FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 1998.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File Number: 000-24366
GORAN CAPITAL INC.
(Exact name of registrant as specified in its charter)
CANADA Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
181 University Avenue, Suite 1101 M5H 3M7
Toronto, Ontario Canada
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (416) 594-1155 (Canada)
(317) 259-6400 (U.S.A.)
Securities registered pursuant to
Section 12(b) of the Act: Common Shares
Securities registered pursuant to None
Section 12(g) of the Act: (Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the 2,813,654 shares of the Issuer's Common Stock
held by nonaffiliates, as of March 22, 1999 was $26,729,713 (US).
The number of shares of Common Stock of the Registrant, without par value,
outstanding as of March 22, 1999 was 5,876,398.
Documents Incorporated By Reference:
Portions of the Annual Report to Shareholders and the Proxy Statement for the
1999 Annual Meeting of Shareholders are incorporated into Parts II and III.
Exhibit Index on Page 42 Page 1 of 49
<PAGE>
Exchange Rate Information
The Company's accounts and financial statements are maintained in U.S. Dollars.
In this Report all dollar amounts are expressed in U.S. Dollars except where
otherwise indicated.
The following table sets forth, for each period indicated, the average exchange
rates for U.S. Dollars expressed in Canadian Dollars on the last day of each
month during such period, the high and the low exchange rate during that period
and the exchange rate at the end of such period, based upon the noon buying rate
in New York City for cable transfers in foreign currencies, as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate").
Foreign Exchange Rates
U.S. to Canadian Dollars
For The Years Ended December 31,
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Average .7322 .7287 .7339 .7222 .6745
Period End .7129 .7325 .7301 .6995 .6532
High .7642 .7465 .7472 .7351 .7061
Low .7097 .7099 .7270 .6938 .6376
</TABLE>
Accounting Principles
The financial information contained in this document is stated in U.S. Dollars
and is expressed in accordance with Canadian Generally Accepted Accounting
Principles unless otherwise stated.
<PAGE>
GORAN CAPITAL INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1998
PART I Page
ITEM 1. Business .................................................. 4
Forward Looking Statements - Safe Harbor Provisions....... 33
ITEM 2. Properties................................................ 38
ITEM 3. Legal Proceedings......................................... 39
ITEM 4. Submission of Matters to a Vote of Security Holders....... 39
PART II
ITEM 5. Market For Registrant's Common Equity And
Related Shareholder Matters............................... 39
ITEM 6. Selected Consolidated Financial Data...................... 40
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 41
ITEM 8. Financial Statements and Supplementary Data............... 41
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant........ 41
ITEM 11. Executive Compensation.................................... 41
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management..................................... 41
ITEM 13. Certain Relationships and Related Transactions............ 41
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports Form 8-K.......................................... 42
SIGNATURES .......................................................... 49
<PAGE>
ITEM 1 - BUSINESS
(figures stated in U.S. dollars)
General
Goran Capital Inc. ("Goran" or the "Company") is a Canadian federally
incorporated holding company principally engaged in the business of underwriting
property and casualty insurance through its insurance subsidiaries Pafco General
Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF
Insurance Company ("IGF"), which maintain their headquarters in Indianapolis,
Indiana, Atlanta, Georgia and Des Moines, Iowa, respectively. Goran owns
approximately 67% of a U.S. holding company, Symons International Group, Inc.
("SIG"). SIG owns IGF and GGS Management Holdings, Inc. ("GGS Holdings") and GGS
Management, Inc. ("GGS") which are the holding company and management company
for Pafco and Superior. Goran sold 33% of SIG in an Initial Public Offering in
November, 1996. The Company's other subsidiaries include Granite Reinsurance
Company Ltd. ("Granite Re"), Granite Insurance Company ("Granite"), a Canadian
federally licensed insurance company and Symons International Group, Inc. -
Florida ("SIGF"), a surplus lines underwriter located in Florida. In 1997, the
Company announced its intention to discontinue the operations of SIGF with a
sale of such operations completed effective January 1, 1999.
Granite Re is a specialized reinsurance company that underwrites niche
products such as nonstandard automobile, crop, property casualty reinsurance and
offers (on a non-risk bearing, fee basis), rent-a-captive facilities for
Bermudian, Canadian and U.S. reinsurance companies.
Through a rent-a-captive program, Granite Re offers the use of its
capital and its underwriting facilities to write specific programs on behalf of
its clients, including certain programs ceded from IGF and Pafco. Granite Re
alleviates the need for its clients to establish their own insurance company and
also offers this facility in an offshore environment.
Granite sold its book of business in January 1990 to an affiliate which
subsequently sold to third parties in June 1990. Granite currently has
approximately 40 outstanding claims and maintains an investment portfolio
sufficient to support those claim liabilities which will likely be settled
between now and the year 2000.
Goran Capital Inc., a specialty property and casualty insurer,
underwrites and markets nonstandard private passenger automobile insurance and
crop insurance. Through its Subsidiaries, the Company writes business in the
United States exclusively through independent agencies and seeks to distinguish
itself by offering high quality, technology based services for its agents and
policyholders. Based on the Company's Gross Premiums Written in 1998, the
Company believes that it is the twelfth largest underwriter of nonstandard
automobile insurance in the United States. Based on premium information compiled
in 1997 by the NCIS, the Company believes that IGF is the fourth largest
underwriter of crop insurance in the United States.
Nonstandard Automobile Insurance
Industry Background
The Company, through its Subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile physical damage and liability
policies for "nonstandard risks." The nonstandard market accounted for
approximately 19% of total private passenger automobile insurance premiums
written in 1997. According to statistical information derived from insurer
annual statements compiled by A.M. Best, the nonstandard automobile market
accounted for $22 billion in annual premium volume for 1997.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
o The Company seeks to achieve profitability through a
combination of internal growth and the acquisition of other
insurers and blocks of business. The Company regularly
evaluates acquisition opportunities.
4
<PAGE>
o The Company will seek to expand the multi-tiered marketing
approach currently employed in certain states in order to
offer to its independent agency network a broader range of
products with different premium and commission structures.
o The Company is committed to the use of integrated technologies
which permit it to rate, issue, bill and service policies in
an efficient and cost effective manner.
o The Company competes primarily on the basis of underwriting
criteria and service to agents and insureds and generally does
not match price decreases implemented by competitors which are
directed towards obtaining market share.
o The Company encourages agencies to place a large share of
their profitable business with its subsidiaries by offering,
in addition to fixed commissions, a contingent commission
based on a combination of volume and profitability.
o The Company responds to claims in a manner designed to reduce
the costs of claims settlements by reducing the number of
pending claims and uses computer databases to verify repair
and vehicle replacement costs and to increase subrogation and
salvage recoveries.
Products
The Company offers both liability and physical damage coverage in the
insurance marketplace, with policies having terms of three to twelve months,
with the majority of policies having a term of six months. Most nonstandard
automobile insurance policyholders choose the basic limits of liability coverage
which, though varying from state to state, generally are $25,000 per person and
$50,000 per accident for bodily injury and in the range of $10,000 to $20,000
for property damage.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Choice
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard marketplace. The Superior Standard policy is intended for risks
which do not qualify for Superior Choice but which nevertheless present a more
favorable risk profile than many other nonstandard risks. The Superior Specialty
policies cover risks which do not qualify for either the Superior Choice or the
Superior Standard. Pafco offers a product similar to the Superior product.
Marketing
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Virginia, Indiana and Georgia and also
writes nonstandard automobile insurance in 16 additional states, with plans to
continue to expand selectively into additional states. The Company will select
states for expansion based on a number of criteria, including the size of the
nonstandard automobile insurance market, state-wide loss results, competition
and the regulatory climate. The following table sets forth the geographic
distribution of Gross Premiums Written for the Company for the periods indicated
including Gross Premiums Written for Superior prior to its acquisition by the
Company on April 30, 1996.
5
<PAGE>
Goran Capital Inc. and Superior Insurance Company (Combined)
Year Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
State 1996 1997 1998
<S> <C> <C> <C>
Arizona $ -- $ -- $6,228
Arkansas 2,004 1,539 1,383
California 25,131 59,819 48,181
Colorado 10,262 9,865 8,115
Florida 97,659 141,907 107,746
Georgia 7,398 11,858 21,575
Illinois 2,994 3,541 2,908
Indiana 16,599 17,227 18,735
Iowa 5,818 7,079 6,951
Kentucky 11,065 9,538 8,108
Mississippi 2,250 2,830 5,931
Missouri 13,423 9,705 8,669
Nebraska 5,390 6,613 6,803
Nevada -- 4,273 8,849
Ohio 3,643 3,731 2,106
Oklahoma 2,559 3,418 3,803
Oregon -- 2,302 6,390
Tennessee (2) -- 1,443
Texas 10,122 7,192 7,520
Virginia 14,733 21,446 22,288
Washington 106 32 5
------- ------- -------
Total $231,154 $323,915 $303,737
======= ======= =======
</TABLE>
The Company markets its nonstandard products exclusively through
approximately 6,000 independent agencies and focuses its marketing efforts in
rural areas and the peripheral areas of metropolitan centers. As part of its
strategy, management is continuing its efforts to establish the Company as a low
cost provider of nonstandard automobile insurance while maintaining a commitment
to provide quality service to both agents and insureds. This element of the
Company's strategy is being accomplished primarily through the automation of
certain marketing, underwriting and administrative functions. In order to
maintain and enhance its relationship with its agency base, the Company has
several territorial managers, each of whom resides in a specific marketing
region and has access to the technology and software necessary to provide
marketing, rating and administrative support to the agencies in his or her
region.
The Company attempts to foster strong service relationships with its
agencies and customers. The Company is currently completing its development of
computer software that will provide on-line communication with its agency force.
In addition, to delivering prompt service while ensuring consistent
underwriting, the Company offers rating software to its agents in some states
which permits them to evaluate risks in their offices. The agent has the
authority to sell and bind insurance coverages in accordance with procedures
established by the Company, which is a common practice in the nonstandard
automobile insurance business. The Company reviews all coverages bound by the
agents promptly and generally accepts all coverages which fall within its stated
underwriting criteria. In most jurisdictions, the Company has the right within a
specified time period to cancel any policy even if the risk falls within its
underwriting criteria. See "Business -- Nonstandard Automobile Insurance --
Underwriting."
6
<PAGE>
The Company compensates its agents by paying a commission based on a
percentage of premiums produced. The Company also offers its agents a contingent
commission based on volume and profitability, thereby encouraging the agents to
enhance the placement of profitable business with the Company.
The Company believes that the combination of Pafco with Superior and
its two Florida-domiciled insurance subsidiaries allows the Company the
flexibility to engage in multi-tiered marketing efforts in which specialized
automobile insurance products are directed toward specific segments of the
market. Since certain state insurance laws prohibit a single insurer from
offering similar products with different commission structures or, in some
cases, premium rates, it is necessary to have multiple licenses in certain
states in order to obtain the benefits of market segmentation. The Company is
currently offering multi-tiered products in its major states. The Company
intends to continue the expansion of the marketing of its multi-tiered products
into other states and to obtain multiple licenses for its subsidiaries in these
states to permit maximum flexibility in designing commission structures.
Underwriting
The Company underwrites its nonstandard automobile business with the
goal of achieving adequate pricing. The Company seeks to classify risks into
narrowly defined segments through the utilization of all available underwriting
criteria. The Company maintains an extensive, proprietary database which
contains statistical records with respect to its insureds on driving and repair
experience by location, class of driver and type of automobile. Management
believes this database gives the Company the ability to be more precise in the
underwriting and pricing of its products. Further, the Company uses motor
vehicle accident reporting agencies to verify accident history information
included in applications.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and
use of rates, while others, such as Florida, Arkansas and California, require
approval of the insurance department prior to the use of the rates.
The Company has integrated its automated underwriting process with the
functions performed by its agency force. For example, the Company has a rating
software package for use by agents in some states. In many instances, this
software package, combined with agent access to the automated retrieval of motor
vehicle reports, ensures accurate underwriting and pricing at the point of sale.
The Company believes the automated rating and underwriting system provides a
significant competitive advantage because it (i) improves efficiencies for the
agent and the Company, thereby reinforcing the agents' commitment to the
Company, (ii) makes more accurate and consistent underwriting decisions possible
and (iii) can be changed easily to reflect new rates and underwriting
guidelines.
Underwriting results of insurance companies are frequently measured by
their Combined Ratios. However, investment income, federal income taxes and
other non-underwriting income or expense are not reflected in the Combined
Ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are generally considered profitable when the Combined Ratio is under
100% and unprofitable when the Combined Ratio is over 100%. Refer to
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a further discussion on the Combined Ratio.
In an effort to maintain and improve underwriting profits, the
territorial managers regularly monitor loss ratios of the agencies in their
regions and meet periodically with the agencies in order to address any adverse
trends in Loss Ratios.
Claims
The Company's nonstandard automobile claims department handles claims
on a regional basis from its Indianapolis, Indiana; Atlanta, Georgia; Tampa,
Florida and Anaheim, California locations. Management believes that the
employment of salaried claims personnel, as opposed to independent adjusters,
results in reduced ultimate loss payments, lower LAE and improved customer
service. The Company generally retains independent appraisers and adjusters on
an as needed basis for estimation of physical damage claims and limited elements
of investigation. The Company uses the Audapoint, Audatex and Certified
7
<PAGE>
Collateral Corporation computer programs to verify, through a central database,
the cost to repair a vehicle and to eliminate duplicate or "overlap" costs from
body shops. Autotrak, which is a national database of vehicles, allows the
Company to locate vehicles nearly identical in model, color and mileage to the
vehicle damaged in an accident, thereby reducing the frequency of disagreements
with claimants as to the replacement value of damaged vehicles.
Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claim-related litigation is monitored by a home
office supervisor or litigation manager. The claims policy of the Company
emphasizes prompt and fair settlement of meritorious claims, appropriate
reserving for claims and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a
portion of its risks and paying for that protection based upon premiums received
on all policies subject to such Reinsurance. Insurance is ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large losses, including catastrophic losses. Although
Reinsurance does not legally discharge the ceding insurer from its primary
obligation to pay the full amount of losses incurred under policies reinsured,
it does render the reinsurer liable to the insurer to the extent provided by the
terms of the Reinsurance treaty. As part of its internal procedures, the Company
evaluates the financial condition of each prospective reinsurer before it cedes
business to that carrier. Based on the Company's review of its reinsurers'
financial health and reputation in the insurance marketplace, the Company
believes its reinsurers are financially sound and that they therefore can meet
their obligations to the Company under the terms of the Reinsurance treaties.
Effective January 1, 1997, Pafco and Superior ceded 20% of its
nonstandard automobile business written during the first three quarters of 1997
and 25% during the fourth quarter in accordance with a quota share Reinsurance
agreement. 90% of the cession was with Vesta Fire Insurance Company (rated "A"
by A.M. Best) and 10% was with Granite Re. Effective January 1, 1998, the
cession rate was changed to 10%. These treaties were commuted effective October
1, 1998, thereby completely and fully discharging Vesta and Granite Re of any
obligations relative to this business for payments of $7,698,977 and $1,123,294,
respectively.
In 1998, 1997 and 1996, Pafco and Superior maintained casualty excess
of loss reinsurance on its nonstandard automobile insurance business covering
100% of losses on an individual occurrence basis in excess of $200,000 up to a
maximum of $5,000,000.
Amounts recoverable from reinsurers relating to nonstandard automobile
operations as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Reinsurance
A.M. Best Recoverable as of
Reinsurers Rating December 31, 1998 (1)
(in thousands)
<S> <C> <C>
Everest Reinsurance Company A+ (2) $315
Q.B.I. Insurance (UK) Ltd. Not Rated $249
Constitution Reinsurance Corporation A+ $251
Federal Emergency Management Administration Not Rated $463
</TABLE>
(1) Only recoverable greater than $200,000 are shown. Total nonstandard
automobile reinsurance recoverables as of December 31, 1998 were
approximately $2,292,000.
(2) An A.M. Best Rating of "A+" is the second highest of 15 ratings.
8
<PAGE>
On April 29, 1996, Pafco retroactively ceded all of its commercial
business relating to 1995 and previous years to Granite Re, with an effective
date of January 1, 1996. Approximately $3,519,000 and $2,380,000 of loss and
loss adjustment expense reserves and unearned premium reserves, respectively,
were ceded and no gain or loss recognized. Effective January 1, 1998, Granite Re
ceded the 1995 and prior commercial business back to Pafco. Approximately
$1,803,000 in loss and loss adjustment expense reserves were ceded back to Pafco
and no gain or loss was recognized.
On April 29, 1996, Pafco also entered into a 100% quota share
reinsurance agreement with Granite Re, whereby all of Pafco's commercial
business from 1996 and thereafter was ceded effective January 1, 1996.
Neither Pafco nor Superior has any facultative Reinsurance with respect
to its nonstandard automobile insurance business.
Competition
The Company competes with both large national and smaller regional
companies in each state in which it operates. The Company's competitors include
other companies which, like the Company, serve the agency market, as well as
companies which sell insurance directly to customers. Direct writers may have
certain competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and, potentially, reduced
acquisition costs. The Company's primary competitors are Progressive Casualty
Insurance Company, Guaranty National Insurance Company, Integon Corporation
Group, Deerbrook Insurance Company (a member of the Allstate Insurance Group)
and the companies of the American Financial Group. Generally, these competitors
are larger and have greater financial resources than the Company. The
nonstandard automobile insurance business is price sensitive and certain
competitors of the Company have, from time to time, decreased their prices in an
apparent attempt to gain market share. Although the Company's pricing is
inevitably influenced to some degree by that of its competitors, management of
the Company believes that it is generally not in the Company's best interest to
match such price decreases, choosing instead to compete on the basis of
underwriting criteria and superior service to its agents and insureds.
Crop Insurance
Industry Background
The two principal components of the Company's crop insurance business
are MPCI and private named peril, primarily crop hail insurance. Crop insurance
is purchased by farmers to reduce the risk of crop loss from adverse weather and
other uncontrollable weather events. Farms are subject to drought, floods and
other natural disasters that can cause widespread crop losses and, in severe
cases, force farmers out of business. Because many farmers rely on credit to
finance their purchases of such agricultural inputs as seed, fertilizer,
machinery and fuel, the loss of a crop to a natural disaster can reduce their
ability to repay these loans and to find sources of funding for the following
year's operating expenses.
MPCI was initiated by the federal government in the 1930s to help
protect farmers against loss of their crops as a result of drought, floods and
other natural disasters. In addition to MPCI, farmers whose crops are lost as a
result of natural disasters have, in the past, occasionally been supported by
the federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available only
on major crops in major producing areas. In 1980, Congress expanded the scope
and coverage of the MPCI program. In addition, the delivery system for MPCI was
expanded to permit private insurance companies and licensed agents and brokers
to sell MPCI policies and the FCIC was authorized to reimburse participating
companies for their administrative expenses and to provide federal Reinsurance
for the majority of the risk assumed by such private companies.
Although expansion of the federal crop insurance program in 1980 was
expected to make crop insurance the farmer's primary risk management tool,
participation in the MPCI program was only 32% of eligible acreage in the 1993
crop year. Due in part to low participation in the MPCI program, Congress
provided an average of $1.5 billion per year in ad hoc disaster payments over
the six years prior to 1994. In view of the combination of low participation
rates in the MPCI program and large federal payments on both crop insurance
(with an average loss ratio of 147%) and ad hoc disaster payments since 1980,
Congress has, since 1990, considered major reform of its crop insurance and
disaster assistance policies. The 1994 Reform Act was enacted in order to
increase participation in the MPCI program and eliminate the need for ad hoc
federal disaster relief payments to farmers.
9
<PAGE>
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage (i.e., the minimum available level of MPCI providing coverage
for 50% of farmers' historic yield at 60% of the price per unit for such crop
set by the FCIC) in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of CAT
Coverage by the local USDA offices which has since been eliminated by the
Federal Agriculture Improvement and Reform Act of 1996 ("the 1996 Reform Act").
The 1996 Reform Act was signed into law by President Clinton in April 1996 and
also eliminated the linkage between CAT Coverage and qualification for certain
federal farm program benefits.
In June 1998, President Clinton signed the Agricultural Research,
Extension and Education Reform Act of 1998 into law ("Ag Research Act"). That
Act contained a number of changes in the crop insurance program, the largest of
which was the conversion of funding for the MPCI Expense Reimbursement subsidy
that had previously been 50% permanent (mandatory spending) under the federal
budget and 50% discretionary (dependent on annual Congressional appropriations)
to 100% permanent/mandatory funding. Thus, the program and the companies are no
longer subject to the annual budget battles in Washington with respect to
administrative funding. This is a major positive change in the stability of the
program.
Other changes included a reduction in the rate of MPCI Expense
Reimbursement from the general 27% in the 1998 reinsurance year to 24.5% in
1999. The reinsurance terms of the 1998 (and now 1999 and 2000) SRA were also
frozen for subsequent reinsurance years thereby providing another aspect of
stability to the program. Two other changes were made related to the
Catastrophic (CAT) level of insurance under the MPCI program. The law
significantly changed the administrative fee structure attached to such policies
(farmers pay no premium only administrative fees for CAT) - the previous $50 per
crop per county (with $200/county, $600 overall limit) was changed to the higher
of $50 or 10% of the imputed premium for such policies plus $10 and no part of
the fees would be retained by the participating reinsured company any longer
(previously up to $100 per county could be retained). Starting in 1999, all fees
would go directly to the Federal Government rather than the Company. In
addition, the CAT LAE Reimbursement was lowered from approximately 13.7% of
imputed premium in 1998 to 11% of premium in 1999.
In October 1998, President Clinton signed the Fiscal Year 1999 Omnibus
Consolidated and Emergency Supplemental Appropriations Act into law. This
provided a total of $2.375 billion in disaster assistance to help producers
weather 1998 and multi-year disasters. Any producer receiving a payment under
that program who did not have crop insurance in 1998 will be required to secure
coverage (CAT or MPCI Buy-up) for the 1999 and 2000 crop years. In addition, on
December 12, 1998, President Clinton and the USDA announced that $400 million of
the $2.375 billion would be set aside as a 1999 crop year crop insurance premium
incentive to encourage producers to secure additional coverage on their 1999
crops. In addition, on January 8, 1999, the FCIC announced that it would accept
additional applications for insurance or accept changes in insurance coverage
from producers for their 1999 crops (2000 crop of citrus) in cases where sales
closing dates had already passed and it would extend upcoming spring application
periods across the country to allow producers additional time to take advantage
of the premium incentive. Additional options for allowing the reinsured
companies to manage the risk associated with these actions were also provided.
The Company expects to more than offset these reimbursement reductions
through growth in fee income from non-federally subsidized programs such as
AgPI(R) and GEO Ag Plus(R) initiated in 1998. The Company has also been working
to reduce its costs. While the Company fully believes it can more than offset
these reductions, there is no assurance the Company will be successful in its
efforts or that further reductions in federal reimbursements will not continue
to occur.
In addition to MPCI, the Company offers stand alone crop hail
insurance, which insures growing crops against damage resulting from hail storms
and which involves no federal participation, as well as its proprietary product
which combines the application and underwriting process for MPCI and hail
coverages. This product tends to produce less volatile loss ratios than the
stand alone product since the combined product generally insures a greater
number of acres, thereby spreading the risk of damage over a larger insured
area. Approximately half of the Company's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide coverage against
hail damage, under crop hail coverages farmers can receive payments for hail
damage which would not be severe enough to require a payment under an MPCI
policy. The Company believes that offering crop hail insurance enables it to
sell more MPCI policies than it otherwise would.
10
<PAGE>
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
o The Company seeks to enhance underwriting profits and reduce the
volatility of its crop insurance business through geographic
diversification and the appropriate allocation of risks among the
federal reinsurance pools and the effective use of federal and
third-party catastrophic Reinsurance arrangements.
o The Company also limits the risks associated with crop insurance
through selective underwriting of crop risks based on its
historical loss experience data base.
o The Company continues to develop and maintain a proprietary
knowledge-based underwriting system which utilizes a database of
Company-specific underwriting rules.
o The Company has further strengthened its independent agency network
by using technology to provide fast, efficient service to its
agencies and providing application documentation designed for
simplicity and convenience.
o Unlike many of its competitors, the Company employs approximately
135 full-time claims adjusters, most of whom are agronomy-trained,
to reduce the cost of losses experienced by IGF and to provide
opportunity to produce fee based income.
o The Company stops selling its crop hail policies after certain
selected dates to prevent farmers from adversely selecting against
IGF when a storm is forecast or hail damage has already occurred.
o The Company continues to explore growth opportunities and product
diversification through new specialty coverages, including
Agriculture Production Interruption (AgPI), Agriculture Revenue
Interruption (AgRI) and specific named peril crop insurance.
Further, IGF has recently released new products such as timber,
fresh market vegetables and environmental ("green") coverages.
o The Company has recently launched a new fee based service for
farmers called Geo AgPLUS(TM).
o The Company continues to explore new opportunities in
administrative efficiencies and product underwriting made possible
by advances in Precision Farming software, Global Positioning
System (GPS) software and Geographical Information System (GIS)
technology, all of which continue to be adopted by insureds in
their farming practices.
Products
MPCI is a federally subsidized program which is designed to provide
participating farmers who suffer insured crop damage with funds needed to
continue operating and plant crops for the next growing season. All of the
material terms of the MPCI program and of the participation of private insurers,
such as the Company, in the program are set by the FCIC under applicable law.
MPCI provides coverage for insured crops against substantially all natural
perils. Purchasing an MPCI policy permits a farmer to insure against the risk
that his crop yield for any growing season will be less than 50% to 75% (as
selected by the farmer at the time of policy application or renewal) of his
historic crop yield. If a farmer's crop yield for the year is greater than the
yield coverage he selected, no payment is made to the farmer under the MPCI
program. However, if a farmer's crop yield for the year is less than the yield
coverage selected, MPCI entitles the farmer to a payment equal to the yield
shortfall multiplied by 60% to 100% of the price for such crop (as selected by
the farmer at the time of policy application or renewal) for that season as set
by the FCIC.
In order to encourage farmers to participate in the MPCI program and
thereby reduce dependence on traditional disaster relief measures, the 1996
Reform Act established CAT Coverage as a new minimum level of MPCI coverage,
which farmers may purchase upon payment of a fixed administrative fee of $60 per
policy instead of any premium. CAT Coverage insures 50% of historic crop yield
at 55% of the FCIC-set crop price for the applicable commodities standard unit
11
<PAGE>
of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private
insurers such as the Company.
In addition to CAT Coverage, MPCI policies that provide a greater level of
protection than the CAT Coverage level are also offered ("Buy-up Coverage").
Most farmers purchasing MPCI have historically purchased at Buy-up Coverage
levels, with the most frequently sold policy providing coverage for 65% of
historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up
Coverages require payment of a premium in an amount determined by a formula set
by the FCIC. Buy-up Coverage can only be purchased from private insurers. The
Company focuses its marketing efforts on Buy-up Coverages, which have higher
premiums and which the Company believes will continue to appeal to farmers who
desire, or whose lenders encourage or require production and revenue protection.
The number of MPCI Buy-up policies written has historically tended to
increase after a year in which a major natural disaster adversely affecting
crops occurs and to decrease following a year in which favorable weather
conditions prevail.
The Company, like other private insurers participating in the MPCI
program, generates revenues from the MPCI program in two ways. First, it
markets, issues and administers policies, for which it receives administrative
fees; and second, it participates in a profit-sharing arrangement in which it
receives from the government a portion of the aggregate profit, or pays a
portion of the aggregate loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex profit sharing formula established by the FCIC. Under
this formula, the primary factors that determine the Company's MPCI profit or
loss share are (i) the gross premiums the Company is credited with having
written, (ii) the amount of such credited premiums retained by the Company after
ceding premiums to certain federal reinsurance pools and (iii) the loss
experience of the Company's insureds.
The Company also offers Crop Revenue Coverage ("CRC"). In contrast to
standard MPCI coverage, which features a yield guarantee or coverage for the
loss of production, CRC provides the insured with a guaranteed revenue stream by
combining both yield and price variability protection. CRC protects against a
grower's loss of revenue resulting from fluctuating crop prices and/or low
yields by providing coverage when any combination of crop yield and price
results in revenue that is less than the revenue guarantee provided by the
policy. CRC was approved by the FCIC as a pilot program for revenue insurance
coverage plans for the 1996 Crop Year and since then it has been expanded
virtually nationwide on corn, soybeans and wheat and to additional crops in new
pilot areas. Currently, CRC represents approximately 20% of all of the Company's
MPCI policies.
Revenue insurance coverage plans such as CRC are largely the result of
the 1996 Reform Act, which directed the FCIC to develop a crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company other than the
Company under the Federal Crop Insurance Act, which authorizes private companies
to design alternative coverage plans and to submit them for review, approval and
endorsement by the FCIC. As a result, although CRC is administered and reinsured
by the FCIC and risks are allocated to the federal reinsurance pools, CRC
remains partially influenced by the private sector, particularly with respect to
changes in its rating structure.
CRC plans to use the policy terms and conditions of the Actual
Production History ("APH") plan of MPCI as the basic provisions for coverage.
The APH provides the yield component by utilizing the insured's historic yield
records. The CRC revenue guarantee is the producer's approved APH times the
coverage level, times the higher of the spring futures price or harvest futures
price (in each case, for post-harvest delivery) of the insured crop for each
unit of farmland. The coverage levels and exclusions in a CRC policy are similar
to those in a standard MPCI policy. For the 1998 Crop Year, the Company received
from the FCIC an expense reimbursement payment equal to 23.5% of Gross Premiums
Written in respect of each CRC policy it writes. The MPCI Buy-up Expense
Reimbursement Payment is currently established by legislation. The expense
reimbursement payment on CRC was 31% in 1996, 29% in 1997, 23.25% in 1998 and
21.1% in 1999.
12
<PAGE>
CRC protects revenues by extending crop insurance protection based on
APH to include price as well as yield variability. Unlike MPCI, in which the
crop price component of the coverage is set by the FCIC prior to the growing
season and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice in
the CRC plan. The spring futures price is used to establish the initial policy
revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to recompute
the revenue guarantee (and resulting indemnity payments) when the harvest price
is higher than the spring price.
In addition to MPCI (including CRC), the Company offers stand alone
crop hail insurance, which insures growing crops against damage resulting from
hail storms and which involves no federal participation, as well as its
proprietary HAILPLUS(R) product which combines the application and underwriting
process for MPCI and hail coverages. The HAILPLUS(R) product tends to produce
less volatile loss ratios than the stand alone product since the combined
product generally insures a greater number of acres, thereby spreading the risk
of damage over a larger insured area. Approximately 50% of IGF's hail policies
are written in combination with MPCI. Although both crop hail and MPCI provide
insurance against hail damage, under crop hail coverages farmers can receive
payments for hail damage which would not be severe enough to require a payment
under an MPCI policy. The Company believes that offering crop hail insurance
enables it to sell more MPCI policies than it otherwise would.
In addition to crop hail insurance, the Company also sells a small
volume of insurance against crop damage from other specific named perils. These
products cover specific crops, including hybrid seed corn, cranberries, cotton,
sugar cane, sugar beets, citrus, tomatoes and onions and are generally written
on terms that are specific to the kind of crops and farming practices involved
and the amount of actuarial data available. The Company plans to seek potential
growth opportunities in this niche market by developing basic policies on a
diverse number of named crops grown in a variety of geographic areas and to
offer these polices primarily to large producers through certain select agents.
The Company's experienced product development team will develop the underwriting
criteria and actuarial rates for the named peril coverages. As with the
Company's other crop insurance products, loss adjustment procedures for named
peril policies are handled by full-time professional claims adjusters who have
specific agronomy training with respect to the crop and farming practice
involved in the coverage.
AgPI(R) protects agriculture based businesses that depend upon a steady
flow of a crop (or crops) to stay in business. This protection is available to
those involved in agribusiness who are a step beyond the farm gate, such as
elevator operators, custom harvesters, cotton gins and businesses that are
dependent upon a single supplier of products, (i.e., popping corn).
These businesses have been able to buy normal business interruption
insurance to protect against on-site calamities such as a fire, wind storm or
tornado. But until now, they have been totally unprotected by the insurance
industry if they encounter a production shortfall in their trade area which
limited their ability to bring raw materials to their operation. AgPI(R) allows
the agricultural business to protect against a disruption in the flow of the raw
materials it depends on. AgPI(R) was formally introduced at the beginning of the
1998 crop year.
Geo AgPLUS(TM) provides to the farmer mapping and soil sampling
services combined with fertility maps and the software that is necessary to run
their precision farming program. Grid soil sampling, when combined with
precision farming technology, allows the farmer to apply just the right amount
of fertilization, thus balancing the soil for a maximum crop yield. Precision
farming increases the yield to the farmer, reduces the cost of unnecessary
fertilization and enhances the environment by reducing overflows of
fertilization into the ecosystem. Geo AgPLUS(TM) is an IGF Insurance Company
trademarked precision farming division that is now marketing its fee based
products to the farmer.
13
<PAGE>
Gross Premiums
Each year the FCIC sets the formulas for determining premiums for
different levels of Buy-up Coverage. Premiums are based on the type of crop,
acreage planted, farm location, price per bushel for the insured crop as set by
the FCIC for that year and other factors. The federal government will generally
subsidize a portion of the total premium set by the FCIC and require farmers to
pay the remainder. Cash premiums are received by the Company from farmers only
after the end of a growing season and are then promptly remitted to the federal
government. Although applicable federal subsidies change from year to year, such
subsidies will range up to approximately 40% of the Buy-up Coverage premium
depending on the crop insured and the level of Buy-up Coverage purchased, if
any. Federal premium subsidies are recorded on the Company's behalf by the
government. For purposes of the profit sharing formula, the Company is credited
with having written the full amount of premiums paid by farmers for Buy-up
Coverages, plus the amount of any related federal premium subsidies (such total
amount, its "MPCI Premium").
As previously noted, farmers pay an administrative fee of $60 per
policy but are not required to pay any premium for CAT Coverage. However, for
purposes of the profit sharing formula, the Company is credited with an imputed
premium (its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount
of such MPCI Imputed Premium credited is determined by formula. In general, such
MPCI Imputed Premium will be less than 50% of the premium that would be payable
for a Buy-up Coverage policy that insured 65% of historic crop yield at 100% of
the FCIC-set crop price per standard unit of measure for the commodity,
historically the most frequently sold Buy-up Coverage. For income statement
purposes under GAAP, the Company's Gross Premiums Written for MPCI consist only
of its MPCI Premiums and do not include MPCI Imputed Premiums.
Reinsurance Pools
Under the MPCI program, the Company must allocate its MPCI Premium or
MPCI Imputed Premium in respect of a farm to one of seven federal reinsurance
pools, at its discretion. These pools provide private insurers with different
levels of Reinsurance protection from the FCIC on the business they have
written. The seven pools have three fundamental designations; Commercial,
Developmental and Assigned Risk. For insured farms allocated to the "Commercial
Pool," the Company, at its election, generally retains 50% to 100% of the risk
and the FCIC assumes 0% - 50% of the risk; for those allocated to the
"Developmental Pool," the Company generally retains 35% of the risk and the FCIC
assumes 65%; and for those allocated to the "Assigned Risk Pool," the Company
retains 20% of the risk and the FCIC assumes 80%. The MPCI Retention is
protected by private third-party stop-loss treaties.
Although the Company in general must agree to insure any eligible farm,
it is not restricted in its decision to allocate a risk to any of the seven
pools, subject to a minimum aggregate retention of 35% of its MPCI Premiums and
MPCI Imputed Premiums written. The Company uses a sophisticated methodology
derived from a comprehensive historical data base to allocate MPCI risks to the
federal reinsurance pools in an effort to enhance the underwriting profits
realized from this business. The Company has crop yield history information with
respect to over 100,000 farms in the United States. Generally, farms or crops
which, based on historical experience, location and other factors, appear to
have a favorable net loss ratio and to be less likely to suffer an insured loss,
are placed in the Commercial Pool. Farms or crops which appear to be more likely
to suffer a loss are placed in the Developmental Pool or Assigned Risk Pool. The
Company has historically allocated the bulk of its insured risks to the
Commercial Pool.
The Company's share of profit or loss depends on the aggregate amount
of MPCI Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention"). As previously
described, the Company purchases Reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds
Under the MPCI program the Company pays losses to farmers through a
federally funded escrow account as they are incurred during the growing season.
The Company requests funding of the escrow account when a claim is settled and
the escrow account is funded by the federal government within three business
days. After a growing season ends, the aggregate loss experience of the
Company's insureds in each state for risks allocated to each of the seven
Reinsurance pools is determined. If, for all risks allocated to a particular
pool in a particular state, the Company's share of losses incurred is less than
its aggregate MPCI Retention, the Company shares in the gross amount of such
14
<PAGE>
profit according to a schedule set by the FCIC Standard Reinsurance Agreement
(SRA). The profit and loss sharing percentages are different for risks allocated
to each of the seven Reinsurance pools and private insurers will receive or pay
the greatest percentage of profit or loss for risks allocated to the Commercial
Pool. The percentage split between private insurers and the federal government
of any profit or loss that emerges from an MPCI Retention is set by the FCIC's
SRA. The FCIC has extended the SRA for the 1999 reinsurance year to 2000.
MPCI Fees and Reimbursement Payments
The Company receives Buy-up Expense Reimbursement Payments from the
FCIC for writing and administering Buy-up Coverage policies. These payments
provide funds to compensate the Company for its expenses, including agents'
commissions and the costs of administering policies and adjusting claims. For
1996, 1997 and 1998, the maximum Buy-up Expense Reimbursement Payment was set at
31%, 29% and 27%, respectively, of the MPCI Premium. Historically, the FCIC has
paid the maximum MPCI Buy-up Expense Reimbursement Payment rate allowable under
law, although no assurance can be given that this practice will continue.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced in
an amount that corresponds to the reduction in the expense reimbursement rate,
there can be no assurance that the Company's actual costs will not exceed the
expense reimbursement rate. For the 1999 crop year, the Buy-up Expense
Reimbursement payment has been set at 24.5%.
Farmers are required to pay a fixed administrative fee of $60 per
policy in order to obtain CAT Coverage. This fee through 1998 was retained by
the Company (maximum of $100 per county) to defray the cost of administration
and policy acquisition. The Company also receives from the FCIC a separate CAT
LAE Reimbursement Payment equal to approximately 13.0% of MPCI Imputed Premiums
(11.0% for the 1999 crop year) in respect of each CAT Coverage policy it writes
and a small MPCI Excess LAE Reimbursement Payment. Beginning with the 1999 crop
year, the Company will no longer receive the CAT Coverage Fee. All such fees
will now go to the federal government.
In addition to premium revenues, the Company received the following
Federally funded fees and commissions from its crop insurance segment for the
periods indicated:
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
CAT Coverage Fees (1) $1,181 $1,191 $2,346
Buy-up Expense Reimbursement Payments 24,971 24,788 37,982
CAT LAE Reimbursement Payments and MPCI Excess
LAE Reimbursement Payments 5,753 4,565 6,520
------ ------ ------
Total $31,905 $30,544 $46,848
====== ====== ======
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company" for a discussion of the accounting
treatment accorded to the crop insurance business.
15
<PAGE>
Third-Party Reinsurance
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss Reinsurance from other private
reinsurers in addition to Reinsurance obtained from the FCIC. In addition, since
the FCIC and state regulatory authorities require IGF to limit its aggregate
writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of
capital, and retain a net loss exposure of not in excess of 50% of capital, IGF
may also obtain Reinsurance from private reinsurers in order to permit it to
increase its premium writings. Such private Reinsurance would not eliminate the
Company's potential liability in the event a reinsurer was unable to pay or
losses exceeded the limits of the stop loss coverage. For crop hail insurance,
the Company had in effect quota share Reinsurance of 40% of business for 1996
and 1997 and 25% for 1998, although the reinsurer is only liable to participate
in losses of the Company up to a 150% pure loss ratio. The Company also has stop
loss treaties for its crop hail business which reinsure net losses in excess of
an 80% pure Loss Ratio to 130% at 95% coverage with IGF retaining the remaining
5%. With respect to its MPCI business, the Company has stop loss treaties which
reinsure 93.75% of the underwriting losses experienced by the Company to the
extent that aggregate losses of its insureds nationwide are in excess of 100% of
the Company's MPCI Retention up to 125% of MPCI Retention. The Company also has
an additional layer of MPCI stop loss Reinsurance which covers 95% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 125% of MPCI Retention up to
160% of MPCI Retention. The Company maintains a 50% quota share reinsurance
treaty for its named peril product. For 1999, the Company plans to increase its
crop hail and AgPI quota share portion to 80% and add AgPI to its MPCI stop loss
coverage.
Based on a review of the reinsurers' financial health and reputation in
the insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they therefor can meet their
obligations to the Company under the terms of the Reinsurance treaties. Reserves
for uncollectible Reinsurance are provided as deemed necessary. The following
table provides information with respect to ceded premiums in excess of $250,000
on crop hail and named perils and for any affiliates.
16
<PAGE>
Year Ended December 31, 1998 (1)
(in thousands, except footnotes)
<TABLE>
<CAPTION>
A.M. Best Ceded
Reinsurers Rating Premiums
<S> <C> <C>
Continental Casualty Insurance Co. (CNA)(2) A $10,796
Muchener Ruckversicherungs-Gesellschaft Not Rated $2,532
New Cap Re Not Rated $1,056
Monde Re (3) Not Rated $2,844
Partner Reinsurance Company Ltd. Not Rated $832
R & V Versicherung AG Not Rated $1,451
Reinsurance Australia Corporation, Ltd. (REAC) (3) Not Rated $2,848
Swiss Reinsurance Company (4) A+ $384
</TABLE>
- ---------------
(1) For the twelve months ended December 31, 1998, total ceded premiums were
$200,658.
(2) An A.M. Best rating of "A" is the third highest of 15 ratings.
(3) Monde Re is owned by REAC.
(4) An A.M. Best rating of "A+" is the second highest of 15 ratings.
As of December 31, 1998, IGF's Reinsurance recoverables aggregated
approximately $5,305 excluding recoverables from the FCIC and recoverables from
affiliates on nonstandard automobile business.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 43 states
through approximately 4,670 agents associated with approximately 2,007
independent insurance agencies, with its primary geographic concentration in the
states of Texas, North Dakota, Iowa, Minnesota, Illinois, California, Nebraska,
Mississippi, Arkansas and South Dakota. IGF is licensed in 30 states and markets
its products in additional states through a fronting agreement with a
third-party insurance company. IGF has a stable agency base and it experienced
negligible turnover in its agencies in 1998. Through its agencies, IGF targets
farmers with an acreage base of at least 1,000 acres. Such larger farms
typically have a lower risk exposure since they tend to utilize better farming
practices and to have noncontiguous acreage, thereby making it less likely that
the entire farm will be affected by a particular occurrence. Many farmers with
large farms tend to buy or rent acreage which is increasingly distant from the
central farm location. Accordingly, the likelihood of a major storm (wind, rain
or hail) or a freeze affecting all of a particular farmer's acreage decreases.
17
<PAGE>
The following table presents MPCI and crop hail premiums written by IGF
by state for the periods indicated.
<TABLE>
<CAPTION>
(in thousands)
Year Ended Year Ended
December 31, 1997 December 31, 199
State Crop Hail MPCI/CAT Total Crop Hail MPCI/CAT Other(1) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama $144 $1,958 $2,102 $83 $2,714 $--- $2,797
Arkansas 652 7,455 8,107 1,460 11,141 --- 12,601
California 1,062 8,498 9,560 661 9,754 7,797 18,212
Colorado 1,309 3,322 4,631 1,626 3,024 7 4,657
Florida 19 5,730 5,749 6 1,994 --- 2,000
Illinois 655 14,023 14,678 2,409 20,407 151 22,967
Indiana 92 4,971 5,063 244 7,031 --- 7,275
Iowa 7,628 13,798 21,426 9,724 16,554 --- 26,278
Kansas 832 6,881 7,713 1,904 4,703 57 6,664
Louisiana 41 3,630 3,671 36 5,486 35 5,557
Minnesota 4,405 4,088 8,493 4,222 16,017 497 20,736
Mississippi 509 9,025 9,534 445 10,382 --- 10,827
Missouri 383 2,116 2,499 1,228 5,822 --- 7,050
Montana 2,879 2,122 5,001 4,280 5,338 --- 9,618
Nebraska 1,597 3,315 4,912 5,752 6,635 --- 12,387
North Dakota 787 3,363 4,150 10,131 20,423 254 30,808
Oklahoma 451 1,727 2,178 857 2,232 --- 3,089
South Dakota 932 1,575 2,507 5,320 6,017 --- 11,337
Texas 3,211 18,071 21,282 9,492 35,212 306 45,010
Wisconsin 407 1,887 2,294 269 3,219 288 3,776
All Other 10,354 3,791 14,145 16,049 13,247 211 29,507
------ ------- ------- ------ ------- ----- -------
Total $38,349 $121,346 $159,695 $76,198 $207,352 $9,603 $293,153
====== ======= ======= ====== ======= ===== =======
</TABLE>
(1) Includes named peril and AgPI(R). There is a small amount of named peril
premiums included with crop hail in 1997. No AgPI(R) I policies were written in
1997.
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<PAGE>
The Company seeks to maintain and develop its agency relationships by
providing agencies with faster, more efficient service as well as marketing
support. IGF owns an IBM AS400 along with all peripheral and networking
equipment and has developed its own proprietary software package, AgentPlus,
which allows agencies to quote and examine various levels of coverage on their
own personal computers. The Company's regional managers are responsible for the
Company's field operations within an assigned geographic territory, including
maintaining and enhancing relationships with agencies in those territories. IGF
also uses application documentation which is designed for simplicity and
convenience. The Company believes that IGF is the only crop insurer which has
created a single application for MPCI, crop hail and named peril coverage.
IGF generally compensates its agents based on a percentage of premiums
produced and, in the case of CAT Coverage and crop hail insurance, a percentage
of underwriting gain realized with respect to business produced. This
compensation structure is designed to encourage agents to place profitable
business with IGF (which tends to be insurance coverages for larger farms with
respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact
that rates are established by the FCIC, the primary underwriting functions
performed by the Company's personnel with respect to MPCI coverage are (i)
selecting of marketing territories for MPCI based on the type of crops being
grown in the area, typical weather patterns and loss experience of both agencies
and farmers within a particular area, (ii) recruiting agencies within those
marketing territories which service larger farms and other more desirable risks
and (iii) ensuring that policies are underwritten in accordance with the FCIC
rules.
With respect to its hail coverage, IGF seeks to minimize its
underwriting losses by maintaining an adequate geographic spread of risk by rate
group. In addition, IGF establishes sales closing dates after which hail
policies will not be sold. These dates are dependent on planting schedules, vary
by geographic location and range from May 15 in Texas to July 15 in North
Dakota. Prior to these dates, crops are either seeds in the ground or young
growth newly emerged from the ground and hail damage to crops in either of these
stages of growth is minimal. The cut-off dates prevent farmers from adversely
selecting against IGF by waiting to purchase hail coverage until a storm is
forecast or damage has occurred. For its hail coverage, IGF also sets limits by
policy ($400,000 each) and by township ($2.0 million per township). The Company
also uses a daily report entitled "Severe Weather Digest" which shows the time
and geographic location of all extraordinary weather events to check incoming
policy applications against possible previous damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters
on a part-time basis for loss adjusting services, IGF employs full-time
professional claims adjusters, most of whom are agronomy trained, as well as
part-time adjusters. Management believes that the professionalism of the IGF
full-time claims staff coupled with their exclusive commitment to IGF helps to
ensure that claims are handled in a manner designed to reduce overpayment of
losses experienced by IGF. The adjusters are located throughout IGF's marketing
territories. As an aid to promote a rapid claims response, the Company has
available numerous all terrain four wheel drive vehicles for use by its
adjusters. The adjusters report to a Field Service Manager in their territory
who manages adjusters' assignments, assures that all preliminary estimates for
loss reserves are accurately reported and assists in loss adjustment. Within 72
hours of reported damage, a loss notice is reviewed by an IGF Field Service
Manager and a preliminary loss reserve is determined which is based on the
representative's and/or adjuster's knowledge of the area or the particular storm
which caused the loss. Generally, within approximately two weeks, hail and MPCI
claims are examined and reviewed on site by an adjuster and the insured signs a
proof of loss form containing a final release. As part of the adjustment
process, IGF's adjusters may use Global Positioning System Units to determine
the precise location where a claimed loss has occurred. IGF has a team of
catastrophic claims specialists who are available on 48 hours notice to travel
to any of IGF's seven regional service offices to assist in heavy claim work
load situations.
19
<PAGE>
In September of 1998, IGF restructured its loss adjustment services. A new
Field Service Department was created with an organization structure designed to
provide better efficiency and accountability at the point of service in the
field. The restructuring eliminated one middle level management layer
stimulating quicker response and more accurate communication. The new structure
placed claim distribution and coordination in the field. It also coordinated the
activities of loss adjustment and precision agriculture support services. The
new structure was also designed to establish better information flow for loss
reserving.
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies for MPCI, crop hail and named peril coverage.
Many of the Company's competitors have substantially greater financial and other
resources than the Company and there can be no assurance that the Company will
be able to compete effectively against such competitors in the future. The
Company competes on the basis of the commissions paid to agents, the speed with
which claims are paid, the quality and extent of services offered, the
reputation and experience of its agency network and, in the case of private
insurance, policy rates. Because the FCIC establishes the rates that may be
offered for MPCI policies, the Company believes that quality of service and
level of commissions offered to agents are the principal factors on which it
competes in the area of MPCI. The Company believes that the crop hail and other
named peril crop insurance industry is extremely rate-sensitive and the ability
to offer competitive rate structures to agents is a critical factor in the
agent's ability to write crop hail and other named peril premiums. Because of
the varying state laws regarding the ability of agents to write crop hail and
other named peril premiums prior to completion of rate and form filings (and, in
some cases, state approval of such filings), a company may not be able to write
its expected premium volume if its rates are not competitive.
The crop insurance industry has become increasingly consolidated. From
the 1985 crop year to the 1998 crop year, the number of insurance companies
having agreements with the FCIC to sell and service MPCI policies has declined
from fifty to seventeen. The Company believes that IGF is the fourth largest
MPCI crop insurer in the United States based on premium information compiled in
1997 by the FCIC and NCIS. The Company's primary competitors are Rain & Hail LLC
(affiliated with Cigna Insurance Company), Rural Community Insurance Services,
Inc. (which is owned by Norwest Corporation), Acceptance Insurance Company
(Redland), FF Agribusiness (affiliated with Fireman's Fund), Great American
Insurance Company, Blakely Crop Hail (an affiliate of Farmers Alliance Mutual
Insurance Company) and North Central Crop Insurance, Inc. (an affiliate of
Farmers Alliance Mutual Insurance Company). The Company believes that in order
to compete successfully in the crop insurance business it will have to market
and service a volume of premiums sufficiently large to enable the Company to
continue to realize operating efficiencies in conducting its business. No
assurance can be given that the Company will be able to compete successfully if
this market further consolidates.
Reserves for Losses and Loss Adjustment Expenses
Loss Reserves are estimates, established at a given point in time based
on facts then known, of what an insurer predicts its exposure to be in
connection with incurred losses. LAE Reserves are estimates of the ultimate
liability associated with the expense of settling all claims, including
investigation and litigation costs resulting from such claims. The actual
liability of an insurer for its Losses and LAE Reserves at any point in time
will be greater or less than these estimates.
The Company maintains reserves for the eventual payment of Losses and
LAE with respect to both reported and unreported claims. Nonstandard automobile
reserves for reported claims are established on a case-by-case basis. The
reserving process takes into account the type of claim, policy provisions
relating to the type of loss and historical paid Loss and LAE for similar
claims. Reported crop insurance claims are reserved based upon preliminary
notice to the Company and investigation of the loss in the field. The ultimate
settlement of a crop loss is based upon either the value or the yield of the
crop.
Loss and LAE Reserves for claims that have been incurred but not
reported are estimated based on many variables including historical and
statistical information, inflation, legal developments, economic conditions,
trends in claim severity and frequency and other factors that could affect the
adequacy of loss reserves.
20
<PAGE>
The Company's reserves are reviewed by independent actuaries on a
semi-annual basis. The Company's recorded Loss Reserves are certified by an
independent actuary for each calendar year.
The following loss reserve development table illustrates the change
over time of reserves established for loss and loss expenses as of the end of
the various calendar years for the nonstandard automobile segment of the
Company. The table includes the loss reserves acquired from the acquisition of
Superior in 1996 and the related loss reserve development thereafter. The first
section shows the reserves as originally reported at the end of the stated year.
The second section, reading down, shows the cumulative amounts paid as of the
end of successive years with respect to the reserve liability. The third
section, reading down, shows the re-estimates of the original recorded reserve
as of the end of each successive year which is a result of sound insurance
reserving practices of addressing new emerging facts and circumstances which
indicate that a modification of the prior estimate is necessary. The last
section compares the latest re-estimated reserve to the reserve originally
established, and indicates whether or not the original reserve was adequate or
inadequate to cover the estimated costs of unsettled claims.
The loss reserve development table is cumulative and, therefore, ending
balances should not be added since the amount at the end of each calendar year
includes activity for both the current and prior years.
The reserve for losses and loss expenses is an accumulation of the
estimated amounts necessary to settle all outstanding claims as of the date for
which the reserve is stated. The reserve and payment data shown below have been
reduced for estimated subrogation and salvage recoveries. The Company does not
discount its reserves for unpaid losses and loss expenses. No attempt is made to
isolate explicitly the impact of inflation from the multitude of factors
influencing the reserve estimates though inflation is implicitly included in the
estimates. The Company regularly updates its reserve forecasts by type of claim
as new facts become known and events occur which affect unsettled claims.
During 1997 and 1998, the Company, as part of its efforts to reduce
costs and combine the operations of the two nonstandard automobile insurance
companies, emphasized a unified claim settlement practice as well as reserving
philosophy for Superior and Pafco. Superior had historically provided
strengthened case reserves and a level of IBNR which reflected the strength of
the case reserves. Pafco had historically carried case reserves which generally
did not reflect the level of future payments but yet a higher IBNR reserve. This
change in claims management philosophy during 1997 and 1998 coupled with the
growth in premium volume produced sufficient volatility in prior year loss
patterns to warrant the Company to re-estimate its 1996 and 1997 reserve for
losses and loss expenses and record an additional reserve during 1997 and 1998.
The effects of changes in settlement patterns, costs, inflation, growth and
other factors have all been considered in establishing the current year serve
for unpaid losses and loss expenses.
21
<PAGE>
Symons International Group, Inc.
Nonstandard Automobile Insurance Only
For The Years Ended December 31, (in thousands)
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995(A) 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for unpaid
losses and LAE $25,248 $71,748 $79,551 $101,185 $121,333
Deduct reinsurance
recoverable 10,927 9,921 8,124 16,378 6,515
Reserve for unpaid losses
and LAE, net of reinsurance $10,747 $13,518 $15,923 $15,682 $17,055 $14,822 14,321 61,827 71,427 84,807 114,818
Paid cumulative as of:
One Year Later 5,947 7,754 7,695 7,519 10,868 8,875 7,455 42,183 59,410 62,962
Two Years Later 7,207 10,530 10,479 12,358 15,121 11,114 10,375 53,350 79,319
Three Years Later 7,635 11,875 12,389 13,937 16,855 13,024 12,040 58,993 --
Four Years Later 7,824 12,733 13,094 14,572 17,744 13,886 12,822 -- --
Five Years Later 8,009 12,998 13,331 14,841 18,195 14,229 -- -- --
Six Years Later 8,135 13,095 13,507 14,992 18,408 -- -- -- --
Seven Years Later 8,154 13,202 13,486 15,099 -- -- -- -- --
Eight Years Later 8,173 13,216 13,567 -- -- -- -- -- --
Nine Years Later 8,174 13,249 -- -- -- -- -- -- --
Ten Years Later 8,175 -- -- -- -- -- -- -- --
Liabilities re-estimated as of:
One Year Later 8,474 13,984 13,888 14,453 17,442 14,788 13,365 59,626 82,011 97,905
Two Years Later 8,647 13,083 13,343 14,949 18,103 13,815 12,696 60,600 91,735
Three Years Later 8,166 13,057 13,445 15,139 18,300 14,051 13,080 63,812 --
Four Years Later 8,108 13,152 13,514 15,218 18,313 14,290 13,561 -- --
Five Years Later 8,179 13,170 13,589 15,198 18,419 14,586 -- -- --
Six Years Later 8,165 13,246 13,612 15,114 18,651 -- -- -- --
Seven Years Later 8,196 13,260 13,529 15,321 -- -- -- -- --
Eight Years Later 8,198 13,248 13,738 -- -- -- -- -- --
Nine Years Later 8,199 13,374 -- -- -- -- -- -- --
Ten Years Later 8,217 -- -- -- -- -- -- -- --
Net cumulative (deficiency)
or redundancy 2,548 270 2,394 568 (1,364) 532 1,241 1,227 (10,584) (13,098)
Expressed as a percentage
of unpaid losses and LAE 23.7% 2.0% 15.0% 3.6% (8.0%) 3.6% 8.7% 2.0% (14.8%) (15.4%)
</TABLE>
(A) Includes Superior loss and loss expense reserves of $44,423 acquired on
April 29, 1996 and subsequent development thereon.
22
<PAGE>
Investments
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate. The Company's investments in real estate and mortgage
loans represent 1.3% of the Company's aggregate investments. The investment
portfolios of the Company at December 31, 1998, consisted of the following:
(in thousands)
<TABLE>
<CAPTION>
Cost or
Amortized Market
Type of Investment Cost Value
<S> <C> <C>
Fixed maturities:
U.S. and Canadian Treasury securities and obligations
of U.S. and Canadian government corporation and agencies $74,060 $76,079
Obligations of states, provinces and political subdivisions 7,080 6,968
Corporate securities 113,137 114,204
------- -------
Total Fixed Maturities 194,277 197,251
Equity Securities:
Common stocks 13,691 12,988
Short-term investments 27,636 27,636
Mortgage loans 2,100 2,100
Real estate 890 890
------- -------
Total Investments $238,594 $240,865
======= =======
- ---------------
</TABLE>
23
<PAGE>
The following table sets forth the composition of the fixed maturity
securities portfolio of the Company by time to maturity as of December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1998
Market Percent Market Percent
Time To Maturity Value Market Value Market
<S> <C> <C> <C> <C>
1 year or less $3,678 2.1% $7,937 4.0%
More than 1 year through 5 years 60,008 34.4% 53,327 27.0%
More than 5 years through 10 years 31,599 18.1% 38,236 19.4%
More than 10 years 8,390 4.8% 23,034 11.7%
------- ----- ------- -----
103,675 59.4% 122,534 62.1%
Mortgage-backed securities 70,540 40.6% 74,717 37.9%
------- ----- ------- -----
Total $174,215 100.0% $197,251 100.0%
======= ===== ======= =====
</TABLE>
The following table sets forth the ratings assigned to the fixed
maturity securities of the Company as of December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1998
Market Percent Market Percent
Rating (1) Value Market Value Market
<S> <C> <C> <C> <C>
Aaa or AAA $112,920 64.8% $76,484 38.8%
Aa or AA 4,145 2.4% 2,256 1.1%
A 20,679 11.9% 81,270 41.2%
Baa or BBB 19,116 11.0% 23,504 11.9%
Ba or BB 16,519 9.5% 13,737 7.0%
Other below investment grade 82 0.1% -- 0.0%
Not rated (2) 754 0.3% -- 0.0%
------- ----- ------- -----
Total $174,215 100.0% $197,251 100.0%
======= ===== ======= =====
</TABLE>
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available, are based on ratings assigned by Standard & Poor's
Corporation.
(2) These securities were not rated by the rating agencies. However, these
securities are designated as Category 1 securities by the NAIC, which is
the equivalent rating of "A" or better.
24
<PAGE>
The investment results of the Company for the periods indicated are set
forth below:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
Net investment income (1) $7,745 $12,777 $13,401
Average investment portfolio (2) $122,363 $215,694 $236,197
Pre-tax return on average investment portfolio 6.3% 5.9% 5.7%
Net realized gains (losses) ($637) $9,393 $4,104
</TABLE>
- ---------------
(1) Includes dividend income received in respect of holdings of common stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio and excludes
cash. For 1996, the average investment portfolio was adjusted for the
effect of the Acquisition.
Market-Sensitive Instruments and Risk Management
The Company's investment strategy is to invest available funds in a
manner that will maximize the after-tax yield of the portfolio while emphasizing
the stability and preservation of the capital base. The Company seeks to
maximize the total return on investment through active investment management
utilizing third-party professional administrators, in accordance with
pre-established investment policy guidelines established and reviewed regularly
by the Board of Directors of the Company. Accordingly, the entire portfolio of
fixed maturity securities is available to be sold in response to changes in
market interest rate; changes in relative values of individual securities and
asset sectors; changes in prepayment risks; changes in credit quality; liquidity
needs and other factors.
The portfolio is invested in types of securities and in an aggregate
duration which reflect the nature of the Company's liabilities and expected
liquidity needs diversified among industries, issuers and geographic locations.
The Company's fixed maturity and common equity investments are substantially all
in public companies.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity date. Additionally,
the Company has assumed its available for sale securities are similar enough to
aggregate those securities for presentation purposes.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
<TABLE>
<CAPTION>
Fair
There- Value
1999 2000 2001 2002 2003 after Total 12/31/98
---- ---- ---- ---- ---- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Available for sale $7,883 $5,363 $22,787 $19,705 $13,970 $137,998 $207,706 $197,251
Average interest rate 6.1% 6.5% 7.2% 8.1% 7.1% 5.9% 6.4% 6.7%
Liabilities:
IGF line of credit $12,000 $ - $ - $ - $ - $ - $12,000 $12,000
Preferred securities $ - $ - $ - $ - $ - $135,000 $135,000 $135,000
Average interest rate 7.75% -% -% -% -% 9.5% 9.4% 9.4%
</TABLE>
25
<PAGE>
The Company has the ability to hold its fixed maturity securities to
maturity. If interest rates were to increase 10% from the December 31, 1998
levels, the decline in fair value of the fixed maturity securities would not
significantly affect the Company's ability to meet its obligations to
policyholders and debtors.
Ratings
A.M. Best has currently assigned a "B+" rating to Superior and a "B-"
rating to Pafco.
A.M. Best's ratings are based upon a comprehensive review of a
company's financial performance, which is supplemented by certain data,
including responses to A.M. Best's questionnaires, phone calls and other
correspondence between A.M. Best analysts and company management, quarterly NAIC
filings, state insurance department examination reports, loss reserve reports,
annual reports, company business plans and other reports filed with state
insurance departments. A.M. Best undertakes a quantitative evaluation, based
upon profitability, leverage and liquidity, and a qualitative evaluation, based
upon the composition of a company's book of business or spread of risk, the
amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus, the soundness of a company's capital
structure, the extent of a company's market presence and the experience and
competence of its management. A.M. Best's ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations to
policyholders. A.M. Best's ratings are not a measure of protection afforded
investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest rating
classifications, respectively, out of 15 ratings. A "B+" rating is awarded to
insurers which, in A.M. Best's opinion, "have demonstrated very good overall
performance when compared to the standards established by the A.M. Best Company"
and "have a good ability to meet their obligations to policyholders over a long
period of time." A "B-" rating is awarded to insurers which, in A.M. Best's
opinion, "have demonstrated adequate overall performance when compared to the
standards established by the A.M. Best Company" and "have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions." There
can be no assurance that such ratings or changes therein will not in the future
adversely affect the Company's competitive position.
Recent Acquisitions
On January 31, 1996, Goran, SIG, Fortis, Inc. and its wholly-owned
subsidiary, Interfinancial, Inc., a holding company for Superior, entered into a
Stock Purchase Agreement (the "Superior Purchase Agreement") pursuant to which
SIG agreed to purchase Superior from Interfinancial, Inc. for a purchase price
of approximately $66.6 million. Simultaneously with the execution of the
Superior Purchase Agreement, Goran, SIG, GGS Holdings and the GS Funds, a
Delaware limited partnership, entered into an agreement (the "GGS Agreement") to
capitalize GGS Holdings and to cause GGS Holdings to issue its capital stock to
SIG and to the GS Funds, so as to give SIG a 52% ownership interest and the GS
Funds a 48% ownership interest (the "Formation Transaction"). Pursuant to the
GGS Agreement (a) SIG contributed to GGS Holdings (i) all the outstanding common
stock of Pafco, with a book value of $16.9 million, (ii) its right to acquire
Superior pursuant to the Superior Purchase Agreement and (iii) certain fixed
assets, including office furniture and equipment, having a value of
approximately $350,000 and (b) the GS Funds contributed to GGS Holdings $21.2
million in cash. The Formation Transaction and the Acquisition were completed on
April 30, 1996. On August 12, 1997, SIG acquired the remaining 48% interest in
GGS Holdings that had been owned by the GS funds for $61 million with a portion
of the proceeds from the sale of the Preferred Securities.
On August 12, 1997, SIG issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities"). These Preferred Securities were
offered through a wholly-owned trust subsidiary of SIG and are backed by Senior
Subordinated Notes to the Trust from SIG. These Preferred Securities were
offered under Rule 144A of the SEC ("Offering") and, pursuant to the
Registration Rights Agreement executed at closing, SIG filed a Form S-4
Registration Statement with the SEC on September 16, 1997 to effect the Exchange
Offer. The S-4 Registration Statement was declared effective on September 30,
1997 and the Exchange Offer successfully closed on October 31, 1997. The
proceeds of the Preferred Securities Offering were used to repurchase the
remaining minority interest in GGSH for $61 million, repay the balance of the
term debt of $44.9 million and SIG expects to contribute the balance, after
expenses, of approximately $24 million to the nonstandard automobile insurers of
which $10.5 million was contributed in 1997. Expenses of the issue aggregated
$5.1 million and are amortized over the term of the Preferred Securities (30
years). In the third quarter of 1997 SIG wrote off the remaining unamortized
costs of the term debt of approximately $1.1 million pre-tax or approximately
$0.09 per share to Goran after income taxes and minority interest.
26
<PAGE>
The Preferred Securities have a term of 30 years with semi-annual
distribution payments at 9.5% per annum commencing February 15, 1998. The
Preferred Securities may be redeemed in whole or in part after 10 years.
SIG shall not, and shall not permit any subsidiary, to incur directly
or indirectly, any indebtedness unless, on the date of such incurrence (and
after giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1.
The Coverage Ratio is the aggregate of net earnings, plus interest expense,
income taxes, depreciation, and amortization divided by interest expense for the
same period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company" for a discussion of the impact of
these covenants on the Company's operations.
On March 2, 1998, the Company announced that it had signed an agreement
with CNA to assume its multi-peril and crop hail operations. CNA wrote
approximately $80 million of multi-peril and crop hail insurance business in
1997. The Company will reinsure a small portion of the Company's total crop book
of business (approximately 22% MPCI and 15% crop hail) to CNA. Starting in the
year 2000, assuming no event of change in control as defined in the agreement,
the Company can purchase this reinsurance from CNA through a call provision or
CNA can require the Company to buy the premiums reinsured to CNA. Regardless of
the method of takeout of CNA, CNA must not compete in MPCI or crop hail for a
period of time. There was no purchase price. The formula for the buyout in the
year 2000 is based on a multiple of average pre-tax earnings that CNA received
from reinsuring the Company's book of business.
On July 8, 1998, the Company acquired North American Crop Underwriters
(NACU) a Henning, Minnesota based managing general agency which focuses
exclusively on crop insurance. The acquisition price was $4 million with $3
million paid at closing and $1 million due July 1, 2000 without interest. This
acquisition captures 100% of the MPCI underwriting gain and fees on
approximately $27 million of premiums. Prior to this transaction, NACU received
all fees and 50% of the underwriting gain with the balance going to the Company
through the CNA transaction.
Regulation
General
The Company's insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition,
(ii) periodic financial examination, (iii) approval of rates and policy
forms,(iv) loss reserve adequacy, (v) insurer solvency, (vi) the licensing of
insurers and their agents, (vii) restrictions on the payment of dividends and
other distributions, (viii) approval of changes in control and (ix) the type and
amount of permitted investments.
Pafco, IGF and Superior and its insurance subsidiaries are subject to
triennial examinations by state insurance regulators. All of these Companies
have been examined through December 31, 1996. The Company did not receive any
material findings from the examinations of its insurance subsidiaries.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding
companies in Florida and Indiana, where the insurers are domiciled. These laws,
among other things, (i) require the Company to file periodic information with
state regulatory authorities including information concerning its capital
structure, ownership, financial condition and general business operations, (ii)
regulate certain transactions between the Company, SIG, its affiliates and IGF,
Pafco and Superior (the "Insurers"), including the amount of dividends and other
distributions , and (iii) restrict the ability of any one person to acquire
certain levels of SIG's voting securities without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of Common Stock
of SIG would be presumed to have acquired control of Pafco and IGF unless the
Indiana Commissioner, upon application, has determined otherwise. In addition,
any purchaser of 5% or more of the outstanding shares of Common Stock of SIG
will be presumed to have acquired control of Superior unless the Florida
Commissioner, upon application, has determined otherwise.
27
<PAGE>
Indiana law defines as "extraordinary" any dividend or distribution which,
together with all other dividends and distributions to shareholders within the
preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as
regards policyholders as of the end of the preceding year or (ii) the prior
year's net income. Dividends which are not "extraordinary" may be paid ten days
after the Indiana Department receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without prior
approval of the Indiana Commissioner or until the Indiana Commissioner has been
given thirty days prior notice and has not disapproved within that period. The
Indiana Department must receive notice of all dividends, whether "extraordinary"
or not, within five business days after they are declared. Notwithstanding the
foregoing limit, a domestic insurer may not declare or pay a dividend of funds
other than earned surplus without the prior approval of the Indiana Department.
"Earned surplus" is defined as the amount of unassigned funds set forth in the
insurer's most recent annual statement, less surplus attributable to unrealized
capital gains or reevaluation of assets. As of December 31, 1998, IGF and Pafco
had earned surplus of $16,377 and $(8,362), respectively. Further, no Indiana
domiciled insurer may make payments in the form of dividends or otherwise to
shareholders as such unless it possesses assets in the amount of such payment in
excess of the sum of its liabilities and the aggregate amount of the par value
of all shares of its capital stock; provided, that in no instance shall such
dividend reduce the total of (i) gross paid-in and contributed surplus, plus
(ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury
stock at cost, below an amount equal to 50% of the aggregate amount of the par
value of all shares of the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to stockholders
without prior approval of the Florida Department if the dividend or distribution
would exceed the larger of (i) the lesser of (a) 10% of surplus or (b) net
income, not including realized capital gains, plus a two-year carryforward, (ii)
10% of surplus with dividends payable constrained to unassigned funds minus 25%
of unrealized capital gains or (iii) the lesser of (a) 10% of surplus or (b) net
investment income plus a three-year carryforward with dividends payable
constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department if the dividend is
equal to or less than the greater of (i) 10% of the insurer's surplus as regards
policyholders derived from realized net operating profits on its business and
net realized capital gains or (ii) the insurer's entire net operating profits
and realized net capital gains derived during the immediately preceding calendar
year; (2) the insurer will have policyholder surplus equal to or exceeding 115%
of the minimum required statutory surplus after the dividend or distribution,
(3) the insurer files a notice of the dividend or distribution with the
department at least ten business days prior to the dividend payment or
distribution and (4) the notice includes a certification by an officer of the
insurer attesting that, after the payment of the dividend or distribution, the
insurer will have at least 115% of required statutory surplus as to
policyholders. Except as provided above, a Florida domiciled insurer may only
pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department or (ii) thirty days after the Florida Department has received
notice of such dividend or distribution and has not disapproved it within such
time. In the consent order approving the Acquisition, the Florida Department has
prohibited Superior from paying any dividends (whether extraordinary or not) for
four years from the date of acquisition without the prior written approval of
the Florida Department.
Under these laws, the maximum aggregate amounts of dividends permitted
to be paid to the Company in 1999 by IGF and Pafco without prior regulatory
approval are $3,123 and $0, respectively, none of which have been paid. Although
the Company believes that amounts required for it to meet its financial and
operating obligations will be available, there can be no assurance in this
regard. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Liquidity and Capital Resources."
Further, there can be no assurance that, if requested, the Indiana Department
will approve any request for extraordinary dividends from Pafco or IGF or that
the Florida Department will allow any dividends to be paid by Superior during
the four year period described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written and the ability to pay future dividends. Further, state insurance
28
<PAGE>
laws and regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly to
the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to GGS Management. The management agreement
between SIG and Pafco has been assigned to GGS Management, Inc. ("GGS
Management") and provides for an annual management fee equal to 15% of gross
premiums. A similar management agreement with a management fee of 17% of gross
premiums has been entered into between GGS Management and Superior. Employees of
SIG relating to the nonstandard automobile insurance business and all Superior
employees became employees of GGS Management effective April 30, 1996. In the
consent order approving the Acquisition, the Florida Department has reserved,
for three years, the right to reevaluate the reasonableness of fees provided for
in the Superior management agreement at the end of each calendar year and to
require Superior to make adjustments in the management fees based on the Florida
Department's consideration of the performance and operating percentages of
Superior and other pertinent data. There can be no assurance that either the
Indiana Department or the Florida Department will not in the future require a
reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the
federal government by means of premium subsidies to farmers, expense
reimbursement and federal reinsurance pools for private insurers. Consequently,
the MPCI program is subject to oversight by the legislative and executive
branches of the federal government, including the FCIC. The MPCI program
regulations generally require compliance with federal guidelines with respect to
underwriting, rating and claims administration. The Company is required to
perform continuous internal audit procedures and is subject to audit by several
federal government agencies. No material compliance issues were noted during
IGF's most recent FCIC compliance review.
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. See Industry Background for further discussion of
Federal Regulations impacting crop insurance.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to deal with the
cyclical nature of the insurance industry, catastrophic events and insurance
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to rescind or otherwise cancel
certain policies in mid-term, (iii) advance notice requirements or limitations
imposed for certain policy non-renewals and (iv) limitations upon or decreases
in rates permitted to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of twelve ratios with defined acceptable ranges. They are used as an
initial screening process for identifying companies that may be in need of
special attention. Companies that have several ratios that fall outside of the
acceptable range are selected for closer review by the NAIC. If the NAIC
determines that more attention may be warranted, one of five priority
designations is assigned and the insurance department of the state of domicile
is then responsible for follow-up action.
During 1998, Pafco had unusual values for three IRIS tests. These
included two-year overall operating ratio where Pafco's ratio was 116.7 compared
to the IRIS upper limit of 100, change in surplus where Pafco's ratio was
(24.4%) compared to the IRIS lower limit of (10%) and two-year reserve
development where Pafco's ratio was 39.1% compared to 20%. Pafco failed the
first two tests due primarily to a high loss ratio. Pafco failed the third test
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due to adverse development on accident year 1996 due to higher than normal
severity as a result of a disruption in claims management in early 1997. Pafco
does not expect such results to continue due to improvements in product
development and rate filing, hiring of a chief actuary, focus on improved claims
management and continued consolidation of operations with its affiliate,
Superior Insurance Company. Pafco expects these actions will improve loss ratio
which will lead to a reduction in the combined ratio, stabilization of surplus
and elimination of significant adverse reserve development. However, such
projections involve a high degree of subjectivity in a competitive marketplace.
Therefore, there is no assurance such results will not continue.
During 1998, Superior had unusual values for three IRIS tests. These
included two-year overall operating ratio where Superior's ratio was 108
compared to the IRIS upper limit of 100, change in surplus where Superior's
ratio was (10%) compared to the IRIS lower limit of (10%) and estimated current
reserve deficiency to surplus where Superior's ratio was (5%) compared to the
IRIS lower limit of 0. Superior failed these tests for the same reasons as Pafco
and expects results to improve in 1999 for the same reasons as Pafco. However,
such projections involve a high degree of subjectivity in a competitive
marketplace. Therefore, there is no assurance such results will not continue.
During 1998, IGF had unusual values for seven IRIS tests. These
included gross premiums to surplus where IGF's ratio was 1,006 compared to the
IRIS upper limit of 900, net premiums to surplus where IGF's ratio was 359.9
compared to the IRIS upper limit of 300, change in net writings where IGF's
ratio was 440.6 compared to the IRIS upper limit of 33, investment yield where
IGF's ratio was 195.5 compared to the IRIS upper limit of 10, change in surplus
where IGF's ratio was (27) compared to the IRIS lower limit of (10), liabilities
to liquid assets where IGF's ratio was 735.7 compared to the IRIS upper limit of
105 and agent's balances to surplus where IGF's ratio was 235.8 compared to the
IRIS upper limit of 40. IGF failed the first three premium writing tests due to
the assumption of the CNA book of business and the fourth quarter assumption of
auto premiums from Pafco and Superior combined with the reduction in surplus due
to catastrophic losses. IGF expects to maintain compliance with these covenants
in 1999 through a return to profitability and greater utilization of quota share
reinsurance. IGF failed the investment test in a positive way due to the high
amount of interest received from farmers which is generally offset by interest
expense to the FCIC. IGF generally fails the final two tests due to the nature
of its business whereby such amounts are settled in full subsequent to year end.
IGF's projections involve a high degree of subjectivity in a competitive
marketplace. Therefore, there is no assurance such results will not continue.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement risk-based capital ("RBC")
requirements for property and casualty insurance companies designed to assess
minimum capital requirements and to raise the level of protection that statutory
surplus provides for policyholder obligations. Indiana and Florida have
substantially adopted the NAIC model law, and Indiana directly, and Florida
indirectly, have adopted the NAIC model formula. The RBC formula for property
and casualty insurance companies measures four major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses the risk of
adverse loss developments and inadequate pricing, (ii) declines in asset values
arising from credit risk, (iii) declines in asset values arising from investment
risks and (iv) off-balance sheet risk arising from adverse experience from
non-controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The
extent of regulatory intervention and action increases as the level of surplus
to RBC falls. The first level, the Company Action Level (as defined by the
NAIC), requires an insurer to submit a plan of corrective actions to the
regulator if surplus falls below 200% of the RBC amount. The Regulatory Action
Level (as defined by the NAIC) requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below 70%
of the RBC amount. Based on the foregoing formulae, as of December 31, 1998, the
RBC ratios of the Insurers were in excess of the Company Action Level, the first
trigger level that would require regulatory action except for Pafco, which was
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1.2 million below the Company Action Level as its ratio of surplus to the RBC
amount was 186%. The required plan of action has been filed by Pafco with the
IDOI. Pafco expects to be in compliance in 1999 through either greater use of
unaffiliated quota share reinsurance or a contribution of capital from its
parent.
Guaranty Funds; Residual Markets
The Insurers also may be required under the solvency or guaranty laws of
most states in which they do business to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would not
ordinarily accept. The Company recognizes its obligations for guaranty fund
assessments when it receives notice that an amount is payable to the fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.
Contingencies
The California Department of Insurance (CDOI) has advised the Company
that they are reviewing a possible assessment which could total $3 million. The
Company does not believe it will owe anything for this possible assessment. This
possible assessment relates to the charging of brokers fees to policyholders by
independent agents who have placed business for one of the Company's nonstandard
automobile carriers, Superior Insurance Company. The CDOI has indicated that
such broker fees charged by the independent agent to the policyholder were
improper and has requested reimbursement to the policyholders by Superior
Insurance Company. The Company did not receive any of these broker fees. As the
ultimate outcome of this potential assessment is not deemed probable the Company
has not accrued any amount in its consolidated financial statements. Although
the assessment has not been formally made by the CDOI at this time, the Company
believes it will prevail and will vigorously defend any potential assessment.
Canadian Federal Income Tax Considerations
This summary is based upon the current provisions of the Income Tax Act
(Canada) (the "Canadian Tax Act"), the regulations thereunder, proposed
amendments thereto publicly announced by the Department of Finance, Canada prior
to the date hereof and the provisions of the Canada-U.S. Income Tax Convention
(1980) (the "Convention") as amended by the Third Protocol (1995).
Amounts in respect of common shares paid or credited or deemed to be
paid or credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a shareholder who is not a resident in Canada within the meaning of
the Canadian Tax Act will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a basic rate of 25% which may
be reduced pursuant to the terms of an applicable tax treaty between Canada and
the country of resident of the non-resident.
Currently, under the Convention, the rate of Canadian non-resident
withholding tax on the gross amount of dividends beneficially owned by a person
who is a resident of the United States for the purpose of the Convention and who
does not have a "permanent establishment" or "fixed base" in Canada is 15%.
However, where such beneficial owner is a company which owns at least 10% of the
voting stock of the company, the rate of such withholding is 5%.
A purchase for cancellation of common shares by the Company (other than
a purchase of common shares by the Company on the open market) will give rise to
a deemed dividend under the Canadian Tax Act equal to the amount paid by the
Company on the purchase in excess of the paid-up capital of such shares
determined in accordance with the Canadian Tax Act. Any such dividend deemed to
have been received by a person not resident in Canada will be subject to
nonresident withholding tax as described above. The amount of any such deemed
dividend will reduce the proceeds of disposition to a holder of common shares
for purposes of computing the amount of his capital gain or loss under the
Canadian Tax Act.
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A holder of common shares who is not a resident of Canada within the
meaning of the Canadian Tax Act will not be subject to tax under the Canadian
Tax Act in respect of any capital gain on a disposition of common shares
(including on a purchase by the Company) unless such shares constitute taxable
Canadian property of the shareholder for purposes of the Canadian Tax Act and
such shareholder is not entitled to relief under an applicable tax treaty.
Common shares will generally not constitute taxable Canadian property of a
shareholder who is not a resident of Canada for purposes of the Canadian Tax Act
in any taxation year in which such shareholder owned common shares unless such
shareholder uses or holds or is deemed to use or hold such shares in or in the
course of carrying on business in Canada or, a share of the capital stock of a
corporation resident in Canada, that is not listed on a prescribed stock
exchange or a share that is listed on prescribed stock exchange, if at any time
during the five year period immediately preceding the disposition of the common
shares owned, either alone or together with persons with whom he does not deal
at arm's length, not less than 25% of the issued shares of any class of the
capital stock of the Company. In any event, under the Convention, gains derived
by a resident of the United States from the disposition of common shares will
generally not be taxable in Canada unless 50% or more of the value of the common
shares is derived principally from real property situated in Canada.
U.S. Federal Income Tax Considerations
The following is a general summary of certain U.S. federal income tax
consequence to U.S. Holders of the purchase, ownership and disposition of common
shares. This summary is based on the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder, and judicial
and administrative interpretations thereof, all as in effect on the date hereof
and all of which are subject to change. This summary does not address all
aspects of U.S. federal income taxation that may be relevant to a particular
U.S. Holder based on such U.S. Holder's particular circumstances. In particular,
the following summary does not address the tax treatment of U.S. Holders who are
broker dealers or who own, actually or constructively, 10% or more of the
Company's outstanding voting stock, and certain U.S. Holders (including, but not
limited to, insurance companies, tax-exempt organizations, financial
institutions and persons subject to the alternative minimum tax) may be subject
to special rules not discussed below.
For U.S. federal income tax purposes, a U.S. Holder of common shares
generally will realize, to the extent of the Company's current and accumulated
earnings and profits, ordinary income on the receipt of cash dividends on the
common shares equal to the U.S. dollar value of such dividends on the date of
receipt (based on the exchange rate on such date) without reduction for any
Canadian withholding tax. Dividends paid on the common shares will not be
eligible for the dividends received deduction available in certain cases to U.S.
corporations. In the case of foreign currency received as a dividend that is not
converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollars
value on the date of receipt. Any gain or loss recognized upon a subsequent sale
or other disposition of the foreign currency, including an exchange for U.S.
dollars, will be ordinary income or loss. Subject to certain requirements and
limitations imposed by the Code, a U.S. Holder may elect to claim the Canadian
tax withheld or paid with respect to dividends on the common shares either as a
deduction or as a foreign tax credit against the U.S. federal income tax
liability of such U.S. Holder. The requirements and limitations imposed by the
Code with respect to the foreign tax credit are complex and beyond the scope of
this summary, and consequently, prospective purchasers of common shares should
consult with their own tax advisors to determine whether and to what extent they
would be entitled to such credit.
For U.S. federal income tax purposes, upon a sale or exchange of a
common share, a U.S. Holder will recognize gain or loss equal to the difference
between the amount realized on such sale or exchange and the tax basis of such
common share. If a common share is held as a capital asset, any such gain or
loss will be capital gain or loss, and will be long-term capital gain or loss if
the U.S. Holder has held such common share for more than one year.
Under current Treasury regulations, dividends paid on the common share to
U.S. Holders will not be subject to the 31% U.S. backup withholding tax.
Proposed Treasury regulations which are not yet in effect and which will only
apply prospectively, however, would subject dividends paid on the common shares
through a U.S. or U.S. related broker to the 31% U.S. backup withholding tax
unless certain information reporting requirements are satisfied. Whether and
when such proposed Treasury regulations will become effective cannot be
determined at this time. The payment of proceeds of a sale or other disposition
of common shares in the U.S. through a U.S. or U.S. related broker generally
will be subject to U.S. information reporting requirements and may also be
subject to the 31% U.S. backup withholding tax, unless the U.S. Holder furnishes
the broker with a duly completed and signed Form W-9. Any amounts withheld under
the U.S. backup withholding tax rules may be refunded or credited against the
U.S. Holder's U.S. federal income tax liability, if any, provided that the
required information is furnished to the U.S. Internal Revenue Service.
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Employees
At December 31, 1998 the Company and its subsidiaries employed
approximately 1,270 persons. The Company believes that relations with its
employees are excellent.
Recent Developments
On March 4, 1999, Gary Hutchcraft and James Lund, the Company's Chief
Financial Officer and Chief Accounting Officer, resigned from the Company
effective April 9, 1999. The Company has hired Mr. Thomas Kaehr effective April
19, 1999 as the Company's new Chief Financial Officer. Mr. Kaehr was formerly
Second Vice President of Lincoln National Corporation, Fort Wayne.
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
The statements contained in this Annual Report which are not historical
facts, including but not limited to, statements concerning (i) the impact of
federal and state laws and regulations, including but not limited to, the 1994
Reform Act and 1996 Reform Act, on the Company's business and results of
operations, (ii) the competitive advantage afforded to IGF by approaches adopted
by management in the areas of information, technology, claims handling and
underwriting, (iii) the sufficiency of the Company's cash flow to meet the
operating expenses, debt service obligations and capital needs of the Company
and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense
Reimbursements on the Company's results of operations, are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. From
time to time the Company may also issue other statements either orally or in
writing, which are forward looking within the meaning of these statutory
provisions. Forward looking statements are typically identified by the words
"believe", "expect", "anticipate", "intend", "estimate", "plan" and similar
expressions. These statements involve a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from the forward looking statements in this Form 10-K or from other
forward looking statements made by the Company. In addition to the risks and
uncertainties of ordinary business operations, some of the facts that could
cause actual results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements are the risks
and uncertainties (i) discussed herein, (ii) contained in the Company's other
filings with the Securities and Exchange Commission and public statements from
time to time, and (iii) set forth below.
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty
industry is that its products generally are priced, before its costs are known,
because premium rates usually are determined before losses are reported. Premium
rate levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in surplus
have generally been accompanied by increased price competition among property
and casualty insurers. The nonstandard automobile insurance business in recent
years has experienced very competitive pricing conditions and there can be no
assurance as to the Company's ability to achieve adequate pricing. Changes in
case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. New products also present special issues in
establishing appropriate premium levels in the absence of a base of experience
with such products' performance.
The number of competitors and the similarity of products offered, as
well as regulatory constraints, limit the ability of property and casualty
insurers to increase prices in response to declines in profitability. In states
which require prior approval of rates, it may be more difficult for the Company
to achieve premium rates which are commensurate with the Company's underwriting
experience with respect to risks located in those states. In addition, the
Company does not control rates on its MPCI business, which are instead set by
the FCIC. Accordingly, there can be no assurance that these rates will be
sufficient to produce an underwriting profit.
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The reported profits and losses of a property and casualty insurance
company are also determined, in part, by the establishment of, and adjustments
to, reserves reflecting estimates made by management as to the amount of losses
and loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses and
LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material adverse
effect on the insurer's financial position or results of operations in future
periods.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many
factors which can cause fluctuation in the results of operations of this
business. Many of these factors are not subject to the control of the Company.
The size of the nonstandard market can be significantly affected by, among other
factors, the underwriting capacity and underwriting criteria of standard
automobile insurance carriers. In addition, an economic downturn in the states
in which the Company writes business could result in fewer new car sales and
less demand for automobile insurance. Severe weather conditions could also
adversely affect the Company's business through higher losses and LAE. These
factors, together with competitive pricing and other considerations, could
result in fluctuations in the Company's underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can
vary substantially from period to period as a result of various factors,
including timing and severity of losses from storms, drought, floods, freezes
and other natural perils and crop production cycles. Therefore, the results for
any quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insurance business are recognized
throughout the year with a reconciliation for the current crop year in the
fourth quarter.
The Company expects that for the foreseeable future a majority of its
crop insurance will continue to be derived from MPCI business. The MPCI program
is federally regulated and supported by the federal government by means of
premium subsidies to farmers, expense reimbursement and federal reinsurance
pools for private insurers. As such, legislative or other changes affecting the
MPCI program could impact the Company's business prospects. The MPCI program has
historically been subject to modification at least annually since its
establishment in 1980, and some of these modifications have been significant. No
assurance can be given that future changes will not significantly affect the
MPCI program and the Company's crop insurance business.
Total MPCI Premium for each farmer depends upon the kinds of crops
grown, acreage planted and other factors determined by the FCIC. Each year, the
FCIC sets, by crop, the maximum per unit commodity price ("Price Election") to
be used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
AgPI is a new insurance product for 1998 and the Company expects to
significantly expand this new product in future years. While the Company
believes there is adequate information to establish pricing and little
competition exits, there is no assurance such pricing will be adequate and
competition will not develop.
The Company's crop insurance business is also affected by market
conditions in the agricultural industry which vary depending on such factors as
federal legislation and administration policies, foreign country policies
relating to agricultural products and producers, demand for agricultural
products, weather, natural disasters, technologic advances in agricultural
practices, international agricultural markets and general economic conditions
both in the United States and abroad. For example, the number of MPCI Buy-up
Coverage policies written has historically tended to increase after a year in
which a major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
Highly Competitive Businesses
Both the nonstandard automobile insurance and crop insurance businesses
are highly competitive. Many of the Company's competitors in both the
nonstandard automobile insurance and crop insurance business segments have
substantially greater financial and other resources than the Company, and there
can be no assurance that the Company will be able to compete effectively against
such competitors in the future.
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In its nonstandard automobile business, the Company competes with both
large national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers. Direct
writers may have certain competitive advantages over agency writers, including
increased name recognition, loyalty of the customer base to the insurer rather
than an independent agency and, potentially, reduced acquisition costs. In
addition, certain competitors of the Company have from time to time decreased
their prices in an apparent attempt to gain market share. Also, in certain
states, state assigned risk plans may provide nonstandard automobile insurance
products at a lower price than private insurers.
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1996 crop year, the
number of insurance companies that have entered into agreements with the FCIC to
sell and service MPCI policies has declined from 50 to 17. The Company believes
that to compete successfully in the crop insurance business it will have to
market and service a volume of premiums sufficiently large to enable the Company
to continue to realize operating efficiencies in conducting its business. No
assurance can be given that the Company will be able to compete successfully if
this market consolidates further.
Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and
Pafco a B- (Adequate) rating. Subsequent to the Acquisition, the rating of
Superior was reduced from A- to B+ as a result of the leverage of GGS Holdings
resulting from indebtedness in connection with the Acquisition. A "B+" and a
"B-" rating are A.M. Best's sixth and eighth highest rating classifications,
respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in
A.M. Best's opinion, "have demonstrated very good overall performance when
compared to the standards established by the A.M. Best Company" and "have a good
ability to meet their obligations to policyholders over a long period of time".
A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have
demonstrated adequate overall performance when compared to the standards
established by the A.M. Best Company" and "generally have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions." IGF
recently received an "NA-2" rating (a "rating not assigned" category for
companies that do not meet A.M. Best's minimum size requirement) from A.M. Best.
IGF intends to seek a revised rating in 1999, although there can be no assurance
that a revised rating will be obtained or as to the level of any such rating.
A.M. Best bases its ratings on factors that concern policyholders and agents and
not upon factors concerning investor protection. Such ratings are subject to
change and are not recommendations to buy, sell or hold securities. One factor
in an insurer's ability to compete effectively is its A.M. Best rating. The A.M.
Best ratings for the Company's rated Insurers are lower than for many of the
Company's competitors. There can be no assurance that such ratings or future
changes therein will not affect the Company's competitive position.
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Georgia, Indiana and Virginia;
consequently the Company will be significantly affected by changes in the
regulatory and business climate in those states. The Company's crop insurance
business is concentrated in the states of Texas, North Dakota, Iowa, Minnesota,
Illinois, California, Nebraska, Mississippi, Arkansas and South Dakota and the
Company will be significantly affected by weather conditions, natural perils and
other factors affecting the crop insurance business in those states.
Future Growth and Continued Operations Dependent on Access to Capital
Property and casualty insurance is a capital intensive business. The
Company must maintain minimum levels of surplus in the Insurers in order to
continue to write business, meet the other related standards established by
insurance regulatory authorities and insurance rating bureaus and satisfy
financial ratio covenants in loan agreements.
Historically, the Company has achieved premium growth as a result of
both acquisitions and internal growth. It intends to continue to pursue
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acquisition and new internal growth opportunities. Among the factors which may
restrict the Company's future growth is the availability of capital. Such
capital will likely have to be obtained through debt or equity financing or
retained earnings. There can be no assurance that the Company's insurance
subsidiaries will have access to sufficient capital to support future growth and
also satisfy the capital requirements of rating agencies, regulators and
creditors. In addition, the Company will require additional capital to finance
future acquisitions.
The Company's ability to borrow additional funds has been limited under
the terms of the Indenture for the Preferred Securities.
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves for unpaid losses and LAE established by the Company are
estimates of amounts needed to pay reported and unreported claims and related
LAE based on facts and circumstances then known. These reserves are based on
estimates of trends in claims severity, judicial theories of liability and other
factors.
Although the nature of the Company's insurance business is primarily
short-tail, the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating these amounts, it has been
necessary, and may over time continue to be necessary, to revise estimates of
the Company's reserves for losses and LAE. The historic development of reserves
for losses and LAE may not necessarily reflect future trends in the development
of these amounts. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on historical information.
Reliance Upon Reinsurance
In order to reduce risk and to increase its underwriting capacity, the
Company purchases reinsurance. Reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers, including the FCIC,
which the Company generally believes to be financially stable, a significant
reinsurer's insolvency or inability to make payments under the terms of a
reinsurance treaty could have a material adverse effect on the Company's
financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing
in property and casualty insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity,
no assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may need
to reduce the levels of its underwriting commitments.
Risks Associated with Investments
The Company's results of operations depend in part on the performance
of its invested assets. Certain risks are inherent in connection with fixed
maturity securities including loss upon default and price volatility in reaction
to changes in interest rates and general market factors. Equity securities
involve risks arising from the financial performance of, or other developments
affecting, particular issuers as well as price volatility arising from general
stock market conditions.
Comprehensive State Regulation
The Company's insurance subsidiaries are subject to comprehensive
regulation by government agencies in the states in which they operate. The
nature and extent of that regulation vary from jurisdiction to jurisdiction but
typically involve prior approval of the acquisition of control of an insurance
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company or of any company controlling an insurance company, regulation of
certain transactions entered into by an insurance company with any of its
affiliates, limitations on dividends, approval or filing of premium rates and
policy forms for many lines of insurance, solvency standards, minimum amounts of
capital and surplus which must be maintained, limitations on types and amounts
of investments, restrictions on the size of risks which may be insured by a
single company, limitation of the right to cancel or non-renew policies in some
lines, regulation of the right to withdraw from markets or agencies,
requirements to participate in residual markets, licensing of insurers and
agents, deposits of securities for the benefit of policyholders, reporting with
respect to financial condition, and other matters. In addition, state
insurance department examiners perform periodic financial and market
conduct examinations of insurance companies. Such regulation is generally
intended for the protection of policyholders rather than security holders. No
assurance can be given that future legislative or regulatory changes will not
adversely affect the Company.
Holding Company Structure; Dividend And Other Restrictions; Management Fees
Holding Company Structure. The Company is a holding company whose
principal asset is the capital stock of the subsidiaries. The Company relies
primarily on dividends and other payments from its subsidiaries, including its
insurance subsidiaries, to meet its obligations to creditors and to pay
corporate expenses. The Insurers are domiciled in the states of Indiana and
Florida and each of these states limits the payment of dividends and other
distributions by insurance companies. The Company's reinsurance subsidiary,
Granite Re is also limited in its ability to make payments to the Company as a
result of restrictions imposed by the regulatory bodies that govern the
companies that ceded business to it.
Dividend and Other Restrictions. Indiana law defines as "extraordinary"
any dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the end
of the preceding year, or (ii) the prior year's net income. Dividends which are
not "extraordinary" may be paid ten days after the Indiana Department of
Insurance ("Indiana Department") receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without the prior
approval of the Indiana Commissioner of Insurance (the "Indiana Commissioner")
or until the Indiana Commissioner has been given thirty days' prior notice and
has not disapproved within that period. The Indiana Department must receive
notice of all dividends, whether "extraordinary" or not, within five business
days after they are declared. Notwithstanding the foregoing limit, a domestic
insurer may not declare or pay a dividend from any source of funds other than
"Earned Surplus" without the prior approval of the Indiana Department. "Earned
Surplus" is defined as the amount of unassigned funds set forth in the insurer's
most recent annual statement, less surplus attributable to unrealized capital
gain or re-evaluation of assets. Further, no Indiana domiciled insurer may make
payments in the form of dividends or otherwise to its shareholders unless it
possesses assets in the amount of such payments in excess of the sum of its
liabilities and the aggregate amount of the par value of all shares of capital
stock; provided, that in no instance shall such dividend reduce the total of (I)
gross paid-in and contributed surplus, plus (ii) special surplus funds, plus
(iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal
to 50% of the aggregate amount of the par value of all shares of the insurer's
capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department of Insurance ("Florida
Department") if the dividend or distribution does not exceed the larger of: (i)
the lesser of (a) 10% of surplus or (b) net investment income, not including
realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with
dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net investment
income plus a 3-year carryforward with dividends payable constrained to
unassigned funds minus 25% of unrealized capital gains. Alternatively, a Florida
domestic insurer may pay a dividend or distribution without the prior written
approval of the Florida Department if (1) the dividend is equal to or less than
the greater of (i) 10% of the insurer's surplus as regards policyholders derived
from net operating profits on its business and net realized capital gains, or
(ii) the insurer's entire net operating profits (including unrealized gains or
losses) and realized net capital gains derived during the immediately preceding
calendar year; (2) the insurer will have policyholder surplus equal to or
exceeding 115% of the minimum required statutory surplus after the dividend or
distribution; (3) the insurer files a notice of the dividend or distribution
with the Florida Department at least ten business days prior to the dividend
payment or distribution; and (4) the notice includes a certification by an
officer of the insurer attesting that, after the payment of the dividend or
distribution, the insurer will have at least 115% of required statutory surplus
37
<PAGE>
as to policyholders. Except as provided above, a Florida domiciled insurer may
only pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department, or (ii) thirty days after the Florida Department has
received notice of such dividend or distribution and has not disapproved it
within such time. In the consent order approving the Acquisition (the "Consent
Order"), the Florida Department has prohibited Superior from paying any
dividends (whether extraordinary or not) for four years from date of acquisition
without the prior written approval of the Florida Department.
Although the Company believes that funds required for it to meet its
financial and operating obligations will be available, there can be no assurance
in this regard. Further, there can be no assurance that, if requested, the
Indiana Department will approve any request for extraordinary dividends from
Pafco or IGF or that the Florida Department will allow any dividends to be paid
by Superior during the four year period described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written and the ability to pay future dividends. Further, state insurance
laws and regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
Management Fees. The management agreement originally entered into
between SIG and Pafco was assigned as of April 30, 1996 by SIG to GGS
Management, a wholly-owned subsidiary of GGS Holdings. This agreement provides
for an annual management fee equal to 15% of gross premiums written. A similar
management agreement with a management fee of 17% of gross premiums written has
been entered into between GGS Management and Superior. Employees of SIG relating
to the nonstandard automobile insurance business and all Superior employees
became employees of GGS Management effective April 30, 1996. In the Consent
Order approving the Acquisition, the Florida Department has reserved, for a
period of three years, the right to re-evaluate the reasonableness of fees
provided for in the Superior management agreement at the end of each calendar
year and to require Superior to make adjustments in the management fees based on
the Florida Department's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees.
Y2K
Please refer to the section, "Impact of Year 2000 Issue", in "Management's
Discussion and Analysis of Results and Operations" in the 1998 Annual Report for
a discussion on this topic.
ITEM 2 - PROPERTIES
The headquarters for the Company is leased space at 181 University Avenue,
Suite 1101, Toronto, Ontario, while SIG, GGS Holdings and Pafco are located at
4720 Kingsway Drive, Indianapolis, Indiana. The Indianapolis building is an
80,000 square foot multilevel structure approximately 50% of which is utilized
by Pafco. The remaining space is leased to third parties at a price of
approximately $10 per square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel building
leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in
Atlanta, Georgia; Tampa, Florida; and Orange, California. Under a lease term
which extends through February 2003, Superior leases office space at 280
Interstate North Circle, N.W., Suite 500, Atlanta, Georgia. Superior occupies
43,448 square feet at this location. Superior also has an office located at 3030
W. Rocky Pointe Drive, Suite 770, Tampa, Florida consisting of 18,477 square
feet of space leased for a term extending through February 2000. In addition,
Superior occupies an office at 1745 West Orangewood, Orange, California
consisting of 3,264 square feet under a lease extending through May 1999.
IGF owns a 57,799 square foot office building located at 6000 Grand
Avenue, Des Moines, Iowa which serves as its corporate headquarters. The
building is fully occupied by IGF.
38
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising
in the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimated costs of litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during 1998 to a vote of security holders of
the Registrant, through the solicitation of proxies or otherwise.
SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officers
of the Company who are not also directors. Their respective ages and their
respective positions with the Company are listed as follows:
Name Age Position
David L. Bates 40 Vice President, General Counsel and
Secretary of the Company
Gary P. Hutchcraft 37 Vice President, Chief Financial Officer
and Treasurer of the Company
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel
and Secretary of SIG since November, 1995 after having been named Vice President
and General Counsel of the Company in April, 1995. Mr. Bates served as a member
of the Fort Howard Corporation Legal Department from September, 1988 through
March, 1995. Prior to that time, Mr. Bates served as a Tax Manager with Deloitte
& Touche.
Mr. Hutchcraft, C.P.A., has served as Vice President, Chief Financial
Officer and Treasurer of SIG and the Company since July, 1996. Prior to that
time, Mr. Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's Common
Shares, the range of selling prices for each quarterly period for the years
ended December 31, 1998 and 1997 with respect to the Common Shares and the
approximate number of holders of Common Shares as of December 31, 1998 the
Common Shares and other matters is included under the caption Market Information
on Page 42 of the 1998 Annual Report, included as Exhibit 13, which information
is incorporated herein by reference.
The Company currently intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon earnings, capital requirements, any financing agreement
covenants and the financial condition of the Company. In addition, regulatory
restrictions and provisions of the Preferred Securities limit distributions to
shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
Selected Financial Data of the Company follows:
39
<PAGE>
GORAN CAPITAL INC.
Selected Financial Data
As of the Year Ended December 31,
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Gross Premium Revenue $126,978 $146,603 $299,376 $448,982 $546,771
Net Earnings (Loss)-Continuing Operations - CDN GAAP 3,940 7,171 14,127 15,983 (8,999)
Net Earnings (Loss) - CDN GAAP 3,940 7,171 31,296 12,438 (11,936)
U.S./Canada GAAP Differences:
Discounting on Outstanding Claims 88 (161) 62 (504) --
Deferred Income Taxes 1,180 (344) (64) 177 --
Minority Interest -- -- (177) 107 --
Net Earnings (Loss)-Continuing Operations - US GAAP 5,208 6,666 14,125 15,763 (8,999)
Net Earnings (Loss) - US GAAP 5,208 6,666 31,117 12,218 (11,936)
Basic Earnings Per Share-Continuing Operations - US GAAP $0.96 $1.33 $2.67 $2.82 $(1.54)
Basic Earnings Per Share - US GAAP $0.96 $1.33 $5.87 $2.19 $(2.04)
EPS Continuing Operations-Fully Diluted - US GAAP $0.96 $1.20 $2.47 $2.68 $(1.54)
EPS-Fully Diluted - US GAAP $0.96 $1.20 $5.44 $2.08 $(2.04)
Dividends Per Share $0.00 $0.00 $0.00 $0.00 $0.00
Total Assets - CDN GAAP 115,240 160,816 381,342 560,848 570,989
U.S./Canada GAAP Differences:
Loans to Purchase Shares (593) (563) (595) (346) (1,377)
Deferred Income Taxes 1,742 1,466 1,798 1,975 --
Outstanding Claims Ceded -- -- -- -- --
Unearned Premiums Ceded -- -- -- -- --
Unrealized Gain (Loss) on Investments (1,383) (221) 820 1,336 1,630
Total Assets - US GAAP 115,006 161,498 383,365 563,813 571,242
Long Term Bonds and Debentures 10,787 9,237 -- -- --
Shareholders' Equity - CDN GAAP 5,067 12,622 47,258 60,332 49,725
U.S./Canada GAAP Differences:
Deferred Income Taxes 1,742 1,466 1,798 1,975 --
Discounting on Claims (1,134) (1,327) (1,260) (1,765) --
Unrealized Gain (Loss) on Investments (1,383) (221) 820 1,336 1,176
Minority Interest Portion -- -- (177) (70) --
Loans to Purchase Shares (593) (563) (595) (346) (1,377)
Shareholders' Equity - US GAAP 3,699 11,977 47,843 61,462 49,524
Shares Outstanding-Fully Diluted - US GAAP 5,399,463 5,567,644 5,724,476 5,886,211 5,841,329
</TABLE>
40
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
The discussion entitled "Management Discussion and Analysis of Financial
Condition and Results of Operations" in the 1998 Annual Report on pages 5
through 19 included as Exhibit 13 is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included in the 1998 Annual Report,
included as Exhibit 13, and listed in Item 14 of this Report are incorporated
herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement for
its 1999 annual meeting of common stockholders filed with the Commission
pursuant to Regulation 14A (the "1999 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the Company's 1999 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the Company's 1999 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the Company's 1999 Proxy Statement.
41
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report except as
otherwise indicated:
1. Financial Statements. The following described consolidated financial
statements found on the pages of the 1998 Annual Report indicated below
are incorporated into Item 8 of this Report by reference.
Description of Financial Statement Item Page
Report of Independent Auditors 41
Consolidated Balance Sheets, December 31, 1998 and 1997 20
Consolidated Statements of Earnings,
Years Ended December 31, 1998, 1997 and 1996 21
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1998, 1997 and 1996 22
Consolidated Statements of Cash Flows,
Years Ended December 31, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements,
Years Ended December 31, 1998, 1997 and 1996 24-39
2. Financial Statement Schedules.
The following financial statement schedules are included herein.
Description of Financial Statement Item Page
Schedule II - Condensed Financial Information Of Registrant 43
Schedule IV - Reinsurance 46
Schedule V - Valuation And Qualifying Accounts 47
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations 48
Schedules other than those listed above have been omitted because the
required information is contained in the financial statements and notes thereto
or because such schedules are not required or applicable.
3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated
herein by reference.
4. Reports on Form 8-K. None
42
<PAGE>
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
BALANCE SHEET
As At December 31,
(In Thousands U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Assets:
Cash and Short-term Investments $1,166 $233
Loans to Related Parties 334 1,982
Capital and Other Assets 597 503
Investment in Subsidiaries, at Cost 10,321 9,636
------ ------
Total Assets $12,418 $12,354
====== ======
Liabilities and Shareholders' Equity:
Loans from Related Parties 9,324 9,937
------ ------
Total Liabilities 9,324 9,937
------ ------
Shareholders' Equity:
Common Shares 18,010 19,317
Cumulative Translation Adjustment 1,597 1,367
Deficit (16,513) (18,267)
------ ------
Total Shareholders' Equity 3,094 2,417
------ ------
Total Liabilities and Shareholders' Equity $12,418 $12,354
====== ======
</TABLE>
43
<PAGE>
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENT OF EARNINGS (LOSS)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Revenues:
Management Fees $352 $336 $108
Dividend Income 3,500 -- --
Other Income -- 52 --
Net Investment Income 264 15 40
------ ----- ------
Total Revenues 4,116 403 148
------ ----- ------
Expenses:
Debenture Interest Expense 868 -- --
Amortization 199 -- --
General, Administrative and Acquisition Expenses 1,879 (234) 1,380
------ ----- ------
Total Expenses 2,946 (234) 1,380
------ ----- ------
Net Income (Loss) 1,170 637 (1,232)
Other - Purchase of Common Shares -- -- (522)
Deficit, Beginning of Year (18,320) (17,150) (16,513)
------ ------ ------
Deficit, End of Year $(17,150) (16,513) (18,267)
====== ====== ======
</TABLE>
44
<PAGE>
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENT OF CASH FLOWS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Cash Flows from Operations 1996 1997 1998
<S> <C> <C> <C>
Net Income (Loss) $1,170 $637 $(1,232)
Items Not Involving Cash:
Amortization and Depreciation 199 -- --
Gain on Sale of Capital Assets (4) -- --
Decrease (Increase) in Accounts Receivable (1) (40) 86 (471)
Decrease (Increase) in Other Assets (3) (54) 779
Increase (Decrease) in Accounts Payable 8,749 (867) 613
Translation Adjustment -- -- (230)
------ --- ---
Net Cash Provided (Used) by Operations 10,071 (198) (541)
------ --- ---
Cash Flows From Financing Activities:
Proceeds on Sale of Capital Assets 14 -- --
Purchase of Common Shares -- -- (748)
Issue of Common Shares (1) 599 594 356
--- --- ---
Net Cash Provided by Financing Activities 613 594 (392)
--- --- ---
Cash Flows From Investing Activities:
Other, net (93) 451 --
Reduction of Debentures (11,084) -- --
------ --- ---
Net Cash Used by Investing Activities (11,177) 451 --
------ --- ---
Net Increase (Decrease) in Cash (493) 847 (933)
Cash at Beginning of Year 812 319 1,166
--- --- -----
Cash at End of Year $319 $1,166 $233
=== ===== ===
Cash Resources are Comprised of:
Cash 187 78 104
Short-Term Investments 132 1,088 129
--- ----- ---
$319 $1,166 $233
=== ===== ===
</TABLE>
(1) Amounts for 1998 exclude consideration of $1, 177 for the issuance of common
shares received in the form of share purchase loans.
45
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1998, 1997 and 1996
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Goran Capital Inc. The condensed financial
information includes the accounts and activities of the Parent Company which
acts as the holding company for the insurance subsidiaries.
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Premiums Written (1) 1996 1997 1998
<S> <C> <C> <C>
Direct Amount $290,355 $420,443 $419,966
Assumed from Other Companies $9,021 $28,539 $126,805
Ceded to Other Companies $(85,598) $(167,086) $(184,665)
Net Amount $213,778 $281,896 $362,106
Percentage of Amount Assumed to Net 4.2% 10.1% 35.0%
</TABLE>
(1) Excludes premiums written with respect to discontinued operations.
46
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND
QUALIFYING ACCOUNTS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
1996 1997 1998
Allowance for Allowance for Allowance for
Doubtful Doubtful Doubtful
Accounts Accounts Accounts
Additions:
<S> <C> <C> <C>
Balance at Beginning of Period $927 $1,480 $1,993
Reserves Acquired in the Superior
Acquisition 500 -- --
Charged to Costs and Expenses (1) 5,034 9,519 12,690
Charged to Other Accounts -- -- --
Deductions from Reserves (4,981)(2) (9,006) (8,290)
----- ----- -----
Balance at End of Period $1,480 $1,993 $6,393
===== ===== =====
</TABLE>
(1) The Company continually monitors the adequacy of its allowance for doubtful
accounts and believes the balance of such allowance at December 31, 1998,
1997 and 1996 was adequate.
(2) Uncollectible accounts written off, net of recoveries.
47
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL
INFORMATION CONCERNING PROPERTY -
CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Deferred Policy Acquisition Costs $13,860 $11,849 $16,332
Reserves for Losses and Loss Adjustment Expenses 127,045 152,871 218,233
Unearned Premiums 91,207 118,616 110,665
Earned Premiums 208,883 276,540 342,177
Net Investment Income 7,745 12,777 13,401
Losses and Loss Adjustment Expenses Incurred Related to:
Current Years 146,844 201,483 268,750
Prior Years (570) 9,516 12,142
Paid Losses and Loss Adjustment Expenses 139,441 203,012 236,179
Amortization of Deferred Policy Acquisition Costs 27,657 19,356 51,558
Premiums Written 299,376 448,982 546,771
</TABLE>
Note: All amounts in the above table are net of the effects of reinsurance
and related commission income, except for net investment income regarding
which reinsurance is not applicable, premiums written, liabilities for
losses and loss adjustment expenses, and unearned premiums which are stated
on a gross basis. The amounts in the above table exclude amounts with
respect to discontinued operations.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
GORAN CAPITAL INC.
April 13, 1999 By: /s/ Alan G. Symons
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on April 13, 1999, on
behalf of the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial/Accounting Officer:
/s/Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/G. Gordon Symons /s/David B. Shapira
Chairman of the Board Director
/s/John K. McKeating /s/James G. Torrance
Director Director
/s/J. Ross Schofield /s/Douglas H. Symons
Director Director
/s/Alan G. Symons
Director
49
<PAGE>
EXHIBIT INDEX
Reference to
Regulation S-K
Exhibit No. Document
1 Final Draft of the Underwriting Agreement dated November 4,
1996 among Registrant, Symons International Group, Inc.,
Advest, Inc. and Mesirow Financial, Inc. is incorporated by
reference in the Registrant's 1996 Form 10-K.
2.1 The Strategic Alliance Agreement by and between Continental
Casualty Company and IGF Insurance Company, IGF Holdings, Inc.
and Symons International Group, Inc. dated February 28, 1998
is incorporated by reference to Exhibit 2.1 of the
Registrant's 1997 Form 10-K.
2.2 The MPCI Quota Share Reinsurance Contract by and between
Continental Casualty Company and IGF Insurance Company, IGF
Holdings, Inc. and Symons International Group, Inc. dated
February 28, 1998 is incorporated by reference to Exhibit 2.2
of the Registrant's 1997 Form 10-K.
2.3 The MPCI Quota Share Reinsurance Agreement by and between
Continental Casualty Company and IGF Insurance Company, IGF
Holdings, Inc. and Symons International Group, Inc. dated
February 28, 1998 is incorporated by reference to Exhibit 2.3
of the Registrant's 1997 Form 10-K.
2.4 The Crop Hail Insurance Quota Share Contract by and between
Continental Casualty Company and IGF Insurance Company, IGF
Holdings, Inc. and Symons International Group, Inc. dated
February 28, 1998 is incorporated by reference to Exhibit 2.4
of the Registrant's 1997 Form 10-K.
2.5 The Crop Hail Insurance Quota Share Agreement by and between
Continental Casualty Company and IGF Insurance Company, IGF
Holdings, Inc. and Symons International Group, Inc. dated
February 28, 1998 is incorporated by reference to Exhibit 2.5
of the Registrant's 1997 Form 10-K.
2.6 The Crop Hail Insurance Services and Indemnity Agreement by
and between Continental Casualty Company and IGF Insurance
Company, IGF Holdings, Inc. and Symons International Group,
Inc. dated February 28, 1998 is incorporated by reference to
Exhibit 2.6 of the Registrant's 1997 Form 10-K.
2.7 The Multiple Peril Crop Insurance Service and Indemnity
Agreement by and between Continental Casualty Company and IGF
Insurance Company, IGF Holdings, Inc. and Symons International
Group, Inc. dated February 28, 1998 is incorporated by
reference to Exhibit 2.7 of the Registrant's 1997 Form 10-K.
2.8 The Stock Purchase Agreement between Symons International
Group, Inc. and GS Capital Partners II, L.P. dated July 23,
1997 is incorporated by reference to Exhibit 2.8 of the
Registrant's 1997 Form 10-K.
2.9 The Stock Purchase Agreement between IGF Holdings, Inc. and
1911 CORP. dated July 7, 1998.
2.10 The Asset Purchase Agreement between the Registrant and
Florida International Underwriters dated January 1, 1999.
3.1 The Registrant's Articles of Incorporation are incorporated
by reference to Exhibit 1 of the Registrant's Form 20-F,
filed October 31, 1994.
3.2 Registrant's Restated Bylaw 1 is incorporated by reference in
the Registrant's 1996 Form 10-K.
<PAGE>
4.1 Sample Share Certificate and Articles of Amalgamation defining
rights attaching to common shares are incorporated by
reference to Exhibit 2 of Registrant's Form 20-F filed
October 31, 1994.
4.2(1) The Senior Subordinated Indenture between Symons
International Group, Inc. as issuer and Wilmington
Trust Company as trustee for SIG Capital Trust I
dated August 12, 1997 is incorporated by reference in
the Registrant's Registration Statement on Form S-4,
Reg. No. 333-35713.
4.2(2) First Supplemental Senior Subordinated Indenture between
Symons International Group, Inc. and Wilmington Trust Company
Related to SIG Capital Trust I dated January 15, 1998.
10.1 The Stock Purchase Agreement among Registrant, Symons
International Group, Inc., Fortis, Inc. and Interfinancial,
Inc. dated January 31, 1996 is incorporated by reference to
Exhibit 10.1 of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.2 The Management Agreement among Superior Insurance Company,
Superior American Insurance Company, Superior Guaranty
Insurance Company and GGS Management, Inc. dated April 30,
1996 is incorporated by reference to Exhibit 10.5 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.3 The Management Agreement between Pafco General Insurance
Company and Symons International Group, Inc. dated May 1,
1987, as assigned to GGS Management, Inc. effective April 30,
1996, is incorporated by reference to Exhibit 10.6 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.4 The Administration Agreement between IGF Insurance Company and
Symons International Group, Inc. dated February 26, 1990, as
amended, is incorporated by reference to Exhibit 10.7 of the
Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.5 The Agreement between IGF Insurance Company and Symons
International Group, Inc. dated November 1, 1990 is
incorporated by reference to Exhibit 10.8 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.6 The Registration Rights Agreement between Registrant and
Symons International Group, Inc. dated May 29, 1996 is
incorporated by reference to Exhibit 10.13 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.7(1) The Employment Agreement between GGS Management Holdings, Inc.
and Alan G. Symons dated January 31, 1996 is incorporated by
reference to Exhibit 10.16(1) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.7(2) The Employment Agreement between GGS Management Holdings, Inc.
and Douglas H. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(2) of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.8(1) The Employment Agreement between IGF Insurance Company and
Dennis G. Daggett effective February 1, 1996 is incorporated
by reference to Exhibit 10.17(1) of Symons International
Group, Inc.'s Registration Statement on Form S-1,
Reg. No. 333-9129.
10.8(2) The Employment Agreement between IGF Insurance Company and
Thomas F. Gowdy effective February 1, 1996 is incorporated by
reference to Exhibit 10.17(2) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
<PAGE>
10.9 The Employment Agreement between Superior Insurance Company
and Roger C. Sullivan, Jr. effective April 23, 1997 is
incorporated by reference to Exhibit 10.9 of the
Registrant's 1997 Form 10-K.
10.10 The Employment Agreement between Registrant and Gary
P. Hutchcraft effective May 1, 1997 is incorporated
by reference to Exhibit 10.10 of the Registrant's
1997 Form 10-K.
10.11 The Employment Agreement between Registrant and David
L. Bates effective April 1, 1997 is incorporated by
reference to Exhibit 10.11 of the Registrant's 1997
Form 10-K.
10.12 The Employment Agreement between Symons International Group,
Inc. and Carl F. Schnaufer effective August 14, 1998.
10.13 The Goran Capital Inc. Stock Option Plan is incorporated by
reference to Exhibit 10.20 of Symons International Group,
Inc.'s Registration Statement of Form S-1,
Reg. No. 333-9129.
10.14 The GGS Management Holdings, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.21 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.15 The Symons International Group, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.22 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.16 The Symons International Group, Inc. Retirement Savings Plan
is incorporated by reference to Exhibit 10.24 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.17 The Insurance Service Agreement between Mutual Service
Casualty Company and IGF Insurance Company dated May 20, 1996
is incorporated by reference to Exhibit 10.25 of Symons
International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.18(1) The Automobile Third Party Liability and Physical Damage Quota
Share Reinsurance. Contract between Pafco General Insurance
Company and Superior Insurance Company is incorporated by
reference to Exhibit 10.27(1) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.18(2) The Crop Hail Quota Share Reinsurance Contract and Crop
Insurance Service Agreement between Pafco General Insurance
Company and IGF Insurance Company is incorporated by reference
to Exhibit 10.27(2) of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.18(3) The Automobile Third Party Liability and Physical Damage Quota
Share Reinsurance Contract between IGF Insurance Company and
Pafco General Insurance Company is incorporated by reference
to Exhibit 10.27(3) of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.18(4) The Multiple Line Quota Share Reinsurance Contract between IGF
Insurance Company and Pafco General Insurance Company is
incorporated by reference to Exhibit 10.27(4) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No.
333-9129.
10.18(5) The Standard Revenue Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(5) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.18(6) The Automobile Variable Quota Share Reinsurance Agreement
between The Superior Group and IGF Insurance Company dated
October 1, 1998.
<PAGE>
10.18(7) The Automobile Variable Quota Share Reinsurance Agreement
between The Pafco Group and IGF Insurance Company dated
October 1, 1998.
10.18(8) The Automobile Variable Quota Share Reinsurance Agreement
between The Pafco Group and Granite Reinsurance Company, Ltd.
dated October 1, 1998.
10.19 The Commitment Letter, effective October 24, 1996, between
Fifth Third Bank of Central Indiana and Symons International
Group, Inc. is incorporated by reference to Exhibit 10.28 of
Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.20 The Reinsurance Agreement No. 1000-91 (Quota Share Agreement)
and Reinsurance Agreement No. 1000-90 (Stop Loss Reinsurance
and Reserves Administration Agreement) are incorporated by
reference to Exhibit 3(c) of Registrant's Form 20-F filed
October 31, 1994.
10.21 The Form of Share Option Agreement is incorporated by
reference to Exhibit 10.05 of Registrant's Form 10-K for the
year ended December 31, 1994.
10.22 The Share Pledge Agreement between Symons International Group,
Ltd and Registrant is incorporated by reference to Exhibit
10.06 of Registrant's Form 10-K for the year ended
December 31, 1994.
10.23(1) The SIG Capital Trust I 91/2% Trust Preferred Securities
Purchase Agreement dated August 7, 1997 is incorporated by
reference in the Registrant's Registration Statement on
Form S-4, Reg. No. 333-35713.
10.23(2) The Registration Rights Agreement among Symons International
Group, Inc., SIG Capital Trust I and Donaldson, Lufkin &
Jenrette Securities Corporation, Goldman, Sachs & Co., CIBC
Wood Gundy Securities Corp. and Mesirow Financial, Inc. dated
August 12, 1997 is incorporated by reference in the
Registrant's Registration Statement on Form S-4,
Reg. No. 333-35713.
10.23(3) The Declaration of Trust of SIG Capital Trust 1 dated
August 4, 1997 is incorporated by reference in the
Registrant's Registration Statement on Form S-4,
Reg. No. 333-35713.
10.23(4) The Amended and Restated Declaration of Trust of SIG Capital
Trust I dated August 12, 1997 is incorporated by reference in
the Registrant's Registration Statement on Form S-4,
333-35713.
11 Statement re Computation of Per Share Earnings
13 Annual Report to Security Holders, 1998, 1997 and 1996
21 The Subsidiaries of the Registrant are incorporated
by reference to Footnote 1 of the Registrant's
consolidated financial statements contained in its
Annual Report to Security Holders filed hereunder as
Exhibit 13.
99 Management Proxy Circular with respect to 1998 Annual Meeting
of Shareholders of Registrant
<PAGE>
Exhibit 2.9
1911 Corp. Draft 7-6-98
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into this 7th day of July, 1998, by
and among 1911 CORP., a Delaware corporation ("Seller"), and IGF Holdings, Inc.,
an Indiana corporation ("Purchaser").
ARTICLE I
Definitions
The following terms, when used in this Agreement, shall have the
meanings described in this Section:
1.1 Balance Sheet shall have the meaning given in Section 3.6.
1.2. Code shall mean the Internal Revenue Code of 1986 and regulations,
revenue rulings and court decisions adopted or decided thereunder.
1.3. Closing and Closing Date shall have the meanings given in Section
2.3.
1.4. Company shall mean North American Crop Underwriters, Inc., a
Minnesota corporation.
1.5. Employee Benefit Arrangement shall mean each employee benefit
(including, but not limited to, fringe benefits as defined in Section 132 of the
Code, and whether or not in writing) that is not salary, a Plan, or an
employment or severance agreement.
1.6. Encumbrance shall mean any pledge, security interest, mortgage,
community property interest, lien, automatic or other stay in a bankruptcy or
insolvency proceeding, legal or equitable claim, trust agreement, constructive
or resulting trust, voting trust or agreement, restricted stock agreement, right
of first refusal, or option, including any restriction on use, voting, transfer,
receipt of income, or exercise of any other attribute of ownership, except such
restrictions as may be contained in the Articles of Incorporation or the By-Laws
of Company and restrictions on subsequent transfer contained in federal and
state securities laws and state insurance laws.
1.6. ERISA shall mean the Employee Retirement Income Security Act
of 1974.
1.7. Governmental Authority means any government or political
subdivision, board, commission or other instrumentality thereof, whether
federal, state, local or foreign.
<PAGE>
1.8. Indemnified Party shall have the meaning given in Section 9.3.
1.9. Indemnifying Party shall have the meaning given in Section 9.4.
1.10. Interim Balance Sheet shall have the meaning given in Section
3.6.
1.11. Legal Requirement shall mean any constitution, law, ordinance,
established principle of common law, regulation, administrative ruling, or
applicable court decision of any Governmental Authority.
1.12. Licenses and Permits shall mean any license, permit, order,
approval, registration, authorization or qualification under any federal, state
or local law or with any Governmental Authority or under any industry or
non-governmental self-regulatory organization that is necessary for the conduct
of the business of the Company or any Subsidiary or the ownership of the
properties of either.
1.13. Plan shall mean a plan as defined in Section 3(3) of ERISA.
1.14. Permitted Encumbrance shall mean Encumbrances described in
Schedule 3.2 with respect to the Shares and in Schedule 3.4 with respect to
Company's assets.
1.15. Purchase Price shall have the meaning given in Section 2.2.
1.16. Securities Act shall mean the federal Securities Act of 1933 and
rules, regulations and applicable administrative rulings and court decisions
issued thereunder.
1.17. Shares shall mean 600 shares of the Common Stock without par
value of the Company, of which 200 shares are individually owned by each person
who is a Seller.
ARTICLE II
2.1. Purchase of the Shares. On the terms and conditions set forth
herein, Seller shall sell, transfer, convey and assign the Shares to Purchaser
and Purchaser shall purchase the Shares from Seller:
2.2. The Purchase Price.
2.2.1. Aggregate Purchase Price. The purchase price payable by
Purchaser to Seller for the Shares pursuant to this Agreement shall be the sum
of Four Million Dollars ($4,000,000.00) (the "Purchase Price").
2.2.2. Method of Payment. Three Million Dollars of the Purchase Price
shall be paid in cash at the Closing (as defined in Section 2.3) by wire
transfer in available funds by Purchaser upon the instructions of Seller, with
the remaining One Million Dollars ($1,000,000) payable by Purchaser
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1911 Corp. Draft 7-6-98
to Seller no earlier than three (3) years from the date hereof, with such
obligation of Purchaser to Seller being unsecured and without interest.
2.3. The Closing. The signing of this Agreement and the Closing of the
purchase and sale under this Agreement (the "Closing") shall take place on July
7, 1998 (provided all of the conditions to Closing set forth in Sections 5 and 6
have been satisfied or waived) (the "Closing Date"), or on such later date as
soon thereafter as possible upon which such conditions have been satisfied or
waived. The Closing shall occur at the place mutually agreed by the parties
hereto.
2.4. Conveyance of the Shares. Conveyance of the Shares to Purchaser
shall be effected by delivery by Seller to Purchaser of the certificates
therefore with stock powers attached thereto duly endorsed in blank. Title to
the Shares shall be conveyed from Seller to Purchaser free and clear of all
Encumbrances.
ARTICLE III
Representations and Warranties of Seller
Seller hereby warrants and represents:
3.1. Organization and Good Standing. Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota. Company has no Subsidiaries. Company has full corporate power and
authority to conduct its business as it is now being conducted. Company is duly
qualified to do business as a foreign corporation in the jurisdictions listed in
Schedule 3.1, and is in good standing in each such jurisdiction, and such
jurisdictions constitute each jurisdiction in which Company is required to be so
qualified as a result of the nature of its business or the ownership or use of
property.
3.2. Capitalization of Company. The authorized capital stock of Company
consists of 100,000 shares of Common Stock without par value, of which 1,000
shares are issued and outstanding, and are held as shown in Schedule 3.2. The
Shares have been duly authorized and validly issued by Company and are fully
paid and non-assessable. The Shares are free and clear of any Encumbrance (other
than any Encumbrance caused to exist by Purchaser), except for Permitted
Encumbrances shown in Schedule 3.2. Company has not authorized or granted any
call, option, warrant, subscription, conversion right or other right to capital
stock of the Company. None of the Shares was issued in violation of the
Securities Act or any other Legal Requirement. Company has no ownership interest
or right or obligation to acquire any ownership interest in any other
corporation, trust, partnership, joint venture or other legal entity.
3.3. Enforceability. Seller has full power and authority to execute and
to deliver this Agreement, and to carry out the transaction contemplated herein.
This Agreement is the valid and binding obligation of the Seller, and
enforceable against Seller in accordance with its terms, except
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<PAGE>
as such enforceability may be limited by laws affecting the rights and remedies
of creditors and applicable principles of equity. The execution, delivery and
performance of this Agreement by the Seller will not, with or without the giving
of notice or passage of time or both, (i) conflict with, result in a default,
right to accelerate or loss of rights under, or result in the creation of any
lien, charge or encumbrance pursuant to any provision of any mortgage, deed of
trust, lease, license agreement or other agreement to which Seller or Company is
a party or by which it is bound or affected, (ii) conflict with or result in a
default under any provision of the Articles of Incorporation or By-Laws of
Seller or Company, or any effective resolution of the Directors or Stockholders
of Seller or Company, (iii) conflict with or provide grounds for modification,
suspension or revocation of any license, permit or other governmental
authorization held by Seller or Company at the Closing, or (iv) conflict with or
result in a violation of any Legal Requirement.
3.4. Company's Assets. Company owns all of the assets included in the
Balance Sheet and the Interim Balance Sheet, except for acquisitions,
dispositions or retirements in the ordinary course of business and any other
dispositions described in Schedule 3.4. Except as stated in Schedule 3.4,
Company has good and marketable title to its assets, and none of the assets of
Company are subject to any Encumbrance.
3.5. Accounts Receivable. The accounts receivable of Company reflected
on the Balance Sheet and the Interim Balance sheet or otherwise on the books of
Company represent valid obligations arising from sales actually made or services
actually performed in the ordinary course of business. Unless paid prior to the
Closing Date, such accounts receivable will be as of the Closing Date current
and collectible net of the respective reserves shown on the Interim Balance
Sheet or the accounting records of Company as of the Closing Date (which
reserves are adequate and calculated in accordance with past practice).
3.6. Financial Statements. Seller has delivered to Purchaser (a) the
unaudited balance sheet of Company and the related statements of income,
statements of operations and retained earnings, and statement of cash flows for
the year ended December 31, 1997 (the "Balance Sheet"), (b) the unaudited
balance sheet, income statement and related financial statements of Company for
year to date and the month ended May 31, 1998 (the "Interim Balance Sheet"). The
Balance Sheet and the Interim Balance Sheet accurately present the financial
condition and results of operations and cash flows of Company as at the
respective dates thereof or for the periods referred to therein, all in
accordance with United States generally accepted accounting principles, applied
on a basis consistent with the basis on which the Balance Sheet was prepared,
and applied on a basis that is consistent from period to period as shown
therein. Seller expressly warrants to Purchaser that the Company's net worth as
of December 31, 1997, was not less than $1,141,641. Except as set forth in
Schedule 3.6, Company has no liabilities as of the dates of the Balance Sheet
and the Interim Balance Sheet that are not reflected therein, including, without
limitation, contingent liabilities required to be disclosed under United States
generally accepted accounting principles.
3.7. No Material Adverse Change. Since the dates of the Balance Sheet
and the Interim Balance Sheet, there has been no material adverse change in the
business, operations, properties, assets or condition of Company.
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<PAGE>
1911 Corp. Draft 7-6-98
3.8. Litigation. There is no litigation, investigation, arbitration or
other proceeding of any court or other Governmental Authority pending or, to the
best of Company's knowledge, threatened against or relating to Company, except
as listed in Schedule 3.8 to this Agreement by date of filing, names of parties,
court or agency and docket number. Company is not a party to or bound by any
order, judgments, injunctions, decrees or settlement agreements under which it
may have continuing obligations as of the date hereof and which may restrict or
affect the current business operations of Company or Company's capacity to
authorize and issue the Shares. Seller does not know or have reasonable grounds
to know of any basis for any such litigation, investigation, arbitration or
other proceeding. The right or ability of Company to consummate the transaction
contemplated herein has not been challenged by any Governmental Authority or any
other person.
3.9. Books and Records. The books of account, stock record books,
minute books, and other records of Company are complete and correct and have
been maintained in accordance with good business practice.
3.10. Contracts. Each and every executory contract under which Company
has any continuing right to performance or any obligation to perform (except for
agreements (i) with employees and (ii) Plans, which are discussed elsewhere in
this Agreement) is listed in Schedule 3.10. True and correct copies of the
contracts listed in Schedule 3.10 have been provided to Purchaser. There are no
defaults under said contracts.
3.11. Intellectual Property.
3.11.1. Trademarks and Service Marks. Company currently uses the
trademarks or service marks listed in Schedule 3.11.1. Except as provided in
Schedule 3.8, Company has received no notice from any person that such
trademarks and service marks may infringe upon trademarks and service marks of
any other entity.
3.11.2. Know-How, Methods of Operation and Customer Lists. Company has
the unrestricted right to use its know-how, methods of operation, and customer
lists free and clear of any claims of third persons to compensation for the use
thereof (except for claims for compensation under agreements disclosed by
Company in Schedule 3.10).
3.11.3. Software Programs. All software programs that are currently
used by Company as part of its management information systems are listed in
Schedule 3.11.3. Seller knows of no claim of conflicting ownership rights,
breaches of license agreements or past or future license expirations that would
materially interfere with Company's continued use of the software programs
listed in Schedule 3.11.3 for the purposes for which such programs are currently
being used, whether such programs are owned by or licensed to Company.
3.12. Compliance with Legal Requirements. Company is in compliance with
Legal Requirements applicable to Company and its business. To the best knowledge
of Seller, Company has not committed any breach of any Legal Requirement that
may, as of the Closing Date, result in
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<PAGE>
any penalty, fine, suspension or loss of any License or Permit listed in
Schedule 3.13, or other adverse or remedial action that would interfere with the
conduct of the business of Company or result in the incurring of costs or
expenses over and above those customarily incurred in the ordinary course of
business.
3.13. Licenses and Permits. Schedule 3.13 lists each License and Permit
of Company as of the Closing Date. Schedule 3.13 specifies for each state or
province in which Company is licensed as an insurance agent, third party
administrator or other regulated provider of similar products or services, the
specific products or services for which Company is licensed in such state, and
the date of expiration of such license, if any. Each License and Permit is
currently effective and is not the subject of any proceedings by which such
License or Permit might be suspended, restricted or revoked. Company is not a
party to any such proceeding. The Licenses and Permits listed in Schedule 3.13
constitute all of the licenses and permits that are necessary for the conduct of
the business of Company as such business is currently conducted. With respect to
each License and Permit listed in Schedule 3.13, such schedule states any
approval or notice filing that is a legal precondition to the closing of the
transactions contemplated by this Agreement, and the applicable statutory or
regulatory reference describing such notice filing or approval.
3.14. Taxes and Tax Returns. Company has filed with the appropriate
governmental authorities all federal, state and local tax returns required to be
filed by Company or appropriate extensions have been obtained therefor. All of
the foregoing have been correct and complete. All federal, state and local
income, sales, use, occupation, property, excise, employment, employee
withholding and other taxes which have become due (including interest and
penalties) have been fully paid (except for taxes, if any, listed in Schedule
3.14 that are being contested in good faith and as to which adequate reserves
have been provided in the Balance Sheet and the Interim Balance Sheet). None of
the federal income tax returns of Company for any year not closed by applicable
statutes of limitations have been audited. All deficiencies proposed as a result
of such audits have been paid, reserved against, settled, or are being contested
in good faith as described in Schedule 3.14. Except as stated in Schedule 3.14,
Company has not granted any waiver of any statute of limitations related to any
federal, state or local tax. Seller shall file or cause to be filed on behalf of
the Company a United States federal income tax return for the Company for the
period ended on the Closing Date, which return shall be subject to prior review
by Purchaser, and Seller shall be responsible for payment of any adjustments to
the tax on such return that are required by the Internal Revenue Service, or to
contest such adjustments only in good faith and at Seller's sole expense, and
Seller shall also receive any refunds with respect to such return.
3.15. Employees. Company is not a party to any employment or severance
agreement with any of its employees or directors except as stated in Schedule
3.15 (except for personnel policies applicable to all employees generally, true
and complete copies of which have previously been made available to Purchaser).
Such Schedule 3.15 contains a complete and accurate list of the following
information for each employee of Company, including each employee on leave of
absence: name, position title, current rate of compensation payable, vacation
accrued, and participation status in any Plan.
3.16. Employee Benefits. Neither Company nor any entity acquired by
Company (whether currently owned by Company or not) has contributed to a
multiemployer plan as defined in Section
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<PAGE>
1911 Corp. Draft 7-6-98
3(37) of ERISA, nor have they ever sponsored or participated in any plan subject
to Title IV of ERISA. Company does not sponsor or contribute to any Plan that
reimburses or funds health or other insurance benefits to retired employees, or
otherwise has any obligation to reimburse or fund health or other insurance
benefits for retired employees. Except as stated in Schedule 3.16, Company has
not terminated any Plan. Each Plan to which Company contributes or of which
Company is a sponsor is listed in Schedule 3.16. True and correct copies of each
Plan listed in Schedule 3.16, have been made available to Purchaser. Each Plan
that is intended to be qualified under Section 401 of the Code is so qualified,
and no event has occurred that would reasonably be expected to cause any such
Plan to fail to meet any requirements for qualification. True and correct copies
of any Internal Revenue Service determination letter, Forms 5500, financial
statements, and consultant reports with respect to each Plan for the most recent
three plan years have been made available to Purchaser. Except as stated in
Schedule 3.16, Company or the administrator of each Plan has administered each
Plan in accordance with the provisions thereof and reasonable interpretations
thereof. Each Employee Benefit Arrangement of Company is listed in Schedule
3.16. True and correct copies of each Employee Benefit Arrangement have been
made available to Purchaser.
3.17. Labor Relations. None of the employees of Company is a member of
a labor union or subject to a collective bargaining agreement or actively
seeking formation of a labor union.
Company is not a party to any labor dispute or grievance.
3.18. Insurance. Schedule 3.18 lists all insurance policies of Company
by type of insurance, name of insurer, expiration date, deductibles and policy
limits. Except as stated in Schedule 3.18, all of such insurance is written on
an occurrence and not on a claims made basis. The retroactive date for any such
insurance that is written on a claims made basis is stated in Schedule 3.18.
True and complete copies of Company's current professional liability, officers
and directors, and errors and omissions insurance policies, including the
declarations pages thereof, have been provided to Purchaser. With respect to any
insurance policy listed as a claims made policy on Schedule 3.18, Company has
delivered to the insurer a notice of any claim or potential claim of which
Company is aware as of the date hereof that may reasonably be expected to be
covered by such policy, and such notice is in accordance with the notice
provisions of such policy.
3.19. Real Estate. Company has no ownership interest in any real
property except for an office building and land located at Highway 210 West,
Henning, Minnesota, and an office building and land located at 801 Inman Street,
Henning, Minnesota. The Inman Street building was constructed in approximately
1988 and the Highway 210 building was constructed in approximately 1978. Neither
Seller nor Company has notice or knowledge of the presence of any hazardous
materials, including but not limited to asbestos, petroleum derivatives or
pesticides, in quantities or concentrations sufficient to require any remedial
action under any federal, state or local law, regulation or court proceeding
effective as of the Closing Date. Company has not disposed of any substances
from the site of such office building or any other site occupied by Company in
such a manner that Company is subject to current or future payment of clean up
or remediation costs under
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<PAGE>
the federal CERCLA statute or any similar state or local law effective as of the
Closing Date with respect to any site at which such substances may have been
disposed.
3.20. Brokers or Finders. Neither Company nor Seller has incurred any
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement and the transactions contemplated thereby.
3.21. Absence of Certain Changes and Events. Since the dates of the
Balance Sheet and the Interim Balance Sheet, Company has conducted its business
in the ordinary course, and has not (without limitation):
(a) Increased the rate of compensation to any employee;
(b) Adopted or modified any Plan or Employee Benefit Arrangement;
(c) Granted or modified any employment contract, severance agreement, or
other benefit not constituting a Plan or Employee Benefit Arrangement;
(d) Made any distribution with respect to its stock;
(e) Suffered any loss or damage to any asset or assets, whether or not
covered by insurance, that materially and adversely affects the
business, financial condition or prospects of Company, taken as a
whole;
(f) Sold, leased or otherwise disposed of any asset of Company that is
material to the operation of Company;
(g) Merged with or acquired capital stock in any corporation;
(h) Made any loan or advance under any loan to or guaranteed any obligation
of any person;
(i) Made any material change in the accounting methods employed by Company;
or
(j) Entered into any agreement to do any of the foregoing.
3.22. Disclosure. No representation or warranty by or on behalf of
Seller contained in this Agreement and no certificate, schedule, or other
document furnished or to be furnished to Purchaser pursuant hereto contains or
will contain any untrue statement of a material fact or omits or will omit to
state any material facts which are necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
3.23. Survival of Representations and Warranties. The representations
and warranties of Seller in this Section of this Agreement shall be true and
correct as of the Closing. The representations and warranties of Seller shall
survive the Closing for a period of two years, except that the representations
and warranties in Section 3.14 shall survive the Closing separately as to each
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<PAGE>
1911 Corp. Draft 7-6-98
tax obligation until the thirtieth day following the expiration of the statute
of limitations applicable to such tax obligation, including any voluntary
extensions thereof.
ARTICLE IV
Representations and Warranties of Purchaser
Purchaser hereby warrants and represents to Seller that:
4.1. Status of Purchaser. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Indiana.
Purchaser has full corporate power and authority to conduct its business as it
is now being conducted. Purchaser is duly qualified to do business as a foreign
corporation in each jurisdiction in which Purchaser is required to be so
qualified as a result of the nature of its business or the ownership or use of
property.
4.2. Enforceability. Purchaser has full power and authority to execute
and to deliver this Agreement and all related documents, and to carry out the
transaction contemplated herein. Purchaser has taken all necessary corporate
action to authorize its execution and performance of this Agreement. This
Agreement is the valid and binding obligation of Purchaser, and enforceable
against Purchaser in accordance with its terms, except as such enforceability
may be limited by laws affecting the rights and remedies of creditors and
applicable principles of equity. The execution, delivery and performance of this
Agreement by the Purchaser will not, with or without the giving of notice or
passage of time or both, (i) conflict with, result in a default, right to
accelerate or loss of rights under, or result in the creation of any lien,
charge or encumbrance pursuant to any provision of any mortgage, deed of trust,
lease, license agreement or other agreement to which Purchaser is a party or by
which it is bound or affected, (ii) conflict with or result in a default under
any provision of the Certificate of Incorporation or By-Laws of Purchaser, or
any effective resolution of the Directors or Stockholders of Purchaser, or (iii)
conflict with or result in a violation of any Legal Requirement.
4.3. Certain Proceedings. There is no pending action against Purchaser
in any court or administrative agency that challenges or may have the effect of
preventing or delaying or making unlawful the consummation of the transactions
contemplated by this Agreement. To Purchaser's knowledge, no such proceeding has
been threatened.
4.4. Brokers or Finders. Purchaser has incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and the
transactions contemplated thereby.
4.5 Disclosure. No representation or warranty by or on behalf of
Purchaser contained in this Agreement and no statement contained in any
certificate, list, exhibit, or other instrument furnished or to be furnished to
Seller pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit to state any material facts which are
necessary in order to
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make the statements contained herein or therein, in light of the circumstances
under which they were made, not misleading.
4.6. Survival of Representations and Warranties. The representations
and warranties of Purchaser in this Section of this Agreement shall be true and
correct as of the date of execution of this Agreement, and as of the Closing.
The representations and warranties of Purchaser shall survive the Closing for a
period of two years.
ARTICLE V
Purchaser's Conditions to Closing
All obligations of Purchaser under this Agreement are subject to
fulfillment, prior to or at Closing, of each of the following conditions, any
one or all or which may be waived in writing by Purchaser:
5.1. Seller's Representations and Warranties True at Closing. Seller's
representations and warranties contained in this Agreement or in any certificate
or document delivered in connection with this Agreement or the transactions
contemplated herein shall be true in all material respects at and as of the date
of Closing as though such representations and warranties were then made.
5.2. Seller's Performance. Seller shall have performed all of its
material obligations under this Agreement that are to be performed prior to or
at Closing to the extent the same have not been waived by Purchaser in
accordance with the terms hereof.
5.3. Delivery of Documents. Seller shall have delivered to Purchaser
the agreements, certificates, consents and other documents required to be
delivered by Seller to Purchaser in accordance with Article VII of this
Agreement.
5.4. Seller's Closing Certificate. Purchaser shall have received a
certificate of Seller dated as of the Closing Date confirming that all
conditions set forth in this Article V to be satisfied by Seller have been
satisfied.
In the event any of the foregoing conditions is not satisfied by
Seller, or waived by Purchaser prior to Closing, Purchaser shall have the right
to terminate this Agreement in accordance with the provisions of Section 10.
ARTICLE VI
Seller's Conditions to Closing
All obligations of Seller under this Agreement are subject to the
fulfillment, prior to or at Closing, of each of the following conditions, any
one or all of which may be waived by Seller in writing:
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1911 Corp. Draft 7-6-98
6.1. Purchaser's Representations and Warranties True at Closing.
Purchaser's representations and warranties contained in this Agreement or in any
certificate or document delivered in connection with this Agreement or the
transactions contemplated herein shall be true in all material respects at and
as of the date of Closing.
6.2. Purchaser's Performance. Purchaser shall have performed its
obligations under this Agreement that are to be performed prior to or at Closing
to the extent the same have not been waived by Seller in accordance with the
terms hereof.
6.3. Delivery of Documents. Purchaser shall have delivered to Seller
the agreements, certificates, consents and other documents to be delivered by
Purchaser to Seller in accordance with Article VIII of this Agreement.
6.4. Purchaser's Closing Certificate. Seller shall have received a
certificate of Purchaser dated as of the Closing Date confirming that all
conditions set forth in this Article VI to be satisfied by Purchaser have been
satisfied.
In the event any of the foregoing conditions is not satisfied by
Purchaser, or waived by Seller prior to Closing, Seller shall have the right to
terminate this Agreement in accordance with the provisions of Section 10.
ARTICLE VII
Seller's Obligations at Closing
7.1 Deliveries by Seller at Closing. On the Closing Date, Seller
agrees that it will deliver to Purchaser:
(a) The Shares, with stock powers attached thereto duly endorsed in
blank.
(b) Seller's certificates and such certificates from public officials
relating to organization and good standing of the Company, which
Purchaser may reasonably request to verify any of the Seller's
representations and warranties herein.
(c) Copies of the duly adopted Articles of Organization and By-Laws of
Company, certified as true and complete by the Secretary of
Company.
(d) Employment Agreements between Company and Raymond C. Murdock,
Harry Pieterick, and Lonnie Anderson.
(e) Release of stock pledge of Shares held by Lonnie Anderson and
Release of those certain Security Agreements pertaining to amounts
owed by the Company to William M. Bengson and Ernest E. Read for
the purchase of their Company Shares in 1996.
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(f) Key man life insurance policy on the life of Raymond C. Murdock.
(g) Estoppel letters from each person who is a Seller.
(h) Termination of Stockholders Agreement dated September 19, 1996.
(i) Any other document reasonably requested by Purchaser to confirm the
accuracy of the representations and warranties by Seller herein and
the compliance by Seller with the provisions of this Agreement.
7.2. Post-Closing. After the Closing of this Agreement, Seller agrees
that at Purchaser's sole cost and expense, it will take such actions and
properly execute and deliver to Purchaser such further instruments of
assignment, conveyance and transfer as, in the reasonable opinion of counsel for
Purchaser and Seller, may be reasonably necessary to assure, complete and
evidence the full and effective transfer and conveyance of the Shares. Purchaser
shall not, however, be responsible for reimbursing Seller for the cost of
Seller's performance of any actions required or contemplated by this Agreement
to be performed by Seller.
ARTICLE VIII
Purchaser's Obligations at Closing
8.1. Purchaser's Obligations at Closing. On the Closing Date, Purchaser
agrees that it will deliver to Seller:
(a) Payment of the Purchase Price.
(b) Secretary's certificates and such certificates from public
officials relating to the legal existence, corporate good
standing, charter documents, and state tax clearance, which
Seller may reasonably request to verify any of Purchaser's
representations and warranties herein.
(c) Certified resolutions of the Boards of Directors of Purchaser,
authorizing the transactions contemplated hereby, certified by
the Secretary of Purchaser.
(d) Certificates of the Secretary of Purchaser as to incumbency and
related matters.
(e) Copies of the duly adopted Articles of Organization and By-Laws of
Purchaser, certified as true and complete by the Secretary of such
corporation.
(fg) Any other document reasonably requested by Seller to confirm the
accuracy of the representations and warranties by Purchaser herein
and the compliance by Purchaser with the provisions of this
Agreement.
8.2. Post-Closing.
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1911 Corp. Draft 7-6-98
8.2.1. After the Closing of this Agreement, Purchaser agrees that it
will take such actions and properly execute and deliver such further instruments
as Seller may reasonably request to assure, complete and evidence the
transaction provided for in this Agreement.
ARTICLE IX
Indemnification
9.1. Seller's Indemnification. Each person constituting a Seller,
jointly and severally, shall indemnify and hold Purchaser harmless from and
against:
(a) Except as otherwise expressly provided in this Agreement, any
and all damage, loss, or liability resulting from any
misrepresentation of a material fact, breach of warranty or
nonfulfillment of any agreement on the part of Seller under this
Agreement or from any misrepresentation in any certificate
furnished or to be furnished to Purchaser hereunder; and
(b) Any and all actions, suits, proceedings, demands, assessments,
judgments, reasonable costs, and other reasonable expenses,
including, but not limited to, reasonable attorney's fees,
incident to any of the foregoing.
9.2. Purchaser's Indemnification. Purchaser shall indemnify and hold
Seller harmless from and against:
(a) Except as otherwise expressly provided in this Agreement, any and
all damage, loss or liability resulting from any
misrepresentation of a material fact, breach of warranty or
nonfulfillment of any agreement on the part of Purchaser under
this Agreement or from any misrepresentation in any certificate
furnished or to be furnished to Seller hereunder; and
(b) Any and all actions, suits, proceedings, demands, assessments,
judgments, reasonable costs and other reasonable expenses,
including, but not limited to, reasonable attorney's fees,
incident to any of the foregoing.
9.3. Conditions of Indemnification. The respective obligations and
liabilities of Seller and Purchaser (the "Indemnifying Party") to the other
(herein sometimes called the "Indemnified Party") under Sections 9.1 and 9.2
hereof with respect to claims resulting from the assertion of liability by third
parties shall be subject to the following terms and conditions:
(a) Within 20 days after receipt of notice (referred to herein as
"notice") of commencement of any action or the assertion in
writing, formal or informal, of any claim, audit or inquiry by
a person (referred to herein as a "claim"), the Indemnified
Party shall give the Indemnifying Party written notice thereof
together with a copy
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of the document asserting such claim, and the Indemnifying Party
shall have the right to respond to such claim and to undertake
the defense thereof by a representative of its own choosing and
to enter into a settlement or compromise thereof or consent to a
judgment with respect thereto; provided, however, the
Indemnifying Party shall not, without the prior written consent
of the Indemnified Party, settle or compromise any claim or
consent to the entry of judgment (i) that does not include as an
unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party a release from all
liability in respect of such claim, or (ii) that contemplates
any payment or performance by the Indemnified Party.
(b) In the event that the Indemnifying Party, by the 20th day after
receipt of notice of a claim (or, if earlier, by the tenth day
preceding the day on which a responsive pleading must be served
in order to prevent judgment by default in favor of the person
asserting such claim), (i) does not elect to defend against
such claim, and (ii) if an election to defend is made, does not
provide reasonable assurances to the Indemnified Party of the
Indemnifying Party's (or its insurer's) ability to pay defense
costs and indemnity costs likely to be incurred with respect to
the claim, the Indemnified Party will, upon notice to the
Indemnifying Party, have the right to respond to such claim and
to undertake to defense, compromise or settlement of such claim
on behalf of and for the account and risk of loss of the
Indemnifying Party, subject to the right of the Indemnifying
Party to assume the defense of such claim upon satisfying
conditions (i) and (ii) above at any time prior to the
settlement, compromise or final determination thereof (if such
assumption be permitted by any court or other tribunal having
jurisdiction thereof), provided that the Indemnifying Party
shall be given at least 15 days' prior written notice of the
effectiveness of any such proposed settlement or compromise;
(c) In connection with any such indemnification, the Indemnified
Party shall cooperate in all reasonable requests of the
Indemnifying Party.
9.4. Indemnification Limits. Neither Seller on the one hand nor
Purchaser on the other hand shall have any obligation to indemnify the other
party for any breach of any misrepresentation, breach of warranty or
nonfulfillment of any agreement on the part of Seller or Purchaser under this
Agreement or from any misrepresentation in any certificate furnished or to be
furnished hereunder unless the aggregate amount of such indemnifiable claims
previously paid by Seller to Purchaser, on the one hand, or by Purchaser to
Seller, on the other hand, shall exceed $100,000.00, and thereafter Seller, on
the one hand, and Purchaser, on the other hand, shall be responsible only for
the excess of such aggregate amount over $100,000.00, provided, however, that in
no event shall the aggregate of all indemnifiable claims paid by Seller to
Purchaser or by Purchaser to Seller hereunder exceed $1,000,000, adjusted for
inflation by the percentage increase in the U.S. Department of Labor consumer
price index, all urban wage earners, from the Closing Date though the date on
which payment is made by Seller.
9.5. No Rescission. It is agreed by Purchaser and Seller in
consideration of their mutual agreements in this Article IX that neither of them
shall be entitled to rescission of this Agreement as a remedy, unless the other
party fails to perform its material obligations under this Article, and
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1911 Corp. Draft 7-6-98
rescission would otherwise be available to the party not in breach under
principles of applicable law.
ARTICLE X
Termination of Agreement
10.1. Termination of Agreement. This Agreement may be terminated and
the transaction contemplated herein abandoned at any time prior to Closing:
(a) By mutual agreement of the parties;
(b) By Seller, if any of the conditions set forth in Article VI
shall have become incapable of fulfillment prior to the Closing
Date or such earlier date as may be specifically provided for
the performance thereof (as the same may be extended) through
no fault of Seller and the same shall not have been waived by
Seller;
(c) By Purchaser, if any of the conditions set forth in Article V
shall have become incapable of fulfillment prior to the Closing
Date or such earlier date as may be specifically provided for
the performance thereof (as the same may be extended) through
no fault of Purchaser and the same shall not have been waived
by Purchaser; or
(d) By either Seller or Purchaser in the event of a material breach
by the other party of its obligations hereunder.
10.2. Notice of Breach Required. Neither party to this Agreement may
claim termination or pursue any other remedy referred to in Section 10.1 on
account of a breach of a condition, covenant or warranty by the other, without
first giving such other party written notice of such breach and not less than
twenty (20) days within which to cure such breach; provided, however, that no
such cure right shall exist in the event of a breach by Purchaser of its
obligation to pay the purchase price due at Closing pursuant to Section 2.2
hereof. The Closing Date shall be postponed, if necessary, to afford such
opportunity to cure.
10.3. Termination by Purchaser for Breach. In the event of the
termination of this Agreement by Purchaser under Sections 10.1(c) or (d) due to
a material breach by Seller of its obligations hereunder, Purchaser shall have
the right either to (i) terminate this Agreement and to sue for any damages
suffered as a result thereof or (ii) seek specific performance of Seller's
obligations hereunder (the costs of which shall be borne by Seller if Purchaser
establishes that Seller has committed a material breach of its obligations
hereunder).
10.4. Termination by Seller for Breach. In the event of the
termination of this Agreement by Seller under Sections 10.1(b) or (d) due to a
material breach by Purchaser of its obligations
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hereunder, Seller shall have the right either to (i) terminate this Agreement
and sue for any damages suffered as a result thereof or (ii) seek specific
performance of the Purchaser's obligations hereunder (the costs of which shall
be borne by Purchaser if Seller establishes that Purchaser has committed a
material breach of its obligations hereunder).
ARTICLE XI
Miscellaneous Provisions
11.1. Notices. Any notice, request or other communication to be given
by any party hereunder shall be in writing and shall be sent by registered or
certified mail, postage prepaid, by overnight courier guaranteeing overnight
delivery or by facsimile transmission (if confirmed verbally or in writing by
mail as aforesaid), to the following address:
To Seller: Joseph Cole
1911 Corp.
CNA Plaza - 36 South
Chicago, Illinois 60685
Telephone No.: 312-822-2052
Fax Number: 312-755-7196
With a copy to: Michael T. Gengler, Esq.
Vice President, Associate General Counsel
CNA Financial Corporation
CNA Plaza-42 South
333 South Wabash
Chicago, Illinois 60685-0001
Telephone No.: 312-922-7189
Fax Number: 312-755-7376
To Purchaser: Dennis Daggett
President
IGF Holding Company
6000 Grand Avenue
Des Moines, Iowa 50312
Telephone No.: 515-633-1000
Fax Number: 515-633-1010
With a copy to: David L. Bates, Esq.
Vice President, General Counsel and Secretary
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Telephone No.: 317-259-6384
Fax Number: 317-259-6395
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1911 Corp. Draft 7-6-98
Notice shall be deemed given three (3) business days after deposit in the mail,
on the next day if sent by overnight courier and on receipt if sent by facsimile
(and confirmed verbally or by mail as aforesaid).
11.2. Arbitration. Any dispute arising between the parties to this
Agreement with respect to performance or interpretation of this Agreement shall
be submitted to arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association before a single arbitrator. The
arbitrator shall give effect to any applicable statutes of limitations. The
essential determinations of the arbitrator's award shall be based upon written
findings of fact and conclusions of law, and judgment upon the award of the
arbitrator may be entered in any court having jurisdiction thereof. The award
shall be subject to judicial review as to any harmful errors of law.
11.3. Sole Agreement. This Agreement may not be amended or modified in
any respect whatsoever except by instrument in writing signed by the parties
hereto. This Agreement, and the exhibits hereto and documents and agreements
delivered pursuant hereto, constitute the entire agreement between the parties
hereto with respect to the sale of the Shares and supersede all prior
negotiations, discussions, writings and agreements between them with respect to
the subject matter hereof.
11.4. Successors. The terms of this Agreement shall be binding upon and
inure to the benefit of and be enforceable by and against the heirs and
successors of the parties hereto.
11.5. Captions. The captions of this Agreement are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.
11.6. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois applicable to contracts
entered into therein, without consideration of principles of choice of law or
conflicts of laws.
11.7. Severability. Should any one or more of the provisions of this
Agreement be determined to be invalid, unlawful or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby.
11.8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
11.9. Third Party Beneficiary. The provisions of this Agreement are not
intended to confer any benefits upon any person or entity not a party to this
Agreement, provided, however, that IGF Insurance Company shall be entitled to
rely upon the agreement of Seller in Section 2.5.
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<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the
day and year first set forth above.
PURCHASER: IGF HOLDINGS, INC.
By:________________________________________
Name:
Title:
SELLER: 1911 CORP.
By:________________________________________
Name:
Title:
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1911 Corp. Draft 7-6-98
SCHEDULE INDEX
Schedule 3.1 Qualifications as Foreign Corporation
Schedule 3.2 Holders of Company's Stock
Schedule 3.4 Dispositions and Permitted Encumbrances
Schedule 3.6. Exceptions to Balance Sheet
Schedule 3.8 Litigation
Schedule 3.10 Executory Contracts
Schedule 3.11.1 Trademarks and Service Marks
Schedule 3.11.3 Software Programs
Schedule 3.13 Licenses and Permits
Schedule 3.14 Taxes and Tax Returns
Schedule 3.15 Employees
Schedule 3.16 Plans and Employee Benefit Arrangements
Schedule 3.18 Insurance
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Exhibit 2.10
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is entered into as of
the 1st day of January, 1999 by and between Goran Capital Inc., a Canadian
corporation ("Goran"), Symons International Group, Inc., a Florida corporation
("SIGFL"), and Florida International Underwriters, Inc., a Florida corporation
("FIU"), with respect to the following:
WHEREAS, FIU AND SIGFL are insurance agencies engaged in the business
of writing policies of insurance;
WHEREAS, all of the issued and outstanding stock of SIGFL is owned by
Goran; and
WHEREAS, SIGFL desires to sell and FIU desires to purchase certain
assets of SIGFL, subject to the terms of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Sale of Assets. SIGFL hereby sells, transfers, conveys,
assigns and delivers to FIU and FIU hereby purchases the book
of business of SIGFL with respect to the excess and surplus
lines property and casualty insurance business currently
written through Pafco General Insurance Company, an Indiana
insurance company ("Pafco"), including access to all
proprietary information such as agents lists, agreements in
force and all other intangible assets of SIGFL relating
thereto (the "Book of Business").
2. Book of Business Purchase Price. The Purchase Price for the
Book of Business shall be equal to one hundred percent (100%)
of the net retained commission income received by FIU on the
Book of Business for the period from January 1, 1999 through
December 31, 1999 (the "Purchase Price"). For purposes of this
Section 2, net retained commission income shall be equal to
gross commission income received by FIU from the renewal of
the Book of Business into facilities represented by FIU less
commissions paid to producing agents or brokers with respect
to the Book of Business. The Purchase Price shall be
calculated at the end of each calendar quarter of 1999 and
shall be paid as follows:
2.1 Prior to April 30, 1999, FIU shall pay to SIGFL
one-third (1/3) of the Purchase Price attributable to
the quarter ending March 31, 1999. The remaining
two-thirds (2/3) of such portion of the Purchase
Price shall be paid by FIU to SIGFL , in two equal
installments, the first of which shall be due and
payable prior to April 30, 2000 and the second of
which shall be due and payable prior to April 30,
2001.
<PAGE>
2.2 Prior to July 30, 1999, FIU shall pay to SIGFL
one-third (1/3) of the Purchase Price attributable to
the quarter ending June 30, 1999. The remaining
two-thirds (2/3) of such portion of the Purchase
Price shall be paid by FIU to SIGFL, in two equal
installments, the first of which shall be due and
payable prior to July 30, 2000 and the second of
which shall be due and payable prior to July 30,
2001.
2.3 Prior to October 30, 1999, FIU shall pay to SIGFL
one-third (1/3) of the Purchase Price attributable to
the quarter ending September 30, 1999. The remaining
two-thirds (2/3) of such portion of the Purchase
Price shall be paid by FIU to SIGFL, in two equal
installments, the first of which shall be due and
payable prior to October 30, 2000 and the second of
which shall be due and payable prior to October 30,
2001.
2.4 Prior to January 30, 2000, FIU shall pay to SIGFL
one-third (1/3) of the Purchase Price attributable to
the quarter ending December 31, 1999. The remaining
two-thirds (2/3) of such portion of the Purchase
Price shall be paid by FIU to SIGFL, in two equal
installments, the first of which shall be due and
payable prior to January 30, 2001 and the second of
which shall be due and payable prior to January 30,
2002.
2.5 Upon execution of this Agreement, FIU shall pay to
SIGFL the sum of Fifteen Thousand Dollars ($15,000)
which shall be allocated to that portion of the
Purchase Price due and payable with respect to the
quarter ending March 31, 1999.
3. Auxiliary Purchase Price. FIU shall have access to the closed
files of SIGFL (the "Old Business"). FIU shall pay to SIGFL
the sum of twenty-five percent (25%) of the net retained
commission income generated by FIU during the period from
January 1, 1999 through December 31, 1999 (the "Auxiliary
Purchase Price"). For purposes of this Section 3, net retained
commission income shall be equal to gross commission income
received by FIU from the renewal of the Old Business into
facilities represented by FIU less commissions paid to
producing agents or brokers with respect to the Old Business.
The Auxiliary Purchase Price shall be calculated at the end of
each calendar quarter during 1999 and the portion of the
Auxiliary Purchase Price attributable to each such calendar
quarter shall be paid within thirty (30) days of the end of
such quarter.
4. Pafco Renewals Purchase Price. FIU shall pay to SIGFL the sum
of fifty percent (50%) of the net retained commission income
generated by FIU during the period from January 1, 1999
through June 30, 1999 pursuant to the UMA (as defined herein)
(the "Pafco Renewals Purchase Price"). For purposes of this
Section 4, net retained commission income shall be equal to
gross commission income received by
2
<PAGE>
FIU from the business written pursuant to the UMA less
commissions paid to producing agents or brokers with respect
thereto. The Pafco Renewals Purchase Price shall be calculated
at the end of each of the first two calendar quarters during
1999 and the portion of the Pafco Renewals Purchase Price
attributable to each such calendar quarter shall be paid
within thirty (30) days of the end of such quarter.
5. Underwriting Management Agreement. Contemporaneously with this
Agreement FIU and Pafco shall enter into that certain
Underwriting Management Agreement (the "UMA") in the form of
Exhibit "A" attached hereto.
6. Representations and Warranties. Goran and SIGFL represent and
warrant to FIU as follows:
6.1 Organization, Standing and Qualification of Goran.
Goran is a Canadian corporation, duly organized,
validly existing and in good standing under the laws
of Canada. Goran has all requisite corporate power
and authority and is entitled to carry on its
business as now being conducted and to own, lease and
operate its assets and business as now conducted.
6.2 Organization, Standing and Qualification of SIGFL.
SIGFL is a Florida corporation, duly organized,
validly existing and in good standing under the laws
of the State of Florida. SIGFL has all requisite
corporate power and authority and is entitled to
carry on its business as now being conducted and to
own, lease and operate its assets and business as now
conducted.
6.3 Execution, Delivery and Performance of Agreement;
Authority of Goran. The execution, delivery and
performance of this Agreement by Goran and the
related agreements referred to herein will not
conflict with any provision of Goran's Certification
of Incorporation or any mortgage, lease, license,
agreement, law, rule or regulation or any order,
judgment or decree to which it is a party or by which
it may be bound. Goran has the full power and
authority to enter into this Agreement and to carry
out the transactions contemplated hereby, and this
Agreement constitutes a valid and binding obligation
of Goran and is enforceable in accordance with its
terms.
6.4 Execution, Delivery and Performance of Agreement;
Authority of SIGFL. The execution, delivery and
performance of this Agreement by SIGFL and the
related agreements referred to herein will not
conflict with any provision of SIGFL's Certificate of
Incorporation or any mortgage, lease, license,
agreement, law, rule or regulation or any order,
judgment or decree to which it is a party or by which
it may be bound. SIGFL has the full power and
authority to enter into this Agreement and to carry
out the transactions
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<PAGE>
contemplated hereby, and this Agreement constitutes a
valid and binding obligation of SIGFL and is
enforceable in accordance with its terms.
6.5 Consent of Sole Shareholder. Goran is the owner of
all of the issued and outstanding stock of SIGFL and
has given all requisite approval and consent to the
transactions contemplated by this Agreement.
6.6 Title to Assets. SIGFL has good and marketable title
to the Book of Business, which is not subject to any
liens, pledges, security interests or other
restrictions.
7. Representations and Warranties of FIU. FIU represents and
warrants to Goran and SIGFL as follows:
7.1 Organization, Standing and Qualification of FIU. FIU
is a Florida corporation, duly organized, validly
existing and in good standing under the laws of the
state of Florida. FIU has all requisite corporate
power and authority and is entitled to carry on its
business as now being conducted and to own, lease and
operate its assets and business as now conducted.
7.2 Execution, Delivery and Performance of Agreement;
Authority of FIU. The execution, delivery and
performance of this Agreement by FIU and the related
agreements referred to herein will not conflict with
any provision of FIU's Certification of Incorporation
or any mortgage, lease, license, agreement, law, rule
or regulation or any order, judgment or decree to
which it is a party or by which it may be bound. FIU
has the full power and authority to enter into this
Agreement and to carry out the transactions
contemplated hereby, and this Agreement constitutes a
valid and binding obligation of FIU and is
enforceable in accordance with its terms.
8. Closing. The effective date of the closing of the transactions
contemplated by this Agreement shall be January 1, 1999
(the "Closing").
9. Covenant Not to Compete.
9.1 Goran and SIGFL acknowledge and agree that the purchase of
the Book of Business by FIU is a valuable and reasonable
consideration for FIU's entering into this Agreement. For
a period of two (2) years from the date of this Agreement,
neither Goran nor SIGFL shall directly or indirectly
engage in, have any interests in, or otherwise form any
relationship with any business, firm, person, partnership,
corporation (whether as an employee, officer, director,
agent, security holder, creditor, consultant, joint
venturer, partner, associate or otherwise), or in any
other entity for the purpose of providing
4
<PAGE>
property and casualty insurance products comparable to
those contained in the Book of Business (the "Business")
unless required by state law. This covenant shall prohibit
Goran and SIGFL from engaging in the Business, either
directly or indirectly, within the State of Florida. It is
expressly understood and agreed by and between the parties
that the geographic scope for such restriction to be
imposed against Goran and SIGFL is fair and reasonable.
9.2 Goran and SIGFL agree that in the event of a determination
of a material violation of any of the foregoing provisions
of Section 9.1 of this Agreement by a court of competent
jurisdiction:
9.2.1 If any of the Purchase Price, Auxiliary Purchase
Price or Pafco Renewals Purchase Price remain
unpaid to SIGFL, FIU shall be entitled to a
set-off of the Purchase Price, Auxiliary Purchase
Price or Pafco Renewals Purchase Price due and
owing to SIGFL for damages to FIU in such amount
as determined by a court of competent
jurisdiction;
9.2.2 The determination of a court of competent
jurisdiction of damages to FIU as a result of
Goran's or SIGFL's breach of this Agreement shall
not, in any event, or in any way prohibit FIU
from obtaining injunctive relief to prevent
further violation of this Agreement by Goran or
SIGFL.
10. Indemnification of Goran and SIGFL. FIU hereby indemnifies and
agrees to hold Goran and SIGFL harmless from, against and in
respect of and shall on demand reimburse such party for any and
all loss, liability or damage suffered or incurred by Goran or
SIGFL by reason of any untrue representation, breach of warranty
or nonfulfillment of any covenants by FIU contained herein or in
any document, instrument or agreement delivered to Goran or SIGFL
pursuant hereto or in connection herewith. Furthermore, FIU agrees
to indemnify and defend Goran and SIGFL and their individual
shareholders, directors and officers, from and against any claim,
suit, demand and for any damages, losses, costs, attorney's fees
and expenses incurred, as a result of any errors, omissions,
misrepresentations or actions taken by FIU subsequent to the
effective date of this Agreement with regard to the Book of
Business. It is the intention of the parties that Goran and SIGFL
and their individual shareholders, directors and officers shall
only be responsible for any losses, claims, demands, costs and
expenses arising out of SIGFL's operation of the Book of Business.
11. Indemnification of FIU. Goran and SIGFL hereby indemnify and agree
to hold FIU harmless from, against and in respect of and shall on
demand reimburse FIU for any
5
<PAGE>
and all loss, liability or damage suffered or incurred by FIU by
reason of any untrue representation, breach of warranty or
nonfulfillment of any covenants by Goran or SIGFL contained herein
or in any document, instrument or agreement delivered to FIU
pursuant hereto or in connection herewith. Furthermore, Goran and
SIGFL agree to indemnify and defend FIU and its individual
shareholders, directors and officers, from and against any claim,
suit, demand and for any damages, losses, costs, attorney's fees
and expenses incurred, as a result of any errors, omissions,
misrepresentations or actions taken by SIGFL prior to the
effective date of this Agreement with regard to the Book of
Business. It is the intention of the parties that FIU and its
individual shareholders, directors and officers shall only be
responsible for any losses, claims, demands, costs and expenses
arising out of its operation of the Book of Business.
12. Costs of Transaction. Except as otherwise provided herein, each of
the parties hereto shall be responsible for their respective costs
and fees in connection with this Agreement or any other agreement
contemplated herein and the transactions contemplated hereby.
13. Notices. Any notice, demand, consent, approval, request, or other
communication or document to be provided hereunder to a party
hereto shall be (a) in writing, and (b) deemed to have been
provided (i) forty-eight (48) hours after being sent as certified
or registered mail in the United States mail, postage prepaid,
return receipt requested, to the address of the party set forth as
follows or to any other address in the United States of America as
the party may designate from time to time by notice to the other
party, or (ii) upon being given by hand or other actual delivery
to the party:
If to Goran: Goran Capital Inc.
4720 Kingway Drive
Indianapolis, IN 46205
Attention: Douglas H. Symons
Executive Vice President
If to SIGFL: Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, IN 46205
Attention: Douglas H. Symons, President
If to FIU: Florida International Underwriters, Inc.
2300 Glades Road, Suite 135 East
Boca Raton, FL 33431-7335
Attention: Colin W. A. Fellows
6
<PAGE>
14. Entirety. This Agreement represents the complete understanding
between the parties with respect to the transactions contemplated
herein.
15. Amendment. This Agreement may be amended by and only by an
instrument executed and delivered by each party.
16. Waiver. No party shall be deemed to have waived any right which it
holds hereunder unless the waiver is made expressly and in writing
(and, without limiting the generality of the foregoing, no delay
or omission by any party in exercising any such right shall be
deemed a waiver of is future exercise). No waiver shall be deemed
a waiver as to any other instance or any other right.
17. Choice of Law. All questions concerning the construction,
validity, and interpretation of this Agreement and the performance
of the obligations imposed hereby shall be governed by the
internal law, not the law of conflicts, of the State of Indiana.
18. Successors. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs,
personal representatives, successors, and assigns hereunder.
19. Severability. No determination by any court, governmental body or
otherwise that any provision of this Agreement or any amendment
hereof is invalid or unenforceable in any instance shall affect
the validity or enforceability of (a) any other provision thereof,
or (b) that provision in any circumstance not controlled by the
determination. Each such provision shall be valid and enforceable
to the fullest extent allowed by and shall be construed wherever
possible as being consistent with, applicable law.
20. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
20. Further Assurances. The parties shall cooperate with each other
and shall execute and deliver, or cause to be delivered, all other
instruments and shall take all other actions, as either party
hereto may reasonably request from time to time in order to
effectuate the provisions hereof.
7
<PAGE>
IN WITNESS WHEREOF, each party hereto has executed this Agreement as of the
day and year first above written.
GORAN CAPITAL INC.
By:
Title:
SYMONS INTERNATIONAL GROUP, INC.
By:
Title:
FLORIDA INTERNATIONAL UNDERWRITERS, INC.
By:
Title:
8
<PAGE>
Exhibit 10.12
EMPLOYMENT AGREEMENT
WHEREAS, Symons International Group, Inc. and its subsidiaries
(collectively, the "Company") considers it essential to its best interests and
the best interests of its stockholders to foster the continuous employment of
its key management personnel and, accordingly, the Company desires to employ
Carl F. Schnaufer ("You", "Your"or "Executive"), upon the terms and conditions
hereinafter set forth; and
WHEREAS, the Executive desires to continue to be employed by the
Company, upon the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth below, the parties agree as follows:
1. Employment
1.1 Term of Agreement. The Company agrees to employ Executive as Vice
President and Chief Information Officer effective as of August 14, 1998 and
continuing until August 13, 1999, unless such employment is terminated pursuant
to Section 3 below; provided, however, that the term of this Agreement shall
automatically be extended without further action of either party for additional
one (1) year periods thereafter unless the Company or Executive gives written
notice that it or he does not intend to extend this Agreement. Executive shall
give to the Company two (2) months written notice prior to the date Executive
desires to terminate his employment by the Company. It is expressly understood
and agreed that a notice of non-renewal issued by the Company shall not
extinguish the Executive's non-competition obligations pursuant to Section 4
herein.
1.2 Terms of Employment. During the Term, You agree to be a full-time
employee of the Company serving in the position of Vice President and Chief
Information Officer of the Company and further agree to devote substantially all
of Your working time and attention to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities associated with
Your position as Vice President and Chief Information Officer of the Company and
to use Your best efforts to perform faithfully and efficiently such
responsibilities. Executive shall perform such duties and responsibilities as
may be determined from time to time by the Chairman and/or Chief Executive
Officer of the Company of the Company, which duties shall be consistent with the
position of Vice President and Chief Information Officer of the Company, which
shall grant Executive authority, responsibility, title and standing comparable
to that of the vice president and chief information officer of a stock insurance
holding company of similar standing. Your primary place of work will be at the
company's headquarters in Indianapolis, Indiana, but it is understood and agreed
that your duties may require travel. In the event you are relocated to another
Company location, the Company agrees to pay for the cost of your move (including
temporary lodging expenses) and to facilitate the sale of your Indianapolis area
home so that you will be enabled to purchase a new home in your new location
that is comparable in price to your existing home and have your family join you
at such new location within two (2) months of your transfer or such other period
as is reasonable considering market and location. Nothing herein shall prohibit
You from
<PAGE>
devoting Your time to civic and community activities or managing personal
investments, as long as the foregoing do not interfere with the performance of
Your duties hereunder.
1.3 Appointment and Responsibility. The Boards of Directors of the
Company shall, following the effective date of this Agreement, elect and appoint
Executive as Vice President and Chief Information Officer. Consistent with
Section 1.2 of this Agreement, Executive shall be primarily responsible for the
information systems of the Company.
2. Compensation, Benefits and Prerequisites
2.1 Salary. Company shall pay Executive a salary, in equal bi-weekly
installments, equal to an annualized salary rate of $140,000. Executive's salary
as payable pursuant to this Agreement may be increased from time to time as
mutually agreed upon by Executive and the Company. Notwithstanding any other
provision of this Agreement, Executive's salary paid by Company for any year
covered by this Agreement shall not be less than such salary paid to Executive
for the immediately preceding calendar year. All salary and bonus amounts paid
to Executive pursuant to this Agreement shall be in U.S. dollars.
2.2 Bonus. The Company and Executive understand and agree that the
Company expects to achieve significant growth during the term of this Agreement
and that Executive will make a material contribution to that growth which will
require certain personal and familial sacrifices on the part of Executive.
Accordingly, it is the desire and intention of the Company to reward Executive
for the attainment of that growth through bonus and other means (including, but
not limited to, stock options, stock appreciation rights and other forms of
incentive compensation). Therefore, the Company will pay Executive a lump-sum
bonus (subject to normal withholdings) within sixty (60) business days from
receipt by Company of its consolidated, annual audited financial statements in
an amount which shall be determined in accordance with the following Bonus
Table. All amounts used for calculation purposes in this section shall be based
on the audited, consolidated financial statements of Symons International Group,
Inc. (or any successor thereto), with such financial statements having been
prepared in accordance with applicable Generally Accepted Accounting Principles,
applied on a consistent basis with that of prior years.
<TABLE>
<CAPTION>
BONUS TABLE
If Audited Net % of Annual Salary
Income (as a % of Payable to Executive
Budgeted Net Income) Is As Bonus
<S> <C>
Less Than 75% -0-
75% or more, but less than 100% 10%
100% or more, but less than 125% 20%
125% or more 30%
</TABLE>
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<PAGE>
2.3 Employee Benefits. During the term of this Agreement, You shall be
entitled to participate in all incentive, savings, and retirement plans,
practices, policies, and programs available generally to other employees of the
Company. During the term of this Agreement, You and/or Your family, as the case
may be, shall be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies, and programs available
generally to other employees of the Company.
2.4 Additional Prerequisites. During the term of this Agreement,
Company shall provide Executive with:
(a) Not less than three(3) weeks paid vacation during each calendar
year.
(b) An automobile allowance of six hundred thirty dollars ($630.00)
per month.
(c) A golfing membership, including initiation and monthly fees,
at a country club as shall be approved by the Chief Executive
Officer of Company, in his sole and absolute discretion.
2.5 Expenses. During the period of his employment hereunder, Executive
shall be entitled to receive reimbursement from the Company (in accordance with
the policies and procedures in effect for the Company's employees) for all
reasonable travel, entertainment and other business expenses incurred by him in
connection with his services hereunder.
3. Termination of Executive's Employment
3.1 Termination of Employment and Severance Pay. Executive's employment
under this Agreement may be terminated by the Company at any time for any
reason; provided, however, that if Executive's employment is terminated for any
reason other than for cause prior to February 14, 1999, he shall receive, as
severance pay, an amount equal to his salary which would have been otherwise
payable from the date of termination of employment to August 13, 1999. If
Executive's employment is terminated subsequent to February 13, 1999 for any
reason other than for cause, he shall receive, as severance pay, an amount equal
to six (6) month's current salary. Further, if Executive shall be terminated
without cause, receipt of severance payments are conditioned upon execution by
Executive and the Company of that mutual Agreement of Release and Waiver
attached hereto as Exhibit A. Further, Executive shall receive severance pay in
accordance with this Section 3.1 if Executive shall terminate this Agreement due
to a breach thereof by the Company or if Executive is directed by the Company
(including, if applicable, any successor) to engage in any act or action
constituting fraud or any unlawful conduct relating to the Company or its
business as may be determined by application of applicable law. The Chief
Executive Officer of the Company may, in his sole and absolute discretion,
provide Executive notice of the Company's intent to terminate this Agreement as
of a future date. In such event, Executive shall receive the right to remain
employed by the Company for a period of six (6) months, in lieu of severance
payments pursuant to this Section 3.1.
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<PAGE>
3.2 Cause. For purposes of this Section 3, "cause" shall mean:
(a) the Executive being convicted in the United States of America,
any State therein, or the District of Columbia, or in Canada
or any Province therein (each, a "Relevant Jurisdiction"), of
a crime for which the maximum penalty may include imprisonment
for one year or longer (a "felony") or the Executive having
entered against him or consenting to any judgment, decree or
order (whether criminal or otherwise) based upon fraudulent
conduct or violation of securities laws;
(b) the Executive's being indicted for, charged with or otherwise
the subject of any formal proceeding (criminal or otherwise)
in connection with any felony, fraudulent conduct or violation
of securities laws, in a case brought by a law enforcement or
securities regulatory official, agency or authority in a
Relevant Jurisdiction;
(c) the Executive engaging in fraud, or engaging in any unlawful
conduct relating to the Company or its business, in either
case as determined under the laws of any Relevant
Jurisdiction;
(d) the Executive breaching any provision of this Agreement;
(e) gross negligence or willful misconduct by the Executive in the
performance of his duties hereunder; or
failure of the Executive to follow the written directive of
the Chief Executive Officer of the Company or the Board of
Directors of the Company such that the activities of the
Executive are detrimental to the business operations.
3.3 Change of Control. Notwithstanding any other provisions of this
Agreement, if (i) a Change of Control shall occur during the initial one year
term of this Agreement ; and (ii) prior to February 14, 1999 Executive (a)
receives a Notice of Non-Renewal, (b) is terminated for any reason other than
for cause, or (c) Company (including its successors, if any) is in breach of
this Agreement, then Executive shall continue to receive his current salary (in
bi-weekly payments) until the date Executive shall commence employment with a
firm or entity other than the Company; provided, however, in such event
Executive shall continue to receive a portion of his current salary (in
bi-weekly payments) only to the extent that his salary with such firm or entity
is less than his current salary payable under the terms of this Agreement but in
any event such payments shall terminate no later than August 14, 1999.
If a Change of Control shall occur and subsequent to February 13, 1999
Executive (a) receives a Notice of Non-Renewal, (b) is terminated for any reason
other than for cause, or (c) Company (including its successors, if any) is in
breach of this Agreement, then Executive shall continue to receive his current
salary (in bi-weekly payments) until the date Executive shall commence
employment with a firm or entity other than the Company; provided, however, in
such
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<PAGE>
event Executive shall continue to receive a portion of his current salary (in
bi-weekly payments) only to the extent that his salary with such firm or entity
is less than his current salary payable under the terms of this Agreement, but
in no event shall such payments continue for a period in excess of six (6)
months from the date of termination of Executive's employment with the Company.
The receipt by Executive of payment pursuant to this Section 3.3 is
specifically conditioned, and no payments pursuant to this Section 3.3 shall be
made to Executive if he is, at the time of his termination, in breach of any
provision (specifically including, but not limited to, the provisions of this
Agreement pertaining to non-competition and confidentiality) of this Agreement
and, further, if such payments have already begun, the continuation of payments
to Executive pursuant to this Section 3.3 shall cease at the time Executive
shall fail to comply with the non-competition and confidentiality provisions of
Article 4 herein. It is expressly understood and agreed that the amount of any
payment to Executive required pursuant to this Section 3.3 shall be reduced (but
not below zero) by any compensation received by Executive during the period
called for in this Section 3.3.
A Change of Control shall mean the inability of the Symons family to
cause the election of a majority of the members of the Board of Directors of
Goran Capital Inc., Symons International Group, Inc. or their respective
successors.
3.4 Disability. So long as otherwise permitted by law, if Executive has
become permanently disabled from performing his duties under this Agreement, the
Company's Chairman of the Board, may, in his discretion, determine that
Executive will not return to work and terminate his employment as provided
below. Upon any such termination for disability, Executive shall be entitled to
such disability, medical, life insurance, and other benefits as may be provided
generally for disabled employees of Company during the period he remains
disabled. Permanent disability shall be determined pursuant to the terms of
Executive's long term disability insurance policy provided by the Company. If
Company elects to terminate this Agreement based on such permanent disability,
such termination shall be for cause.
3.5 Indemnification. Executive shall be indemnified by Company (and,
where applicable, its subsidiaries) to the maximum extent permitted by
applicable law for actions undertaken for, or on behalf of, the Company and its
subsidiaries.
4. Non-Competition, Confidentiality and Trade Secrets
4.1 Noncompetition. In consideration of the Company's entering into
this Agreement and the compensation and benefits to be provided by the Company
to You hereunder, and further in consideration of Your exposure to proprietary
information of the Company, You agree as follows:
(a) Until the date of termination or expiration of this Agreement
for any reason (the "Date of Termination") You agree not to
enter into competitive endeavors and not to undertake any
commercial activity which is contrary to the best interests of
the Company or its affiliates, including, directly or
-5-
<PAGE>
indirectly, becoming an employee, consultant, owner (except
for passive investments of not more than one percent (1%) of
the outstanding shares of, or any other equity interest in,
any company or entity listed or traded on a national
securities exchange or in an over-the-counter securities
market), officer, agent or director of, or otherwise
participating in the management, operation, control or profits
of (a) any firm or person engaged in the operation of a
business engaged in the acquisition of insurance businesses or
(b) any firm or person which either directly competes with a
line or lines of business of the Company accounting for five
percent (5%) or more of the Company's gross sales, revenues or
earnings before taxes or derives five percent (5%) or more of
such firm's or person's gross sales, revenues or earnings
before taxes from a line or lines of business which directly
compete with the Company. Notwithstanding any provision of
this Agreement to the contrary, You agree that Your breach of
the provisions of this Section 4.1(a) shall permit the Company
to terminate Your employment for cause.
(b) If Your employment is terminated by You, or by reason
of Your Dsability, by the Company for cause, or
pursuant to a notice of non-renewal as outlined in Section
1.1, then for two (2) years after the Date of Termination,
You agree not to become, directly or indirectly, an
employee, consultant, owner (except for passive investments
of not more than one percent (1%) of the outstanding shares
of, or any other equity interest in, any company or entity
listed or traded on a national securities exchange or in
an over-the-counter securities market), officer, agent or
director of, or otherwise to participate in the management,
operation, control or profits of, any firm or person
which directly competes with a business of the Company which
at the Date of Termination produced any class of products or
business accounting for five percent (5%) or more of the
Company's gross sales, revenues or earnings before taxes at
which the Date of Termination derived five percent (5%) or
more of such firm's or person's gross sales, revenues or
earnings before taxes. It is expressly agreed and understood
that this Section 4.1(b) shall not apply to a public
accounting or consulting firm.
(c) You acknowledge and agree that damages for breach of the
covenant not to compete in this Section 4.1 will be difficult
to determine and will not afford a full and adequate remedy,
and therefore agree that the Company shall be entitled to an
immediate injunction and restraining order (without the
necessity of a bond) to prevent such breach or threatened or
continued breach by You and any persons or entities acting for
or with You, without having to prove damages, and to all costs
and expenses (if a court or arbitrator determines that the
Executive has breached the covenant not to compete in this
Section 4.1, including reasonable attorneys' fees and costs,
in addition to any other remedies to which the Company may be
entitled at law or in equity. You and the Company agree that
the provisions of this covenant not to compete are reasonable
and necessary for the operation of the Company and its
-6-
<PAGE>
subsidiaries. However, should any court or arbitrator
determine that any provision of this covenant not to compete
is unreasonable, either in period of time, geographical area,
or otherwise, the parties agree that this covenant not to
compete should be interpreted and enforced to the maximum
extent which such court or arbitrator deems reasonable.
4.2 Confidentiality. You shall not knowingly disclose or reveal to any
unauthorized person, during or after the Term, any trade secret or other
confidential information (as outlined in the Indiana Uniform Trade Secrets Act)
relating to the Company or any of its affiliates, or any of their respective
businesses or principals, and You confirm that such information is the exclusive
property of the Company and its affiliates. You agree to hold as the Company's
property all memoranda, books, papers, letters and other data, and all copies
thereof or therefrom, in any way relating to the business of the Company and its
affiliates, whether made by You or otherwise coming into Your possession and, on
termination of Your employment, or on demand of the Company at any time, to
deliver the same to the Company.
Any ideas, processes, characters, productions, schemes, titles, names,
formats, policies, adaptations, plots, slogans, catchwords, incidents,
treatment, and dialogue which You may conceive, create, organize, prepare or
produce during the period of Your employment and which ideas, processes, etc.
relate to any of the businesses of the Company, shall be owned by the Company
and its affiliates whether or not You should in fact execute an assignment
thereof to the Company, but You agree to execute any assignment thereof or other
instrument or document which may be reasonably necessary to protect and secure
such rights to the Company.
5. Miscellaneous
5.1 Amendment. This Agreement may be amended only in writing, signed by
both parties.
5.2 Entire Agreement. This Agreement contains the entire understanding of
the parties with regard to all matters contained herein. There are no other
agreements, conditions or representations, oral or written, expressed or
implied, with regard to the employment of Executive or the obligations of the
Company or the Executive. This Agreement supersedes all prior employment
contracts and non-competition agreements between the parties.
5.3 Notices. Any notice required to be given under this Agreement shall be
in writing and shall be delivered either in person or by certified or registered
mail, return receipt requested.
Any notice by mail shall be addressed as follows:
If to the Company, to:
Chief Executive Officer
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
-7-
<PAGE>
If to Executive, to:
Carl F. Schnaufer
948 Queensbury Drive
Noblesville, Indiana 46060
or to such other addresses as one party may designate in writing to the other
party from time to time.
5.4 Waiver of Breach. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
5.5 Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
5.6 Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Indiana, without giving effect to
conflict of law principles.
5.7 Headings. The headings of articles and sections herein are included
solely for convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
5.8 Counterparts. This Agreement may be executed by either of the parties
in counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute a single instrument.
5.9 Survival. Company's obligations under Section 3.1 and Executive's
obligations under Section 4 shall survive the termination and expiration of this
Agreement in accordance with the specific provisions of those Paragraphs and
Sections and this Agreement in its entirety shall be binding upon, and inure to
the benefit of, the successors and assigns of the parties hereto.
5.10 Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by You and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior
subsequent time.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
SYMONS INTERNATIONAL GROUP, INC.
("Company")
By:__________________________________
Title:_______________________________
State of Indiana )
) SS:
County of Marion )
Before me the undersigned, a Notary Public for Marion County, State of
Indiana, personally appeared ______________________________, and acknowledged
the execution of this instrument this _______ day of August, 1998.
-------------------------------
CARL F. SCHNAUFER
("Executive")
---------------------------------------
State of Indiana )
) SS:
County of Marion )
Before me the undersigned, a Notary Public for Marion County, State of
Indiana, personally appeared Carl F. Schnaufer and acknowledged the execution of
this instrument this _______ day of ___________________, 1998.
-------------------------------
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<PAGE>
Exhibit 10.18(6)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
This Agreement is made and entered into by and between
SUPERIOR INSURANCE COMPANY
Atlanta, Georgia
SUPERIOR AMERICAN INSURANCE COMPANY
Tampa, Florida
SUPERIOR GUARANTY INSURANCE COMPANY
Tampa, Florida
(hereinafter together called "SUPERIOR GROUP")
and/or any subsidiaries of the above companies (hereinafter together called the
"Company") and the Reinsurer specifically identified on the signature page of
this Agreement (hereinafter called the "Reinsurer").
ARTILCE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company's net retained liability under all Policies classified by the
Company as Private Passenger Automobile and Motorcycle business (including
Artisans' vehicles) covering Bodily Injury and Property Damage Liability,
Personal Injury Protection, Medical Payments, Uninsured and Underinsured
Motorists Liability, Physical Damage, inforce, written or renewed by or on
behalf of the Company and produced by Superior Insurance Company, Atlanta,
Georgia, Superior American Insurance Company, Tampa, Florida and Superior
Guaranty Insurance Company, Tampa, Florida, during the term of this Agreement,
subject to the terms and conditions herein contained.
ARTICLE 2
COVER
A. The Company will cede, and the Reinsurer will accept as reinsurance, a
37% share of all business reinsured hereunder, subject to the maximum
limits as specified in the MAXIMUM LIMITS OF LIABILITY ARTICLE.
ARTICLE 3
COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective at 12:01 a.m., Eastern Standard
Time, October 1, 1998, and shall remain in full force and effect until
terminated as provided in the following paragraph.
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B. Either the Company or the Reinsurer shall have the right to terminate
this Agreement at any time.
C. Notwithstanding the termination provisions as set forth in section B.
above, this Agreement may be terminated, if:
1. The Company defaults upon its obligation to pay the Reinsurer any net
balances due hereunder in accordance with the terms and conditions
hereof, by the Reinsurer giving 15 days' notice prior to any month-end.
Should the Company correct the default within a 10-day period following
receipt of such notice, then termination of this reinsurance by the
Reinsurer for reason of default shall be rescinded automatically.
2. The Company:
a. Is acquired or controlled by, or merged with any other
company;
b. Reinsures its entire business;
c. Loses the whole or any part of its paid in capital;
d. Has a liquidator, receiver or conservator appointed, or is the
subject of any liquidation, conservation, insolvency or cease and
desist proceedings, then the Reinsurer may terminate at any month-
end by giving 15 days' prior written notice.
D. In the event of termination of this Agreement, the Reinsurer will continue
to cover all Policies coming within the scope of this Agreement, including
those written or renewed during the period of notice, until the natural
expiration or anniversary of such Policies, whichever occurs first, but
in no event longer than 12 months plus odd time, not to exceed 15 months
in all, from the date of termination.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination. The
Reinsurer will return to the Company a portfolio representing the unearned
premium reserve under this Agreement appropriate to the mode of termination.
E. Either party hereto may request commutation of the ceded reserves for
losses and loss adjustment expenses outstanding for any Underwriting Year
at the end of the Underwriting Year of at anytime thereafter. The Reinsurer
shall have no liability beyond such amount and upon payment by the
Reinsurer of an amount equal to the ceded reserves for losses and loss
adjustment expenses outstanding, which said amount shall be mutually agreed
between the Company and Reinsurer, the Reinsurer shall be relieved of all
further liability hereunder with respect to the losses so commuted.
ARTICLE 4
TERRITORY
This Agreement applies to losses arising out of Policies written in the United
States of America, its territories and possessions, Puerto Rico and Canada,
wherever occurring or to follow the Company's original Policies.
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ARTICLE 5
MAXIMUM LIMITS OF LIABILITY
For purposes of determining the liability of the Reinsurer, the limits of
liability of the Company with respect to any one Policy shall be deemed not to
exceed the maximum limits as follows:
1. Bodily Injury: $100,000 per person/
$300,000 per occurrence
2. Uninsured Motorist BI: $100,000 per person/
$300,000 per occurrence
3. Underinsured Motorist BI: $100,000 per person/
$300,000 per occurrence
4. Property Damage Liability: $100,000 per occurrence
5. Uninsured Motorist PD: $50,000 per occurrence
6. Automobile Physical Damage: $50,000 per vehicle
Notwithstanding the maximum Policy limits listed above, it is agreed that the
Company may issue, and the Reinsurer will be liable for, a maximum of ten
Policies per Underwriting Year with limits of $1,000,000.
Loss in excess of the Policy limit and Extra Contractual Obligations as set
forth in the EXCESS OF POLICY LIMITS ARTICLE and the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE will be covered hereunder subject to the maximum Policy
limits as set forth in this Article, including the Policies with $1,000,000
limits.
The Company may request prior approval of the Reinsurer to cover more than ten
Policies per Underwriting Year with limits of $1,000,000.
ARTICLE 6
WARRANTY
The Company maintains the following reinsurance, which inure to the benefit of
this Agreement, whether collectible or not:
1. Casualty Excess of Loss Reinsurance Agreement of $800,000 in excess of
$200,000 each and every occurrence.
2. Contingent and Clash Casualty Excess of Reinsurance Agreement of $4,000,000
in excess of $1,000,000 each and every occurrence.
3. First Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of $750,000
in excess of $250,000 each and every occurrence.
4. Second Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of
$2,000,000 in excess of $1,000,000 each and every occurrence.
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ARTICLE 7
EXCLUSIONS
This Agreement does not cover:
A. All excess of loss reinsurance assumed by the Company.
B. Reinsurance assumed by the Company under obligatory reinsurance agreements,
except;
1. agency reinsurance where the Policies involved are to be reunderwritten
in accordance with the underwriting standards of the Company and
reissued as Company Policies at the next anniversary or expiration date,
and;
2. reinsurance assumed by the Company for Old American Insurance Company
of Texas and Southern County Mutual Insurance Company.
C. Financial guarantee and insolvency.
D. Business written by the Company on a co-indemnity basis where the Company
is not the controlling carrier.
E. Business written to apply in excess of a deductible of more than $5,000,
and business issued to apply specifically in excess over underlying
insurance.
F. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability Reinsurance - U.S.A., No. 08-31.1 and Physical Damage -
Reinsurance - U.S.A., No. 08-33.
G. War Risks as excluded in the attached North American War Exclusion Clause
(Reinsurance) No. 08-45.
H. Pollution or contamination liability except mandatory coverage for motor
carriers subject to environmental restoration coverage under the Motor
Carrier Act of 1980 or similar mandatory coverages.
I. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or
Association.
J. All liability of the Company arising by contract, operations of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee or other obligation of
an insurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise deemed
unable to meet any claim, debt, charge, fee or other obligation in
whole or in part.
K. All classifications of business not specifically included under the BUSINESS
REINSURED ARTICLE.
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L. Automobile Liability with respect to any vehicle used principally as:
1. A taxicab, public or livery conveyance or bus.
2. An ambulance or fire department vehicle.
3. A racing or exhibition vehicle.
4. A long-haul public freight carrier operating regularly and frequently
beyond a 300-mile radius from its territorial location.
5. A truck greater than 10 tons transporting explosive, munitions,
ammonium nitrate, gasoline or liquefied petroleum gas, including
butane and propane.
Not withstanding the foregoing, any reinsurance falling within the scope of one
or more of the exclusions set forth in paragraph L that is specially accepted by
the Reinsurer from the Company shall be covered under this Agreement and be
subject to the terms hereof, except as such terms shall be modified by the
special acceptance. Furthermore, any exclusion set forth in paragraph L shall be
waived automatically when, in the opinion of the Company, the exposure excluded
therein is incidental to the principal exposure on the risk in question.
If the Company is bound, without the knowledge and contrary to the instructions
of the Company's supervisory underwriting personnel, on any business falling
within the scope of one or more of the exclusions set forth in paragraph L, the
exclusion shall be suspended with respect to such business until 30 days after
an underwriting supervisor of the Company acquires knowledge thereof.
ARTICLE 8
ACCOUNTS AND REMITTANCES
A. Within 45 days following the end of each month, the Company shall report to
the Reinsurer:
1. Net Written Premium for the month;
2. Unearned premium at the end of the month;
3. Earned premium for the month;
4. Provisional ceding commission based on item 3. Above;
5. Ceded losses and allocated loss adjustment expense paid during the
month, as respects losses occurring during the Underwriting Period
under consideration;
6. The ceded reserves for losses outstanding and allocated loss adjustment
expenses outstanding at the end of the month, as respects losses
occurring during the Underwriting Period under consideration;
7. The balance 3. Less 4. Less 5.
B. In the event the balances shown in A.7. above for the Underwriting Period,
for the Superior Group, are due the Reinsurer, the Company will hold such
funds as it is the intent of this Agreement that the Company receive
interest on such funds. However, 2.5% of the amount shown in paragraph A.7.
shall be paid by the Company to the Reinsurer in cash within 30 days after
the due dates representing the Reinsurer's margin. In the event the balance
shown in paragraph A.7. is negative as of the end of any month, the negative
balance due the Company shall be payable by the Reinsurer in cash, within
60 days after the end of the month, but any such cash payment by the
Reinsurer shall be returned by the Company before any subsequent monthly net
balance due the Reinsurer is withheld from payment. However, it is agreed
that any negative balance due the Company will be offset by the positive
balance due the Company.
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C. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 9
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of 21.0% of
the Net Earned Premium Income ceded hereunder. Return commission shall be
allowed on return premiums at the same rate.
ARTICLE 10
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss experience
under this Agreement. The Company will calculate an adjusted ceding
commission for the Underwriting Period within 14 months following the
inception of the Underwriting Period based on premiums earned and losses
incurred. The provisional ceding commission will be adjusted between
the parties as appropriate. Adjustments for the Underwriting Period
continue to be made annually until all losses ascribed to the
Underwriting Period have been paid or closed, at which time the ceding
commission will become final. For purposes of this calculation, no
upward adjustment will be made until 26 months following the inception
of the Underwriting Period.
2. Premium earned for the Underwriting Period shall mean all written
premium ceded to this Agreement and ascribed to the Underwriting Period
(less cancellations and returns) less the unearned premium reserve at
the time of the adjustment, if any.
3. Losses incurred for the Underwriting Period shall mean the loss and
allocated loss expense paid by the Reinsurer (less salvages and
recoveries received) on losses ascribed to the Underwriting Period, plus
loss and allocated loss expense reserves outstanding on losses ascribed
to the Underwriting Period, and plus or minus any debit or credit
carryforward as provided in this Article.
4. The adjusted ceding commission shall be calculated for the Underwriting
Period for the Company as a whole.
B. 1. Should the ratio of losses incurred to premium earned be 76.5% or
higher, then the adjusted ceding commission shall be 21.0%.
2. Should the ratio of losses incurred to premium earned be less than
76.5%, then the adjusted commission shall be further adjusted by
adding one percent (1%) to the ceding commission for each one percent
reduction of loss ratio subject to a maximum ceding commission of 28.0%
at a loss ratio of 69.5% or less.
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ARTICLE 11
DEFINITIONS
A. The term "Net Written Premium" as used in this Agreement shall mean the
gross written premium income on business subject to this Agreement less
returns and cancellations.
B. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
C. The term "Underwriting Period" as used in this Agreement shall mean those
Policies inforce at the effective date hereof or issued or renewed on and
after that date and all premium attributable to, and all loss arising out
of such Policies from such until expiration or cancellation, whichever
occurs first, will be ascribed to the Underwriting Period.
C. The term "Superior Group" means Superior Insurance Company, Superior
American Insurance Company and Superior Guaranty Insurance Company.
ARTICLE 12
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Company (except that in the
event of the insolvency of the Company the provisions of the INSOLVENCY ARTICLE
of this Agreement shall apply).
ARTICLE 13
OFFSET
The Company and the Reinsurer shall have the right to offset any balances or
amounts due from one party to the other under the terms of this Agreement or any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming Reinsurer or Ceding Company. However, in
the event of the insolvency of any party hereto, offset shall only be allowed in
accordance with applicable law.
ARTICLE 14
CURRENCY
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
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ARTICLE 15
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss and Unearned Premium Reserve Funding Clause
No. 13-04.
ARTICLE 16
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 17
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (including claim-specific declaratory
judgment expenses but excluding office expenses and salaries of officials of the
Company) and shall receive its proportionate share of any recoveries of such
expenses.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific policies and claims
subject to this Agreement. Declaratory judgment expense will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
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ARTICLE 18
EXCESS OF POLICY LIMITS
In the event the loss includes an amount in excess of the Company's Policy
limit, 100% of such amount in excess of the Company's Policy limit shall be
added to the amount of the Company's Policy limit, and the sum thereof shall be
covered hereunder, subject to the Reinsurer's limit of liability appearing in
the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE of this Agreement.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original Policy.
ARTICLE 19
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE
of this Agreement, where the loss includes any Extra Contractual Obligations for
100% of such Extra Contractual Obligations. "Extra Contractual Obligations" are
defined as those liabilities not covered under any other provision of this
Agreement and which arise from handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the Policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in rejecting an offer
of settlement or in the preparation of the defense or in the trial of any action
against its insured or in the preparation or prosecution of an appeal consequent
upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE 20
DELAY, OMISSION OR ERROR
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, providing such delay, omission or
error is rectified upon discovery.
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ARTICLE 21
INSPECTION
The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
any reinsurance hereunder or claims in connection herewith.
ARTICLE 22
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Indianapolis, Indiana in accordance with the attached Arbitration
Clause No. 22-01.1.
ARTICLE 23
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this
Agreement.
ARTICLE 24
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-01 - 1/1/86 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
ARTICLE 25
AFFILIATED COMPANIES
Superior Insurance Company shall be deemed to be the agent of the Company and/or
the Superior Group.
The retention of the Company and the liability of the Reinsurer and all other
benefits accruing to the Company as provided in this Agreement shall apply to
the companies comprising the Company and not separately to each of the
companies. Any payments by the Reinsurer to any of the companies comprising the
Company shall discharge the Reinsurer's liability under this Agreement.
Each of the companies comprising the Company shall be jointly and severally
liable for the obligations of the Company hereunder.
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ARTICLE 26
PARTICIPATION: AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE October 1, 1998
This Agreement obligates the Reinsurer for 100% of the interests and liabilities
set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
IGF Insurance Company 100.0%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
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and in Indianapolis, Indiana, this day of , 1999.
SUPERIOR INSURANCE COMPANY
SUPERIOR AMERICAN INSURANCE COMPANY
SUPERIOR GUARANTY INSURANCE COMPANY
(hereinafter together called "SUPERIOR GROUP")
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
SUPERIOR INSURANCE COMPANY
SUPERIOR AMERICAN INSURANCE COMPANY
SUPERIOR GUARANTY INSURANCE COMPANY
(hereinafter together called "SUPERIOR GROUP")
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<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
IGF INSURANCE COMPANY
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
SUPERIOR INSURANCE COMPANY
SUPERIOR AMERICAN INSURANCE COMPANY
SUPERIOR GUARANTY INSURANCE COMPANY
(hereinafter together called "SUPERIOR GROUP")
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<PAGE>
Exhibit 10.18(7)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
This Agreement is made and entered into by and between
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
(hereinafter together called "COMPANY")
and the Reinsurer specifically identified on the signature page of this
Agreement (hereinafter called the "Reinsurer").
ARTILCE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company's net retained liability under all Policies written or assumed and
classified by the Company as Private Passenger Automobile and Motorcycle
business (including Artisans' vehicles) covering Bodily Injury and Property
Damage Liability, Personal Injury Protection, Medical Payments, Uninsured and
Underinsured Motorists Liability, Physical Damage, inforce, written or renewed
by or on behalf of the Company and produced by Pafco General Insurance Company,
Indianapolis, Indiana or assumed from IGF Insurance Company, Indianapolis,
Indiana, during the term of this Agreement, subject to the terms and conditions
herein contained.
ARTICLE 2
COVER
A. The Company will cede, and the Reinsurer will accept as reinsurance, a
7.72% share of all business reinsured hereunder, subject to the maximum
limits as specified in the MAXIMUM LIMITS OF LIABILITY ARTICLE.
ARTICLE 3
COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective at 12:01 a.m., Eastern Standard Time,
October 1, 1998, and shall remain in full force and effect until terminated
as provided in the following paragraph.
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B. Either the Company or the Reinsurer shall have the right to terminate this
Agreement at any time.
C. Notwithstanding the termination provisions as set forth in section B. above,
this Agreement may be terminated, if:
1. The Company defaults upon its obligation to pay the Reinsurer any net
balances due hereunder in accordance with the terms and conditions
hereof, by the Reinsurer giving 15 days' notice prior to any month-end.
Should the Company correct the default within a 10-day period following
receipt of such notice, then termination of this reinsurance by the
Reinsurer for reason of default shall be rescinded automatically.
2. The Company:
a. Is acquired or controlled by, or merged with any other company;
b. Reinsures its entire business;
c. Loses the whole or any part of its paid in capital;
d. Has a liquidator, receiver or conservator appointed, or is the
subject of any liquidation, conservation, insolvency or cease and
desist proceedings, then the Reinsurer may terminate at any
month-end by giving 15 days' prior written notice.
D. In the event of termination of this Agreement, the Reinsurer will continue
to cover all Policies coming within the scope of this Agreement, including
those written or renewed during the period of notice, until the natural
expiration or anniversary of such Policies, whichever occurs first, but in
no event longer than 12 months plus odd time, not to exceed 15 months in
all, from the date of termination.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination. The
Reinsurer will return to the Company a portfolio representing the unearned
premium reserve under this Agreement appropriate to the mode of termination.
E. Either party hereto may request commutation of the ceded reserves for losses
and loss adjustment expenses outstanding for any Underwriting Year at the
end of the Underwriting Year of at anytime thereafter. The Reinsurer shall
have no liability beyond such amount and upon payment by the Reinsurer of
an amount equal to the ceded reserves for losses and loss adjustment
expenses outstanding, which said amount shall be mutually agreed between the
Company and Reinsurer, the Reinsurer shall be relieved of all further
liability hereunder with respect to the losses so commuted.
ARTICLE 4
TERRITORY
This Agreement applies to losses arising out of Policies written in the United
States of America, its territories and possessions, Puerto Rico and Canada,
wherever occurring or to follow the Company's original Policies.
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ARTICLE 5
MAXIMUM LIMITS OF LIABILITY
For purposes of determining the liability of the Reinsurer, the limits of
liability of the Company with respect to any one Policy shall be deemed not to
exceed the maximum limits as follows:
1. Bodily Injury: $100,000 per person/
$300,000 per occurrence
2. Uninsured Motorist BI: $100,000 per person/
$300,000 per occurrence
3. Underinsured Motorist BI: $100,000 per person/
$300,000 per occurrence
4. Property Damage Liability: $100,000 per occurrence
5. Uninsured Motorist PD: $50,000 per occurrence
6. Automobile Physical Damage: $50,000 per vehicle
Notwithstanding the maximum Policy limits listed above, it is agreed that the
Company may issue, and the Reinsurer will be liable for, a maximum of ten
Policies per Underwriting Year with limits of $1,000,000.
Loss in excess of the Policy limit and Extra Contractual Obligations as set
forth in the EXCESS OF POLICY LIMITS ARTICLE and the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE will be covered hereunder subject to the maximum Policy
limits as set forth in this Article, including the Policies with $1,000,000
limits.
The Company may request prior approval of the Reinsurer to cover more than ten
Policies per Underwriting Year with limits of $1,000,000.
ARTICLE 6
WARRANTY
The Company maintains the following reinsurance, which inure to the benefit of
this Agreement, whether collectible or not:
1. Casualty Excess of Loss Reinsurance Agreement of $800,000 in excess of
$200,000 each and every occurrence.
2. Contingent and Clash Casualty Excess of Reinsurance Agreement of $4,000,000
in excess of $1,000,000 each and every occurrence.
3. First Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of $750,000
in excess of $250,000 each and every occurrence.
4. Second Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of
$2,000,000 in excess of $1,000,000 each and every occurrence.
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ARTICLE 7
EXCLUSIONS
This Agreement does not cover:
A. All excess of loss reinsurance assumed by the Company.
B. Reinsurance assumed by the Company under obligatory reinsurance agreements,
except;
1. agency reinsurance where the Policies involved are to be reunderwritten
in accordance with the underwriting standards of the Company and
reissued as Company Policies at the next anniversary or expiration date,
and;
2. reinsurance assumed by the Company for Old American Insurance Company
of Texas and Southern County Mutual Insurance Company.
C. Financial guarantee and insolvency.
D. Business written by the Company on a co-indemnity basis where the Company is
not the controlling carrier.
E. Business written to apply in excess of a deductible of more than $5,000, and
business issued to apply specifically in excess over underlying insurance.
F. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability Reinsurance - U.S.A., No. 08-31.1 and Physical Damage -
Reinsurance - U.S.A., No. 08-33.
G. War Risks as excluded in the attached North American War Exclusion Clause
(Reinsurance) No. 08-45.
H. Pollution or contamination liability except mandatory coverage for motor
carriers subject to environmental restoration coverage under the Motor
Carrier Act of 1980 or similar mandatory coverages.
I. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or
Association.
J. All liability of the Company arising by contract, operations of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee or other obligation of
an insurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise deemed
unable to meet any claim, debt, charge, fee or other obligation in
whole or in part.
K. All classifications of business not specifically included under the BUSINESS
REINSURED ARTICLE.
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L. Automobile Liability with respect to any vehicle used principally as:
1. A taxicab, public or livery conveyance or bus.
2. An ambulance or fire department vehicle.
3. A racing or exhibition vehicle.
4. A long-haul public freight carrier operating regularly and frequently
beyond a 300-mile radius from its territorial location.
5. A truck greater than 10 tons transporting explosive, munitions,
ammonium nitrate, gasoline or liquefied petroleum gas, including
butane and propane.
Not withstanding the foregoing, any reinsurance falling within the scope of one
or more of the exclusions set forth in paragraph L that is specially accepted by
the Reinsurer from the Company shall be covered under this Agreement and be
subject to the terms hereof, except as such terms shall be modified by the
special acceptance. Furthermore, any exclusion set forth in paragraph L shall be
waived automatically when, in the opinion of the Company, the exposure excluded
therein is incidental to the principal exposure on the risk in question.
If the Company is bound, without the knowledge and contrary to the instructions
of the Company's supervisory underwriting personnel, on any business falling
within the scope of one or more of the exclusions set forth in paragraph L, the
exclusion shall be suspended with respect to such business until 30 days after
an underwriting supervisor of the Company acquires knowledge thereof.
ARTICLE 8
ACCOUNTS AND REMITTANCES
A. Within 45 days following the end of each month, the Company shall report to
the Reinsurer:
1. Net Written Premium for the month;
2. Unearned premium at the end of the month;
3. Earned premium for the month;
4. Provisional ceding commission based on item 3. Above;
5. Ceded losses and allocated loss adjustment expense paid during the
month, as respects losses occurring during the Underwriting Period under
consideration;
6. The ceded reserves for losses outstanding and allocated loss adjustment
expenses outstanding at the end of the month, as respects losses
occurring during the Underwriting Period under consideration;
7. The balance 3. Less 4. Less 5.
B. In the event the balances shown in A.7. above for the Underwriting Period,
for the Company, are due the Reinsurer, the Company will hold such funds as
it is the intent of this Agreement that the Company receive interest on such
funds. However, 2.5% of the amount shown in paragraph A.7. shall be paid by
the Company to the Reinsurer in cash within 30 days after the due dates
representing the Reinsurer's margin. In the event the balance shown in
paragraph A.7. is negative as of the end of any month, the negative balance
due the Company shall be payable by the Reinsurer in cash, within 60 days
after the end of the month, but any such cash payment by the Reinsurer
shall be returned by the Company before any subsequent monthly net balance
due the Reinsurer is withheld from payment. However, it is agreed that any
negative balance due the Company will be offset by the positive balance due
the Company.
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C. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 9
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of 24.0%
of the Net Earned Premium Income ceded hereunder. Return commission shall be
allowed on return premiums at the same rate.
ARTICLE 10
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss experience
under this Agreement. The Company will calculate an adjusted ceding
commission for the Underwriting Period within 14 months following the
inception of the Underwriting Period based on premiums earned and losses
incurred. The provisional ceding commission will be adjusted between
the parties as appropriate. Adjustments for the Underwriting Period
continue to be made annually until all losses ascribed to the
Underwriting Period have been paid or closed, at which time the ceding
commission will become final. For purposes of this calculation, no
upward adjustment will be made until 26 months following the inception
of the Underwriting Period.
2. Premium earned for the Underwriting Period shall mean all written
premium ceded to this Agreement and ascribed to the Underwriting Period
(less cancellations and returns) less the unearned premium reserve at
the time of the adjustment, if any.
3. Losses incurred for the Underwriting Period shall mean the loss and
allocated loss expense paid by the Reinsurer (less salvages and
recoveries received) on losses ascribed to the Underwriting Period,
plus loss and allocated loss expense reserves outstanding on losses
ascribed to the Underwriting Period, and plus or minus any debit or
credit carryforward as provided in this Article.
4. The adjusted ceding commission shall be calculated for the Underwriting
Period for the Company as a whole.
B. 1. Should the ratio of losses incurred to premium earned be 73.5% or
higher, then the adjusted ceding commission shall be 24.0%.
2. Should the ratio of losses incurred to premium earned be less than
73.5%, then the adjusted commission shall be further adjusted by adding
one percent (1%) to the ceding commission for each one percent reduction
of loss ratio subject to a maximum ceding commission of 31.0% at a loss
ratio of 66.5% or less.
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ARTICLE 11
DEFINITIONS
A. The term "Net Written Premium" as used in this Agreement shall mean the
gross written premium income on business subject to this Agreement less
returns and cancellations.
B. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
C. The term "Underwriting Period" as used in this Agreement shall mean those
Policies inforce at the effective date hereof or issued or renewed on and
after that date and all premium attributable to, and all loss arising out
of such Policies from such until expiration or cancellation, whichever
occurs first, will be ascribed to the Underwriting Period.
D. The term "Company" means Pafco General Insurance Company.
ARTICLE 12
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Company (except that in the
event of the insolvency of the Company the provisions of the INSOLVENCY ARTICLE
of this Agreement shall apply).
ARTICLE 13
OFFSET
The Company and the Reinsurer shall have the right to offset any balances or
amounts due from one party to the other under the terms of this Agreement or any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming Reinsurer or Ceding Company. However, in
the event of the insolvency of any party hereto, offset shall only be allowed in
accordance with applicable law.
ARTICLE 14
CURRENCY
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
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ARTICLE 15
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss and Unearned Premium Reserve Funding Clause
No. 13-04.
ARTICLE 16
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 17
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (including claim-specific declaratory
judgment expenses but excluding office expenses and salaries of officials of the
Company) and shall receive its proportionate share of any recoveries of such
expenses.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific policies and claims
subject to this Agreement. Declaratory judgment expense will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
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ARTICLE 18
EXCESS OF POLICY LIMITS
In the event the loss includes an amount in excess of the Company's Policy
limit, 100% of such amount in excess of the Company's Policy limit shall be
added to the amount of the Company's Policy limit, and the sum thereof shall be
covered hereunder, subject to the Reinsurer's limit of liability appearing in
the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE of this Agreement.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original Policy.
ARTICLE 19
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE
of this Agreement, where the loss includes any Extra Contractual Obligations for
100% of such Extra Contractual Obligations. "Extra Contractual Obligations" are
defined as those liabilities not covered under any other provision of this
Agreement and which arise from handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the Policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in rejecting an offer
of settlement or in the preparation of the defense or in the trial of any action
against its insured or in the preparation or prosecution of an appeal consequent
upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE 20
DELAY, OMISSION OR ERROR
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, providing such delay, omission or
error is rectified upon discovery.
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ARTICLE 21
INSPECTION
The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
any reinsurance hereunder or claims in connection herewith.
ARTICLE 22
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Indianapolis, Indiana in accordance with the attached Arbitration
Clause No. 22-01.1.
ARTICLE 23
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this
Agreement.
ARTICLE 24
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-01 - 1/1/86 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
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ARTICLE 25
PARTICIPATION: AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE October 1, 1998
This Agreement obligates the Reinsurer for 100% of the interests and liabilities
set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
IGF Insurance Company 100.0%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
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and in Indianapolis, Indiana, this day of , 1999.
PAFCO GENERAL INSURANCE COMPANY
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
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and in Indianapolis, Indiana, this day of , 1999.
IGF INSURANCE COMPANY
By______________________________________
(signature)
---------------------------------------
(name)
---------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
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Exhibit 10.18(8)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
This Agreement is made and entered into by and between
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
(hereinafter together called "COMPANY")
and the Reinsurer specifically identified on the signature page of this
Agreement (hereinafter called the "Reinsurer").
ARTILCE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and liabilities of
the Company's net retained liability under all Policies written or assumed and
classified by the Company as Private Passenger Automobile and Motorcycle
business (including Artisans' vehicles) covering Bodily Injury and Property
Damage Liability, Personal Injury Protection, Medical Payments, Uninsured and
Underinsured Motorists Liability, Physical Damage, inforce, written or renewed
by or on behalf of the Company and produced by Pafco General Insurance Company,
Indianapolis, Indiana or assumed from IGF Insurance Company, Indianapolis,
Indiana, during the term of this Agreement, subject to the terms and conditions
herein contained.
ARTICLE 2
COVER
A. The Company will cede, and the Reinsurer will accept as reinsurance, a
57.24% share of all business reinsured hereunder, subject to the maximum
limits as specified in the MAXIMUM LIMITS OF LIABILITY ARTICLE.
ARTICLE 3
COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective at 12:01 a.m., Eastern Standard
Time, October 1, 1998, and shall remain in full force and effect until
terminated as provided in the following paragraph.
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B. Either the Company or the Reinsurer shall have the right to terminate this
Agreement at any time.
C. Notwithstanding the termination provisions as set forth in section B. above,
this Agreement may be terminated, if:
1. The Company defaults upon its obligation to pay the Reinsurer any net
balances due hereunder in accordance with the terms and conditions
hereof, by the Reinsurer giving 15 days' notice prior to any month-end.
Should the Company correct the default within a 10-day period following
receipt of such notice, then termination of this reinsurance by the
Reinsurer for reason of default shall be rescinded automatically.
2. The Company:
a. Is acquired or controlled by, or merged with any other company;
b. Reinsures its entire business;
c. Loses the whole or any part of its paid in capital;
d. Has a liquidator, receiver or conservator appointed, or is the
subject of any liquidation, conservation, insolvency or cease and
desist proceedings, then the Reinsurer may terminate at any month-
end by giving 15 days' prior written notice.
D. In the event of termination of this Agreement, the Reinsurer will continue
to cover all Policies coming within the scope of this Agreement, including
those written or renewed during the period of notice, until the natural
expiration or anniversary of such Policies, whichever occurs first, but in
no event longer than 12 months plus odd time, not to exceed 15 months in
all, from the date of termination.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to termination. The
Reinsurer will return to the Company a portfolio representing the unearned
premium reserve under this Agreement appropriate to the mode of termination.
E. Either party hereto may request commutation of the ceded reserves for losses
and loss adjustment expenses outstanding for any Underwriting Year at the
end of the Underwriting Year of at anytime thereafter. The Reinsurer shall
have no liability beyond such amount and upon payment by the Reinsurer of an
amount equal to the ceded reserves for losses and loss adjustment expenses
outstanding, which said amount shall be mutually agreed between the Company
and Reinsurer, the Reinsurer shall be relieved of all further liability
hereunder with respect to the losses so commuted.
ARTICLE 4
TERRITORY
This Agreement applies to losses arising out of Policies written in the United
States of America, its territories and possessions, Puerto Rico and Canada,
wherever occurring or to follow the Company's original Policies.
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ARTICLE 5
MAXIMUM LIMITS OF LIABILITY
For purposes of determining the liability of the Reinsurer, the limits of
liability of the Company with respect to any one Policy shall be deemed not to
exceed the maximum limits as follows:
1. Bodily Injury: $100,000 per person/
$300,000 per occurrence
2. Uninsured Motorist BI: $100,000 per person/
$300,000 per occurrence
3. Underinsured Motorist BI: $100,000 per person/
$300,000 per occurrence
4. Property Damage Liability: $100,000 per occurrence
5. Uninsured Motorist PD: $50,000 per occurrence
6. Automobile Physical Damage: $50,000 per vehicle
Notwithstanding the maximum Policy limits listed above, it is agreed that the
Company may issue, and the Reinsurer will be liable for, a maximum of ten
Policies per Underwriting Year with limits of $1,000,000.
Loss in excess of the Policy limit and Extra Contractual Obligations as set
forth in the EXCESS OF POLICY LIMITS ARTICLE and the EXTRA CONTRACTUAL
OBLIGATIONS ARTICLE will be covered hereunder subject to the maximum Policy
limits as set forth in this Article, including the Policies with $1,000,000
limits.
The Company may request prior approval of the Reinsurer to cover more than ten
Policies per Underwriting Year with limits of $1,000,000.
ARTICLE 6
WARRANTY
The Company maintains the following reinsurance, which inure to the benefit of
this Agreement, whether collectible or not:
1. Casualty Excess of Loss Reinsurance Agreement of $800,000 in excess of
$200,000 each and every occurrence.
2. Contingent and Clash Casualty Excess of Reinsurance Agreement of $4,000,000
in excess of $1,000,000 each and every occurrence.
3. First Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of $750,000
in excess of $250,000 each and every occurrence.
4. Second Catastrophe Excess of Loss Reinsurance Agreement of 97.5% of
$2,000,000 in excess of $1,000,000 each and every occurrence.
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ARTICLE 7
EXCLUSIONS
This Agreement does not cover:
A. All excess of loss reinsurance assumed by the Company.
B. Reinsurance assumed by the Company under obligatory reinsurance agreements,
except;
1. agency reinsurance where the Policies involved are to be reunderwritten
in accordance with the underwriting standards of the Company and
reissued as Company Policies at the next anniversary or expiration date,
and;
2. reinsurance assumed by the Company for Old American Insurance Company
of Texas and Southern County Mutual Insurance Company.
C. Financial guarantee and insolvency.
D. Business written by the Company on a co-indemnity basis where the Company is
not the controlling carrier.
E. Business written to apply in excess of a deductible of more than $5,000, and
business issued to apply specifically in excess over underlying insurance.
F. Business excluded by the attached Nuclear Incident Exclusion Clauses -
Liability Reinsurance - U.S.A., No. 08-31.1 and Physical Damage -
Reinsurance - U.S.A., No. 08-33.
G. War Risks as excluded in the attached North American War Exclusion Clause
(Reinsurance) No. 08-45.
H. Pollution or contamination liability except mandatory coverage for motor
carriers subject to environmental restoration coverage under the Motor
Carrier Act of 1980 or similar mandatory coverages.
I. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or
Association.
J. All liability of the Company arising by contract, operations of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee or other obligation of
an insurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise deemed
unable to meet any claim, debt, charge, fee or other obligation in
whole or in part.
K. All classifications of business not specifically included under the
BUSINESS REINSURED ARTICLE.
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L. Automobile Liability with respect to any vehicle used principally as:
1. A taxicab, public or livery conveyance or bus.
2. An ambulance or fire department vehicle.
3. A racing or exhibition vehicle.
4. A long-haul public freight carrier operating regularly and frequently
beyond a 300-mile radius from its territorial location.
5. A truck greater than 10 tons transporting explosive, munitions,
ammonium nitrate, gasoline or liquefied petroleum gas, including
butane and propane.
Not withstanding the foregoing, any reinsurance falling within the scope of one
or more of the exclusions set forth in paragraph L that is specially accepted by
the Reinsurer from the Company shall be covered under this Agreement and be
subject to the terms hereof, except as such terms shall be modified by the
special acceptance. Furthermore, any exclusion set forth in paragraph L shall be
waived automatically when, in the opinion of the Company, the exposure excluded
therein is incidental to the principal exposure on the risk in question.
If the Company is bound, without the knowledge and contrary to the instructions
of the Company's supervisory underwriting personnel, on any business falling
within the scope of one or more of the exclusions set forth in paragraph L, the
exclusion shall be suspended with respect to such business until 30 days after
an underwriting supervisor of the Company acquires knowledge thereof.
ARTICLE 8
ACCOUNTS AND REMITTANCES
A. Within 45 days following the end of each month, the Company shall report to
the Reinsurer:
1. Net Written Premium for the month;
2. Unearned premium at the end of the month;
3. Earned premium for the month;
4. Provisional ceding commission based on item 3. Above;
5. Ceded losses and allocated loss adjustment expense paid during the
month, as respects losses occurring during the Underwriting Period under
consideration;
6. The ceded reserves for losses outstanding and allocated loss adjustment
expenses outstanding at the end of the month, as respects losses
occurring during the Underwriting Period under consideration;
7. The balance 3. Less 4. Less 5.
B. In the event the balances shown in A.7. above for the Underwriting Period,
for the Company, are due the Reinsurer, the Company will hold such funds as
it is the intent of this Agreement that the Company receive interest on such
funds. However, 2.5% of the amount shown in paragraph A.7. shall be paid by
the Company to the Reinsurer in cash within 30 days after the due dates
representing the Reinsurer's margin. In the event the balance shown in
paragraph A.7. is negative as of the end of any month, the negative balance
due the Company shall be payable by the Reinsurer in cash, within 60 days
after the end of the month, but any such cash payment by the Reinsurer shall
be returned by the Company before any subsequent monthly net balance due the
Reinsurer is withheld from payment. However, it is agreed that any negative
balance due the Company will be offset by the positive balance due the
Company.
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C. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
ARTICLE 9
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of 24.0%
of the Net Earned Premium Income ceded hereunder. Return commission shall be
allowed on return premiums at the same rate.
ARTICLE 10
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss experience
under this Agreement. The Company will calculate an adjusted ceding
commission for the Underwriting Period within 14 months following the
inception of the Underwriting Period based on premiums earned and losses
incurred. The provisional ceding commission will be adjusted between
the parties as appropriate. Adjustments for the Underwriting Period
continue to be made annually until all losses ascribed to the
Underwriting Period have been paid or closed, at which time the ceding
commission will become final. For purposes of this calculation, no
upward adjustment will be made until 26 months following the inception
of the Underwriting Period.
2. Premium earned for the Underwriting Period shall mean all written
premium ceded to this Agreement and ascribed to the Underwriting
Period (less cancellations and returns) less the unearned premium
reserve at the time of the adjustment, if any.
3. Losses incurred for the Underwriting Period shall mean the loss and
allocated loss expense paid by the Reinsurer (less salvages and
recoveries received) on losses ascribed to the Underwriting Period, plus
loss and allocated loss expense reserves outstanding on losses ascribed
to the Underwriting Period, and plus or minus any debit or credit
carryforward as provided in this Article.
4. The adjusted ceding commission shall be calculated for the Underwriting
Period for the Company as a whole.
B. 1. Should the ratio of losses incurred to premium earned be 73.5% or
higher, then the adjusted ceding commission shall be 24.0%.
2. Should the ratio of losses incurred to premium earned be less than
73.5%, then the adjusted commission shall be further adjusted by adding
one percent (1%) to the ceding commission for each one percent reduction
of loss ratio subject to a maximum ceding commission of 31.0% at a loss
ratio of 66.5% or less.
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ARTICLE 11
DEFINITIONS
A. The term "Net Written Premium" as used in this Agreement shall mean the
gross written premium income on business subject to this Agreement less
returns and cancellations.
B. The term "Policy" as used in this Agreement shall mean any binder, policy,
or contract of insurance or reinsurance issued, accepted or held covered
provisionally or otherwise, by or on behalf of the Company.
C. The term "Underwriting Period" as used in this Agreement shall mean those
Policies inforce at the effective date hereof or issued or renewed on and
after that date and all premium attributable to, and all loss arising out of
such Policies from such until expiration or cancellation, whichever occurs
first, will be ascribed to the Underwriting Period.
D. The term "Company" means Pafco General Insurance Company.
ARTICLE 12
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same terms,
rates, conditions and waivers, and to the same modifications, alterations and
cancellations as the respective Policies of the Company (except that in the
event of the insolvency of the Company the provisions of the INSOLVENCY ARTICLE
of this Agreement shall apply).
ARTICLE 13
OFFSET
The Company and the Reinsurer shall have the right to offset any balances or
amounts due from one party to the other under the terms of this Agreement or any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming Reinsurer or Ceding Company. However, in
the event of the insolvency of any party hereto, offset shall only be allowed in
accordance with applicable law.
ARTICLE 14
CURRENCY
The currency to be used for all purposes of this Agreement shall be United
States of America currency.
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ARTICLE 15
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss and Unearned Premium Reserve Funding Clause
No. 13-04.
ARTICLE 16
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who are
domiciled outside the United States of America.
The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax 1% of the premium payable hereon to the extent such premium is subject to
Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurer will
deduct 1% from the amount of the return, and the Company or its agent should
take steps to recover the Tax from the U.S. Government.
ARTICLE 17
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy conditions
or by way of compromise, shall be unconditionally binding upon the Reinsurer in
proportion to its participation, and the Reinsurer shall benefit proportionally
in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of expenses incurred by the
Company in the investigation, adjustment, appraisal or defense of all claims
under Policies reinsured hereunder (including claim-specific declaratory
judgment expenses but excluding office expenses and salaries of officials of the
Company) and shall receive its proportionate share of any recoveries of such
expenses.
The phrase "claim-specific declaratory judgment expenses," as used in this
Agreement will mean all expenses incurred by the Company in connection with
declaratory judgment actions brought to determine the Company's defense and/or
indemnification obligations that are allocable to specific policies and claims
subject to this Agreement. Declaratory judgment expense will be deemed to have
been incurred by the Company on the date of the original loss (if any) giving
rise to the declaratory judgment action.
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ARTICLE 18
EXCESS OF POLICY LIMITS
In the event the loss includes an amount in excess of the Company's Policy
limit, 100% of such amount in excess of the Company's Policy limit shall be
added to the amount of the Company's Policy limit, and the sum thereof shall be
covered hereunder, subject to the Reinsurer's limit of liability appearing in
the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE of this Agreement.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not been
for the limit of the original Policy.
ARTICLE 19
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company, subject to the Reinsurer's limit of
liability appearing in the COVER ARTICLE and MAXIMUM LIMITS OF LIABILITY ARTICLE
of this Agreement, where the loss includes any Extra Contractual Obligations for
100% of such Extra Contractual Obligations. "Extra Contractual Obligations" are
defined as those liabilities not covered under any other provision of this
Agreement and which arise from handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the Policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in rejecting an offer
of settlement or in the preparation of the defense or in the trial of any action
against its insured or in the preparation or prosecution of an appeal consequent
upon such action.
The date on which any Extra Contractual Obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original loss.
However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE 20
DELAY, OMISSION OR ERROR
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, providing such delay, omission or
error is rectified upon discovery.
Page 9
<PAGE>
ARTICLE 21
INSPECTION
The Company shall place at the disposal of the Reinsurer at all reasonable
times, and the Reinsurer shall have the right to inspect, through its authorized
representatives, all books, records and papers of the Company in connection with
any reinsurance hereunder or claims in connection herewith.
ARTICLE 22
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Indianapolis, Indiana in accordance with the attached Arbitration
Clause No. 22-01.1.
ARTICLE 23
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to this
Agreement.
ARTICLE 24
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency Clause
No. 21-01 - 1/1/86 will apply.
In the event of the insolvency of any company or companies included in the
designation of "Company," this clause will apply only to the insolvent company
or companies.
Page 10
<PAGE>
ARTICLE 25
PARTICIPATION: AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
EFFECTIVE October 1, 1998
This Agreement obligates the Reinsurer for 100% of the interests and liabilities
set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of this
Agreement shall be separate and apart from the participations of other
reinsurers and shall not be joint with those of other reinsurers, and the
Reinsurer shall in no event participate in the interests and liabilities of
other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
Granite Re Insurance Company 100.0%
Upon completion of Reinsurers' signing, fully executed signature pages will be
forwarded to you for the completion of your file.
Page 11
<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
PAFCO GENERAL INSURANCE COMPANY
By______________________________________
(signature)
--------------------------------------
(name)
--------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
Page 12
<PAGE>
and in Indianapolis, Indiana, this day of , 1999.
GRANITE RE INSURANCE COMPANY
By______________________________________
(signature)
--------------------------------------
(name)
--------------------------------------
(title)
AUTOMOBILE QUOTA SHARE REINSURANCE AGREEMENT
issued to
PAFCO GENERAL INSURANCE COMPANY
Page 13
<PAGE>
Exhibit 11
GORAN CAPITAL INC. - Consolidated
Analysis of Earnings Per Share
As At December 31,
(In Thousands U.S. Dollars)
<TABLE>
<CAPTION>
1996 1997 1998
NASDAQ Trading Activity
<S> <C> <C> <C>
Average Price $13.98 $28.04 $21.86
Proceeds from Exercise of Warrants and Options (US$) $3,789,130 $9,753,456 $13,596,852
Shares Repurchased - Treasury Method 270,943 347,841 621,997
Shares Outstanding - Weighted Average Basic 5,286,270 5,590,576 5,841,329
Add Options and Warrants Outstanding 709,149 546,856 696,572
Less Treasury Method - Shares Repurchased (207,943) (295,635) (621,997)
Shares Outstanding - Fully Diluted 5,724,476 5,886,211 5,915,904
Net Earnings in Accordance with U.S. GAAP $31,294,636 $12,218,000 $(11,936,000)
Earnings Per Share - GAAP $5.92 $2.19 $(2.04)
Basic - Fully Diluted $5.47 $2.08 $(2.04)
</TABLE>
<PAGE>
Exhibit 13
GCI LOGO
1998 Annual Report
[Large GCI logo with three photos]
Corporate Profile
Goran Capital Inc. owns subsidiaries engaged in a number of business activities.
The most important of these is the property and casualty insurance business
conducted in 42 U.S. states, Canada and Barbados, on both a direct and
reinsurance basis through a number of subsidiaries collectively referred to in
this report as Goran. Goran owns 67% of Symons International Group, Inc. ("SIG")
which began trading on the NASDAQ on November 5, 1996 under the symbol SIGC. SIG
owns IGF Insurance Company of Des Moines, Iowa which is the fourth largest crop
insurer in the United States. SIG also owns Superior Insurance Company of Tampa,
Florida and Pafco General Insurance Company of Indianapolis, Indiana. These
insurers provide nonstandard automobile insurance and combined are the twelfth
largest writers of such insurance in the United States. The other subsidiary,
Granite Reinsurance Company Ltd. underwrites finite (limited risk) reinsurance
in Bermuda, the United States and Canada.
Goran is a public company listed on The Toronto Stock Exchange under the symbol
GNC and NASDAQ under the symbol GNCNF.
All dollar amounts shown in this report are in U.S. currency unless otherwise
indicated. The conversion rates for 1998 and as of December 31, 1998 were
$1.4826 and $1.5310, respectively.
Table of Contents
Financial Highlights
Chairman's Report
Management's Discussion and Analysis
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Auditors' Report
Corporate Directory
Subsidiaries and Branch Offices
Shareholder Information
[Bar Graph to be included]
1
<PAGE>
Financial Highlights
(dollars in thousands, except per share amounts)
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995(1) 1994(1)
<S> <C> <C> <C> <C> <C>
Gross premium revenue $546,771 $448,982 $299,376 $146,303 $126,978
Earnings (loss) from continuing operations $(8,999) $15,983 $14,127 $6,652 $5,214
Earnings (loss) per share from continuing operations $(1.54) $2.86 $2.67 $1.33 $1.07
Shareholders' Equity $49,725 $60,332 $47,258 $12,761 $5,695
Book Value per share $8.48 $10.53 $8.74 $2.52 $1.16
Market Value per share $10.38 $29.41 $20.08 $8.57 $5.20
</TABLE>
(1) 1994 and 1995 figures have been restated to reflect accounting policy
changes adopted in 1998 (see Note 2(l) to the financial statements); 1996
and 1997 figures were not materially impacted by the changes.
CORPORATE STRUCTURE
Goran Capital, Inc.
Toronto, Ontario
("Goran" or the "Company")
|
- ------------------------------------------------------------------------
|
|
67% Owned 100% Owned 100% Owned 100% Owned
Symons International Granite Reinsurance Granite Symons
Group, Inc. Company, Ltd. Insurance International
Indianapolis, Indiana Barbados Company Group, Inc.
("SIG") ("Granite Re") ("Granite") Florida
|------------------------------|
IGF Holdings GGS Management, Inc.
("IGFH") ("GGSH" or "GGS Management")
| |
IGF Insurance
Company
("IGF") ---------------------------------------------------
| |
Pafco General Superior Insurance
Insurance Company Company
("Pafco") ("Superior")
|
-----------------------------
| |
Superior Guaranty Superior American
Insurance Company Insurance Company
2
<PAGE>
Chairman's Report to our Shareholders
Greetings:
GORAN MILESTONES:
Usually I am in a good frame of mind when I sit down to rough out the Chairman's
comments for the annual report. This year I am far less happy for as you are
aware, our results, at least with respect to the profit aspects, are less than I
would have liked.
You will be aware of that, yet many of our shareholders are "profit" trained and
while that is not a bad formula for investing, it is not the only criterion for
considering the merits of an insurance company. Scattered in among our results,
there is a statement to the effect that Gross Premium rose to $546.8 million in
1998, up 22% from $449 million in 1997. We have concentrated on eliminating
those factors that had such a negative effect on our results.
When we acquired the crop insurance book of CNA, we had to close offices and
take other measures to reduce redundant personnel at a cost of $3.5 million.
During 1998 we upgraded our computer and reporting systems at an operating cost
in excess of $5 million. Adding to these non-recurring items, a further $12
million in reserve increases for years prior due to projected increases in the
cost of auto repairs, and higher liability settlements. As new business cures,
it becomes better with age. At the same time, the cost to put the business on
the books reduces thus improving our profitability. Today we have a company with
one of the lowest operating costs in both non-standard automobile insurance and
crop insurance. With this low operating cost, we can compete with the best of
our competition.
Those added expenses are in part, the cost of acquisition. What happened to our
crop insurers in 1998 was catastrophic. In the year of the worst loss record for
the industry, we took our share of hail and hurricane damage with losses in 1998
exceeding premiums by $16 million. We do not expect to see anything like that in
1999, in fact we are optimistic about the crop year ahead.
There have been a number of changes in the crop insurance industry with respect
to legislation put into effect by the U.S. government to increase the subsidies
to farmers. The effect on the crop insurance sector will increase the federal
government MPCI. insurance program from $1.8 billion to approximately $2.2
billion for 1999. This has a direct effect on the premium revenues we receive
and with the acquisition of new business in 1998 our premium levels will be
proportionately higher. The effect of this is to proportionately reduce costs as
a result of the size of the business we are handling. We have taken an ultra
conservative approach to the underwriting of the business through the use of
broader terms and scope of coverage available to us now from the re-insurance
markets.
As you may recall, up to the end of the second quarter of 1998, we were moving
along nicely, anticipating good results represented by volume gains in both crop
and non-standard auto insurance. Halfway through the year, the non-standard
automobile insurance writers took a very competitive attitude to the business,
forcing many of the smaller insurers to cut rates to remain competitive and
protect their market share. There is no sure reason for this action, but many
felt that the leading underwriter of non-standard auto, Progressive Insurance
Company's decision to go direct, cutting out many agents and reducing rates had
some effect on the psyche of the underwriting fraternity.
The summer months brought in the most severe weather patterns to hit the crop
insurance companies. Devastating heat and drought in Texas followed by
hurricanes and storms with large hail losses throughout the U.S. To add to this
burden, world commodity prices tumbled, leading us to the end of the crop year
with very poor underwriting results despite a large gain in our book of
business.
A little more information on our crop insurance business. When we acquired IGF
Insurance Company in 1990, it wrote $23 million of premiums and there were 55
crop insurers. In 1999 we will write in excess of approximately $300 million of
crop business and are the fourth ranked company in the field of 17 crop
insurers. The Gross Premium for the industry has grown from $1.3 billion in 1990
to $2.2 billion in 1998. With the recently announced federal legislation
increasing the support for farmers buying crop insurance by $400 million in 1999
and an additional $1.5 billion for the crop year 2001 onward, a large number of
farmers who heretofore did not buy crop insurance will find the incentive to do
so through the generosity of their government. We will also be the benefactors
of this largesse for our share of the business should be considerably enhanced
in view of the gains we have made in our share of the market. Oh yes, we expect
to see better underwriting results in 1999.
3
<PAGE>
We have some cause for optimism in 1999, for among other factors:
o Our crop insurance sales are showing the result early in the year that
would signal a banner year income.
o We increased the amount of re-insurance applicable to our crop
insurance enterprise to reduce exposure to catastrophic losses.
o Crop insurance has two components, fee income and premium income. We
developed Geo AgPLUS, a fee based innovative soil analysis service using
GPS (global positioning system) and through the advent of other fee based
products, we are increasing our fee income as it relates to our risk
income.
o We improved our operational staff by several new appointments and added
an in-house senior actuary to our professional staff.
o At considerable but necessary expense, we developed and are installing a
state of the art computer system to replace one that was proving costly
and non-compatible to our increased needs.
I anticipate that I will have a happier time writing the next Chairman's Report,
probably my last, but I must not forget to thank those ladies and gentlemen who
have helped our companies through the rough passage of 1998, our Board members
and our loyal staff.
Ladies and gentlemen, my heartfelt thanks to all of you.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Goran Capital Inc. (the "Company" or "Goran") underwrites and markets
nonstandard private passenger automobile insurance and crop insurance. The
Company also provides finite risk, stop loss and quota share reinsurance.
Acquisitions and Public Offerings
On April 30, 1996, the Company purchased the operations of Superior
Insurance Company for $66.6 million in cash (the "Acquisition"). Funds for the
Acquisition were provided from funds affiliated with Goldman Sachs and a bank
term loan of $48 million. Goldman Sachs was bought out and the bank term loan
was repaid in August 1997.
On November 5, 1996, SIG issued 3,450,000 shares in an initial public
offering of 33% of its stock at $12.50 per share.
On November 12, 1997, SIG issued $135 million of Trust Preferred Securities
at 9.50%. The proceeds of this offering were used to purchase Goldman Sachs
minority interest share of the nonstandard automobile operations, repay the term
loan used to acquire Superior and provide capital to the nonstandard automobile
division for future growth.
On March 2, 1998, the Company announced that it had signed an agreement
with CNA to assume its multi-peril and crop hail operations. CNA wrote
approximately $80 million of multi-peril and crop hail insurance business in
1997. The Company will reinsure a small portion of the Company's total crop book
of business (approximately 22% MPCI and 15% crop hail) to CNA. Starting in the
year 2000, assuming no event of change in control as defined in the agreement,
the Company can purchase this reinsurance from CNA through a call provision or
CNA can require the Company to buy the premiums reinsured to CNA. Regardless of
the method of takeout of CNA, CNA must not compete in MPCI or crop hail for a
period of time. There was no purchase price. The formula for the buyout in the
year 2000 is based on a multiple of average pre-tax earnings that CNA received
from reinsuring the Company's book of business.
Nonstandard Automobile Insurance Operations
The Company, through Pafco and Superior, is engaged in the writing of
insurance coverage on automobile physical damage and liability policies for
"nonstandard risks". Nonstandard insureds are those individuals who are unable
to obtain insurance coverage through standard market carriers due to factors
such as poor premium payment history, driving experience, record of prior
accidents or driving violations, particular occupation or type of vehicle. The
Company offers several different policies which are directed towards different
classes of risk within the nonstandard market. Premium rates for nonstandard
risks are higher than for standard risks. Since it can be viewed as a residual
market, the size of the nonstandard private passenger automobile insurance
market changes with the insurance environment and grows when the standard
coverage becomes more restrictive. Nonstandard policies have relatively short
policy periods and low limits of liability. Due to the low limits of coverage,
the period of time that elapses between the occurrence and settlement of losses
under nonstandard policies is shorter than many other types of insurance. Also,
since the nonstandard automobile insurance business typically experiences lower
rates of retention than standard automobile insurance, the number of new
policyholders underwritten by nonstandard automobile insurance carriers each
year is substantially greater than the number of new policyholders underwritten
by standard carriers.
5
<PAGE>
[photographs of crops down right margin]
Crop Insurance Operations
General
The two principal components of the Company's crop insurance business
are Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop
hail insurance. Crop insurance is purchased by farmers to reduce the risk of
crop loss from adverse weather and other uncontrollable events. Farms are
subject to drought, floods and other natural disasters that can cause widespread
crop losses and, in severe cases, force farmers out of business. Historically,
one out of every twelve acres planted by farmers has not been harvested because
of adverse weather or other natural disasters. Because many farmers rely on
credit to finance their purchases of such agricultural inputs as seed,
fertilizer, machinery and fuel, the loss of a crop to a natural disaster can
reduce their ability to repay these loans and to find sources of funding for the
following year's operating expenses.
The Company, like other private insurers participating in the MPCI
program, generates revenues from the MPCI program in two ways. First, it
markets, issues and administers policies, for which it receives administrative
fees; and second, it participates in a profit-sharing arrangement in which it
receives from the government a portion of the aggregate profit, or pays a
portion of the aggregate loss, in respect of the business it writes. The Company
writes MPCI and crop hail insurance through 2,007 independent agencies in 43
states.
In addition to MPCI, the Company offers stand alone crop hail insurance,
which insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary product which
combines the application and underwriting process for MPCI and hail coverages.
This product tends to produce less volatile loss ratios than the stand alone
product since the combined product generally insures a greater number of acres,
thereby spreading the risk of damage over a larger insured area. Approximately
half of the Company's hail policies are written in combination with MPCI.
Although both crop hail and MPCI provide coverage against hail damage, under
crop hail coverages farmers can receive payments for hail damage which would not
be severe enough to require a payment under an MPCI policy. The Company believes
that offering crop hail insurance enables it to sell more policies than it
otherwise would.
In addition to crop hail insurance, the Company also sells a small
volume of insurance against crop damage from other specific named perils. These
products cover specific crops and are generally written on terms that are
specific to the kind of crop and farming practice involved and the amount of
actuarial data available. The Company plans to seek potential growth
opportunities in this niche market by developing basic policies on a diverse
number of named crops grown in a variety of geographic areas and to offer these
policies primarily to large producers through certain select agents.
AgPI(R) is business interruption insurance that protects businesses that
depend upon a steady flow of a crop (or crops) to stay in business. This
protection is available to those involved in agribusiness who are a step beyond
the farm gate, such as elevator operators, custom harvesters, cotton gins and
other processing businesses that are dependent upon a single supplier of
products, (i.e., popping corn).
These businesses have been able to buy normal business interruption
insurance to protect against on-site calamities such as a fire, wind storm or
tornado. But until now, they have been totally unprotected by the insurance
industry if they encounter a production shortfall in their trade area which
limited their ability to bring raw materials to their operation. AgPI(R) allows
the agricultural business to protect against a disruption in the flow of the raw
materials it depends on. AgPI(R) was formally introduced at the beginning of the
1998 crop year.
Geo AgPLUS(TM) provides to the farmer measuring, gridding and soil
sampling services combined with fertility maps and the software that is
necessary to run their precision farming program. Grid soil sampling, when
combined with precision farming technology, allows the farmer to apply just the
right amount of fertilization, thus balancing soil nutrients for a maximum crop
yield. Precision farming technology increases the yield to the farmer, reduces
the cost of unnecessary fertilization and enhances the environment by reducing
overflows of fertilization into the ecosystem. Geo AgPLUS(TM) is an IGF
Insurance Company trademarked precision farming division that is now marketing
its fee based services to the farmer.
6
<PAGE>
Certain Accounting Policies for Crop Insurance Operations
MPCI is a government-sponsored program with accounting treatment which
differs in certain respects from the more traditional property and casualty
insurance lines. For income statement purposes under generally accepted
accounting principles, gross premiums written consist of the aggregate amount of
MPCI premiums paid by farmers for buy-up coverage (MPCI coverage in excess of
CAT Coverage - the minimum available level of MPCI Coverage), and any related
federal premium subsidies, but do not include MPCI premium on CAT Coverage. By
contrast, net premiums written do not include any MPCI premiums or subsidies,
all of which are deemed to be ceded to the Federal Crop Insurance Corporation
("FCIC") as a reinsurer. The Company's profit or loss from its MPCI business is
determined after the crop season ends on the basis of a complex profit sharing
formula established by law and the FCIC. For generally accepted accounting
principles income statement purposes, any such profit or loss sharing earned or
payable by the Company is treated as an adjustment to commission expense and is
included in policy acquisition and general and administrative expenses.
The Company also receives from the FCIC (i) an expense reimbursement
payment equal to a percentage of gross premiums written for each Buy-Up Coverage
policy it writes ("Buy-Up Expense Reimbursement Payment") and (ii) an LAE
reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT
Coverage policy it writes (the "CAT LAE Reimbursement Payment"). For 1998 and
1997, the Buy-Up Expense Reimbursement Payment has been set at 27% and 29%,
respectively, of the MPCI Premium. For generally accepted accounting principles
income statement purposes, the Buy-Up Expense Reimbursement Payment is treated
as a contribution to income and reflected as an offset against policy
acquisition and general and administrative expenses. The CAT LAE Reimbursement
Payment is, for income statement purposes, recorded as an offset against LAE, up
to the actual amount of LAE incurred by the Company in respect of such policies,
and the remainder of the payment, if any, is recorded as Other Income.
In June 1998, the United States Congress passed legislation which
provided permanent funding for the crop insurance industry. However, beginning
with the 1999 crop year, the Buy-Up Expense Reimbursement Payment was reduced to
24.5%, the CAT LAE Reimbursement Payment was reduced to 11% and the $60 CAT
coverage fee will no longer go to the insurance companies.
The Company expects to more than offset these reductions through growth
in fee income from non-federally subsidized programs such as AgPI(R) and Geo
AgPLUS(TM) initiated in 1998. The Company has also been working to reduce its
costs. While the Company fully believes it can more than offset these
reductions, there is no assurance the Company will be successful in its efforts
or that further reductions in federal reimbursements will not continue to occur.
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI gross premiums written for each of the first and second quarters,
20% for the third quarter and 10% for the fourth quarter, (ii) commission
expense at the applicable rate of MPCI gross premiums written recognized and
(iii) Buy-Up Expense Reimbursement at the applicable rate of MPCI gross premiums
written recognized along with normal operating expenses incurred in connection
with premium writings. In the third quarter, if a sufficient volume of
policyholder acreage reports have been received and processed by the Company,
the Company's policy is to recognize MPCI gross premiums written for the first
nine months based on a re-estimate which takes into account actual gross
premiums processed. If an insufficient volume of policies has been processed,
the Company's policy is to recognize in the third quarter 20% of its full year
estimate of MPCI gross premiums written, unless other circumstances require a
different approach. The remaining amount of gross premiums written is recognized
in the fourth quarter, when all amounts are reconciled. The Company also
recognizes the MPCI underwriting gain or loss during each quarter, reflecting
the Company's best estimate of the amount of such gain or loss to be recognized
for the full year, based on, among other things, historical results, plus a
provision for adverse developments. In the third and fourth quarters, a
reconciliation amount is recognized for the underwriting gain or loss based on
final premium and latest available loss information.
[photographs of automobiles down right margin]
7
<PAGE>
Selected Segment Data of the Company
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate overhead, interest costs and
amortization of intangibles or commercial or reinsurance insurance operations,
nor does it include the results of operations of Superior prior to May 1, 1996.
<TABLE>
<CAPTION>
Nonstandard - Automobile Insurance Operations: Year ended December 31,
(in thousands, except ratios) 1998 1997 1996
<S> <C> <C> <C>
Gross premiums written $303,737 $323,915 $187,176
======= ======= =======
Net premiums written $269,741 $256,745 $186,579
======= ======= =======
Net premiums earned $264,022 $251,020 $168,746
Fee income 16,431 15,515 7,578
Net investment income 11,958 10,969 6,489
Net realized capital gain (loss) 4,124 9,462 (1,014)
------- ------- -------
Total Revenues 296,535 286,966 181,799
------- ------- -------
Losses and loss adjustment expenses 217,916 195,900 124,385
Policy acquisition and general and administrative expenses 73,346 72,463 46,796
------- ------- -------
Total Expenses 291,262 268,363 171,181
------- ------- -------
Earnings before income taxes $5,273 $18,603 $10,618
======= ======= =======
GAAP RATIOS (Nonstandard Automobile Only)
Loss and LAE ratio 82.5% 78.0% 73.7%
Expense ratio, net of billing fees 21.6% 22.7% 23.2%
----- ----- -----
Combined ratio 104.1% 100.7% 96.9%
===== ===== =====
Crop Insurance Operations:
Gross premiums written $243,026 $126,401 $110,059
======= ======= =======
Net premiums written $62,467 $20,796 $23,013
======= ======= =======
Net premiums earned $60,901 $20,794 $23,013
Fee income 3,772 2,276 1,672
Net investment income 275 191 181
Net realized capital gain (loss) 217 (18) (1)
------- ------- ------
Total Revenues 65,165 23,243 24,865
------- ------- ------
Losses and loss adjustment expenses 52,550 16,550 12,724
Policy acquisition and general and administrative expenses (1) 21,906 (14,404) (6,095)
Interest and amortization of intangibles 502 235 551
------- ------- ------
Total Expenses 74,958 2,381 7,180
------- ------- ------
Earnings (loss) before income taxes $(9,793) $20,862 $17,685
======= ======= =======
Statutory Capital and Surplus:
Pafco $16,275 $19,924 $18,112
IGF $31,234 $42,809 $29,412
Superior $57,571 $65,146 $57,121
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense
reimbursements and underwriting gain.
8
<PAGE>
RESULTS OF OPERATIONS
Overview
1998 Compared To 1997
The Company recorded a net loss from continuing operations of $(8,999,000) or
$(1.54) per share (basic) compared to net earnings from continuing operations of
$15,983,000 or $2.86 per share in 1997. In the fourth quarter of 1997, the
Company discontinued the operations of SIGFL and sold this book of business
January 1, 1999. The sale results from the Company's decision to focus on
nonstandard automobile, crop and reinsurance operations. The Company recorded a
loss from discontinued operations of $2,937,000 in 1998 compared to a loss of
$3,545,000 in 1997. The loss from continuing operations in 1998 was due to
reduced earnings in both crop and nonstandard automobile operations. Results for
1998 for the crop operations were significantly impacted by catastrophic crop
hail losses primarily from Hurricane Bonnie and other weather related events of
approximately $14 million pre-tax. Contributing to the lower results were higher
than expected commission and integration costs related to the CNA transaction of
approximately $3.0 million pre-tax and a lower underwriting gain on MPCI (11.2%
in 1998 versus 25.0% in 1997) due primarily to severe drought conditions in
certain parts of the country, overly wet conditions in other parts of the
country and higher frequency of Crop Revenue Coverage ("CRC") claims due to
extremely low commodity prices. Results for 1998 for the nonstandard automobile
operations were impacted by a higher loss ratio and lower premium volume. These
were the result of problems encountered with timely rate filings, implementation
of the Company's new operating system and competitive pressure. The Company also
increased loss reserves for prior accident years by approximately $13 million in
1998 due to adverse loss development.
1997 Compared To 1996
The Company recorded earnings from continuing operations of $15,983,000 or $2.86
per share, respectively in 1997. This is approximately a 13.1% and 7.1% increase
from 1996 comparable amounts of $14,127,000 or $2.67 per share. The Company
recorded a loss from discontinued operations of $3,545,000 in 1997 compared to a
loss of $1,000,000 in 1996. The Company also recorded a gain of $18,169,000 in
1996 from the sale of SIG stock in its IPO. That gain is not included as part of
earnings from continuing operations. The nonstandard automobile insurance
segment demonstrated improved earnings due to continued premium growth, improved
expense ratios and higher realized gains from investment sales. Premium growth
in nonstandard automobile was generated from increased pressure on uninsured
motorists to obtain insurance, expansion into new states and increased market
share penetration. During 1997, the Company increased nonstandard auto reserves
for both prior and current accident years. The total increase for prior accident
years was approximately $10 million due to adverse loss development. The
improvement in crop insurance earnings relates to growth in market share and
favorable underwriting results. Growth in market share occurred in all product
lines for crop and is the result of improved marketing and agent service
efforts. Record underwriting results were due to favorable crop conditions and
continued improvement in risk selection.
Years Ended December 31, 1998 and 1997
Gross Premiums Written
Consolidated Gross Premiums Written increased 21.8% in 1998 due to
growth in the crop operations from the integration of CNA, internal growth and
introduction of a new product line, AgPI(R). Crop Gross Premiums Written
increased 92.3% in 1998 from 1997. The following represents the breakdown of
crop Gross Premiums Written by line:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CAT imputed $50,127 $33,294
MPCI 157,225 88,052
Crop hail and named perils 76,198 38,349
Named perils 2,074 -
AgPI(R) 7,529 -
------- -------
293,153 159,695
Less CAT imputed (50,127) (33,294)
------- -------
Total $243,026 $126,401
======= =======
</TABLE>
9
<PAGE>
Nonstandard automobile Gross Premiums Written decreased 6.2% in 1998 as
compared to 1997 due primarily to reduced volume in the states of Florida and
California for the reasons previously cited.
Net Premiums Written
Net Premiums Written increased in 1998 as compared to 1997 due to the growth
in Gross Premiums Written offset by quota share reinsurance.
In 1998, the Company ceded 10% of its nonstandard automobile premiums as
part of a quota share treaty. This treaty and all previous quota share treaties
for 1997 and 1998 were commuted effective October 1, 1998 with the Company
receiving back the unearned premiums on those treaties as of that date and their
respective loss reserves. For the first three quarters of 1997, the Company
ceded 20% of nonstandard automobile premiums and ceded 25% of such premiums in
the fourth quarter of 1997. In 1998, the Company ceded 25% of its crop hail
premiums as part of a quota share treaty as compared to 40% in 1997. Named peril
premiums were ceded at a 50% rate in both 1998 and 1997 under a quota share
treaty. In the fourth quarter of 1999, SIG ceded $22,250,000 of nonstandard
automobile premiums to Granite Re.
Net Premiums Earned
Net Premiums Earned increased in 1998 as compared to the prior year
reflecting growth in Gross and Net Premiums Written and reduced quota share
reliance. The ratio of Net Premiums Earned to Net Premiums Written for the
nonstandard automobile segment was 97.9% in 1998 as compared to 97.8% in 1997.
Fee Income
Fee income increased 13.4% in 1998 compared to 1997. Fee income on
nonstandard automobile operations increased as a result of higher fees as a
percentage of gross premiums written, 5.41% in 1998 and 4.79% in 1997, offset by
lower premium volume. Crop fees primarily include CAT fees. CAT fees increased
in 1998 as compared to 1997 due to growth in premium volume. Fees in 1998 also
increased due to introduction of Geo AgPLUS(TM) and other processing fees.
Net Investment Income
Net investment income increased 4.9% in 1998 compared to 1997. Such increase
was due to greater invested assets offset somewhat by declining yields due to
market conditions.
Net Realized Capital Gains
Capital transaction activity primarily reflects activity in the Company's
equity portfolio. The higher level of gains in 1997 reflects the strong market
conditions during that year. Gains decreased in 1998 as a result of market
conditions. In the fourth quarter of 1998, the Company significantly reduced its
exposure to equities reflecting the Company's concern with the market and its
desire to increase investment income.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 82.5% for
1998 as compared to 78.0% for 1997. The Crop Hail Loss and LAE Ratio was 79.4%
in 1998 compared to 75.1% in 1997. The increase in the Loss and LAE Ratio for
the nonstandard automobile segment reflects adverse development on prior years
of approximately 5.0%. The Company estimates its nonstandard automobile 1998
accident year loss ratio was 77.5% as compared to 76.1% in accident year 1997.
The increase in the accident year loss ratio results from product and pricing
decisions and increases in frequency in certain product lines. The increase in
the Crop Hail Loss and LAE Ratio includes $10.7 million for the effects of
catastrophic events net of reinsurance recoveries. The Crop Hail Loss and LAE
Ratio prior to reinsurance recoveries was 100.6%. The named perils loss ratio
was 100% and the AgPI(R) loss ratio was 100% in 1998 due to losses on certain
coverages due to unusual weather related events estimated to be $3.3 million.
10
<PAGE>
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses have increased as
a result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $103,926,000 or
30.4% of Net Premiums Earned in 1998 compared to $63,344,000 or 22.9% of Net
Premiums Earned for 1997. The increase in the Company's overall expense ratio
reflects certain changes in the Company's crop operations as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
MPCI expense reimbursements $(37,982) $(24,788)
MPCI underwriting gain, net of stop loss
and CNA reinsurance in 1998 (14,902) (26,589)
Commissions 50,089 25,713
Ceding commission income (6,899) (5,030)
Operating expenses 31,600 16,290
------ ------
$21,906 $(14,404)
====== ======
</TABLE>
MPCI expense reimbursements declined to 24.2% of MPCI premiums for 1998 as
compared to 28.2% in 1997 due to federally mandated reductions. The MPCI
underwriting gain, net of stop loss costs, decreased to 9.5% of CAT and MPCI
premiums in 1998 (after adding back CNA share of $4,861,000 in 1998) compared to
21.9% in 1997 due to severe drought in certain sections of the country and
overly wet conditions in other sections of the country. The Company considers
the 1998 underwriting gain to be well below average while the 1997 gain was well
above average. Commission expense as a percentage of gross written premiums
(including CAT) increased in 1998 to 17.1% of gross written premiums compared to
16.1% in 1997 due to the integration of CNA and competitive industry pressure.
Ceding commission income increased in 1998 compared to 1997 due to a increase in
ceded premiums. Operating expenses as a percentage of gross written premiums
(including CAT) increased in 1998 to 10.8% compared to 10.2% 1997. Operating
expenses in 1998 include $3 million, or 1.0% of gross written premiums
(including CAT), of one time costs primarily related to the integration of CNA.
Operating expenses in 1998 also include a $3.2 million reserve, or 1.1% of gross
written premiums (including CAT), for potential processing errors during 1998 on
assumed premiums from CNA.
Nonstandard automobile expenses net of fee income were 21.6% of earned
premiums in 1998 compared to 22.7% in 1997.
Amortization of Intangibles
Amortization of intangibles includes goodwill from the acquisition of
Superior, additional goodwill from the acquisition of the minority interest
portion of GGSH and the acquisition of NACU, debt or preferred security issuance
costs and organizational costs. The increase in 1998 over 1997 reflects a full
year's impact of amortization of goodwill associated with the purchase of the
minority interest position in GGSH and a full year's amortization of deferred
issuance costs on the Preferred Securities.
Interest Expense
Interest expense in 1998 represents the crop segment's borrowings on its
seasonal line of credit. Interest expense for 1997 includes both interest for
the crop segment and interest on the GGSH Senior Credit Facility which was
repaid in 1997 from the proceeds of the Preferred Securities Offering.
Income Tax Expense (Benefit)
The variance in the effective tax rate from the U.S. federal statutory rate
of 35% is due primarily to tax-exempt income and nondeductible costs, primarily
goodwill amortization.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at 9.5% net of federal
income taxes from the offering date of August 12, 1997.
11
<PAGE>
Years Ended December 31, 1997 and 1996
Gross Premiums Written
Consolidated Gross Premiums Written increased 50.0% in 1997 due to growth in
both the nonstandard automobile and crop segments. Gross Premiums Written for
the nonstandard automobile segment increased 73.1% in 1997. While a portion of
this increase relates to four additional months of premium in 1997 of Superior,
additional premium growth relates to internal growth due to improved service,
certain product improvements, tougher uninsured motorist laws in states such as
California and Florida and entrance into new states such as Nevada and Oregon.
Such increase was primarily due to volume rather than rate increases, although
the Company adjusts rates on an ongoing basis. Gross Premiums Written for the
crop segment increased 14.5% in 1997. Such increase was due to continued
industry privatization and aggressive marketing efforts, resulting in continued
increase in market share. Remaining gross written premiums represent reinsurance
business.
Net Premiums Written
Net Premiums Written increased in 1997 as compared to 1996 due to the growth
in Gross Premiums Written offset by quota share reinsurance.
For the first three quarters of 1997 the Company ceded 20% of nonstandard
automobile premiums and ceded 25% of such premiums in the fourth quarter. No
such treaty was in effect during 1996. In 1997, the Company ceded 40% of crop
hail premiums as part of a quota share treaty. In 1996, crop hail premiums were
ceded at a rate of 10%. Granite Re participated in 10% of the nonstandard
automobile quota share treaties but did not participate in the crop hail quota
share treaties.
Net Premiums Earned
Net Premiums Earned increased in 1997 as compared to the prior year,
reflecting the strong growth in Gross Written Premiums offset by the effects of
the nonstandard automobile and crop hail quota share treaties. Net premiums
earned to net premiums written for the nonstandard automobile segment was 97.8%
in 1997 as compared to 90.4% in 1996. The increase in the earned ratio is due to
higher premium growth earlier in 1997.
Fee Income
Fee income increased $8,535,000 in 1997 compared to 1996. Such increase was
due to billing fee income on nonstandard automobile business from an increase in
in-force policy count. There was also an increase in the receipt of CAT Coverage
Fees and CAT LAE Reimbursement Payments due to higher premium volume.
Net Investment Income
Net investment income increased $5,032,000 in 1997 compared to 1996. Such
increase was due primarily from additional months of investment income from
Superior but also due to greater invested assets resulting from premium growth
and higher profitability.
Net Realized Capital Gains (Loss)
Realized gains of $9,393,000 in 1997 were due to the significant strength of
the equity markets in 1997 and the Company's position to realize gains as
securities had reached targeted pricing levels.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 78.0% for
1997 as compared to 73.7% for 1996. The Crop Hail Loss and LAE Ratio in 1997 was
75.1% compared to 59.2% in 1996. The increase in the Loss and LAE Ratio for the
nonstandard automobile segment reflects the growth in premium volume in an
effort to increase market share and improve economies of scale, increased
physical damage severity costs and certain pending rate increases. Deficient
reserve development was approximately $10 million in 1997. The increase in the
crop hail loss ratio was the result of storm damage in the third quarter in
certain eastern states on new business obtained in 1997.
12
<PAGE>
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses increased as a
result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $63,344,000 or 22.9%
of Net Premiums Earned for 1997 compared to $48,647,000 or 23.3% of Net Premiums
Earned in 1996. The Expense Ratio, net of billing fees, for the nonstandard
automobile segment improved to 22.7% for 1997 as compared to 23.2% for 1996.
Due to the accounting for the crop insurance segment, operating expenses for
1997 includes a contribution to earnings of $14,404,000 as compared to
$6,095,000 for 1996. Such increase was due to greater Buy-up Expense
Reimbursement Payments and MPCI underwriting gain due to increased premium
volumes and more favorable underwriting results.
Amortization of Intangibles
The increase in 1997 over 1996 reflects the effects of the Preferred
Securities Offering.
Interest Expense
Interest expense primarily represents interest incurred since April 30, 1996
on the GGS Senior Credit Facility. The GGS Senior Credit Facility was repaid
with the proceeds from the Preferred Securities Offering.
Income Tax Expense
Income tax expense was 30.6% of pre-tax income from continuing operations
for 1997 as compared to 32.2% in 1996.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at a rate of 9.5% net
of federal income taxes from the offering date of August 12, 1997.
Symons International Group, Inc. - Florida ("SIGF")
Goran's wholly-owned subsidiary, Symons International Group, Inc. - Florida
is a specialized surplus lines underwriting unit. The Company decided to
discontinue the operations of this unit in 1997 and sold this book of business
on January 1, 1999. Such operations no longer fit the Company's strategic
operating plan of concentrating on the business segments of nonstandard
automobile, crop and reinsurance. Goran wrote third party property and casualty
coverage using Pafco, IGF and other insurance companies under contract with
SIGF. The volume of business was $6,427,000 in 1998, $9,560,000 in 1997 and
$8,258,000 in 1996, however, the underwriting profits continued to deteriorate
in 1997 and 1998. SIGF produced an overall loss to the Company of $2,937,000 in
1998, $3,545,000 in 1997 and $1,000,000 in 1996.
Non-U.S. Operations
Granite Insurance Company ("Granite")
Granite is a Canadian federally licensed insurance company which is
presently servicing its investment portfolio and a very few outstanding claims.
Granite stopped writing business on December 31, 1989 and sold its book of
Canadian business in June 1990. The outstanding claims continue to be settled in
accordance with actuarial estimates with some deficiencies showing in the most
recent year. Granite's invested assets reduced to $2.6 million from $3.4 million
in 1997. This is the result of the administration and settlement of claims.
Total net outstanding claims decreased to $400,000 in 1998 from $700,000 in
1997. It is expected that the run-off of outstanding claims will continue at
least through 1999. Granite recorded a net loss of $403,000 in 1998, compared to
a $261,000 net loss in 1997 and $50,000 earnings in 1996. This is reflective of
the reduction in investment income.
Granite Reinsurance Company Limited ("Granite Re")
Granite Re is managed by Atlantic Security Ltd. of Bermuda and Colybrand in
Barbados. Granite Re underwrites finite risk reinsurance, stop loss reinsurance
and quota share reinsurance. This reinsurance involves a defined maximum risk at
the time of entering into a contract. Granite Re participates in various
programs in Bermuda, the United States and Canada.
13
<PAGE>
On December 31, 1995, its Canadian quota share terminated and is now in run-off
which is expected to yield investment revenue for the next four to five years.
During 1998, 1997 and 1996, Granite Re participated in certain stop loss
programs for Goran's crop insurance subsidiary, IGF. These covers were in
accordance with third party placements where Granite Re took a portion after
terms having been established by substantial third party reinsurers. In 1998 and
1997, Granite Re participated in Goran's nonstandard automobile subsidiaries
quota share treaty. On January 1, 1996, it assumed all of the outstanding losses
and the book of business of Pafco's premium writings from the surplus lines
operation in Florida, which was sold on January 1, 1999. Gross premiums written
during the 12 months ended November 30, 1998 (Granite Re has a year-end
different from Goran) were $26.6 million compared to $10.5 million for the
corresponding period in 1997 and $12.3 million in 1996, composed entirely of
premiums from SIG. Earnings were, excluding discontinued operations, $1.9
million, $3.3 million and $3.7 million in 1998, 1997 and 1996, respectively. The
decline in Granite Re's earnings in 1998 was due to its participation in the
crop hail stop loss treaty and its related share of catastrophic losses of $1.2
million.
Total capital and surplus of Granite Re decreased to $16.2 million in 1998
from $18.0 million in 1997. Granite Re initially started July 1, 1990 with a
capital base of $825,000.
Liquidity and Capital Resources
The primary sources of funds available to Goran are from the management fee
arrangements with Granite. At this time SIG pays no dividends to Goran or any of
its shareholders. The primary source of funds available to SIG as a holding
company are dividends from its primary subsidiaries, IGF, IGF Holdings and GGS
Management. SIG also receives $150,000 quarterly pursuant to an administration
agreement with IGF to cover the costs of executive management, accounting,
investing, marketing, data processing and reinsurance.
GGS Management collects billing fees charged to policyholders of Pafco and
Superior who elect to make their premium payments in installments. GGS
Management also receives management fees under its management agreement with
Pafco and Superior. When the Florida Department of Insurance ("Florida
Department") approved the acquisition of Superior by GGS Holdings, it prohibited
Superior from paying any dividends (whether extraordinary or not) for four years
from the date of Acquisition without the prior written approval of the Florida
Department. Extraordinary dividends, within the meaning of the Indiana Insurance
Code, cannot be paid by Pafco without the prior approval of the Indiana
Insurance Commissioner. The management fees charged to Pafco and Superior by GGS
Management are subject to review by the Indiana and Florida Departments of
Insurance.
The nonstandard automobile insurance subsidiaries' primary sources of funds
are premiums, investment income and proceeds from the maturity or sale of
invested assets. Such funds are used principally for the payment of claims,
operating expenses (primarily management fees), commissions, dividends and the
purchase of investments. There is variability to cash outflows because of
uncertainties regarding settlement dates for liabilities for unpaid losses.
Accordingly, the Company maintains investment programs intended to provide
adequate funds to pay claims without forced sales of investments. As claim
payments tend to lag premium receipts and due to the growth in premium volume,
the Company has experienced an increase in its investment portfolio and has not
experienced any problems with meeting its obligations for claims payments or
management fees.
As of December 31, 1998, IGF has the ability to pay $3,123,000 in dividends
without prior regulatory approval.
Cash flows in the Company's MPCI business differ from cash flows from
certain more traditional lines. The Company pays insured losses to farmers as
they are incurred during the growing season, with the full amount of such
payments being reimbursed to the Company by the federal government within three
business days. MPCI premiums are not received from farmers until covered crops
are harvested. Such premiums are required to be paid in full to the FCIC by the
Company, with interest, if not paid by a specified date in each crop year.
During 1998, IGF continued the practice of borrowing funds under a revolving
line of credit to finance premium payables to the FCIC on amounts not yet
received from farmers (the "IGF Revolver"). The maximum borrowing amount under
the IGF Revolver is $12,000,000. The IGF Revolver carried a weighted average
interest rate of 8.6%, 8.75% and 6.96% in 1996, 1997 and 1998, respectively.
Payables to the FCIC accrue interest at a rate of 15%, as do the receivables
from farmers. By utilizing the IGF Revolver, which bears interest at a floating
rate equal to the prime rate minus 1.00% in 1998 (prime rate plus .25% in 1997),
IGF avoids incurring interest expense at the rate of 15% on interest payable to
the FCIC while continuing to earn 15% interest on the receivables due from the
farmer. The IGF Revolver contains certain covenants which (i) restricts IGF's
ability to accumulate common stock, (ii) sets minimum standards for investments
and policyholder surplus and (iii) limits
14
<PAGE>
ratio of net written premiums to surplus. The IGF Revolver also contains other
customary covenants which, among other things, restricts IGF's ability to
participate in mergers, acquire another enterprise or participate in the
organization or creation of any other business entity. At December 31, 1998, IGF
had borrowed the full amount available.
On August 12, 1997, SIG issued $135 million in Trust Originated Preferred
Securities (the "Preferred Securities Offering") at a rate of 9.5% paid
semi-annually. These Preferred Securities were offered through a wholly-owned
trust subsidiary of SIG and are backed by Senior Subordinated Notes to the Trust
from SIG. The proceeds of the Preferred Securities Offering were used to
repurchase the remaining minority interest in GGSH for $61 million, repay the
balance of the GGS Senior Credit Facility of $44.9 million and contribute $10.5
million to the nonstandard automobile insurers with the balance held for general
corporate purposes. Expenses of the issue aggregated $5.1 million and are
amortized over the term of the Preferred Securities (30 years). In the third
quarter of 1997, SIG wrote off the remaining unamortized costs of the GGS Senior
Credit Facility of approximately $1.1 million pre-tax or approximately $0.09 per
share (basic).
The Preferred Securities have a term of 30 years with semi-annual
distribution payments at 9.5% per annum commencing February 15, 1998. The
Preferred Securities may be redeemed in whole or in part after 10 years.
The Preferred Security obligations of approximately $13 million per year is
funded from SIG's nonstandard automobile management company and dividend
capacity from the crop operations. The nonstandard auto funds are the result of
management and billing fees in excess of operating costs. For calendar 1998 and
1997, the coverage ratio of nonstandard automobile cash flows to Preferred
Security costs was 2.1x and 2.2x, respectively. Coverage from SIG's crop
operations entailed a dividend capacity of $13.4 million in 1998 that will
reduce to approximately $3.1 million in 1999 as a result of SIG's operations and
statutory limitations. SIG also has approximately $10 million in excess funds
for debt service. Surplus needs at the insurance companies will be handled
primarily by reinsurance for which SIG believes it has good relationships and
numerous alternatives. SIG believes it can continue to meet its obligations in
1999 and that coverage will increase through higher nonstandard automobile
premium volumes and more profitable crop operations.
The Trust Indenture for the Preferred Securities contains certain
preventative covenants. These covenants are based upon SIG's Consolidated
Coverage Ratio of earnings before interest, taxes, depreciation and amortization
(EBITDA) whereby if SIG's EBITDA falls below 2.5 times Consolidated Interest
Expense (including Preferred Security distributions) for the most recent four
quarters the following restrictions become effective:
o SIG may not incur additional Indebtedness or guarantee additional
Indebtedness.
o SIG may not make certain Restricted Payments including loans or advances to
affiliates, stock repurchases and a limitation on the amount of dividends is
inforce.
o SIG may not increase its level of Non-Investment Grade Securities defined
as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply as SIG's Consolidated Coverage Ratio was
(.15x)% in 1998, and will continue to apply until SIG's Consolidated Coverage
Ratio is in compliance with the terms of the Trust Indenture. This does not
represent a Default by SIG on the Preferred Securities. SIG is in compliance
with these preventative covenants as of December 31, 1998.
Net cash provided by operating activities in 1998 aggregated $10,685,000
compared to $14,027,000 in 1997 due to reduced cash provided by operations as a
result of the net loss offset primarily by funds provided by the commutation of
the nonstandard automobile quota share treaty.
Net cash used in investing activities decreased from $100,208,000 in 1997 to
$10,346,000 in 1998. Such decrease was due to the purchase of minority interest
in 1997 and less investing activities in 1998 due to lower earnings offset by
increased fixed asset expenditures from continued technological improvements and
the purchase of a new building for the crop operations and the purchase of NACU.
In 1998, financing activities provided cash of $5,863,000 compared to
$89,007,000 in 1997. Such decrease was due to the proceeds of the Preferred
Securities Offering in 1997 net of payments on term debt and increased
borrowings on the seasonal crop line of credit due to hail losses and use of
cash for loans to affiliates and repurchase of stock.
Net cash provided by operating activities in 1997 aggregated $14,027,000
compared to $12,728,000 in 1996, excluding the sale of subsidiary stock in 1996
of $18,169,000. This increase in funds provided was caused by additional cash of
$15,508,000 from net earnings adjusted for non-cash expenses and realized gains
or losses and continued premium growth which results in increased cash flows as
loss payments lag receipt of premiums. Net cash used in investing activities
increased
15
<PAGE>
from $80,482,000 in 1996 to $100,208,000 in 1997 reflecting investment of
remaining proceeds from the Preferred Securities Offering and cash flow from
operations. In 1997, financing activities provided cash of $89,007,000 compared
to cash provided of $72,703,000 in 1996, with funds in 1997 primarily from the
Preferred Securities Offering while funds provided in 1996 were primarily from
the financing of the acquisition of Superior.
The Company believes cash flows in the nonstandard automobile segment from
premiums, investment income and billing fees are sufficient to meet that
segment's obligations to policyholders, operating expenses and debt service for
the foreseeable future. This is due primarily to the lag time between receipt of
premiums and claims payments. Therefore, the Company does not anticipate
additional borrowings for this segment other than in the event of an
acquisition. The Company also believes cash flows in the crop segment from
premiums and expense reimbursements are sufficient to meet the segment's
obligations for the foreseeable future. Due to the more seasonal nature of the
crop segment's operations, it may be necessary to obtain short term funding at
times during a calendar year by drawing on an existing line of credit. Except
for this short term funding and normal increases therein resulting from an
increase in the business in force, the Company does not anticipate any
significant short or long term additional borrowing needs for this segment.
Accordingly, while there can be no assurance as to the sufficiency of the
Company's cash flow in future periods, the Company believes that its cash flow
will be sufficient to meet all of the Company's operating expenses and debt
service for the foreseeable future and, therefore, does not anticipate
additional borrowings except as may be necessary to finance acquisitions.
While GAAP shareholders' equity was $49,725,000 at December 31, 1998, it
does not reflect the statutory equity upon which the Company conducts its
various insurance operations. Pafco, Superior and IGF individually had statutory
surplus at December 31, 1998 of $16,275,000, $57,571,000 and $31,234,000,
respectively.
Effects of Inflation
Due to the short term that claims are outstanding in the two product lines
the Company underwrites, inflation does not pose a significant risk to the
Company.
Primary Differences Between GAAP and SAP
The financial statements contained herein have been prepared in conformity
with Generally Accepted Accounting Principles ("GAAP") which differ from
Statutory Accounting Practices ("SAP") prescribed or permitted for insurance
companies by regulatory authorities in the following respects: (i) certain
assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii)
costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes; (iii) the investment in wholly-owned
subsidiaries is consolidated for GAAP rather than valued on the statutory equity
method. The net income or loss and changes in unassigned surplus of the
subsidiaries is reflected in net income for the period rather than recorded
directly to unassigned surplus; (iv) fixed maturity investments are reported at
amortized cost or market value based on their National Association of Insurance
Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment
expenses and unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes; (vi) deferred income taxes are not
recognized on a statutory basis; and (vii) credits for reinsurance are recorded
only to the extent considered realizable.
New Accounting Standards
The NAIC is considering the adoption of a recommended statutory accounting
standard for crop insurers, the impact of which is uncertain since several
methodologies are currently being examined. Although the Indiana Department has
permitted the Company to continue, for its statutory financial statements
through March 31, 1999, its practice of recording its MPCI business as 100%
ceded to the FCIC with net underwriting results recognized in ceding
commissions, the Indiana Department has indicated that in the future it will
require the Company to adopt the MPCI accounting practices recommended by the
NAIC or any similar practice adopted by the Indiana Department. Since such a
standard would be adopted industry wide for crop insurers, the Company would
also be required to conform its future GAAP financial statements to reflect the
new MPCI statutory accounting methodology and to restate all historical GAAP
financial statements consistent with this methodology for comparability. The
Company cannot predict what accounting methodology will eventually be
implemented or when the Company will be required to adopt such methodology. The
Company anticipates that any such new crop accounting methodology will not
affect GAAP net earnings.
In 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles guidance, which will
replace the current Accounting Practices and Procedures manual as the NAIC's
primary guidance on statutory accounting. The NAIC is now considering amendments
to the Codification guidance that would
16
<PAGE>
also be effective upon implementation. The NAIC has recommended an effective
date of January 1, 2001. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas.
It is not known whether the Indiana and Florida Insurance Departments will
adopt the Codification, and whether the Departments will make any changes to the
guidance. The Company has not estimated the potential effect of the Codification
guidance if adopted by the Departments. However, the actual effect of adoption
could differ as changes are made to the Codification guidance, prior to its
recommended effective date of January 1, 2001.
Impact of the Year 2000 Issue
The Year 2000 Project ("Project") is addressing the inability of computer
software and hardware to distinguish between the year 1900 and the year 2000. In
1996, the Company began a company-wide replacement of hardware and software
systems to address this and other issues. This replacement is using systems from
Dell, Hewlett Packard, Sun Systems, Compaq, Oracle and ZIM as well as some
software conversions using Java. The new hardware is in place and operational at
all subsidiaries. The software systems are in place in our nonstandard auto
operations and are being implemented on a state-by-state basis. The Company
began implementing the new nonstandard auto operating system in those states in
which the Company writes annual policies (annual states). 100% of those annual
states are currently in production. The remaining non-annual states are
scheduled to be completed by June 30, 1999. The Y2K issue does not have an
effect on the crop operations until October 1, 1999. The Company is converting
non-compliant crop systems, through programmatic means, into a Y2K compliant
environment. The crop operations are at 70% of completion for this conversion
and are scheduled to be completed by the end of June 1999. A number of the
Company's other IT projects are being delayed or completely eliminated due to
the implementation of the Project. Additionally, the Company continues to
experience certain processing concerns related to its nonstandard automobile
operating system. The delay and/or elimination of these projects and the current
processing concerns has caused or could cause a loss of market share in the
nonstandard auto market.
Project
The Company has divided the Project into three sections-Infrastructure,
Applications/Business Systems and Third Party Suppliers. There are common
portions of each of these divisions which are: (1) identifying Y2K items, (2)
assigning a priority for those items identified, (3) repairing or replacing
those items, (4) testing the fixes, and (5) designing a contingency and business
continuation plan for each subsidiary.
In February 1998, all items had been identified and the plans for
replacement or repair were proposed to management. These plans were approved and
the process began.
The infrastructure section of the Project was quickly implemented and tested
by the Company's IT staff and has been completed since May of 1998. All desktop,
mini and midrange systems as well as phone switches, phones and building
security systems have been tested for Y2K compliance. Any new systems required
by the Company are being tested and certified prior to purchase with completion
by June 30, 1999. Two mainframes being used by the Company are not Y2K certified
or compliant. These machines have been replaced by Sun and HP compliant systems
and are being kept in production until new applications are put in place on the
new machines.
The applications systems section of the Project includes: (1) the
replacement of nonstandard auto companies Policy Administration and Claims
systems, (2) the conversion of crop operations systems in total, and (3)
replacement of non compliant business systems company-wide (this includes
wordprocessors, network operating systems, spreadsheet programs, presentation
systems, etc.).
The Company had already made the decision to transition off all of its
nonstandard auto legacy systems and this process had been in work since 1996.
These systems are Y2K compliant and are scheduled for completion by the end of
June 30, 1999. The conversion of crop systems began in August 1998 and is
scheduled for completion by the end of June 1999. Business systems are being
replaced as vendors certify their compliance. The Company is at 75% compliance
in this area.
The Company relies on third party vendors for investments, reinsurance
treaties and banking. The Company began inquiring about Y2K compliance with its
third party vendors beginning in July 1998. To date all vendors have replied
regarding their compliance efforts. Those that are not in compliance have until
the end of second quarter 1999 to do so, or they will be replaced.
17
<PAGE>
Costs
The Company considers the cost associated with the Project to be material.
The Company has estimated the total cost to be $5.7 million, the majority of
which has been capitalized as hardware or software costs. The Company has also
incurred substantial costs for carrying two systems including personnel costs
and outside service fees. The component of these costs specifically associated
with Y2K cannot be reasonably estimated. The total amount expended through
December 31, 1998 on all infrastructure and software upgrades is approximately
$4.6 million. The Company expects to spend another $1.1 million in its efforts
to complete the Project. This does not include additional annual maintenance
costs that will be incurred as we move forward. Funding for these costs will
continue to be provided by funds from operations. The Company believes that the
new nonstandard auto system will significantly enhance service capability and
reduce future operating costs.
Risks
Failure to correct the Y2K problem through efficient and timely
implementation of the Company's new operating system could cause a failure or
interruption of normal business operations. These failures could materially
affect the Company's operational results, financial condition and liquidity
through reduction of premium volume and an increase in operating costs as a
percentage of premium volume or deterioration of loss experience. Due to the
nature of the Y2K problem, the Company is uncertain whether it will have a
material affect or the potential magnitude of any financial impact. The Company
believes that the possibility of significant business interruptions should be
reduced by successful implementation of the Project.
18
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
As at December 31 (in thousands of U.S. dollars, except per share data)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and investments (note 5) $253,718 $247,124
Accounts Receivable
Premiums receivable 121,328 89,762
Income taxes recoverable 12,711 1,505
Due from related parties 3,495 1,442
Accrued and other receivables 2,362 2,658
------- -------
139,896 95,367
Reinsurance recoverable on paid and unpaid claims 67,885 108,206
Prepaid reinsurance premiums 17,486 36,607
Capital assets (note 6) 19,350 12,230
Deferred policy acquisition costs 16,332 11,849
Deferred income taxes 5,825 2,098
Intangibles (note 7) 46,300 42,562
Other assets 4,197 4,805
------- -------
$570,989 $560,848
======= =======
LIABILITIES
Accounts Payable
Due to insurance companies $ 12,353 $ 37,350
Accrued and other payables 22,283 27,266
------- -------
34,636 64,616
Outstanding claims (notes 2(e) and 4) 207,432 152,871
Unearned premiums (note 4) 110,665 118,616
Notes payable (note 8) 13,744 4,182
------- -------
366,477 340,285
------- -------
Minority interest:
Equity in net assets of subsidiaries 19,787 25,231
Preferred Securities (note 9) 135,000 135,000
------- -------
154,787 160,231
------- -------
Contingent liabilities and commitments (note 13)
SHAREHOLDERS' EQUITY 49,725 60,332
------- -------
$570,989 $560,848
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
19
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31
(in thousands of U.S. Dollars, except per share
data) CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
REVENUE 1998 1997 1996
<S> <C> <C> <C>
Gross premiums written $546,771 $448,982 $299,376
======= ======= =======
Net premiums written $362,106 $281,896 $213,778
======= ======= =======
Net premiums earned $342,177 $276,540 $208,883
Fee income 20,203 17,821 9,286
Net investment income 13,401 12,777 7,745
Net realized capital gains (losses) 4,104 9,393 (637)
------- ------- -------
Total Revenue 379,885 316,531 225,277
------- ------- -------
EXPENSES
Net claims incurred 280,892 210,999 146,274
Commissions and operating expenses (note 15) 103,926 63,344 48,647
Amortization of intangibles 2,379 1,197 411
Interest expense 163 3,087 4,961
------- ------- -------
Total Expenses 387,360 278,627 200,293
------- ------- -------
Earnings (loss) before undernoted items (7,475) 37,904 24,984
Provision for income taxes (note 11) (2,038) 11,596 8,056
Preferred security distributions, net of tax 8,411 3,120 --
Minority interest (4,849) 7,205 2,801
------- ------- -------
Earnings (loss) from continuing operations (8,999) 15,983 14,127
Net earnings (loss) from discontinued
operations (note 3) (2,937) (3,545) (1,000)
Gain on sale of subsidiary stock (note 3) -- -- 18,169
------- ------- -------
Net earnings (loss) $(11,936) $12,438 $31,296
======= ======= =======
Earnings (loss) per share from continuing
operations $(1.54) $2.86 $2.67
Earnings (loss) per share from continuing
operations - fully diluted $(1.54) $2.70 $2.48
Net earnings (loss) per share $(2.04) $2.22 $5.92
Net earnings (loss) per share - fully diluted $(2.04) $2.12 $5.28
==== ==== ====
</TABLE>
See accompanying Notes to Consolidated Financial Statements
20
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31
(in thousands of U.S. Dollars, except per share data)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Cumulative Retained Total
Stock Contributed Translation Earnings Shareholders'
(Note 10) Surplus Adjustment (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $16,817 $-- $(300) $(3,895) $12,622
Issuance of common shares 599 -- -- -- 599
Increase in contributed surplus -- 2,775 -- -- 2,775
Change in cumulative translation adjustment -- -- (34) -- (34)
Net earnings -- -- -- 31,296 31,296
------ ----- --- ------ ------
Balance at December 31, 1996 17,416 2,775 (334) 27,401 47,258
Issuance of common shares 594 -- -- -- 594
Change in cumulative translation adjustment -- -- 42 -- 42
Net earnings -- -- -- 12,438 12,438
------ ----- --- ------ ------
Balance at December 31, 1997 18,010 2,775 (292) 39,839 60,332
Issuance of common shares 1,533 -- -- -- 1,533
Purchase of common shares (226) -- -- (522) (748)
Change in cumulative translation adjustment -- -- 544 -- 544
Net earnings (loss) -- -- -- (11,936) (11,936)
------ ----- --- ------ ------
Balance at December 31, 1998 $19,317 $2,775 $252 $27,381 $49,725
====== ===== === ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
21
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31
(in thousands of U.S. Dollars, except per share data)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities
Net earnings (loss) $(11,936) $12,438 $31,296
Items not involving cash:
Amortization 6,032 5,258 2,438
Minority interest share in net earnings (4,849) 7,205 2,801
Loss (gain) on sale of investments (4,104) (9,393) 637
Gain on sale of capital assets (267) -- (4)
------ ------ ------
Working capital provided (used) by operating activities (15,124) 15,508 37,168
Changes in working capital relating to operations (note 16) 25,809 (1,481) (6,271)
------ ------ ------
10,685 14,027 30,897
------ ------ ------
Financing activities, net of assets acquired
Proceeds from issuance of preferred securities -- 129,877 --
Repayment of debentures -- -- (11,085)
Increase (decrease) in notes payable 7,855 (43,818) 42,189
Cost of shares acquired (748) -- --
Proceeds from consolidated subsidiary minority interest owners -- 2,354 41,000
Loans to related parties (1,600) -- --
Issue of share capital 356 594 599
------ ------ ------
5,863 89,007 72,703
------ ------ ------
Investing activities, net of assets acquired
Purchase of minority interest (1,208) (61,000) --
Acquisition of Superior -- -- (66,590)
Net purchase of marketable securities 3,210 (34,535) (11,996)
Net purchase of capital assets (9,348) (5,803) (2,459)
Cash paid for NACU (3,000) -- --
Other, net -- 1,130 563
------ ------- ------
(10,346) (100,208) (80,482)
------ ------- ------
Increase in cash resources during the year 6,202 2,826 23,118
Cash resources, beginning of year 36,557 33,731 10,613
------ ------ ------
Cash resources, end of year $42,759 $36,557 $33,731
====== ====== ======
Cash resources are comprised of:
Cash $15,123 $13,324 $4,679
Short-term investments 27,636 23,233 29,052
------ ------ ------
$42,759 $36,557 $33,731
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(in thousands of U.S. dollars, except share and per share data)
1. ORGANIZATION
Goran Capital Inc. ("Goran" or the "Company") is the parent company of the Goran
group of companies. The consolidated financial statements include the accounts
of all subsidiary companies of Goran, as follows:
1. Symons International Group, Inc. ("SIG") is a 67% owned subsidiary of Goran.
SIG is primarily involved in the sale of nonstandard automobile insurance and
crop insurance. Its products are marketed through independent agents and
brokers, in 42 states, primarily in the Midwest and Southern United States.
SIG's wholly-owned subsidiaries are as follows:
GGS Management Holdings, Inc. ("GGSH") - a holding company for the nonstandard
automobile operations which includes GGS Management, Inc., Pafco General
Insurance Company and the Superior Insurance Company entities;
GGS Management, Inc. ("GGS") - a management company for the nonstandard
automobile operations domiciled in Delaware;
Superior Insurance Company ("Superior") - an insurance company domiciled in
Florida;
Superior American Insurance Company ("Superior American") - an insurance company
domiciled in Florida;
Superior Guaranty Insurance Company ("Superior Guaranty") - an insurance company
domiciled in Florida;
Pafco General Insurance Company ("Pafco") - an insurance company domiciled in
Indiana; and
IGF Holdings, Inc. ("IGFH") - a holding company for the crop operations which
includes IGF Insurance Company ("IGF") - an insurance company domiciled in
Indiana and North American Crop Underwriters ("NACU") - a managing general
agency with exclusive focus on crop insurance.
2. Granite Reinsurance Company Ltd. ("Granite Re") - a finite risk reinsurance
company based in Barbados.
3. Granite Insurance Company ("Granite") - a Canadian federally licensed
insurance company which ceased writing new insurance policies on January 1,
1990.
4. Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIGF") - a
Florida based surplus lines insurance agency. (See Note 3.)
On January 31, 1996, Goran and SIG entered into an agreement with GS Capital
Partners II, L.P. ("Goldman Sachs") to create a company, GGSH, to be owned 52%
by SIG and 48% by Goldman Sachs. GGSH created GGS, a management company for the
nonstandard automobile operations which includes Pafco and the Superior
entities. (See Note 3.)
On April 30, 1996, GGSH acquired the Superior entities through a purchase
business combination. The Company's Consolidated Statement of Earnings for the
year ended December 31, 1996 includes the results of operations of the Superior
entities subsequent to April 30, 1996, the date of the acquisition. (See Note
3.)
On August 12, 1997, SIG acquired the 48% minority interest in GGSH from Goldman
Funds through a purchase business combination. (See Note 3.)
On July 8, 1998, SIG acquired NACU through a purchase business combination.
SIG's Consolidated Statement of Earnings for the year ended December 31, 1998
includes the results of operations of NACU subsequent to July 8, 1998.
(See Note 3.)
23
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in Canada ("Canadian GAAP").
(a) Basis of Consolidation
The consolidated financial statements include the accounts of Goran and its
subsidiary companies.
All significant intercompany transactions and balances have been eliminated.
(b) Premiums
Premiums are taken into income evenly over the lives of the related
policies.
(c) Commissions
Commission expenses and related reinsurance commission recoveries are
recorded at the effective date of the respective insurance policy.
(d) Deferred Policy Acquisition Costs
Deferred policy acquisition costs are comprised of agents' commissions,
premium taxes and certain general expenses which are related directly to the
acquisition of premiums. These costs, to the extent that they are considered
recoverable, are deferred and amortized over the same period that the
related premiums are taken into income.
(e) Outstanding Claims
The reserve for outstanding claims includes estimates for reported unpaid
losses and losses incurred but not reported. These reserves have not been
discounted. Reserves are established using case-basis valuations and
statistical analysis as claims are reported. Those estimates are subject to
the effects of trends in loss severity and frequency. While management
believes the reserves are adequate, the provision for losses are necessarily
based on estimates and are subject to considerable variability. Changes in
the estimated reserves are charged and credited to operations as additional
information on the estimated amount of a claim becomes known during the
course of its settlement. The reserve for outstanding claims has been
reported on by independent actuaries. (See also Note 2(l)).
(f) Investments
Investments in bonds, mortgages and debentures are carried at amortized cost
providing for the amortization of the discount or premium to maturity date.
Investments in short-term investments, real estate, and equities are carried
at cost. Gains and losses on disposal of investments are taken into income
when realized. When there has been a loss in value of an investment that is
other than a temporary decline, the investment is written down to recognize
the loss.
(g) Capital Assets
Capital assets are recorded at cost, net of accumulated amortization.
Amortization is provided at rates sufficient to amortize the costs over the
estimated useful lives of the assets.
(h) Foreign Currency Translation
Foreign currency transaction gains and losses are included in the statement
of earnings. Goran and each of its subsidiaries have been determined to be
self-sustaining foreign operations and are translated using the current rate
method whereby all assets and liabilities are translated into U.S. dollars
at the year end rate of exchange and revenue and expense items are
translated at the average rate of exchange for the year. The resulting
unrealized translation gain or loss is deferred and shown separately in
shareholders' equity. These adjustments are not included in operations until
realized through a reduction in the Company's net investment in such
operations.
24
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
(i) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could
change in future as more information becomes known which could impact the
amounts reported and disclosed herein.
(j) Comparative Figures
Certain comparative figures have been reclassified to conform to the basis
of presentation adopted in 1997.
(k) Preferred Securities
Preferred securities represent SIG-obligated mandatorily redeemable
securities of subsidiary holding solely parent debentures and are
reported at their liquidation value under minority interest.
Distributionson these securitiesare charged against consolidated earnings.
(l) Accounting Changes
In the consolidated financial statements, the Company has adopted the
following pronouncements:
Segmented Information - Canadian Institute of Chartered Accountants ("CICA")
Handbook Section 1701 and United States Financial Accounting Standards Board
("FASB") Statement of Accounting Standard No. 131; the adoption of these
standards is consistent with the Company's previously established segment
disclosures.
Income Taxes - CICA Handbook Section 3465; the standard is consistent with FASB
Statement of Financial Accounting Standard No. 109 "Accounting for Income
Taxes". These standards require an asset and liability approach that takes into
account changes in tax rates when valuing the deferred tax amounts reported in
the balance sheet. Valuation allowances are established when necessary, to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Outstanding Claims - the Company's accounting policy prior to 1998 was to
discount the reserves for direct claims for the time value of money. Effective
January 1, 1998, the Company adopted its current policy (see Note 2 (e)) which
does not take into the account the impact of discounting. The new policy is
consistent with United States generally accepted accounting principles ("GAAP").
The net impact of the changes in accounting for income taxes and outstanding
claims has been applied prospectively in the accounts with no material effect in
the current year. The impact of the previously applied policies on prior years'
financial statements is presented in the reconciliation of Canadian and United
States GAAP in Note 18.
3. CORPORATE REORGANIZATION, ACQUISITIONS AND PUBLIC OFFERINGS
In April 1996, Pafco contributed all of the outstanding shares of capital stock
of IGF to IGFH, a wholly-owned and newly formed subsidiary of Pafco, and the
Board of Directors of IGFH declared an $11,000 distribution to Pafco in the form
of cash or $7,500 and a note payable of $3,500 ("Pafco Note"). IGFH borrowed the
$7,500 portion of the distribution from a bank ("IGFH Note"). The notes were
paid in full from the proceeds of the Offering. Immediately following the
distribution, Pafco distributed all of the outstanding common stock of IGFH to
SIG.
25
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
On January 31, 1996, the Company and SIG entered into an agreement ("Agreement")
with GS Capital Partners II, L.P. (the "Goldman Funds") to create GGSH, to be
owned 52% by the Company and 48% by the Goldman Funds. In accordance with the
Agreement, on April 30, 1996, the Company contributed certain fixed assets and
Pafco with a combined book value, determined in accordance with generally
accepted accounting principles, of $17,186, to GGSH. Goldman Funds contributed
$21,200 to GGSH, in accordance with the Agreement. In return for the cash
contribution of $21,200, Goldman Funds received a minority interest share in
GGSH at the date of contribution of $18,425, resulting in a $2,775 increase to
additional paid-in capital.
In connection with the above transactions, GGSH acquired (the "Acquisition") all
of the outstanding shares of common stock of Superior and its wholly-owned
subsidiaries, domiciled in Florida, (collectively referred to as "Superior") for
cash of $66,590. In conjunction with the Acquisition, the Company's funding was
through a senior bank facility of $48,000 and a cash contribution from Goldman
Funds of $21,200.
The acquisition of Superior was accounted for as a purchase and recorded as
follows:
<TABLE>
<CAPTION>
<S> <C>
Assets acquired $165,826
Liabilities assumed 100,566
-------
Net assets acquired 65,260
Purchase price 66,590
-------
Goodwill $ 1,330
=======
</TABLE>
The Company's results from operations for the year ended December 31, 1996
include the results of Superior subsequent to April 30, 1996.
On August 12, 1997, the Company purchased the remaining minority interest in
GGSH for $61 million in cash. The excess of the acquisition price over the
minority interest liability of $25,355 aggregated approximately $35,645 and was
assigned to goodwill as the fair market value of assets and liabilities
approximated their carrying value.
In July 1998, IGFH acquired all of the outstanding shares of common stock of
North American Crop Underwriters ("NACU"), a Henning, Minnesota based managing
general agency which focuses exclusively on crop insurance. The acquisition
price for NACU was $4,000 of which $3,000 was paid in cash and the remaining
$1,000 payable July 1, 2001 without interest.
The acquisition of NACU was accounted for as a purchase and recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets acquired $21,035
Liabilities assumed 19,705
------
Net assets acquired 1,330
Purchase price 4,000
------
Excess purchase price (goodwill) $ 2,670
======
</TABLE>
The Company's results from operations for the year ended December 31, 1998
include the results of NACU subsequent to July 8, 1998.
Goodwill is amortized over a 25-year period on a straight-line basis based upon
management's estimate of the expected benefit period.
26
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
On November 5, 1996, SIG sold 3,000,000 shares at $12.50 per share in an initial
public offering ("IPO") of common stock. An additional 450,000 shares were sold
in December 1996 representing the exercise of the overallotment option. SIG
generated net proceeds after underwriter's discount and expenses, of $37,969
from the offering, the proceeds of which were used to repay the IGFH and Pafco
Notes, repay indebtedness to Goran and Granite Re of approximately $7,500 and
pay Goran a dividend of $3,500. The Company used its proceeds to pay off the
balance of its debentures.
Assuming that these transactions took place (including the IPO) at January 1,
1996, the pro-forma effect of these transactions would result in summarized
company consolidated statements of earnings as follows:
<TABLE>
<CAPTION>
1996
(unaudited)
<S> <C>
Revenues $269,362
Earnings from continuing operations $16,318
Earnings per share from continuing operations $3.08
</TABLE>
As a result of the IPO, the Company effectively disposed of a 33% interest in
SIG. The change in the Company's share of SIG's net identifiable assets at the
time of the IPO, represented by the Company's 67% proportionate interest in the
net IPO proceeds over the 33% proportionate share of the book value of SIG
disposed, amounts to a gain of $18,169 and is reported as unusual income in
1996.
In December 1997, the Company discontinued the operations of SIGF whose book of
business was subsequently sold on January 1, 1999. Accordingly, the results of
these operations have been accounted for separately from the results of ongoing
operations. The net loss from discontinued operations was $2,937, $3,545 and
$1,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
4. REINSURANCE
The Company's insurance subsidiaries follow a policy of underwriting and
reinsuring contracts of insurance which limits their liability to a maximum
amount on any one claim for nonstandard automobile of $250 with the result that
claims incurred are stated net of reinsurance. The crop division reinsures
losses through stop loss in excess of 80% loss ratio for crop hail and 100% loss
ratio for MPCI. As the primary insurers, the Company's insurance subsidiaries
maintain the principal liability to the policyholder.
On March 2, 1998, SIG announced that it had signed an agreement with CNA to
assume its multi-peril and crop hail operations. CNA wrote approximately $80
million of multi-peril and crop hail insurance business in 1997. SIG reinsured a
small portion of the Company's total crop book of business (approximately 22%
MPCI and 15% crop hail) to CNA. Starting in the year 2000, assuming no event of
change in control as defined in the agreement, SIG can purchase the premiums
reinsured from CNA through a call provision or CNA can require SIG to buy the
premiums reinsured to CNA. Regardless of the method of takeout of CNA, CNA must
not compete in MPCI or crop hail for a period of time. There was no purchase
price. The formula for the buyout in the year 2000 is based on a multiple of
average pre-tax earnings that CNA received from reinsuring SIG's book of
business.
27
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
The effect of reinsurance on the activities of the Group can be summarized as
follows:
<TABLE>
<CAPTION>
1998 Gross Ceded Net
<S> <C> <C> <C>
Premiums written $546,771 $(184,665) $362,106
Premiums earned 554,722 (212,545) 342,177
Incurred losses and loss adjustment expenses 521,476 (240,584) 280,892
Commission expense (note 15) 94,818 (80,272) 14,546
Outstanding claims 207,432 (69,541) 137,891
Unearned premiums 110,665 (17,486) 93,179
1997 Gross Ceded Net
<S> <C> <C> <C>
Premiums written $448,982 $(167,086) $281,896
Premiums earned 422,200 (145,660) 276,540
Incurred losses and loss adjustment expenses 312,079 (101,080) 210,999
Commission expense (note 15) 65,529 (77,279) (11,750)
Outstanding claims 152,871 (94,424) 58,447
Unearned premiums 118,616 (36,607) 82,009
1996 Gross Ceded Net
<S> <C> <C> <C>
Premiums written $299,376 $ (85,598) $213,778
Premiums earned 303,187 (94,304) 208,883
Incurred losses and loss adjustment expenses 237,882 (91,608) 146,274
Commission expense (note 15) 48,601 (44,096) 4,505
Outstanding claims 127,045 (33,113) 93,932
Unearned premiums 91,207 (14,983) 76,224
</TABLE>
28
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
5. CASH AND INVESTMENTS
<TABLE>
<CAPTION>
1998 1997
Book Market Book Market
Value Value Value Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $15,123 $15,123 $13,324 $13,324
Short-term investments 27,637 27,637 23,233 23,233
Equities 13,691 12,988 35,446 36,631
Bonds and debentures 194,277 197,251 172,401 174,215
Mortgages 2,100 2,100 2,220 2,220
Real Estate 890 890 450 450
Other loan receivable -- -- 50 50
------- ------- ------- -------
Total Cash & Investments $253,718 $255,989 $247,124 $250,123
======= ======= ======= =======
</TABLE>
At December 31, 1998, cash and investments with a market value of approximately
$31,201 (1997 - $42,367) are on deposit or held in trust by cedents, and to a
limited amount regulatory authorities, to secure certain of the outstanding
claims of the Company.
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998
Accumulated 1997
Cost Depreciation Net Net
<S> <C> <C> <C> <C>
Land $ 260 $-- $260 $226
Buildings 7,397 1,049 6,348 4,098
Furniture, fixtures and equipment 6,621 3,439 3,182 1,970
Computer equipment 14,683 5,193 9,490 5,907
Automobiles 108 38 70 29
------ ----- ------ ------
Total $29,069 $9,719 $19,350 $12,230
====== ===== ====== ======
</TABLE>
Depreciation expense related to capital assets for the years ended December 31,
1998, 1997 and 1996 was $3,151, $1,754 and $1,811, respectively.
29
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
7. INTANGIBLES
Intangible assets at December 31 are as follows:
<TABLE>
<CAPTION>
1998
Accumulated 1997
Cost Depreciation Net Net
<S> <C> <C> <C> <C>
Goodwill $42,372 $2,521 $39,851 $36,321
Deferred debt costs 5,131 242 4,889 5,053
Organization costs 2,494 934 1,560 1,188
------ ----- ------ ------
Total $49,997 $3,697 $46,300 $42,562
====== ===== ====== ======
</TABLE>
Amortization expense related to intangible assets for the years ended December
31, 1998, 1997 and 1996 was $2,379, $1,197 and $411, respectively.
8. NOTES PAYABLE
At December 31, 1998, IGF maintained a revolving bank line of credit in the
amount of $12,000. At December 31, 1998 and 1997, the outstanding balance was
$12,000 and $4,182, respectively. Interest on this line of credit was at the New
York prime rate (7.75% at December 31, 1998) minus 1% adjusted daily. Prior to
December 31, 1997 this rate was adjusted to prime plus .25%. This line is
collateralized by the crop-related uncollected premiums, reinsurance recoverable
on paid losses, Federal Crop Insurance Corporation (FCIC) annual settlement, and
a first lien on the real estate owned by IGF. The IGF Revolver contains certain
covenants which (i) restricts IGF's ability to accumulate common stock, (ii)
sets minimum standards for investments and policyholder surplus and (iii) limits
ratio of net written premiums to surplus. At December 31, 1998, IGF was in
compliance with all covenants associated with the line or had received proper
waivers.
The weighted average interest rate on the line of credit was 6.96%, 8.75% and
8.6% during 1998, 1997, and 1996, respectively.
Notes payable at December 31, 1998 also includes a $1,000,000 note due 2001 on
the purchase of NACU at no interest. The balance of notes payable at December
31, 1998 includes three smaller notes (less than $300,000 each) assumed in the
acquisition of NACU due 2002-2006 with periodic payments at interest rates
ranging from 7% to 9.09%.
9. PREFERRED SECURITIES
On August 12, 1997, SIG issued $135 million in Trust Originated Preferred
Securities ("Preferred Securities") at a rate of 9.5% paid semi-annually. These
Preferred Securities were offered through a wholly-owned trust subsidiary of SIG
and are backed by Senior Subordinated Notes to the Trust from SIG. These
Preferred Securities were offered under Rule 144A of the SEC ("Preferred
Securities Offering") and, pursuant to the Registration Rights Agreement
executed at closing, SIG filed a Form S-4 Registration Statement with the SEC on
September 16, 1997 to effect the Exchange Offer. The S-4 Registration Statement
was declared effective on September 30, 1997 and the Exchange Offer successfully
closed on October 31, 1997. The proceeds of the Preferred Securities Offering
were used to repurchase the remaining minority interest in GGSH for $61 million,
repay the balance of the term debt of $44.9 million and SIG expects to
contribute the balance, after expenses, of approximately $24 million to the
nonstandard automobile insurers of which $10.5 million was contributed in 1997.
Expenses of the issue aggregated $5.1 million and are amortized over the term of
the Preferred Securities (30 years). In the third quarter of 1997, SIG wrote off
the remaining unamortized costs of the term debt of approximately $1.1 million
pre-tax or approximately $0.09 per share.
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1998. The Preferred Securities may be redeemed
in whole or in part after 10 years. The Preferred Security obligations of
approximately $13 million per year is funded from SIG's nonstandard automobile
management company and dividend capacity from the crop operations. The
nonstandard auto funds are the result of management and billing fees in excess
of operating costs.
30
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
For calendar 1998 and 1997, the coverage ratio of nonstandard automobile cash
flows to Preferred Security costs was 2.1x and 2.2x, respectively. Coverage from
SIG's crop operations entailed a dividend capacity of $13.4 million in 1998 that
will reduce to approximately $3.1 million in 1999 as a result of SIG's
operations and statutory limitations.
SIG also has approximately $10 million in excess funds for debt service.
The Trust Indenture for the Preferred Securities contains certain preventative
covenants. These covenants are based upon SIG's Consolidated Coverage Ratio of
earnings before interest, taxes, depreciation and amortization (EBITDA) whereby
if SIG's EBITDA falls below 2.5 times Consolidated Interest Expense (including
Preferred Security distributions) for the most recent four quarters the
following restrictions become effective:
o SIG may not incur additional Indebtedness or guarantee additional
Indebtedness.
o SIG may not make certain Restricted Payments including loans or advances
to affiliates, stock repurchases and a limitation on the amount of
dividends is inforce.
o SIG may not increase its level of Non-Investment Grade Securities defined
as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply as SIG's Consolidated Coverage Ratio was
(.15x) in 1998, and will continue to apply until SIG's Consolidated Coverage
Ratio is in compliance with the terms of the Trust Indenture. This does not
represent a Default by SIG on the Preferred Securities. SIG is in compliance
with these preventative covenants as of December 31, 1998.
Assuming the Preferred Securities Offering took place at January 1, 1997, the
proforma effect of this offering on the Company's consolidated statement of
earnings from continuing operations for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Unaudited
(In thousands)
<S> <C>
Revenues $319,019
Net earnings $11,163
Net earnings per common share $1.99
</TABLE>
Proforma results for the Preferred Securities Offerings for 1996 would not be
meaningful due to the Acquisition and IPO in 1996.
The pro forma results are not necessarily indicative of what actually would have
occurred if these transactions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
10. CAPITAL STOCK
The Company's authorized share capital consists of:
(a) First Preferred Shares
An unlimited number of first preferred shares of which none are
outstanding at December 31, 1998 (1997 NIL).
(b) Common Shares
An unlimited number of common shares of which 5,876,398 are
outstanding as at December 31, 1998 (1997 - 5,730,276).
During the year, pursuant to the exercise of warrants and options, the Company
issued 215,922 (1997 - 324,456) common shares for aggregate consideration in the
amount of $1,533 (1997 - $594) of which $1,177 of the consideration was in the
form of a loan. During the year, the Company purchased 69,800 of its common
shares for an aggregate consideration of $748.
31
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
Information regarding the Goran Stock Option Plan is summarized below (in
Canadian dollars):
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 546,856 $17.86 526,899 $8.76 499,129 $2.87
Granted 363,970 36.57 188,355 29.57 213,986 16.50
Exercised (215,254) 10.53 (166,831) 2.26 (186,216) 1.88
Forfeited -- -- (1,567) 25.45 -- --
------- ------- -------
Outstanding at the end of the year 695,572 $29.92 546,856 $17.86 526,899 $8.76
======= ======= =======
Options exercisable at year end 569,126 349,141 449,082
Available for future grant 175,428 40,062 60,019
</TABLE>
The weighted average remaining life of the Goran options as of December 31, 1998
is 8.3 years.
On November 1, 1996, SIG adopted the Symons International Group, Inc. 1996 Stock
Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides
SIG authority to grant nonqualified stock options and incentive stock options to
officers and key employees of SIG and its subsidiaries and nonqualified stock
options to nonemployee directors of SIG and Goran. Options have been granted at
an exercise price equal to the fair market value of SIG's stock at date of
grant. The options granted to SIG's Chairman (633,900 shares) vest and become
exercisable in full on the first anniversary of the grant date. All of the
remaining outstanding stock options vest and become exercisable in three equal
installments on the first, second and third anniversaries of the date of grant.
On October 14, 1998 all SIG options were repriced to $6.3125 per share.
Information regarding the SIG Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 1,000,000 $6.3125 830,000 $12.50 -- $--
Granted 478,000 6.3125 185,267 15.35 830,000 12.50
Exercised (4,332) 6.3125 (1,667) 12.50 -- --
Forfeited (15,835) 6.3125 (13,600) 12.50 -- --
--------- --------- -------
Outstanding at the end of the year 1,457,833 $6.3125 1,000,000 $13.03 830,000 $12.50
========= ========= =======
Options exercisable at year end 760,289 $6.3125 521,578 $12.50
Available for future grant 42,167 -- 170,000
</TABLE>
The weighted average remaining life of the SIG options as of December 31, 1998
is 8.5 years.
32
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. Stock
Option Plan (the "GGS Stock Option Plan"), effective April 30, 1996. The GGS
Stock Option Plan authorizes the granting of nonqualified and incentive stock
options to such officers and other key employees as may be designated by the
Board of Directors of GGSH. Options granted under the GGS Stock Option Plan have
a term of ten years and vest at a rate of 20% per year for the five years after
the date of the grant. The exercise price of any options granted under the GGS
Stock Option Plan shall be subject to the following formula: 50% of each grant
of options having an exercise price determined by the Board of Directors of GGSH
at its discretion, with the remaining 50% of each grant of options subject to a
compound annual increase in the exercise price of 10%, with a limitation on the
exercise price escalation as such options vest.
Information regarding the GGS Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 54,022 $51.75 55,972 $51.75 -- $--
Granted -- -- -- -- 55,972 51.75
Forfeited (150) $51.75 (1,950) 51.75 -- --
------ ------ ------
Outstanding at the end of the year 53,872 $51.75 54,022 $51.75 55,972 $51.75
====== ====== ======
Options exercisable at year end 21,549 10,804 --
Available for future grant 57,239 57,089 55,139
</TABLE>
<TABLE>
<CAPTION>
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years price exercisable price
<S> <C> <C> <C> <C> <C>
$44.17-$53.45 37,710 7.3 $46.13 21,549 $47.60
$58.79-$71.14 16,162 7.3 64.87 -- --
------ ------
53,872 21,549
====== ======
</TABLE>
33
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
11. INCOME TAXES
The provision for (recovery of) income taxes is analyzed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Consolidated net earnings (loss) before income taxes
and discontinued operations $(7,475) $37,904 $43,153
===== ====== ======
Incomes taxes at Canadian statutory rates $(3,326) $16,867 $19,203
Effect on taxes resulting from:
Tax exempt income (958) (1,714) (1,495)
U.S. statutory rate differential 1,518 (3,262) (2,566)
Application of losses carried forward and reserves -- (292) --
Nontaxable gain on IPO -- -- (8,085)
Operating loss for which no current income tax
benefit is recognized 728 116 1,027
Timing differences 332 1,124 (73)
Other, net -- (119) (28)
Current tax provision (1,706) 12,720 7,983
Deferred tax provision (recovery) (332) (1,124) 73
----- ------ ------
$(2,038) $11,596 $ 8,056
===== ====== ======
</TABLE>
At December 31, 1998, the Company's Canadian subsidiary had reserves, unclaimed
for income tax purposes, of $424 (1997 - $677). In addition, the Company and its
consolidated subsidiaries have operating loss carry forwards of approximately
$11,459 (1997 - $8,909) for tax purposes which expire primarily after 1998. The
Company also has net capital losses carried forward of approximately $7,607
(1997 - $8,052) which can be applied to reduce income taxes on any future
taxable capital gains. The potential tax benefit of the reserves and losses
carried forward have not been recorded in these financial statements.
34
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
12. RELATED PARTY TRANSACTIONS
In 1989, the Company wrote off a loan of $5,135 owed by a subsidiary of Symons
International Group Ltd. ("SIGL"). SIGL, the majority shareholder of Goran,
guaranteed this loan and pledged 1.2 million escrowed common shares of Goran
(the "escrowed shares") as security for the loan. During 1994, SIGL entered into
agreements with Goran whereby as consideration for the release of 766,600 of the
escrowed shares, SIGL repaid $1,465 of the loan. During 1997, SIGL entered into
an agreement with Goran whereby as consideration for release of 333,400 of the
escrowed shares, SIGL repaid $1,444 of the loan. The balance due to Goran of
$2,226 continues to be guaranteed by SIGL and is secured by the 100,000
remaining escrowed shares.
Included in due from related parties are $1,377 (1997 - $346) due from certain
shareholders and directors which relate to the purchase of common shares of the
Company. Approximately $1,157 of the amounts due bear interest and are subject
to principal repayment schedules. Other receivables at December 31, 1998 also
includes $1,414 due from certain shareholders unrelated to stock purchases, the
majority of which bear interest and are subject to principal repayment terms.
The Company paid $2,832,000, $1,034,000 and $692,000 in 1998, 1997 and 1996,
respectively, for consulting and other services relative to the conversion to
the Company's new non-standard automobile operating system. The Company has
capitalized these costs as part of its new non-standard automobile operating
system. Approximately 90% of these payments are for services provided by
consultants and vendors unrelated to the Company. Stargate Solutions
("Stargate") manages the work of each unrelated consultants and vendors and, as
compensation for such work, has retained approximately 10% of the payments
referred to above in return for management services provided. During 1998,
Stargate was owned generally by certain directors of the Company and a relative
of those directors. The Company also paid consulting fees to related parties of
$270 and $86 in 1998 and 1997, respectively, for payments to Onex, Inc., an
officer of whom is on the Company's Board of Directors, for employment related
matters.
13. CONTINGENT LIABILITIES AND COMMITMENTS
The Company, and its subsidiaries, are named as defendants in various lawsuits
relating to their business. Legal actions arise from claims made under insurance
policies issued by the subsidiaries. These actions were considered by the
Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial position.
As part of the agreement by the Company to assume the multi-peril and crop
operations of CNA, the Company agreed to reimburse CNA for certain direct
overhead costs incurred by CNA during the first quarter of 1998 before the
Company assumed the book of business. CNA has requested reimbursement of $2.0
million in expenses which the Company believes should only be $1.1 million.
Negotiations are in process to settle this reimbursement. The Company fully
expects the ultimate settlement will approximate $1.1 million and has therefore,
accrued this amount in its consolidated financial statements. In the unforeseen
event the ultimate settlement is greater than $1.1 million, the Company will
accrue the full additional amount at that time.
The California Department of Insurance (CDOI) has advised the Company that they
are reviewing a possible assessment which could total $3 million. The Company
does not believe it will owe anything for this possible assessment. This
possible assessment relates to the charging of brokers fees to policyholders by
independent agents who have placed business for one of the Company's nonstandard
automobile carriers, Superior Insurance Company. The CDOI has indicated that
such broker fees charged by the independent agent to the policyholder were
improper and has requested reimbursement to the policyholders by Superior
Insurance Company. The Company did not receive any of these broker fees. As the
ultimate outcome of this potential assessment is not deemed probable the Company
has not accrued any amount in its consolidated financial statements. Although
the assessment has not been formally made by the CDOI at this time, the Company
believes it will prevail and will vigorously defend any potential assessment.
The Company began writing a new crop insurance product in 1998, AgPI(R), which
provides business interruption coverage to agricultural product processors. At
December 31, 1998 certain coverages exist, the results of which will not be
fully known until the second quarter of 1999. The Company believes it has
sufficient reserves at December 31, 1998; however, ultimate results could vary
materially.
At December 31, 1998, the Company provided an allowance of $3.2 million
associated with discrepancies identified in connection with the processing of
premiums from the assumption of the CNA business and the related premiums
35
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
receivable balance. The Company has been unable to resolve these discrepancies
and has fully provided for this amount as the Company continues its
investigation. Ultimate resolution of this matter may result in a change in the
$3.2 million allowance. Ultimate resolution of this matter may result in a
change in the $3.2 million allowance.
An assertion has been made in Florida alleging that service charges or finance
charges are in violation of Florida law. The plaintiff is attempting to obtain a
class certification in this action. The Company believes that it has
substantially complied with the premium financing statue and intends to
vigorously defend any potential loss. The ultimate outcome is uncertain.
14. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
United States
United States Nonstandard
1998 Crop Auto Other Consolidated
<S> <C> <C> <C> <C>
Gross premiums written $243,026 $303,737 $8 $546,771
======= ======= = =======
Net premiums written $62,467 $269,741 $29,898 $362,106
====== ======= ====== =======
Net premiums earned $60,901 $264,022 17,254 $342,177
Fee income 3,772 16,431 -- 20,203
Net investment income 275 11,958 1,168 13,401
Net realized capital gains (losses) 217 4,124 (237) 4,104
------ ------- ------ -------
Total revenue 65,165 296,535 18,185 379,885
------ ------- ------ -------
Net claims incurred 52,550 217,916 10,426 280,892
Commission and operating expenses 21,906 73,346 8,674 103,926
Interest and amortization of intangibles 502 -- 2,040 2,542
------ ------- ------ -------
Total expenses 74,958 291,262 21,140 387,360
------ ------- ------- -------
Earnings (loss) before income taxes, minority
interest and discontinued operations $(9,793) $5,273 $(2,955) $(7,475)
====== ===== ====== ======
Identifiable assets $143,434 $376,831 $50,724 $570,989
======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
United States
United States Nonstandard
1997 Crop Auto Other Consolidated
<S> <C> <C> <C> <C>
Gross premiums written $126,401 $323,915 $(1,334) $448,982
======= ======= ===== =======
Net premiums written $20,796 $256,745 $4,355 $281,896
====== ======= ===== =======
Net premiums earned $20,794 $251,020 $4,726 $276,540
Fee income 2,276 15,515 30 17,821
Net investment income 191 10,969 1,617 12,777
Net realized capital gains (losses) (18) 9,462 (51) 9,393
------ ------- ----- -------
Total revenue 23,243 286,966 6,322 316,531
------ ------- ----- -------
Net claims incurred 16,550 195,900 (1,451) 210,999
Commission and operating expenses (14,404) 72,463 5,285 63,344
Interest and amortization of intangibles 235 -- 4,049 4,284
------ ------- ----- -------
Total expenses 2,381 268,363 7,883 278,627
------ ------- ----- -------
Earnings (loss) before income taxes, minority
interest and discontinued operations $20,862 $18,603 $(1,561) $37,904
====== ======= ===== ======
Identifiable assets $119,660 $363,864 $77,324 $560,848
======= ======= ====== =======
</TABLE>
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
<TABLE>
<CAPTION>
United States
United States Nonstandard
1996 Crop Auto Other Consolidated
<S> <C> <C> <C> <C>
Gross premiums written $110,059 $187,176 $2,141 $299,376
======= ======= ===== =======
Net premiums written $23,013 $186,569 $4,196 $213,778
====== ======= ===== =======
Net premiums earned $23,013 $168,746 $17,124 $208,883
Fee income 1,672 7,578 36 9,286
Net investment income 181 6,489 1,075 7,745
Net realized capital gains (losses) (1) (1,014) 378 (637)
------ ------- ------ -------
Total revenue 24,865 181,799 18,613 225,277
------ ------- ------ -------
Net claims incurred 12,724 124,385 9,165 146,274
Commission and operating expenses (6,095) 46,796 7,946 48,647
Interest and amortization of intangibles 551 -- 4,821 5,372
------ ------- ------ -------
Total expenses 7,180 171,181 21,932 200,293
------ ------- ------ -------
Earnings (loss) before income taxes, minority
interest and discontinued operations $17,685 $10,618 $(3,319) $24,984
====== ====== ====== ======
Identifiable assets $72,916 $260,332 $48,094 $381,342
====== ======= ====== =======
</TABLE>
Other results are comprised of the operations of Granite, Granite Re and
corporate operations of Goran and SIG. In 1998 results for Granite Re include
the following for assumed nonstandard auto premiums from SIG:
<TABLE>
<CAPTION>
<S> <C>
Net premiums written $27,767
======
Net premiums earned $14,874
Net claims incurred 11,080
Commissions 3,492
------
Pre-tax income to Granite Re $ 302
======
</TABLE>
The negative premiums for other in 1997 result from return premiums on prior
periods for reinsurance transactions which has no significant impact on net
earnings.
See also Note 1.
15. REGULATORY MATTERS
Goran's insurance subsidiaries are subject to certain requirements and
restrictions in accordance with the regulations of their respective
jurisdictions. Statutory regulations require that the subsidiaries maintain a
minimum amount of capital to support outstanding insurance in force and new
premium writing. This requirement and other regulations in the respective
jurisdictions, restricts the amount of dividends payable in any year by the
subsidiaries to the parent. The statutory surplus of the Company's active
insurance subsidiaries at December 31, 1998 amounted to $121,447 (1997 -
$145,859).
Superior, Pafco and IGF, domiciled in Florida and Indiana, prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the Indiana Department of Insurance ("IDOI") or the
Florida Department of Insurance ("FDOI"). Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioner ("NAIC"), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
37
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
IGF received written approval through March 31, 1999 from the IDOI to reflect
its business transacted with the FCIC as a 100% cession with any net
underwriting results recognized in ceding commissions for statutory accounting
purposes, which differs from prescribed statutory accounting practices. As of
December 31, 1998, that permitted practice had no effect on statutory surplus or
net earnings.
The net underwriting results, included in commissions and operating expenses,
for the years ended December 31, 1998, 1997 and 1996 were gains of $19,763,
$26,589 and $12,277, respectively.
As of December 31, 1998, IGF and the Superior entities had risk-based capital
ratios that were in excess of the minimum requirements. Pafco's risk-based
capital ratio was 186% or $1.2 million less than the Company Active Level. Pafco
has filed its plan of corrective action with the IDOI.
16. CHANGES IN WORKING CAPITAL RELATING TO OPERATIONS
The undernoted amounts are net of assets acquired on purchase of NACU:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Decrease (increase) in accounts receivable $(11,427) $(6,395) $(19,448)
Decrease (increase) in reinsurance recoverable
paid and unpaid claims 40,321 (61,311) 8,464
Decrease (increase) in prepaid reinsurance
premiums 19,121 (21,624) (8,785)
Decrease (increase) in deferred policy
acquisition costs (4,483) 2,011 1,649
Decrease (increase) in deferred income taxes (3,727) (1,124) 73
Increase in other assets (11,836) (4,083) (2,433)
Increase (decrease) in accounts payable (48,770) 37,810 5,576
Increase (decrease) in outstanding claims 54,561 25,826 (4,545)
Increase (decrease) in unearned premiums (7,951) 27,409 13,178
------ ------ ------
$25,809 $(1,481) $(6,271)
====== ====== ======
</TABLE>
17. LEASES
The Company has certain commitments under long-term operating leases for a
branch office and sales offices for Superior Insurance Company. Rental expense
under these commitments was $2,939 in 1998 and $1,176 for 1997. Future minimum
lease payments required under these noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $3,087
2000 1,522
2001 1,291
2002 1,099
2003 and thereafter 284
-----
TOTAL $7,283
=====
</TABLE>
38
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
18. RECONCILIATION OF CANADIAN GAAP AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("U.S. GAAP") AND ADDITIONAL INFORMATION
The consolidated financial statements are prepared in accordance with Canadian
GAAP. Material differences between Canadian and U.S. GAAP are described below.
There were no material differences in 1998:
<TABLE>
<CAPTION>
(a) Earnings and retained earnings
1997 1996
<S> <C> <C>
Net earnings in accordance with
Canadian GAAP $12,438 $31,296
Add effect of difference in accounting for:
Deferred income taxes (see note (d)) 177 (64)
Minority interest 107 (177)
Outstanding claims (see note (e)) (504) 62
------ ------
Net earnings in accordance with U.S. GAAP $12,218 $31,117
====== ======
</TABLE>
Applying U.S. GAAP, deferred income tax assets would be
increased by $1,975 and outstanding claims would be increased
by $1,765, as at December 31, 1997. As a result of these
adjustments, retained earnings would be increased by $140,
which is net of related minority interest of $70, as at
December 31, 1997. The effect of the above noted differences
on other individual balance sheet items and on working capital
is not significant.
(b) Earnings per share
Earnings per share, as determined in accordance with U.S. GAAP
are set out below. Basic earnings per share are computed based
on the weighted average number of common shares outstanding
during the year. Fully diluted earnings per share are
calculated using the Treasury Stock method and assume
conversion of securities when the result is dilutive.
The following average number of shares were used for the
compilation of basic and fully diluted earnings per share:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Basic 5,590,576 5,286,270
Fully Diluted 5,886,211 5,724,476
</TABLE>
Earnings per share, as determined in accordance with U.S.
GAAP, are as follows (no differences for 1998):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Basic earnings per share from
continuing operations $2.82 $2.67
Fully diluted earnings per share
from continuing operations $2.68 $2.47
Basic earnings per share $2.19 $5.89
Fully diluted earnings per share $2.08 $5.44
</TABLE>
39
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
(c) Supplemental cash flow information
Cash paid for interest and income taxes is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash paid for interest $260 $3,467 $4,005
Cash paid for income taxes,
net of refunds $5,351 $10,979 $9,825
</TABLE>
(d) Income taxes
The difference in accounting for deferred income taxes
reflects the adoption for U.S. GAAP, effective January 1,
1993, of Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), "Accounting for Income Taxes." This standard
requires an asset and liability approach that takes into
account changes in tax rates when valuing the deferred tax
amounts to be reported in the balance sheet.
(See Note (a) and see Note 2 (l))
(e) Outstanding claims
The difference in accounting for outstanding claims reflects
the application for U.S. GAAP of SEC Staff Accounting Bulletin
No. 62, "Discounting by Property/Casualty Insurance
Companies". This standard does not allow discounting of unpaid
claim liabilities by public companies, except in specific
circumstances that are not applicable to the Company.
(f) Receivables from sale of capital stock
The SEC Staff Accounting Bulletins require that accounts or
notes receivable arising from transactions involving capital
stock should be presented as deductions from shareholders'
equity and not as assets. Accordingly, in order to comply with
U.S. GAAP, shareholders' equity would be reduced by $1,377 and
$346 as at December 31, 1998 and 1997, respectively, to
reflect the loans due from certain shareholders which relate
to the purchase of common shares of the Company.
(g) Unrealized gain (loss) on investments
U.S. GAAP require that unrealized gains and losses on
investment portfolios be included as a component in
determining shareholders' equity. In addition, SFAS No. 115
permits prospective recognition of unrealized gains on
investment portfolios for year-ends commencing after December
15, 1993. As a result, shareholders' equity would be increased
by $1,176 and by $1,336, which is net of deferred tax of $679
and $1,005 and related minority interest of $416 and $658, as
at December 31, 1998 and 1997, respectively. As the Company
classifies its debt and equity securities as available for
sale, the adoption of SFAS No. 115 in 1994 has no effect on
net earnings.
40
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
(h) Changes in shareholders' equity
A reconciliation of shareholders' equity from Canadian GAAP to
U.S. GAAP is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Shareholders' equity in accordance
with Canadian GAAP $49,725 $60,332
Add (deduct) effect of difference in
accounting for:
Deferred income taxes (see note (a)) -- 1,975
Outstanding claims (see note (a)) -- (1,765)
Minority interest portion -- (70)
Receivables from sale of capital stock
(see note (f)) (1,377) (346)
Unrealized gain on investments
(see note (g)) 1,176 1,336
------ ------
Shareholders' equity in accordance
with U.S. GAAP $49,524 $61,462
====== ======
</TABLE>
(i) Comprehensive income
In June 1997, FASB issued Statement No. 130 ("SFAS 130"),
"Reporting Comprehensive Income". SFAS 130 requires companies to
disclose comprehensive income in their financial statements. In
addition to items included in net income, comprehensive income
will include items currently charged or credited directly to
shareholders' equity, such as the change in unrealized gains or
losses of securities and foreign currency translation
adjustments. For the years presented, comprehensive income
adjustments have no material impact on the Company's reported
consolidated financial position, results of operations or cash
flows.
(j) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
interpretation in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for such
plans. Had compensation cost been determined, based on fair value
at the grant dates for options granted under the Company stock
option plan as well under both the SIG Stock Option Plan and the
GGS Stock Option Plan during 1998, 1997 and 1996 consistent with
the method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's pro-forma net earnings and pro-forma
earnings per share for the years ended December 31, 1998, 1997
and 1996 would have been as follows:
<TABLE>
<CAPTION>
1998 1998 1997 1997 1996 1996
As Pro- As Pro- As Pro-
Reported Forma Reported Forma Reported Forma
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) from continuing operations $(8,999) $(11,941) $15,763 $10,047 $13,948 $13,369
Basic EPS from continuing operations $(1.54) $(2.04) $2.82 $1.80 $2.67 $2.53
Fully diluted EPS continuing operations $(1.54) $(2.04) $2.68 $1.71 $2.47 $2.41
Net earnings (loss) $(11,936) $(14,678) $12,218 $6,502 $31,117 $30,538
Basic EPS $(2.04) $(2.54) $2.19 $1.16 $5.89 $5.78
Fully diluted EPS $(2.04) $(2.54) $2.08 $1.11 $5.44 $5.50
</TABLE>
41
<PAGE>
[Header]
(in thousands of U.S. dollars, except share and per share data)
The fair value of each option grant used for purposes of estimating the
pro-forma amounts summarized above is estimated on the grant date using the
Black-Scholes option-pricing model with the weighted average assumptions for
1998, 1997 and 1996 shown on the following table:
<TABLE>
<CAPTION>
Goran SIG Goran SIG Goran SIG
1998 1998 1997 1997 1996 1996
Grants Grants Grants Grants Grants Grants
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rates 5.53% 5.40% 6.03% 6.40% 6.00% 6.27%
Dividend yields -- -- -- -- -- --
Volatility factors 0.41 0.41 0.40 0.39 0.40 0.40
Weighted average expected life 2.5 years 3.2 years 2.0 years 3.3 years 2.5 years 3.1 years
Weighted average fair value per share $7.20 $5.73 $5.28 $5.54 $3.27 $4.27
</TABLE>
The Goran stock options are granted and denominated in Canadian dollars. The
pro-forma stock based compensation for these options are translated at the
average rate for the year. The weighted average fair value per share is
translated at the year end rate.
42
<PAGE>
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this Annual
Report and elsewhere (such as in other filings by the Company or its affiliates
with the Securities and Exchange Commission, press releases, presentations by
the Company or its management or oral statements) relative to markets for the
Company's products and/or trends in the Company's operations or financial
results, as well as other statements including words such as "anticipate,"
"could," "feel(s)," "believe," "believes," "plan," "estimate," "expect,"
"should," "intend" and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results to be materially different from
those contemplated by the forward-looking statements. Such factors include,
among other things: (i) general economic conditions, including prevailing
interest rate levels and stock market performance; (ii) factors affecting the
Company's crop operations such as weather-related events, final harvest results,
commodity price levels, governmental program changes, new product acceptance and
commission levels paid to agents; and (iii) factors affecting the Company's
nonstandard automobile operations such as premium volume, levels of operating
expenses as compared to premium volume, ultimate development of loss reserves
and implementation of the Company's operating system. The Company desires to
take advantage of the "safe harbor" afforded such statements under the Private
Securities Litigation Reform Act of 1995 when they are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking statements. Such
cautionary statements which discuss certain risks associated with the Company's
business are set forth under the heading "Forward-Looking Statements -- Safe
Harbor Provisions" in Item 1 - Business in the Company's Annual Report on Form
10-K for the Year Ended December 31, 1998.
MANAGEMENT RESPONSIBILITY
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which involve the use
of judgement and estimates in applying the accounting principles selected. Other
financial information in this Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains systems of internal controls which are designed to provide
reasonable assurance that accounting records are reliable and to safe-guard the
Company's assets. The independent accounting firm of Schwartz Levitsky Feldman,
LLP Chartered Accountants has audited and reported on the Company's financial
statements. Their opinion is based upon audits conducted by them in accordance
with generally accepted auditing standards to obtain reasonable assurance that
the consolidated financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representatives to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations to
the Board of Directors.
/s/ Alan G. Symons
Alan G. Symons
Chief Executive Officer and President
April 13, 1999
43
<PAGE>
AUDITORS' REPORT
To the Shareholders of Goran Capital Inc.
We have audited the consolidated balance sheets of Goran Capital Inc. as at
December 31, 1998 and 1997 and the consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1997 and the results of its operations and cash flows for each of the three
years in the period ended December 31, 1998 in accordance with generally
accepted accounting principles.
/s/ SCHWARTZ LEVITSKY FELDMAN, LLP
Chartered Accountants
Toronto, Ontario
April 13, 1999
44
<PAGE>
MARKET INFORMATION
The Company's common shares began trading on the Toronto Stock Exchange under
the symbol "GNC" in 1986. The Company's common shares began trading on the
NASDAQ National Market under the symbol "GNCNF" on November 8, 1994.
As of December 31, 1998 there were approximately 100 Common shareholders of
record, including many brokers holding shares for the individual clients. The
number of individual shareholders on the same date is estimated at 1,000.
The number of common shares outstanding on December 31, 1998 totaled 5,876,398.
Information relating to the common shares is available through the NASDAQ
National Market system and the Toronto Stock Exchange. The following table sets
forth the high and low closing sale prices for the common shares for each
quarter of 1998, 1997 and 1996.
<TABLE>
<CAPTION>
TORONTO STOCK EXCHANGE
1998 1997 1996
Quarter Ended High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C>
March 31 31.93 25.84 29.15 18.98 14.02 8.76
June 30 29.61 23.89 26.05 19.31 14.05 10.59
September 30 28.10 20.38 39.35 24.27 19.35 11.32
December 31 21.40 8.04 39.32 27.75 20.26 16.79
</TABLE>
<TABLE>
<CAPTION>
NASDAQ
1998 1997 1996
Quarter Ended High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C>
March 31 31.50 25.25 29.25 18.75 13.125 8.625
June 30 30.50 23.50 26.25 19.75 13.125 10.75
September 30 28.50 19.75 40.00 24.50 19.375 11.125
December 31 21.06 8.00 39.50 27.75 22.00 17.00
</TABLE>
DIVIDEND POLICY
Since 1988, the Company has not paid a dividend on its stock. The Company has no
present intention to pay dividends on its common stock.
45
<PAGE>
Directors
G. Gordon Symons
Hamilton, Bermuda
Chairman of the Board
Goran Capital Inc.
J. Ross Schofield
Toronto, Ontario
President
Schofield Insurance Brokers
*David B. Shapira
Toronto, Ontario
President
Medbers Limited
Douglas H. Symons
Indianapolis, Indiana
Vice President and Chief Operating Officer
*James G. Torrance, Q.C.
Toronto, Ontario
Partner Emeritus
Smith, Lyons, Barristers & Solicitors
John K. McKeating
Montreal, Quebec
Partner
Vision 2120, Inc.
*Alan G. Symons
Indianapolis, Indiana
President and Chief Executive Officer
Goran Capital Inc.
*Members of Audit Committee
Officers
G. Gordon Symons
Chairman of the Board
Alan G. Symons
President and Chief Executive Officer
Douglas H. Symons
Vice-President and Chief Operating Officer
Gary P. Hutchcraft, C.P.A.
Vice President and Chief Financial Officer
David L. Bates, J.D., C.P.A.
Vice President, General Counsel and Secretary
46
<PAGE>
Actuaries
Tillinghast
Philadelphia, Pennsylvania
J.S. Cheng & Partners Inc.
Toronto, Ontario
Trustee and Registrar
CIBC Mellon Trust Company
Toronto, Ontario
Auditors
Schwartz Levitsky Feldman LLP
Chartered Accountants
Toronto, Ontario
PricewaterhouseCoopers LLP
Indianapolis, Indiana
Managers -
Granite Reinsurance Company Ltd.
Atlantic Security Ltd.
Hamilton, Bermuda
47
<PAGE>
SUBSIDIARIES AND BRANCH OFFICES
HEAD OFFICE CANADA
Goran Capital Inc.
181 University Avenue
Box 11, Suite 1101
Toronto, Ontario Canada M5H 3M7
Tel: 416-594-1155
Fax: 416-594-0711
HEAD OFFICE U.S.
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6400
Fax: 317-259-6395
SHAREHOLDER INFORMATION
Stock Exchange Listings
The common shares are listed on
The Toronto Stock Exchange (GNC)
and on NASDAQ (GNCNF)
Annual Meeting
The Annual Meeting of Shareholders
will be held on June 15, 1999
at 10:00 a.m.
181 University Avenue, Suite 1101,
Toronto, Ontario Canada
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
President and Chief Executive Officer
Goran Capital Inc.
Tel: 416-594-1155 (Canada)
317-259-6302 (U.S.)
Email: [email protected]
SUBSIDIARIES AND BRANCHES
Granite Insurance Company
181 University Avenue
Box 11, Suite 1101
Toronto, Ontario Canada M5H 3M7
Tel: 416-594-1155
Fax: 416-594-0711
48
<PAGE>
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Website: SIGINS.com
Pafco General Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Symons International Group, Inc. (Florida)
5900 North Andrews Drive, Suite 800
Fort Lauderdale, Florida 33309
Tel: 954-772-5061
Fax: 954-772-9873
Superior Insurance Company
280 Interstate North Circle N.W.
Atlanta, Georgia 30339
Tel: 770-952-4885
Fax: 770-988-8583
Superior Insurance Company
3030 N. Rocky Point Drive, Suite 770
Tampa, Florida 33607
Tel: 813-281-2444
Fax: 813-281-8036
Superior Insurance Company
1745 W. Orangewood Road
Orange, California 92868
Tel: 714-978-6811
Fax: 714-978-0353
IGF Insurance Company
Corporate Office
6000 Grand Avenue
Des Moines, Iowa 50312
Tel: 515-633-1000
Fax: 515-633-1010
IGF Mid West
6000 Grand Avenue
Des Moines, Iowa 50312
Tel: 515-633-1000
Fax: 515-633-1012
IGF Mid East
3900 Wood Duck Drive, Suite B
Springfield, Illinois 62707
Tel: 217-726-2450
Fax: 217-726-2451
49
<PAGE>
IGF Southwest
7914 Abbeville Avenue
Lubbock, Texas 79424
Tel: 806-783-3010
Fax: 806-783-3017
IGF South
101 Business Park Drive, Suite C
Jackson, Mississippi 39213
Tel: 601-957-9780
Fax: 601-957-9793
IGF West
1750 Bullard Avenue, Suite 106
Fresno, California 93710
Tel: 209-432-0196
Fax: 209-432-0294
IGF North
116 South Main, Box 1090
Stanley, North Dakota 58784
Tel: 701-628-3536
Fax: 701-628-3537
IGF - NACU
Highway 210 West, Box 375
Henning, Minnesota 56551
Tel: 218-583-4800
Fax: 218-583-4852
Granite Reinsurance Company Ltd.
Bishop's Court Hill
St. Michael, Barbados, W.I.
(Managers: Atlantic Security Ltd.)
Tel: 441-295-5425
Fax: 441-295-5444
50
<PAGE>
BACK PAGE
Goran logo
GORAN CAPITAL INC.
181 University Avenue 4720 Kingsway Drive
Box 11, Suite 1101 Indianapolis, Indiana
Toronto, Ontario 46205
Canada M5H 3M7
Tel: 416-594-1155 Tel: 317-259-6400
Fax: 416-594-0711 Fax: 317-259-6395
51
<PAGE>
Exhibit 99
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14 (a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Goran Capital Inc.
_______________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
_______________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
.................................................................
2) Aggregate number of securities to which transaction applies:
.................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and
state how it was determined):
.................................................................
4) Proposed maximum aggregate value of transaction:
.................................................................
5) Total fee paid:
.................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
.................................................................
2) Form, Schedule or Registration Statement No.:
.................................................................
3) Filing Party:
.................................................................
4) Date Filed:
.................................................................
<PAGE>
GORAN CAPITAL INC.
FORM OF PROXY
PROXY SOLICITED BY MANAGEMENT OF THE CORPORATION FOR THE
ANNUAL OF SHAREHOLDERS TO BE HELD ON TUESDAY, JUNE 15, 1999
1. The undersigned shareholder of Goran Capital Inc. (the "Corporation") hereby
appoints G. Gordon Symons, Chairman of the Board, whom failing Alan G.
Symons, CEO, or instead of either of them..................as Proxy for the
undersigned, to attend, vote and act for and on behalf of the undersigned at
the Annual and Special Meeting of the Shareholders of the Corporation (the
"Meeting") to be held at the City of Toronto on Tuesday, June 15, 1999, and
at any adjournment thereof, in the same manner, to the same extent and with
the same power as if the undersigned were present at the Meeting or any
adjournment thereof, and the undersigned hereby revokes any former
instrument appointing a Proxy for the undersigned at the Meeting or at any
adjournment thereof.
The Shares represented by this Proxy are to be:
1. VOTED FOR__ OR WITHHELD FROM VOTING___ in the election of Directors.
2. VOTED FOR__ OR WITHHELD FROM VOTING___ in the appointment of the
auditor.
3. VOTED FOR__ OR VOTED AGAINST___ a resolution apprvoing the re-
pricing certain options to
purchase shares of the
Corporation to a maximum price
of $14.70 (Cdn.) per share.
DATED this ______ day of _____________________, 1999.
.....................................
Signature of Shareholder
Notes:
1. THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY ACCOMPANYING THIS
CIRCULAR ARE DIRECTORS AND OFFICERS OF THE CORPORATION. A SHAREHOLDER
OF THE CORPORATION HAS THE RIGHT TO APPOINT A PERSON OTHER THAN THE
PERSONS SPECIFIED IN SUCH FORM OF PROXY AND WHO NEED NOT BE A
SHAREHOLDER OF THE CORPORATION TO ATTEND AND ACT FOR HIM AND ON HIS
BEHALF AT THE MEETING. SUCH RIGHT MAY BE EXERCISED BY STRIKING OUT THE
NAMES OF THE PERSONS SPECIFIED IN THE FORM OF PROXY, INSERTING THE NAME
OF THE PERSON TO BE APPOINTED IN THE BLANK SPACE PROVIDED IN THE FORM
OF PROXY, SIGNING THE FORM OF PROXY AND RETURNING IT IN THE REPLY
ENVELOPE IN THE MANNER SET OUT IN THE ACCOMPANYING NOTICE OF MEETING.
2. If this Form of Proxy is to be utilized, it should be dated and must be
signed by the shareholder or his attorney authorized in writing. If
this Form of Proxy is not dated in the space provided, it will be
deemed to bear the date on which it was mailed to shareholders.
3. If it is desired that the shares represented by this Proxy are to be
withheld from voting in the election of Directors or the appointment of
the auditor or against the resolution approving the re-pricing of
certain options, the appropriate box or boxes above must be marked.
If no specification has been made with respect to voting or
withholding from voting in the election of directors or appointment of
Auditor, the Proxy nominees are instructed to vote the shares
represented by this Proxy for such matters.
4. If any amendments or variations to the matters referred to above or to
any other matters identified in the Notice of Meeting are proposed at
the Meeting or any adjournment or adjournments thereof, or if any
other matters which are not known to management should properly come
before the Meeting or any adjournment or adjournments thereof, this
Proxy confers discretionary authority on the person voting the Proxy to
vote on such amendments or variations or such other matters in
accordance with the best judgment of such person.
5. This Proxy should be voted, dated and signed and returned in the
enclosed envelope to CIBC Mellon Trust Company, 320 Bay Street, P.O.
Box 1, Toronto, Ontario M5H 4A6 or presented in person at the meeting
to be held June 15, 1999, at 181 University Avenue, Suite 1101,
Toronto, Ontario, at 10:00 a.m.
<PAGE>
GORAN CAPITAL INC.
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual and Special Meeting (the
"Meeting") of the Shareholders of Goran Capital Inc. (the "Corporation") will be
held at 181 University Avenue, Suite 1101, Toronto, Ontario, on Tuesday, June
15, 1999, at 10:00 a.m., Toronto time, for the following purposes:
1. To receive the annual report and financial statements of the
Corporation for the year ended December 31, 1998, and the report
of the auditor thereon;
2. To elect directors;
3. To appoint an auditor and to authorize the directors to fix the
auditor's remuneration;
4. To consider, and if thought fit, approve a repricing of certain
of the Stock Options issued by the Corporation.
5. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The accompanying management information circular provides additional
information relating to the matters to be dealt with at the Meeting and forms
part of this Notice.
Shareholders who are unable to attend the Meeting are requested to
date, sign and return the accompanying form of proxy in the envelope provided
for that purpose.
DATED at Toronto, this 13th day of April, 1999.
BY ORDER OF THE BOARD
ALAN G. SYMONS
CEO and President
<PAGE>
April _____, 1999
Dear Shareholder:
Re: Supplemental Mailing List
If you wish to have your name added to the supplemental mailing list of Goran
Capital Inc. so you may receive the Corporation's quarterly reports which
contain interim unaudited financial statements, please fill in your name and
address in the space provided below and return to our transfer agent, CIBC
Mellon Trust Company, 320 Bay Street, P.O. Box 1, Toronto, Ontario M5H 4A6.
NAME:__________________________________________________
Please print
ADDRESS:_______________________________________________
CITY:__________________________________________________
PROVINCE/STATE:___________POSTAL CODE/ZIP CODE:________
I hereby confirm that I am the owner of shares issued by the above-mentioned
Corporation.
SIGNATURE:________________________________________
DATE:_____________________________________________
<PAGE>
GORAN CAPITAL INC.
MANAGEMENT PROXY CIRCULAR
Solicitation of Proxies
This Management Proxy Circular is furnished in connection with the
solicitation of proxies by the management of Goran Capital Inc. (the
"Corporation") for use at the Annual and Special Meeting (the "Meeting") of
Shareholders of the Corporation to be held Tuesday, June 15, 1999, at 10:00
a.m., (Toronto time) or at any and all adjournments thereof, for the purposes
set forth in the accompanying Notice of Meeting. It is expected that the
solicitation will be primarily by mail, but proxies may also be solicited
personally, by telephone or by telecopier, by directors, officers or regular
employees of the Corporation. The costs of such solicitation will be borne by
the Corporation.
The Corporation will provide to any person or company, upon written request to
the Secretary of the Corporation, a copy of:
(a) its latest annual information form together with one copy of
any document, or the pertinent pages of any document,
incorporated therein by reference, filed with the applicable
securities regulatory authorities under the Prompt Offering
Qualification System;
(b) its comparative financial statements for the year ended
December 31, 1998, together with the accompanying report of
the auditor and one copy of any interim financial statements
of the Corporation subsequent to December 31, 1998; and
(c) this Circular.
Revocation of Proxies
A shareholder who has given a proxy may revoke it at any time to the
extent it has not been exercised. In addition to revocation in any other manner
permitted by law, a proxy may be revoked by instrument in writing executed by
the shareholder or his attorney authorized in writing, and deposited either at
the registered office of the Corporation at any time up to 5:00 p.m. (Toronto
time) on the last business day preceding the day of the Meeting, or any
adjournment thereof, at which the Proxy is to be used, or with the Chairman of
the Meeting prior to the beginning of the Meeting on the day of the Meeting, or
any adjournment thereof or in any other manner provided by law.
Voting of Shares Represented by Management Proxies
The persons specified in the enclosed form of proxy are directors and
officers of the Corporation and will represent management at the Meeting. Each
shareholder of the Corporation has the right to appoint a person (who need not
be a shareholder), other than the persons specified in the enclosed form of
proxy, to attend for him and on his behalf at the Meeting or any adjournment
thereof. Such right may be exercised by striking out the names of the specified
persons and inserting the name of the shareholder's nominee in the space
provided or by completing another appropriate form of proxy and, in either case,
signing, dating and delivering the form of proxy to the Corporation prior to the
holding of the Meeting.
<PAGE>
The persons named in the enclosed form of proxy will vote the shares in
respect of which they are appointed by proxy on any ballot that may be called
for in accordance with the instructions thereon. In the absence of such
specifications, such shares will be voted in favour of each of the matters
referred to herein.
The enclosed form of proxy confers discretionary authority upon the
persons named therein with respect to amendments to or variations of matters
identified in the Notice of Meeting and with respect to other matters, if any,
that may properly come before the Meeting. As of the date of this Circular,
management of the Corporation knows of no such amendments, variations or other
matters to come before the Meeting other than routine matters incidental to the
conduct of the Meeting. However, if any other matters that are not known to
management should properly come before the Meeting, the proxy will be voted on
such matters in accordance with the best judgment of the named proxy.
Voting Securities
The only voting securities of the Corporation currently outstanding and
entitled to be voted at the Meeting are 5,876,398 common shares as of April 12,
1999 each of which carries one vote.
The Corporation has fixed April 30, 1999 as the Record Date for the
Meeting. The Corporation will prepare a list of the holders of common shares at
the close of business on that day. Each person named in such list is entitled to
be present and vote the shares shown opposite his name on such list at the
Meeting except to the extent that he has transferred ownership of any of his
shares after that date and the transferee of those shares produces properly
endorsed share certificates or otherwise establishes that he owns the shares and
demands, not later than ten days before the Meeting, that his name be included
in the list before the Meeting, in which case the transferee is entitled to vote
his shares at the Meeting or any adjournment thereof.
Principal Holders of Voting Securities
To the knowledge of the directors and officers of the Corporation, the
following are the only persons who beneficially own or exercise control or
direction over more than 10% of the outstanding common shares of the
Corporation:
2
<PAGE>
<TABLE>
<CAPTION>
Number of Common Shares Percentage of
Beneficially Owned, Outstanding
Name Controlled or Directed 1 Common Shares
<S> <C> <C>
Symons International Group
Ltd. 2 1,646,413 28.0%
G. Gordon Symons 479,111 8.2%
Alan G. Symons 557,965 9.4%
Douglas H. Symons 251,455 4.3%
</TABLE>
1 The information as to beneficial ownership of shares not being within the
knowledge of the Corporation, has been furnished by the persons and
companies listed above. Information presented is as of March 18, 1999
and does not reflect shares under option.
2 Mr. G. Gordon Symons is the controlling shareholder of Symons
International Group LTD., a private company, and Mr. G. Gordon Symons is
the father of Alan and Douglas Symons.
Particulars of Matters to be Acted Upon
At the Meeting, shareholders will be asked to elect directors, to
appoint an auditor and to consider and, if thought fit, approve a Shareholders
Resolution approving the re-pricing of certain options to purchase shares of the
Corporation to a maximum price of $14.70 (Cdn.) per share and to deal with other
matters which may properly come before the Meeting.
Election of Directors
The Articles of the Corporation currently provide for a board
consisting of a minimum of three and a maximum of ten directors. The board
currently consists of seven Directors until otherwise determined by further
resolution of the board of directors of the Corporation.
Unless otherwise specified therein, proxies received in favour of
management nominees will be voted for the following proposed nominees (or for
substitute nominees in the event of contingencies not known at present) whose
term of office will continue until the next Annual Meeting of Shareholders or
until they are removed or their successors are elected or appointed in
accordance with the Canada Business Corporations Act and the by-laws of the
Corporation.
3
<PAGE>
<TABLE>
<CAPTION>
Year First Number of Commons
Name and Principal Position in the Became Shares of the Corporation
Occupation Corporation Director Beneficially Owned1
<S> <C> <C> <C>
G. Gordon Symons Chairman of the Board 1986 2,125,524 4
Chairman of the Board
Goran Capital Inc.
Alan G. Symons2 CEO and President 1992 557,965
CEO and President
Goran Capital Inc.
Douglas H. Symons3 COO and Vice 1989 251,455
President, Symons President
International Group,
Inc., Chief Operating
Officer, Goran Capital Inc.
J. Ross Schofield,3 President Director 1992 3,800
Schofield Insurance Brokers
David B. Shapira,2 President Director 1989 100,000
Medbers Limited
James G. Torrance, Q.C.2 Director 1995 2,000
Partner Emeritus
Smith Lyons, Barristers & Solicitors
John K. McKeating2 Director 1995 2,000
Former Owner
Vision 2120, Inc.
</TABLE>
1 Information as to the shareholdings of each nominee has been provided by the
nominee.
2 Member of the Audit Committee.
3 Member of the Compensation Committee.
4 Includes 1,646,413 shares owned by Symons International Group Ltd., a
private company of which Mr. G. Gordon Symons is the controlling shareholder.
Each of the foregoing nominees has held the principal occupation
indicated above during the past five years except: (i) David B. Shapira who
prior to 1995 was the President of Morse Jewelers Inc.
Proposed Re-Pricing of Certain Options to
Purchase Common Shares of the Corporation
On November 10, 1998, the directors of the Corporation passed, by
unanimous written consent, resolutions (the "Re-Pricing Resolutions") that
re-priced certain options to purchase common shares of the Corporation that had
been previously granted to participants in the Corporation's Share Option Plan
(the "Plan"). The Re-Pricing Resolutions specified that the new exercise price
for such options (the "New Price") was to be the closing price of the
Corporation's common shares on the Toronto Stock Exchange (the "TSE") the
4
<PAGE>
business day prior to the passage of the Re-Pricing Resolutions. The New Price
is $14.70 (Cdn.) per share. The Re-Pricing Resolutions went on to state that the
New Price shall not be effective, and no options may be exercised pursuant to
the Plan at the New Price, unless and until the disinterested shareholders of
the Corporation shall have approved the New Price.
The price of the Corporation's publicly traded shares fell dramatically
during October, 1998. As a consequence, the Exercise Price of all options to
purchase common shares of the Corporation granted pursuant to the Plan after
January 1, 1996 was above the market price of the Corporation's shares.
Options to purchase common shares of the Corporation are granted by the
directors from time to time to incentivize management and other Plan
participants to maximize shareholder value. The board has determined that the
re-pricing is very important to the Corporation's ability to retain and
incentivize key management personnel. Should the Re-Pricing Resolutions fail to
receive the necessary shareholder approval, the Corporation is at risk in that
certain key management personnel may leave the Corporation, thereby hampering
the ability of the Corporation to achieve its business objectives.
The following chart sets forth the Stock Options subject to the
Re-Pricing Resolutions and the New Price, as well as the original exercise price
and other data.
New Price 1 $14.70
Closing Price on March 3, 1999 $11.30
Total Options Outstanding 695,572
Options subject to Re-Pricing, with Original Exercise Price:
100,301 @ $16.50
180,494 @ $29.00
7,861 @ $39.00
74,970 @ $40.00
33,000 @ $41.00
256,000 @ $35.00
-------
652,626
- ----------------
1 The closing TSE price of the Company's shares on November 9, 1998.
All monetary amounts are denominated in Cdn. dollars.
5
<PAGE>
As can be seen from the above Table, almost 94% of the Corporation's
outstanding share purchase options, have an original exercise price in excess
(in some cases materially so) of the current market price of the Corporation's
shares. This situation, in the opinion of the Corporation's directors, is
undesirable in that properly incentivizing management is made extremely
difficult in these current circumstances.
A vote FOR proposal 3 would re-price the 652,626 Options in the above
schedule to a uniform price of $14.70 (Cdn.) via adoption of the following
shareholders' resolution:
RESOLVED; we the disinterested shareholders of Goran Capital Inc.
("Goran" or "Company"), being neither officers, directors, controlling
shareholders, participants in the Company's share option plan ("Plan")
or an associate of any of them, (collectively, the "Disinterested
Shareholders") hereby resolve that it is in the best interests of
the Company and its Shareholders to incentivize Company management
to maximize Shareholder value; and
FURTHER RESOLVED; that we, the Disinterested Shareholders hereby
resolve that re-pricing the options to purchase shares of the Company's
stock outlined in Appendix I to a uniform exercise price of $14.70
(Cdn.) per share, achieves our desired result of incentivizing
management; and
FURTHER RESOLVED; that the Disinterested Shareholders hereby approve
the re-pricing of the 652,626 options to purchase shares of the
Company's common shares as set forth on Appendix I to a uniform price
of $14.70 per share; and
FURTHER RESOLVED; that the officers of the Company, or the any of them,
are hereby authorized, directed and empowered to do all things as our
necessary to accomplish the foregoing Resolutions.
Directors' and Officers' Remuneration
The aggregate remuneration paid by the Corporation and its subsidiaries
to its five highest paid employees or officers, including the three directors
who are also officers of the Corporation, during the financial year ended
December 31, 1998 was $1,974,345 all in the form of salary, bonus and consulting
fees.
In 1998, the Corporation's directors received (i) a flat annual fee of
$10,000 for each director; and (ii) a $1,000 fee for each board or committee
meeting attended. In addition, Committee Chairmen received an additional $1,000
per quarter.
6
<PAGE>
Interest of Insiders in Material Transactions
Reference is made to the 1998 Annual Report, sent to each shareholder
with this management proxy circular, and to Note 12, Related Party Transactions,
to the Corporation's financial statements as at and for the year ended December
31, 1998.
Indebtedness of Officers and Directors of the Corporation
The following directors and officers of the Corporation were indebted
to the Corporation, or its subsidiaries, in amounts exceeding $10,000 during
1998. All amounts listed in this section are denominated in U.S. Dollars.
<TABLE>
<CAPTION>
Name and
Municipality of Largest Loan
Residence Date of Loan Balance During 1998 Present Balance
<S> <C> <C> <C>
G. Gordon Symons June 30, 1986 $115,807 $115,807
February 28, 1986 $156,495 $156,495
Alan G. Symons June 30, 1986 $19,772 $6,617
February 24, 1988 $27,309 $27,309
March 19, 1998 $887,444 $0
October 15, 1998 $562,413 $0
Throughout 1998 $102,051 $0
Douglas H. Symons June 30, 1986 $15,000 $9,798
February 24, 1988 $2,219 $2,219
November 1, 1990 $68,050 $0
April 20, 1998 $260,358 $0
October 15, 1998 $594,517 $0
Throughout 1998 $22,533 $0
October, 1998 $600,000 $0
</TABLE>
The foregoing loans to G. Gordon Symons are on account of loans to
purchase common shares of the Corporation. Such loans are collateralized by
pledges of the common shares of the Corporation acquired and are payable on
demand and are interest free.
Loans made to Alan G. Symons in 1986 and 1988 were made to facilitate
the purchase of common shares of the Corporation. These loans are payable upon
demand and are interest free. The loan to Alan G. Symons dated March 19, 1998,
bears interest at the rate of 5.85% and was secured by a pledge of his options
to purchase shares in GGS Management, Inc. This loan was repaid in April, 1999.
The loan to Alan G. Symons dated October 15, 1998, bears interest at the rate of
7.25% and the proceeds were used to facilitate the exercise of options to
purchase common shares of the Corporation. This loan was repaid in April, 1999.
Symons International Group, Inc. ("SIG"), a subsidiary of the Corporation, made
7
<PAGE>
various advances to Alan G. Symons throughout 1998, primarily to facilitate the
payment of interest on a loan from an unrelated third party relating to the
purchase of SIG stock at the time of its Initial Public Offering ("IPO") in
1996. This loan was repaid in April, 1999.
The loans to Douglas H. Symons in 1986 and 1988 were to facilitate the
purchase of common shares of the Corporation. Such loans are collateralized by
pledges of the common shares of the Corporation and are payable upon demand and
are interest free. The loan to Douglas H. Symons in November, 1990, bears
interest at the rate of prime plus 1%, the proceeds being used to facilitate the
purchase of a primary residence. This loan was repaid in April, 1999. The loan
to Douglas Symons dated April 20, 1998 bears interest at the rate of 5.85%, with
the proceeds of this loan being used to help facilitate the exercise of options
to purchase stock in the Corporation. This loan was repaid in April, 1999. This
loan was secured by a pledge of options to purchase shares in GGS Management,
Inc. The loan to Douglas H. Symons dated October 15, 1998, bears interest at the
rate of 7.25%. The proceeds of this loan were used to help facilitate the
exercise of options to purchase stock of the Corporation. This loan was repaid
in April, 1999. The advances made to Douglas H. Symons throughout 1998 were used
to pay interest on a loan from an unrelated third party which was undertaken to
enable him to acquire stock of SIG at the time of its IPO. This loan was repaid
in April, 1999. In October, 1998, an affiliate of the Corporation advanced
$600,000 to Douglas H. Symons on an interest-free basis. The outstanding balance
of this advance was $300,000 at December 31, 1998 and was entirely repaid in
January, 1999.
On October 24, 1997, SIG guaranteed a loan from an unrelated third
party to Dennis G. Daggett, the President of the Corporation subsidiary, IGF
Insurance Company. The $290,000 loan is due February 10, 2001 and carries a
7.75% interest rate.
In April, 1999, the Corporation guaranteed loans from an unrelated
third party to Alan G. Symons and Douglas H. Symons in the approximate amounts
of $1,552,000 and $945,000, respectively. The Corporation's guarantee to the
unrelated third party is secured by a pledge of certain shares of stock of SIG
owned by the Corporation. In turn, Alan G. Symons and Douglas H. Symons have
executed guarantees in favor of the Corporation which are triggered in the event
the Corporation shall perform on its guarantee to such unrelated third party.
The guarantees by Alan and Douglas Symons are secured by all shares of SIG and
the Corporation and options to purchase shares of SIG and the Corporation held
respectively by Alan and Douglas Symons.
Executive Compensation
The aggregate cash compensation paid by the Corporation and its
subsidiaries to the Corporation's five most highly paid executive officers, (the
"Executive Officers"), (including officers of its subsidiaries) including
salaries, fees, commissions and bonuses, during 1998 was $1,691,374 (U.S.). The
aggregate value of compensation, other than that referred to above, paid to
executive officers during 1998 does not exceed $10,000 times the number of
Executive Officers.
8
<PAGE>
Table 1 sets forth certain compensation information, paid by the
Corporation and its subsidiaries, to the Corporation's Chief Executive Officer
and each of the Corporation's other Executive Officers during the Corporation's
three most recently completed fiscal years.
TABLE 1: SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Annual Compensation Awards
Securities
Under
Salary Bonus Other Annual Options All Other
Name and US $ US $ Compensation Granted Compensation
Principal Position Year Note A Note A US$ Note B (#) Note C US$
<S> <C> <C> <C> <C> <C> <C>
G. Gordon 1998 $0 $0 Nil 34,000 $600,000 H
Symons, Chairman 1997 $0 $0 Nil 166,651 $440,000 H
1996 $171,000 $393,945 Nil 51,524 $170,799 E
Alan G. Symons 1998 $400,000 F $0 I Nil 217,920 Note B
CEO, President 1997 $378,230 $300,000 G Nil 9,650 Note B
and Secretary 1996 $242,786 $143,333 Nil 51,399 Note B
Douglas H. Symons 1998 $300,000 K $0 J Nil 20,000 Note B
Vice President and 1997 $200,000 $200,000 G Nil 9,650 Note B
COO 1996 $195,973 $50,000 Nil 54,333 Note B
Dennis G. Daggett 1998 $186,923 K $0 Nil 12,000 Note B
President, IGF 1997 $180,000 K $270,000 K Nil 1,000 Note B
Insurance Company 1996 $174,077 $150,000 Nil 0 N/R
Roger C. Sullivan 1998 $204,451 K $0 Nil 17,000 Note B
Executive Vice 1997 $169,612 K $90,176 K Nil 0 Note B
President, Superior 1996 $118,851 $27,217 Nil 0 N/R
Insurance Company
</TABLE>
N/R Not required.
Note A Salary and bonus are stated in U.S. dollars as the majority of payments
are actually made in U.S. dollars.
Note B Aggregate amounts not greater than the lesser of $50,000 and 10% of the
total of the annual salary and bonus.
Note C No stock appreciation rights (SAR's), restricted shares, or restricted
share units were granted during any of the past three completed
fiscal years. Amounts reflect stock options granted during 1998.
Note D Imputed interest on interest-free stock purchase loan.
Note E Consulting fees paid to companies owned by Mr. G. Gordon Symons
including $52,411 paid to such companies by the Company's 67% owned
subsidiary, Symons International Group, Inc.
Note F Includes $300,000 paid by Symons International Group, Inc.
Note G Includes $200,000 paid by Symons International Group, Inc.
Note H Amount paid by a subsidiary of the Company, Granite ReInsurance Company,
Ltd., a Barbados company to companies owned by Mr. G. Gordon Symons.
Note I Alan Symons received $200,000 from Symons International Group, Inc. in
1998 for bonus earned in 1997. No bonuses have been paid in respect of
1998.
Note J Douglas H. Symons received $82,971 from Symons International Group, Inc.
in 1998 for bonus earned in 1997. No bonuses have been paid in respect
of 1998.
Note K Amount paid by Symons International Group, Inc.
9
<PAGE>
Employee Share Option Plan
The Corporation has a Share Option Plan (the "Option Plan"). The terms,
conditions and limitations of options granted under the Option Plan are
determined by the board of directors of the Corporation with respect to each
option, within certain limitations. The exercise price per share is payable in
full on the date of exercise. Options granted under the Option Plan are not
assignable.
During 1998, options to purchase a total of 305,920 common shares were
granted to executive officers pursuant to the Option Plan.
TABLE 2: OPTION GRANTS DURING 1998
<TABLE>
<CAPTION>
Market Value
of Common
% of Total Shares
Securities Options Underlying
Under Granted to Exercise Options on the
Option Employees Price Date of Grant Expiration
Name Granted (#) 1998 ($/Share) 1 ($/Share) Date
<S> <C> <C> <C> <C> <C>
G. Gordon 33,000 9.1% $41.00 $41.00 Apr 1, 2008
Symons 1,000 .3% $35.00 $35.00 June 16, 2008
Alan G. 63,920 17.6% $40.00 $40.00 Jan 12, 2008
Symons 154,000 42.3% $35.00 $35.00 June 16, 2008
Douglas H. 20,000 5.5% $35.00 $35.00 June 16, 2008
Symons
Dennis G. 2,000 .5% $40.00 $40.00 Jan 12, 2008
Daggett 15,000 4.1% $35.00 $35.00 June 16, 2008
Roger C. 2,000 .5% $40.00 $40.00 Jan 12, 2008
Sullivan 15,000 4.1% $35.00 $35.00 June 16, 2008
</TABLE>
1 In November, 1998, the Goran directors passed resolutions which re-priced all
outstanding options with an exercise price in excess of $14.70 (Cdn.). This
re-pricing is subject to disinterested shareholder approval as described
herein.
10
<PAGE>
TABLE 3: AGGREGATED OPTION EXERCISES DURING 1998 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Common Unexercised Unexercised In-
Shares Options The-Money
Acquired Aggregate at FY-End (#) Options ($)
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable 1
<S> <C> <C> <C> <C> <C> <C>
G. Gordon Symons 31,000 $1,251,780 252,121/34,000 $509,780/30,600
Alan G. Symons 85,344 $830,390 9,650/217,920 $8,685/196,135
Douglas H. Symons 94,855 $1,113,359 9,650/20,000 $8,685/18,000
</TABLE>
1 Based on the TSE Closing Price as of December 31, 1998 of $15.60 (Cdn.) and
assumes approval of Option re-pricing to $14.70.
Composition of the Compensation Committee
During 1998, the Compensation Committee of the board of directors consisted
of John K. McKeating (Committee Chair), J. Ross Schofield and Douglas H. Symons.
Mr. Douglas H. Symons was the Corporation's Vice President and Chief Operating
Officer throughout 1998. The role of the Compensation Committee is to review the
total compensation of the Corporation's executive officers in an effort to
ensure that the Corporation attracts and retains the talent commensurate with
its business objectives.
Report On Executive Compensation
The Corporation's Executive Compensation Policy (the "Policy")
considers an individual's experience, market conditions (including industry
surveys), individual performance and overall financial performance of the
Corporation. The Corporation's total compensation program for officers includes
base salaries, bonuses and the grant of stock options pursuant to the Option
Plan. The Corporation's primary objective is to achieve above-average
performance by providing the opportunity to earn above-average total
compensation (base salary, bonus, and value derived from stock options) for
above-average performance. Each element of total compensation is designed to
work in concert. The total program is designed to attract, motivate, reward and
retain the management talent required to serve shareholder, customer and
employee interests. The Corporation believes that this program also motivates
the Corporation's officers to acquire and retain appropriate levels of share
ownership. It is the opinion of the Compensation Committee that the total
compensation earned by the Corporation's officers during 1998 achieves these
objectives and is fair and reasonable.
11
<PAGE>
Compensation is comprised of base salary, annual cash incentive (bonus)
opportunities, and long-term incentive opportunities in the form of stock
options. Individual performance is determined in relation to short and long-term
objectives that are established and maintained on an on-going basis. Performance
of these objectives is formally reviewed annually and base salary adjusted as a
result. Bonus rewards are provided upon the attainment of corporate financial
performance objectives as well as the individual's direct responsibilities and
their attainment of budget and other objectives.
The Policy also strives to establish long-term incentives to executive
officers by aligning their interests with those of the Corporation's
shareholders through award opportunities that can result in the ownership of the
Corporation's common shares.
12
<PAGE>
Comparison of 5 Year Cumulative Total Return*
Between Goran Capital Inc. and the TSE 300 Index
Bar graph
Goran Cap Inc (GNCNF)
<TABLE>
<CAPTION>
12/93 12/94 12/95 12/96 12/97 12/98
<S> <C> <C> <C> <C> <C> <C>
GORAN CAPITAL INC. 100 157 253 585 896 332
TSE 300 100 100 114 147 169 166
</TABLE>
13
<PAGE>
Appointment of Auditor
Unless otherwise instructed, the persons named in the enclosed form of
proxy intend to vote for the appointment of Schwartz Levitsky Feldman, Chartered
Accountants, as auditor of the Corporation to hold office until the next annual
meeting of shareholders. Schwartz Levitsky Feldman was first appointed auditor
of the Corporation in 1990.
Statement of Corporate Governance Practices
In February, 1995 the Toronto Stock Exchange ("TSE") announced that all
companies with a year-end on or after June 30, 1995 would be required to
describe their practices of corporate governance with reference to TSE
Guidelines previously published. Goran conforms with the majority of these
Guidelines except as noted below:
"Corporate Governance" is the process and structure used to direct and
manage the business and affairs of the Corporation to achieve shareholders'
objectives. The shareholders of the Corporation elect the directors who, in
turn, are responsible for overseeing all aspects of the operation of the
Corporation, appointing management and ensuring that the business is managed
properly, taking into account the interests of the shareholders.
The Guidelines suggest that the chairman of the board of directors not
be a member of management and state that members of the board's nominating
committee should be exclusively non-management directors. In this respect, the
Corporation does not comply. The Corporation currently does not have a
nominating or corporate governance committee. Further, the knowledge and
experience of G. Gordon Symons, the founder of the Corporation and its current
chairman, are very important to the Corporation and the board. Further, it is
believed that the best interests of the Corporation's shareholders, the
Corporation and the board would not be properly served with either Mr. Symons
relinquishing his management function or the board appointing a different
chairman. The board of the Corporation is currently comprised of seven members,
four of whom are "unrelated" within the meaning of the Guidelines and this
majority of unrelated directors allows the board the independence of management
which is a fundamental cornerstone of the TSE Guidelines.
Another Guideline states that position descriptions should be developed
for the board and for the chief executive officer which delineate and define
management's responsibilities. The segregation of duties and responsibilities
between the board and its chief executive officer have been traditionally
understood but have not been formalized.
The Corporation has a significant shareholder and the percentage of
shares held by individuals or entities who are not directly or indirectly
related to the Corporation's significant shareholder is approximately 50%. Yet,
the Corporation has a majority of its directors who are unrelated directors. The
number of such directors more than fairly reflects the investment in the
Corporation by shareholders other than the significant shareholder and those
persons or entities directly or indirectly related to the significant
shareholder. Therefore, the unrelated directors (and the board as a whole) are
in a position to fairly represent minority shareholders.
14
<PAGE>
Mandate Of The Board
The responsibility of the Corporation's board of directors is to
oversee the conduct of the Corporation's business and to supervise management.
The board discharges its responsibilities either directly or through its
committees. The board met five times during 1998 and also acted through the
medium of unanimous written consent.
The board has three committees. All of these committees (except the
executive committee) have a majority of members who are unrelated directors.
During 1998, the audit committee comprised Alan G. Symons, David B.
Shapira, and James G. Torrance. Its principal responsibilities are to review
annual audited financial statements prior to submission to the board for
approval, review the nature and scope of the annual audit, evaluate auditors'
performance, review fees and make recommendations as to the appointment of
auditors for the ensuing year and review the adequacy of internal accounting
control procedures and systems.
During 1998, the compensation committee comprised Douglas H. Symons, J.
Ross Schofield and John K. McKeating. Mr. McKeating served as Committee Chair.
The committee's role is to review the performance of the chairman and chief
executive officer as regards compensation, determine compensation practices for
the officers of the Corporation, periodically review the Corporation's
long-range plans and policies for recruiting, developing and motivating
personnel, and to make recommendations to the board concerning stock option
grants.
Decisions Requiring Prior Approval Of The Board
In general, the management of the Corporation is empowered to run the
business on a day-to-day basis. The board approves the annual business and
strategic plan and reviews performance against those plans on an interim basis
throughout the year. Any action leading to a material change in the nature of
the business of the Corporation, including any acquisition or disposition of a
significant operating unit, must be approved by the directors. The directors
must also approve key borrowing and financing decisions. The board also appoints
the officers of the Corporation, determines directors' compensation and declares
dividends (if any).
Recruitment Of New Directors
Currently, if vacancies should occur on the board, the board seeks and
receives input from individual board members and reviews the qualifications of
prospective members while taking into consideration current board composition
and the Corporation's needs.
Measures For Receiving Shareholder Feedback
The board has requested management to make it aware, on an on-going
basis, of any significant shareholder concerns which are communicated to
management.
15
<PAGE>
The Board's Expectation Of Management
The board expects management to operate the Corporation in accordance
with prudent business practices and the direction of the board. The goal of
management, the Corporation and the board is to protect and enhance shareholder
value while managing the Corporation in a prudent manner as a fiduciary for the
Corporation's shareholders. Management is expected to provide regular financial
and operating reports to the board and to make the board aware of all important
issues and major business developments, especially those which have not been
anticipated. Consistent with its previously enunciated goal, management is
expected to seek out opportunities for business acquisitions and expansion and
to forward appropriate recommendations to the board for its action.
Directors and Officers Liability Insurance
The Corporation has purchased Directors and Officers Liability
insurance from The Chubb Insurance Company of Canada (policy # 7022 9536). This
coverage expires on October 27, 2000 and contains a limit of liability of $20
million.
Directors' Approval
The contents of this information circular and the sending thereof have
been approved by the board of directors of the Corporation.
April 13, 1999
Alan G. Symons
President and CEO
16
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APPENDIX I
Options subject to Re-Pricing, with Original Exercise Price:
100,301 @ $16.50
180,494 @ $29.00
7,861 @ $39.00
74,970 @ $40.00
33,000 @ $41.00
256,000 @ $35.00
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652,626
17
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