-------------------------
Total (28,517) (28,405) (37,696)
-------------------------
Adjustment due to deconsolidation
of Kingsway - - (17,201)
-------------------------
Unpaid Losses and LAE at the end of period,
net of reinsurance recoverables of $11,970
$9,980 and $3,138 $43,385 37,057 33,155
=========================
(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 1997, 1996 and 1995, 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 $139 thousand, $116
thousand, and $94 thousand in 1997, 1996 and 1995, 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 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.
<PAGE>
The estimated fair values of the Company's financial instruments at December
31, 1997 are as follows (in thousands):
Carrying Fair
Value Value
-----------------
Assets:
Fixed maturities $60,676 60,676
Equity securities 4,234 4,234
Cash and cash equivalents 49,400 49,400
Premiums receivable 15,677 15,677
Reinsurance recoverable on paid claims 1,137 1,137
Notes receivable 99 99
Income tax recoverable 1,365 1,365
Liabilities:
Funds held by Company 372 372
Supplemental duty deposits 2,016 2,016
The estimated fair values of the Company's financial instruments at December
31, 1996 are as follows (in thousands):
Carrying Fair
Value Value
-----------------
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
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, income tax recoverable 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
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
<PAGE>
thousands):
Year Ended December 31,
1997 1996 1995
-----------------------
Beginning amount of cumulative translation
adjustments $(978) (1,179) (2,002)
Included in Kingsway's basis at sale 1,045 189 319
Aggregate adjustment for the period resulting
from translation adjustments (44) 12 504
------ ------- -------
Net aggregate translation included in equity 1,001 201 823
------ ------- -------
Ending amount of cumulative translation
adjustments $23 (978) (1,179)
====== ======= =======
Canadian foreign exchange rate at end of year 0.69810 0.72970 0.73290
British foreign exchange rate at end of year 1.65600 1.71250 1.55300
Hong Kong foreign exchange rate at end of year 0.12900 0.12930 0.12930
(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 at December 31, 1996 is undistributed net
income from Kingsway of approximately $9.3 million.
The following presents summary financial data for Kingsway as of December 31,
1996 and for the years ended December 31, 1996 and 1995 (in thousands).
December 31,
1996
------------
Assets:
Investments $111,052
Other assets 70,084
--------
Total assets $181,136
========
Liabilities:
Unpaid claims $66,152
Unearned premiums 46,747
Other liabilities 5,020
--------
Total liabilities $117,919
Shareholders' equity 63,217
--------
Total liabilities and shareholders' equity $181,136
========
<PAGE>
Year Ended December 31,
1996 1995
-----------------------
Revenues:
Net premiums earned $78,972 $33,617
Other revenues 8,103 3,585
-------------------
Total revenues 87,075 37,202
-------------------
Expenses:
Claims incurred 51,257 22,360
Other expenses 24,263 10,118
-------------------
Total expenses 75,520 32,478
-------------------
Income before income taxes 11,555 4,724
Income taxes 3,369 1,975
-------------------
Net income $8,186 $2,749
===================
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
(1) International Advisory Services has ten subsidiaries, nine known as
Trade Insurance Services, Inc., one known as TRM Insurance Services,
Inc. all operating as insurance agencies. These are located in various
states as well as one location each in Canada and Hong Kong.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Intercargo Corporation:
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of our report dated March 23, 1998, with respect to the consolidated financial
statements as of December 31, 1997 and for the year ended December 31, 1997,
included in the December 31, 1997 Annual Report to Shareholders of Intercargo
Corporation.
Our audit also included the financial statement schedules of Intercargo
Corporation as of December 31, 1997 and for the year ended December 31, 1997
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, with respect to which the date is March 23, 1998, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-11867) pertaining to the issuance of common shares
under the 1987 Non-Qualified and Incentive Stock Option Plan of Intercargo
Corporation of our report dated March 23, 1998, with respect to the
consolidated financial statements as of December 31, 1997 and for the year
ended December 31, 1997 incorporated herein by reference, and our report,
included in the preceding paragraph with respect to the financial statement
schedules as of December 31, 1997 and for the year ended December 31, 1997
included in this Annual Report (Form 10-K) of Intercargo Corporation.
ERNST & YOUNG LLP
Chicago, Illinois
March 23, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Intercargo Corporation:
We consent to incorporation by reference in the registration statement (No.
333-11867) on Form S-8 of Intercargo Corporation of our report dated February
21, 1997, relating to the consolidated balance sheet of Intercargo Corporation
as of December 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1996, and related schedules, which report appears in
the 1997 annual report on Form 10-K of Intercargo Corporation.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 26, 1998
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 60,676
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0
0
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57,410
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<OTHER-INCOME> 967
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<UNDERWRITING-OTHER> 16,427
<INCOME-PRETAX> 46,141
<INCOME-TAX> 17,710
<INCOME-CONTINUING> 28,431
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,788
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<EPS-DILUTED> 4.14
<RESERVE-OPEN> 37,057
<PROVISION-CURRENT> 34,260
<PROVISION-PRIOR> 585
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