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, 1999.
( ) 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)
2 Eva Road, Suite 200
Etobicoke, Ontario Canada M9C 2A8
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(416) 622-0660 (Canada)
(317) 259-6300 (USA)
Securities registered pursuant to Section 12(b) of the Act: Common Shares
Securities registered pursuant to Section 12(g) of the Act: None
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 No X
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 2,834,654 shares of the Registrant's
common stock held by non-affiliates, as of April 3, 2000 was $4,960,645.
The number of shares of common stock of the Registrant, without par
value, outstanding as of April 3, 2000 was 5,876,398.
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
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>
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Average .7287 .7339 .7222 .6745 .6724
Period End .7325 .7301 .6995 .6532 .6929
High .7456 .7472 .7351 .7061 .6929
Low .7099 .7270 .6938 .6376 .6625
</TABLE>
Accounting Principles
The financial information contained in this document is stated in U.S. Dollars
and is expressed in accordance with US Generally Accepted Accounting Principles
unless otherwise stated.
<PAGE>
GORAN CAPITAL INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1999
PART I PAGE
Item 1. Business 4
Item 2. Properties 35
Item 3. Legal Proceedings 36
Item 4. Submission of Matters to a Vote of Security Holders 37
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 38
Item 6. Selected Consolidated Financial Data 38
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial
Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 47
SIGNATURES 46
<PAGE>
PART I
ITEM 1 - BUSINESS
Please refer to "Forward-Looking Statement" following the Index in front of this
Form 10-K.
Overview of Business Segments
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 67.2% of a U.S. holding company, Symons International Group, Inc.
("SIG"). SIG owns IGF Holdings, Inc. ("IGFH"), Superior Insurance Group
Management, Inc. ("Superior Group Management") (formerly, GGS Management
Holdings, ("GGS Holding") and Superior Insurance Group, Inc. ("Superior Group")
(formerly, GGS Management, Inc. ("GGS")) which are the holding company and
management company for the insurance subsidiaries. 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 faciliaties 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 10 outstanding claims and maintains an investment portfolio
sufficient to support those claim liabilities which will likely be settled
between now and the year 2002.
Nonstandard Automobile Insurance
Pafco, Superior, Superior Guaranty Insurance Company ("Superior
Guaranty") and Superior American Insurance Company ("Superior American") are
engaged in the writing of insurance coverage for automobile physical damage and
liability policies. Nonstandard insureds are those individuals who are unable to
obtain insurance coverage through standard market carriers due to factors such
as poor premium payment history, driving experience or violations, particular
occupation or type of vehicle. The Company offers several different policies,
which are directed towards different classes of risk within the nonstandard
market. Premium rates for nonstandard risks are higher than for standard risk.
Since it can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when the standard coverage becomes more restrictive. Nonstandard policies
have relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers.
Products
The Company offers both liability and physical damage coverage in the
insurance marketplace, with policies having terms of three to twelve 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 to others and in
the range of $10,000 to $20,000 for damage to other parties' cars or property.
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 risk which do not qualify for either the Superior Choice or the
Superior Standard policies.
Marketing
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Virginia, Indiana and Georgia. The Company
also writes nonstandard automobile insurance in fifteen additional states. The
Company selects states for expansion or withdrawal based on a number of
criteria, including the size of the nonstandard automobile insurance market,
state-wide loss results, competition, capitalization of its companies and the
regulatory climate. The following table sets forth the geographic distribution
of gross premiums written for the Company for the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
Goran Capital Inc.
Year Ended December 31,
(in thousands)
State 1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Arizona $ -- $ 6,228 $ 10,912
Arkansas 1,539 1,383 804
California 59,819 48,181 29,993
Colorado 9,865 8,115 8,238
Florida 141,907 107,746 67,459
Georgia 11,858 21,575 22,945
Illinois 3,541 2,908 1,795
Indiana 17,227 18,735 23,599
Iowa 7,079 6,951 4,028
Kentucky 9,538 8,108 5,768
Mississippi 2,830 5,931 3,515
Missouri 9,705 8,669 4,555
Nebraska 6,613 6,803 3,846
Nevada 4,273 8,849 6,954
Ohio 3,731 2,106 2,096
Oklahoma 3,418 3,803 1,921
Oregon 2,302 6,390 12,394
Tennessee -- 1,443 6,840
Texas 7,192 7,520 2,641
Virginia 21,446 22,288 15,470
Washington 32 5 --
- ----------------------------------------------------- -------- -------- -------
Total $323,915 $303,737 $235,773
======== ======== =======
</TABLE>
The Company markets its nonstandard products exclusively through
approximately 7,000 independent agencies. 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 has automated certain marketing,
underwriting and administrative functions and has allowed 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.
Most of the Company's agents have 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
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. The
Company compensates its agents by paying a commission based on a percentage of
premiums produced.
The Company believes that having five individual companies licensed in
various states 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 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 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, Florida, Kentucky and Missouri, allow
filing and immediate use of rates, while others, such as Arkansas and
California, require approval by the state's insurance department prior to the
use of the rates.
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 Financial Condition and Results of
Operations" for a further discussion on the combined ratio.
In an effort to maintain and improve underwriting profits, the
territorial managers 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 Orange, California locations.
The Company retains independent appraisers and adjusters for estimation
of physical damage claims and limited elements of investigation. The Company
uses the Audapoint, Audatex and Certified 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 can meet their
obligations to the Company under the terms of the reinsurance treaties.
In 1999, Pafco and Superior maintained casualty excess of loss
reinsurance on their 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, 1999 follows:
<TABLE>
<CAPTION>
Reinsurance Recoverables
Reinsurers A.M. Best Rating as of December 31, 1999 (1)
<S> <C> <C>
Constitution Reinsurance Corporation (2) A+ 1,492
Lloyds of London Not Rated 818
Trans Atlantic Reinsurance Corporation (2) A++ 1,062
</TABLE>
(1) Only recoverables greater than $200,000 are shown. Total
nonstandard automobile reinsurance recoverables as of December
31, 1999 were approximately $4,752,00.
(2) An A.M. Best Rating of "A++" is the highest of 15 ratings.
An A.M. Best Rating "A+" is the second highest of 15 ratings
On April 29, 1996, Pafco also entered into a 100% quota share
reinsurance agreement with Granite ("Granite Re"), whereby all of Pafco's
commercial business from 1996 and thereafter was ceded effective January 1,
1996. This agreement was in effect during 1999.
Effective January 1, 2000, Pafco, Superior and IGF entered into an
automobile quota share agreement with National Union Fire Insurance Company of
Pittsburgh (A.M. Best rated A++). The amount of cession is 40% for Pafco and 20%
for Superior and 0% for IGF for all new business, renewal business and in force
unearned premium reserves. This treaty is subject to the approval of the
applicable departments of insurance. If the departments of insurance do not
approve of this arrangement, the Company may need to adjust its premium writings
to comply with the required writings to statutory surplus ratios.
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. The most recent two years have seen
severe price competition for nonstandard automobile insurance.
Recent Developments
After experiencing continued operating losses in its nonstandard
automobile operations throughout 1999, the Company decided to, in the latter
part of 1999, implement significant changes in its auto operations to effect
improvement in its operating results. Effective January 10, 2000 the Company
engaged Gene Yerant as the President of its nonstandard automobile operations.
Mr. Yerant's focus in his position with the Company is to return the auto
operations to profitability by improving efficiency and effectiveness in all
aspects of the operation. Since his engagement, Mr. Yerant has effected a number
of management changes designed to improve operations, including the hiring of a
new Chief Information Officer, a new Vice President of Marketing and Product
Management for the auto operations and certain other key claims and operating
positions.
Crop Insurance
General
The two principal components of the Company's crop insurance business
are multiple-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 causes
widespread crop losses and, in severe case, 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.
Industry Background
MPCI was initiated by the U.S. 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, the U.S. 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. Further, the Federal Crop Insurance Corporation
(FCIC), a United States Department of Agriculture (USDA) department, was
authorized to reimburse participating companies for their administrative
expenses and to provide federal reinsurance for a portion of the risk assumed by
such private companies.
Due to a 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, the U.S. Congress has, since
1990, enacted major reform of its crop insurance and disaster assistance
policies.
The 1994 Reform Act required farmers for the first time to purchase at
least catastrophic (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 dropping to 55% of the price in 1999) 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
field offices which has since been eliminated by the Federal Agriculture
Improvement and Reform Act of 1996 ("the 1996 Fair Act"). The 1996 Fair Act,
signed into law by President Clinton in April 1996, 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"). The Ag
Research 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.
Other changes impacted by the Ag Research Act included a reduction in
the rate of MPCI Expense Reimbursement from the general 27.0% in the 1998
reinsurance year to 24.5% in 1999 and thereafter. The reinsurance terms through
2001 under the Standard Reinsurance Agreement (SRA) offered by the FCIC were
also frozen for subsequent reinsurance years. Two other changes were made
related to the 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. Further, 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 be remitted directly to the federal government rather than
partially retained by the Company. The 10% imputed premium charges; however, was
eliminated before it was implemented and the law reverted to essentially a $60
fee per policy without limits per county. In addition, the Ag Research Act
lowered the CAT Loss Adjustment Expense (LAE) Reimbursement from approximately
14.1% of imputed premium in 1998 to 11.0% of premium in 1999 and succeeding
years.
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 coverages above 50%) 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 crop. This was set at 30% of the farmer-paid
portion of the crop insurance premium. Furthermore, 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. It would also
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.
In October 1999, Congress once again provided additional ad hoc
disaster monies ($1.386 billion) to farmers for losses suffered in 1999. This
same legislation (Public Law No. 106-78) provided $400 million to continue the
extra premium incentive provided by the 1998 Emergency Supplemental
Appropriations Act. However, due to the very positive farmer response nationwide
to the 1999 30% extra incentive; the 2000 extra incentive was set at 25%
initially to avoid over-subscription. In addition, the State of Pennsylvania has
added its own subsidy in addition to the U.S. federal subsidy for
farmer-residents buying crop insurance as an added incentive to manage their
risks.
Finally, proposals for further changes in the crop insurance program
are currently being debated in Congress. The main thrust of these proposals is
to permanently change the law to build in premium subsidies equal to or in
excess of the net subsidy afforded by the existing law plus the 30% supplemental
subsidy provided in the 1999 crop year. Crop reform bills have passed both the
U.S. House of Representatives and the U.S. Senate and are currently in
conference. The House bill does contain proposed further reductions in
administrative income for reinsured companies, the Senate bill does not.
Thus, while the 1998 Research Act provided permanent administrative
funding at the expense of reduced administrative rates and fee income, the
additional premium incentives provided in 1999 and 2000 have afforded the
Company the opportunity to offset the decreased income that would otherwise have
resulted. This is due to the fact that the increased premium incentives resulted
in more producers buying higher levels of coverage (higher premiums are
associated with higher levels of coverage and thus higher administrative income
that is a function of premium) and the additional disaster monies increased the
insureds' capabilities to pay their premiums in an otherwise economically
struggling farm sector. The Company also continues to build on initiatives
outside the federal program that create fee-based income and to reduce costs
where possible as a means to offset prior reimbursement reductions and any
additional ones that may occur. While the Company believes its effort can more
than offset administrative income reductions, there is no assurance that the
Company will be successful or that further reductions in federal reimbursements
will not continue to occur.
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 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
adverse weather 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%, and in some areas 85%, (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. As of 1999, CAT coverage insures 50% of historic
crop yield at 55% of the FCIC-set crop price for the applicable commodities
standard unit 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 and are referred to
as "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.
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. However, the
Company may pay a portion of the aggregate loss, in respect of the business it
writes, if the losses are significant.
The Company's share of profit or loss on the MPCI business it writes is
determined by 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 several types of revenue coverage in the
federal program, the most popular of which is Crop Revenue Coverage ("CRC"). In
contrast to standard MPCI coverage, which features a yield guarantee or coverage
for the loss of production, revenue coverage provides the insured with a
guaranteed revenue stream by combining both yield and price variability
protection. Such policies protect 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. For 1999 revenue based policies
represented approximately 20% of all of the Company's MPCI policies.
In addition to MPCI (including CRC and several other lower volume
revenue plans), the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hailstorms and which
involves no federal participation. The stand alone crop hail line of reinsurance
has a 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 37% of IGF's hail
policies are written in combination with MPCI. Although both crop hail and MPCI
provide insurance against hail damage, the private crop hail coverages allow the
farmers to receive payments for hail damage which would not be severe enough to
require a payment under an MPCI policy. The Company believes that offering crop
hail insurance enables it to sell more MPCI policies than it otherwise would.
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 timber 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. 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.
IGF has launched a pilot program in Iowa and Illinois for the 2000 crop
year entitled IGF Agronomics. Under this new program farmer-clients work
hand-in-hand with IGF employed professional agronomists. The agronomist's role
is to continually educate producers in ways to lower costs and increase yields.
Producers receive information on new pesticides, hybrids, varieties, and
genetically modified products; nutrient recommendations; soil testing;
management zone setup; equipment calibration assistance; and ongoing education
seminars to apprise producers on the latest advancements in agriculture.
Through IGF Agronomics, the producer has the opportunity to receive a
nutrient warranty based on his/her goals and the Company's recommendations. In
many instances, the input savings created under the recommended programs will
more than pay for the cost of the services. The services include helping the
producer compile a professional presentation of his/her farming skills, which
could lead to direct tie-ins with end users of specialized crops. Using this
service, the Company will become more familiar with producers' wants and needs,
resulting in the offering of more tailored insurance products. To the extent the
particular clients are also insureds of the Company, the Company also decreases
its risk of loss under the underlying insurance policies due to the better
management practices employed under the agronomic services provided.
Other services include soil mapping and soil testing, with
interpretation and decision support. The Company works directly with the grower
to determine what information and tests are most beneficial, and then performs
them on a grid or management-zone basis. The Company will not only give
producers the information and maps from these tests, it will help them analyze
the data and make recommendations based on prudent economics which give
producers the opportunity to reach their greatest net return per acre. The goal
is to convert the information to knowledge, which brings producers increased
profitability while it brings the Company fee income and better insurance risks
to the extent the agronomy client is also an insured.
The Company's crop subsidiary continues to offer Geo AgPLUS mapping and
other services and it has expanded the variety of means by which to generate
information for use by farmer-clients. Geo AgPLUS now uses not only use
GPS-derived boundaries, but also use digital aerial photos, satellite imagery or
other background data, such as scanned Farm Service Agency (a U.S. Department of
Agriculture agency) maps. The Geo AgPLUS system can convert producers' yield
monitor data into accurate field maps--saving many hours of time and cost from
manually operating an ATV to measure field boundaries. All methods of mapping
can be used to create accurate and concise maps of producers' operations,
providing a familiar visual to look at and use in better managing the farming
operation. Geo AgPLUS provides:
o GPS field boundaries.
o Remotely digitized boundaries.
o Yield monitor generated boundaries.
o Background data for roads, streams, sections, etc.
o Customized maps to meet customers' needs.
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 commodity unit of measure 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, is the "MPCI Gross
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 a formula set by the
FCIC. 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 general accepted accounting principles (GAAP),
the Company's Gross Premiums Written for MPCI consist only of its MPCI Buy-up
Premiums and do not include MPCI Imputed CAT Premiums.
Reinsurance Pools
Under the MPCI program, the Company must allocate its MPCI Gross
Premium or MPCI Imputed CAT 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% of the risk; and for those allocated to the "Assigned Risk Pool,"
the Company retains 20% of the risk and the FCIC assumes 80% of the risk.
Beginning with the 1998 crop year, separate Developmental and Commercial Funds
were provided for CAT and Revenue (i.e., CRC) policies apart from non-revenue
Buy-up Coverage. Thus the seven risk funds are Assigned Risk (all types of
policies pooled together); CAT Developmental; Revenue Developmental; Other
Developmental; CAT Commercial; Revenue Commercial; Other Commercial. There are
limitations on the amount of premium that can be placed in the Assigned Risk
Fund on a state basis based on historical loss ratios (i.e. 75% of Texas
business but only 15% of Iowa business) and policy designations must be made by
certain date deadlines. Furthermore, these reinsurance pools are based on a
fund-by-state basis. Finally, on the risk retained by the Company, the FCIC
provides increasing levels of stop loss protection as the loss ratio increases
on a fund-by-state basis such that the FCIC pays 100% of losses that exceed a
500% loss ratio. Thus, a loss in the "Other Commercial" fund in the State of
Texas is first potentially offset by a gain in the other six risk funds in which
Texas policies were placed before the Texas experience is then blended with
experience from the other states. The MPCI Retained Premium, which is the
premium left after all cessions are made to FCIC under the SRA within the
various risk funds, is then further 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 gross
premiums and MPCI Imputed CAT Premiums written. The Company uses a historical
database 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 policies 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.
Policies 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 Gross Premium and MPCI Imputed CAT Premium on which the Company retains
risk after allocating policies to the foregoing pools (its "MPCI Retained
Premium"). 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 Retained Premium, the Company shares in the gross amount of
such profit according to a schedule set by the FCIC's SRA. The profit and loss
sharing percentages are different for risks allocated to each of the seven
reinsurance pools. Private insurers will receive or pay the greatest percentage
of profit or loss for risks allocated to the Commercial Pool. The reinsurance
terms contained in the SRA that were last negotiated in 1998 have been frozen in
statute for 1999 and subsequent years (7 U.S.C. 1506 note added by Sec. 536 of
the 1998 Ag Research Act). There, of course, can be no assurance by the Company
that Congress and the President will not change the law. FCIC has extended the
1998 SRA through the 2001 crop/reinsurance year (July 1, 2000 to June 30, 2001).
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
1999, the Buy-up Expense Reimbursement was set at 24.5% of the MPCI Gross
Premium (including CRC which has been reimbursed at approximately 86% of the
rate for regular MPCI). For 1999 and succeeding years, the 24.5% rate on MPCI
and 21.1% on CRC has been frozen by statute (7 U.S.C. 1506 note added by Sec.
536 of the 1998 Ag Research Act). 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.
Farmers are required to pay a fixed administrative fee of $60 per
policy in order to obtain CAT Coverage. Starting in 1999, the fee was sent to
the FCIC, and the Company did not retain any portion of this fee. The Company
also receives from the FCIC a separate CAT LAE Reimbursement Payment equal to
approximately 11.0% of MPCI Imputed CAT Premiums of each CAT Coverage policy it
writes.
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,
1997 1998 1999
<S> <C> <C> <C>
CAT Coverage Fees (1) $1,191 $2,346 $--
Buy-up Expense Reimbursement Payments 24,788 37,982 38,580
CAT LAE Reimbursement Payments and MPCI Excess LAE
Reimbursement Payments 4,565 6,520 4,273
----- ----- -----
Total $30,544 $46,848 $42,853
======= ======= =======
</TABLE>
1) See "Management's Discussion and Analysis of Financial Condition
and Results of Operations " for a discussion of the accounting
treatment accorded to the crop insurance business.
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 68.5% of business for 1999
, 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
Retained Premium up to 125% of MPCI Retained Premium. The Company also has
additional layers of MPCI stop loss reinsurance which covers 100% 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 Retained
Premiums up to 185% of MPCI Retained Premium. The Company maintains a 50% quota
share reinsurance treaty and a stop loss treaty covering 95% of losses in excess
of 100% up to 250% for its named peril products. For 2000, the Company plans to
maintain its crop hail and named peril quota share portion.
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 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.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 (1)
(in thousands, except footnotes)
A.M. Best Ceded
Reinsurers Rating Premiums
<S> <C> <C>
Continental Casualty Insurance Co. (CNA)(2) A 9,308
Muchener Ruckversicherungs-Gesellschaft Not Rated 15,740
Monde Re (3) Not Rated 1,719
Partner Reinsurance Company Ltd. Not Rated 653
R & V Versicherung AG Not Rated 664
Reinsurance Australia Corporation, Ltd. (REAC) (3) Not Rated 1,719
Insurance Corp of Hannover (2) A 6,544
Scandinavian Reinsurance Company Ltd. Not Rated 683
</TABLE>
1) For the twelve months ended December 31, 1999, total ceded premiums
were $209,012,000.
2) An A.M. Best rating of "A" is the third highest of 15 ratings.
3) Monde Re is owned by REAC.
As of December 31, 1999, IGF's reinsurance recoverables aggregated
approximately $2,196,000 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 46
states through approximately 5,499 agents associated with approximately 2,850
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 31 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 1999.
<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 December 31, Year Ended December 31,
1998 1999
State Crop Hail MPCI/CAT(1) Other Total Crop Hail MPCI/CAT(1) Other Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama $ 83 $ 2,714 $-- $ 2,797 $ 132 $ 4,245 $ 67 $ 4,444
Arkansas 1,460 11,141 -- 12,601 1,823 9,737 20 11,580
California 661 9,754 7,797 18,212 776 9,207 325 10,308
Colorado 1,626 3,024 7 4,657 1,199 3,844 24 5,067
Idaho 2,266 1,332 188 3,786 1,343 1,824 580 3,747
Illinois 2,409 20,407 151 22,967 2,323 21,295 215 23,833
Indiana 244 7,031 -- 7,275 263 10,163 101 10,527
Iowa 9,724 16,554 -- 26,278 7,161 16,693 124 23,978
Kansas 1,904 4,703 57 6,664 1,005 4,029 -- 5,034
Kentucky 1,722 672 -- 2,394 1,074 2,829 4 3,907
Louisiana 36 5,486 35 5,557 23 6,033 80 6,136
Michigan 68 3,107 20 3,195 46 2,479 44 2,569
Minnesota 4,222 16,017 497 20,736 4,425 16,919 371 21,715
Mississippi 445 10,382 -- 10,827 407 9,078 26 9,511
Missouri 1,228 5,822 -- 7,050 806 5,368 14 6,188
Montana 4,280 5,338 -- 9,618 3,572 4,421 18 8,011
Nebraska 5,752 6,635 -- 12,387 2,060 6,541 5 8,606
North Carolina 4,770 1,807 -- 6,577 926 2,152 -- 3,078
North Dakota 10,131 20,423 254 30,808 4,169 21,913 311 26,393
Oklahoma 857 2,232 -- 3,089 391 2,842 116 3,349
South Dakota 5,320 6,017 -- 11,337 5,556 4,523 7 10,086
Texas 9,492 35,212 306 45,010 8,646 37,464 419 46,529
Wisconsin 269 3,219 288 3,776 279 4,383 635 5,297
All Other 7,229 8,323 3 15,555 5,242 11,472 406 17,120
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 76,198 $207,352 $ 9,603 $293,153 $ 53,647 $219,454 $ 3,912 $277,013
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) CAT imputed premiums has been included in the totals above. However, for
financial reporting requirements, these premiums are not included. For 1999 and
1998, CAT imputed premiums total $39,727 and $50,127.
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(TM),
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 called HailPlus(TM).
IGF generally compensates its agents based on a percentage of premiums
produced. The Company utilizes a percentage of underwriting gain realized with
respect to business produced in specific cases. This compensation structure is
designed to encourage agents to place profitable business with IGF.
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; and (ii) ensuring that policies are
underwritten in accordance with the FCIC rules.
With respect to its crop hail coverage, the Company seeks to minimize
its underwriting losses by maintaining an adequate geographic spread of risk by
rate group. In addition, the Company establishes sales closing dates after which
hail policies will not be sold. These dates are dependent on planting schedules,
vary by geographic location and generally 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 is minimal. The cut-off dates prevent farmers from adversely
selecting against the Company by waiting to purchase hail coverage until a storm
is forecast or damage has occurred. For its crop hail coverage, the Company also
sets limits by policy ($400,000 each) and by township ($2.0 million per
township).
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent contracts
or per diem adjusters on a part-time basis for loss adjusting services, the
Company employs full-time professional claims adjusters, most of whom are
agronomy trained, as well as a supplemental staff of part-time adjusters. The
adjusters are located throughout the Company's marketing territories. 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 the Company's 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, crop 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, the Company's adjusters may use global positioning system units to
determine the precise location where a claimed loss has occurred. The Company
has a team of catastrophic claims specialists who are available on 48 hours
notice to travel to any of the Company's seven regional service offices to
assist in heavy claim work load situations.
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, product 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 1999 crop year, the number of insurance companies
having agreements with the FCIC to sell and service MPCI policies has declined
from a number in excess of fifty to seventeen. The Company believes that it is
the fifth largest MPCI crop insurer in the United States based on premium
information compiled in 1999 by the FCIC. The Company's primary competitors are
Rain & Hail LLC (affiliated with ACE USA), Rural Community Insurance Services,
Inc. (owned by Wells Fargo/Norwest Corporation), Acceptance Insurance Company
(Redland/American Agrisurance), Fireman's Fund Agribusiness (formerly Crop
Growers), Great American Insurance Company (part of the American Financial
Group), Blakely Crop Hail (owned by Farmers Alliance Mutual Insurance Company)
and North Central Crop Insurance, Inc. (owned by Farmers Alliance Mutual
Insurance Company).
Recent Developments
The crop division, with stable gross premium volumes overall and
increased reinsurance protection, experienced a near break-even year except for
additional reserve adjustments required with respect to an agricultural business
interruption product that was offered in 1998 (the "Discontinued Product") which
is no longer being written. Although additional reinsurance negotiated both
early in 1999 and again at year end 1999, mitigated some of the losses from the
Discontinued Product, IGF's net results were dominated by losses from the
Discontinued Product of approximately $18.1 million recognized in 1999 net after
reinsurance.
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 the Company projects its exposure to be in
connection with incurred losses. Loss adjustment expense reserves are estimates
of the ultimate liability associated with the expense of settling all claims,
including investigation and litigation costs. The Company's actual liability for
losses and loss adjustment expense at any point in time will be greater or less
than these estimates.
The Company maintains reserves for the eventual payment of losses and
loss adjustment expenses 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 payments made 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 loss adjustment expense 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.
The Company's recorded reserves for losses and loss adjustment expense
reserves at the end of 1999 are certified by the Company's chief actuary in
compliance with insurance regulatory requirements.
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.
Since the beginning of 1997, 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 incurred but not reported ("IBNR")
that reflected the strength of the case reserves. Pafco had historically carried
relatively lower case reserves with higher IBNR reserve. This change in claims
management philosophy since 1997, combined with the growth in premium volume
produced sufficient volatility in prior year loss patterns to warrant the
Company to re-estimate its reserve for losses and loss expenses and record an
additional reserve during 1997, 1998, and 1999. The effects of changes in
settlement patterns, costs, inflation, growth and other factors have all been
considered in establishing the current year reserve for unpaid losses and loss
expenses.
<PAGE>
<TABLE>
<CAPTION>
Goran Capital Inc.
Nonstandard Automobile Insurance Only
For The Years Ended December 31, (in thousands)
1989 1990 1991 1992 1993 1994 1995(A) 1996 1997 1998 1999
Gross reserves for
<S> <C> <C> <C> <C> <C> <C> <C>
unpaid losses and $27,403 $25,248 $71,748 $ 79,551 $101,185 $121,661 141,260
LAE
Deduct reinsurance 12,581 10,927 9,921 8,124 16,378 6,515 3,167
recoverable
Reserve for unpaid
losses and LAE, $13,518 $15,923 $15,682 $ 17,055 $ 14,822 14,321 61,827 71,427 84,807 114,829 138,093
net of reinsurance
Paid cumulative as
of:
One Year Later 7,754 7,695 7,519 10,868 8,875 7,455 42,183 59,410 62,962 85,389 --
Two Years Later 10,530 10,479 12,358 15,121 11,114 10,375 53,350 79,319 89,285 -- --
Three Years Later 11,875 12,389 13,937 16,855 13,024 12,040 58,993 86,298 -- -- --
Four Years Later 12,733 13,094 14,572 17,744 13,886 12,822 61,650 -- -- -- --
Five Years Later 12,998 13,331 14,841 18,195 14,229 13,133 -- -- -- -- --
Six Years Later 13,095 13,507 14,992 18,408 14,330 -- -- -- -- -- --
Seven Years Later 13,202 13,486 15,099 18,405 -- -- -- -- -- -- --
Eight Years Later 13,216 13,567 15,095 -- -- -- -- -- -- -- --
Nine Years Later 13,249 13,566 -- -- -- -- -- -- -- -- --
Ten Years Later 13,249 -- -- -- -- -- -- -- -- -- --
Liabilities
re-estimated as of:
One Year Later 13,984 13,888 14,453 17,442 14,788 13,365 59,626 82,011 97,905 131,256 --
Two Years Later 13,083 13,343 14,949 18,103 13,815 12,696 60,600 91,743 104,821 -- --
Three Years Later 13,057 13,445 15,139 18,300 14,051 13,080 63,752 91,641 -- -- --
Four Years Later 13,152 13,514 15,218 18,313 14,290 13,485 63,249 -- -- -- --
Five Years Later 13,170 13,589 15,198 18,419 14,499 13,441 -- -- -- -- --
Six Years Later 13,246 13,612 15,114 18,533 14,523 -- -- -- -- -- --
Seven Years Later 13,260 13,529 15,157 18,484 -- -- -- -- -- -- --
Eight Years Later 13,248 13,573 15,145 -- -- -- -- -- -- -- --
Nine Years Later 13,251 13,574 -- -- -- -- -- -- -- -- --
Ten Years Later 13,259 -- -- -- -- -- -- -- -- -- --
Net cumulative
(deficiency) or 259 2,349 537 (1,429) 299 880 (1,422) (20,214) (20,014) (16,427) --
redundancy
Expressed as a
percentage of
unpaid losses and 1.9% 14.8% 3.4% (8.4%) 2.0% 6.1% (2.3%) (28.3%) (23.6%) (14.3%) --
LAE
Revaluation of gross losses and LAE as of year-end 1999:
Cumulative Gross Paid as of Year-end 1999 26,949 24,390 71,484 94,108 107,074 87,873
Gross liabilities re-estimated as of year-end 27,287 24,953 73,522 99,890 123,060 136,131
1999
Gross cumulative (deficiency) or redundancy 116 295 (1,774) (20,339) (21,875) (14,470)
</TABLE>
(A) Includes Superior loss and loss expense reserves of $44,423 acquired on
April 29, 1996 and subsequent development thereon.
<PAGE>
<TABLE>
<CAPTION>
Goran Capital Inc.
Crop Insurance Only
For The Years Ended December 31, (in thousands)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Gross reserves for
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
unpaid losses and $ 25,653 $ 3,354 $30,574 $ 17,537 $ 17,748 $ 66,921 $ 62,459
LAE
Deduct reinsurance 25,333 3,166 29,861 16,727 16,894 56,502 47,991
recoverable
Reserve for unpaid
losses and LAE, 99 222 309 316 320 188 713 810 854 10,419 14,468
net of reinsurance
Paid cumulative as
of:
One Year Later 416 726 263 463 765 473 1,148 1,184 1,311 12,427 --
Two Years Later 416 726 263 463 772 473 1,148 1,197 1,335 -- --
Three Years Later 416 726 263 463 772 473 1,148 1,197 -- -- --
Four Years Later 416 726 263 463 772 473 1,148 -- -- -- --
Five Years Later 416 726 263 463 772 473 -- -- -- -- --
Six Years Later 416 726 263 463 772 -- -- -- -- -- --
Seven Years Later 416 726 263 463 -- -- -- -- -- -- --
Eight Years Later 416 726 263 -- -- -- -- -- -- -- --
Nine Years Later 416 726 -- -- -- -- -- -- -- -- --
Ten Years Later 416 -- -- -- -- -- -- -- -- -- --
Liabilities
re-estimated as of:
One Year Later 416 726 263 463 765 473 1,148 1,184 1,311 24,587 --
Two Years Later 416 726 263 463 772 473 1,148 1,197 1,335 -- --
Three Years Later 416 726 263 463 772 473 1,148 1,197 -- -- --
Four Years Later 416 726 263 463 772 473 1,148 -- -- -- --
Five Years Later 416 726 263 463 772 473 -- -- -- -- --
Six Years Later 416 726 263 463 772 -- -- -- -- -- --
Seven Years Later 416 726 263 463 -- -- -- -- -- -- --
Eight Years Later 416 726 263 -- -- -- -- -- -- -- --
Nine Years Later 416 726 -- -- -- -- -- -- -- -- --
Ten Years Later 416 -- -- -- -- -- -- -- -- -- --
Net cumulative
(deficiency) or (317) (504) 46 (147) (452) (285) (435) (387) (481) (14,168) --
redundancy
Expressed as a
percentage of
unpaid losses and (320.2%) (227.0%) 14.9% (46.5%) (141.3%) (151.6%) (61.0%) (47.8%) (56.3%) (136.0%) --
LAE
Revaluation of gross losses and LAE as of year-end 1999:
Cumulative Gross Paid as of Year-end 1999 27,849 5,547 29,459 21,612 15,916 79,420
Gross liabilities re-estimated as of year-end 27,849 5,547 29,459 21,612 15,917 91,581
1999
Gross cumulative (deficiency) or redundancy (2,196) (2,193) 1,115 (4,075) 1,831 (24,660)
</TABLE>
<PAGE>
Activity in the liability for unpaid loss and loss adjustment expenses for
nonstandard automobile insurance is summarized below:
<TABLE>
<CAPTION>
Reconciliation of Nonstandard Auto Reserves (1)
1999 1998 1997
<S> <C> <C> <C>
Balance at January 1, 1999 $121,661 $101,185 $79,551
Less Reinsurance Recoverables 6,832 16,378 8,124
----- ------ -----
Net Balance at January 1, 1999 $114,829 $84,807 $71,427
Incurred related to
Current Year $214,606 $204,818 $185,316
Prior Years 16,427 13,098 10,584
------ ------ ------
Total Incurred $231,033 $217,916 $195,900
Paid Related to
Current Year $122,380 $124,932 $123,410
Prior Years 85,389 62,962 59,410
------ ------ ------
Total Paid $207,769 $187,894 $182,820
Net Balance at December 31, 1999 $138,093 $114,829 $84,807
Plus Reinsurance Balance 3,167 6,832 16,378
----- ----- ------
Balance at December 31, 1999 $141,260 $121,661 $101,185
</TABLE>
(1) The 1999 incurred in the above Reserve Reconciliation Table is $60 greater
than the nonstandard auto segment incurred per note 18 of the Consolidated
Financial Statement that includes favorable development on prior year commercial
reserves for policies written by Pafco in 1995 and prior. The reserves for
commercial business are excluded from the nonstandard auto reserve developments.
Activity in the liability for unpaid loss and loss adjustment expenses for crop
insurance is summarized below:
<TABLE>
<CAPTION>
Reconciliation of Crop Reserves (1)
1999 1998 1997
<S> <C> <C> <C>
Balance at January 1, 1999 $66,918 $17,748 $17,537
Less Reinsurance Recoverables 56,501 16,894 16,727
------ ------ ------
Net Balance at January 1, 1999 $10,417 $854 $810
Incurred related to
Current Year $20,131 $52,093 $16,176
Prior Years 14,095 457 374
------ --- ---
Total Incurred $34,226 $52,550 $16,550
Paid Related to
Current Year $17,748 $41,676 $15,322
Prior Years 12,427 1,311 1,184
------ ----- -----
Total Paid $30,175 $42,987 $16,506
Net Balance at December 31, 1999 $14,468 $10,417 $854
Plus Reinsurance Balance 47,991 56,501 16,894
------ ------ ------
Balance at December 31, 1999 $62,459 $66,918 $17,748
</TABLE>
(1) The 1999 incurred in the above Reserve Reconciliation Table is $1 greater
than the crop segment incurred per note 18 of the Consolidated Financial
Statements that includes favorable development on prior commercial reserves for
policies written by IGF prior to 1989. The reserves for commercial business are
excluded from the crop insurance reserve developments.
Ratings
A.M. Best has currently assigned a "B-" rating to Superior, a "C" rating to
Pafco and an "NA-3" rating to IGF.
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 "C" ratings are A.M. Best's eighth and eleventh highest
rating classifications, respectively, out of fifteen ratings. A "B-" rating is
awarded to insurers which, in A.M. Best's opinion, "have, on balance, fair
financial strength, operating performance and market profile when compared to
the standards established by the A.M. Best Company" and "have an ability to meet
their current obligations to policyholders, but their financial strength is
vulnerable to adverse changes in underwriting and economic conditions". A "C"
rating is awarded to insurers which, in A. M. Best's opinion, "have, on balance,
weak financial strength, operating performance and market profile when compared
to the standards established by the A.M. Best Company" and "have an ability to
meet their current obligations to policyholders, but their financial strength is
very vulnerable to adverse changes in underwriting and economic conditions". An
"NA-3" is a "rating procedure inapplicable" category.
The current ratings represent downgrades in the previously assigned
ratings. There can be no assurance that the current ratings or future changes
therein will adversely affect the Company's competitive position.
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.
The losses, adverse trends and uncertainties discussed in this report
have been and continue to be matters of concern to the domiciliary and other
insurance regulators of the Company's operating subsidiaries. See "Recent
Regulatory Developments and Risk Based Capital Requirements" below and "RISK
FACTORS."
Recent Regulatory Developments
To address Indiana Department of Insurance ("Indiana Department")
concerns relating to Pafco, on February 17, 2000, Pafco agreed to an order under
which the Indiana Department may monitor more closely the ongoing operations of
Pafco. Among other matters, Pafco must:
o Refrain from doing any of the following without the Indiana Department's
prior written consent: selling assets or business in force or transferring
property, except in the ordinary course of business; disbursing funds,
other than for specified purposes or for normal operating expenses and in
the ordinary course of business (which does not include payments to
affiliates, other than under written contracts previously approved by the
Indiana Department, and does not include payments in excess of $10,000);
lending funds; making investments, except in specified types of
investments; incurring debt, except in the ordinary course of business and
to unaffiliated parties; merging or consolidating with another company, or
entering into new, or modifying existing, reinsurance contracts.
o Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the year 2000 ratio of gross written premium
to surplus and net written premium to surplus does not exceed 4.0 and 2.4,
respectively; and provide the Indiana Department with regular reports
demonstrating compliance with these monthly writings limitations. Further
restrictions in premium writings would result in lower premium volume.
Management fees payable to Superior Insurance Group, Inc. ("Superior
Group") are based gross written premium;therefore, lower premium volume
would result in reduced management fees paid by Pafco.
o Provide a summary of affiliate transactions to the Indiana Department.
o Continue to comply with prior Indiana Department agreements and orders to
correct business practices, under which Pafco must provide monthly
financial statements to the Indiana Department, obtain prior Indiana
Department approval of reinsurance arrangements and of affiliated party
transactions, submit business plans to the Indiana Department that address
levels of surplus and net premiums written, and consult with the Indiana
Department on a monthly basis. Pafco's failure to provide the monthly
financial information could result in the Indiana Department requiring a
50% reduction in Pafco's monthly written premiums.
Pafco's inability or failure to comply with any of the above could
result in the Indiana Department requiring further reductions in Pafco's
permitted premium writings or in the Indiana Department instituting future
proceedings against Pafco. No report has yet been issued by the Indiana
Department on its previously disclosed target examination of Pafco, covering
loss reserves, pricing and reinsurance.
Pafco has also agreed with the Iowa Department of Insurance ("Iowa
Department") to (i) limit policy counts on automobile business in Iowa and (ii)
provide the Iowa Department with policy count information on a monthly basis
until June 30, 1999 and thereafter on a quarterly basis. In addition Pafco has
agreed to provide monthly financial information to other departments of
insurance in states in which Pafco operates.
As previously disclosed, with regard to IGF and as a result of the
losses experienced by IGF in the crop insurance operations, IGF has agreed with
the Indiana Department to provide monthly financial statements and consult
monthly with the Indiana Department, and to obtain prior approval for affiliated
party transactions. IGF is currently not in compliance with the requirement to
provide monthly financial statements; however IGF is working with the Indiana
Department to provide this information on a timely basis.
IGF has agreed with the Iowa Department that it will not write any
nonstandard business, other than that which it is currently writing until such
time as IGF has: (i) increased surplus; (ii) a net written premium to surplus
ratio of less than three times to one; and (iii) surplus reasonable to its risk.
Superior is required to submit monthly financial information to the
Florida Department, including a demonstration that it has not exceeded a ratio
of net written premiums to surplus of four to one. Superior must also file a
risk-based capital plan with the Florida Department by May 15, 2000.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding
companies in Florida and Indiana, where its U.S. insurance company subsidiaries
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, its
affiliates and IGF, Pafco, Superior, Superior American and Superior Guaranty
(the "Insurers"), including the amount of dividends and other distributions and
the terms of surplus notes; and (iii) restrict the ability of any one person to
acquire certain levels of the Company's voting securities without prior
regulatory approval.
Any purchaser of 10% or more of the outstanding shares of common stock
of the Company would be presumed to have acquired control of Pafco and IGF
unless the Indiana Commissioner of Insurance ("Indiana Commissioner") upon
application, has determined otherwise. In addition, any purchaser of 5% or more
of the outstanding shares of common stock of the Company will be presumed to
have acquired control of Superior unless the Florida Commissioner of Insurance
("Florida Commissioner"), upon application, has determined otherwise.
Dividend payments by the Company's insurance subsidiaries are subject
to restrictions and limitations under applicable law, and under those laws an
insurance subsidiary may not pay dividends to the Company without prior notice
to, or approval by, the subsidiary's domiciliary insurance regulator. In
addition, in the 1996 consent order approving the Company's acquisition of
Superior, the Florida Department prohibited Superior from paying any dividends
for four years from the date of acquisition without the prior approval of the
Florida Department, and as a result of regulatory actions taken by the Indiana
Department with respect to Pafco and IGF, those subsidiaries may not pay
dividends to the Company without prior approval by the Indiana Department (see
"Recent Regulatory Developments" above). Further, payment of dividends may be
constrained by business and regulatory considerations, and 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.
Accordingly, there can be no assurance that the Indiana Department or the
Florida Department would permit any of the Company's insurance subsidiaries to
pay dividends at this time (see "RISK FACTORS").
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 Superior Group (formerly, GGS Management,
Inc.). The management agreement between the Company and Pafco was assigned to
Superior Group 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 was entered into between Superior and Superior Group. 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.
In addition, neither Pafco nor IGF may engage in any transaction with
an affiliate, including the Company, without the prior approval of the Indiana
Department (see "Recent Regulatory Developments" above).
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 1999, Pafco had values outside of the acceptable ranges for
three IRIS tests. These included the two-year overall operating ratio, the
change in surplus ratio and the two-year reserve development ratio. Pafco failed
the first two tests due primarily to a high loss ratio. Pafco failed the third
test 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.
During 1999, Superior had values outside of the acceptable ranges for
three IRIS tests. These included the two-year overall operating ratio, the
change in surplus ratio and estimated current reserve deficiency to ratio.
During 1999, IGF had values outside of the acceptable ranges for the
following eight IRIS tests: gross premiums to surplus, change in net writings,
surplus aid to surplus, two year overall operating ratio, investment yield,
liabilities to liquid assets, agent's balances to surplus, and one year reserve
development to surplus.
IGF failed the gross premiums to surplus and the one year reserve
development to surplus ratio due to IGF's surplus being below its projections in
1999 as a result of the booking of additional loss reserves for the Discontinued
Product. IGF failed the change in net writings and the two year overall
operating ratio due to IGF's auto business in 1999. IGF failed the investment
test due to its need to borrow on its line of credit at the end of each year in
order to pay MPCI premiums owed to the FCIC. IGF generally fails the liabilities
to liquid assets and the agent's balance to surplus ratios due to the nature of
its business whereby such amounts are settled in full subsequent to year end.
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 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 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 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,
1999, the RBC ratio of IGF was in excess of the Company Action Level, Superior's
ratio was at 199% of the RBC amount, or $151,000 below the Company Action Level,
and Pafco's ratio was 72% of the RBC amount, or $10.5 million below the Company
Action Level.
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.
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 U.S. 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 U.S.
government at least annually since its establishment in 1980, some, of which
changes have been significant. See Industry Background for further discussion of
U.S. regulations impacting crop insurance.
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.
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.
Employees
At April, 2000 the Company and its subsidiaries employed approximately
895 full and part-time employees. The Company believes that relations with its
employees are excellent.
RISK FACTORS
The following factors, in addition to the other information contained
in this report should be considered in evaluating the Company and its prospects.
All statements, trend analyses, and other information herein contained
relative to markets for the Company's products and/or trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate," "could," "feel (s)," "believe," "believes," "plan,"
"estimate," "expect," "should," "intend," "will," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks; uncertainties and other factors which may cause actual results to
be materially different from those contemplated by the forward-looking
statements. Such factors include, among other things: (i) general economic
conditions, including prevailing interest rate levels and stock market
performance; (ii) factors affecting the Company's crop insurance operations such
as weather-related events, final harvest results, commodity price levels,
governmental program changes, new product acceptance and commission levels paid
to agents; (iii) factors affecting the Company's nonstandard automobile
operations such as premium volume; and (iv) the factors described in this
section and elsewhere in this report.
Significant Losses Have Been Reported and May Continue
The Company reported net losses of $62.4 million in 1999 and $11.9
million in 1998. The losses were due to reduced earnings in both segments of the
Company's operations. In 1999, the Company's crop insurance business was
adversely affected by the increased claim settlements and reserves resulting
from the Discontinued Product. In 1998, the crop insurance business was
adversely affected by catastrophic crop hail losses and other weather-related
events. Results for 1999 and 1998 for the nonstandard automobile business were
adversely affected by continuing higher loss ratios and lower premium volumes as
a result of problems that the Company encountered in making timely rate filings,
problems with new policy administration systems and competitive pressures. The
Company also significantly increased loss reserves for the nonstandard
automobile business in 1999 and 1998 due to adverse loss development. Although
the Company has taken a number of actions to address the factors that have
contributed to these operating losses, there can be no assurance that operating
losses will not continue.
Recent and Further Regulatory Actions May Affect the Company's Future Operations
The Company's insurance company subsidiaries, their business
operations, and their transactions with affiliates, including the Company, are
subject to extensive regulation and oversight by the Indiana Department, the
Florida Department and the insurance regulators of other states in which the
insurance company subsidiaries write business. Moreover, the insurance company
subsidiaries' losses, adverse trends and uncertainties discussed in this report
have been and continue to be matters of concern to the domiciliary and other
insurance regulators of the Company's insurance company subsidiaries and have
resulted in enhanced scrutiny and regulatory actions by several regulators. See
"Regulation - Recent Regulatory Developments and Risk-Based Capital
Requirements" . The primary purpose of insurance regulation is the protection of
policyholders rather than stockholders. Failure to resolve issues with the
Indiana Department and the Florida Department, and with other regulators
(including the RBC levels of Pafco and IGF), in a manner satisfactory to the
Company could impair the Company's ability to execute its business strategies or
result in future regulatory actions or proceedings that otherwise materially and
adversely affect the Company's operations. Current A.M. Best Ratings May
Adversely Affect the Company's Ability to Retain and Expand its Business
A.M. Best Company, which rates insurance companies based on factors of
concerns to policyholders, recently lowered its ratings of Superior from "B+" to
"B-" and its rating of Pafco from "B-" to "C" and changed its rating of IGF from
"NA-2" to "NA-3". One factor in an insurer's ability to compete effectively is
its A.M. Best rating. There can be no assurance that the current rating or
future ratings will not adversely affect the Company's competitive position. It
is not likely that the ratings will be improved unless the Company improves its
future operating performance.
The Company is Subject to a Number of Pending Legal Proceedings
As discussed elsewhere in this report, the Company is involved in a
number of pending legal proceedings (see Part I - Item 3). Most of these
proceedings remain in the early stages. Although the Company believes that many
of the allegations of wrongdoing are without merit and intends to vigorously
defend the claims brought against it, there can be no assurance that such
proceedings will not have a materially adverse effect on the Company's
operations.
The Terms of the Trust Preferred Securities May Restrict The Company's Ability
to Act
SIG has issued through a wholly owned trust subsidiary $135 million
aggregate principal amount in Trust Originated Preferred Securities ("Preferred
Securities"). The Preferred Securities have a term of 30 years with annual
interest payments of 9.5% paid semi-annually. The obligations of the Preferred
Securities are funded from the Company's nonstandard automobile management
company and dividend capacity from the crop insurance business. SIG has elected
to defer the semi-annual interest payment that was due February 2000 and may
continue to defer such payments for up to five years as permitted by the
indenture for the Preferred Securities. Although there is no present default
under the indenture which would accelerate the payment of the Preferred
Securities, the indenture contains a number of convenants which may restrict
SIG's ability to act in the future. These covenants include restrictions on
SIG's ability to: incur or guarantee debt; make payment to affiliates;
repurchase its common stock; pay dividends on common stock; and make certain
investments other than investment grade fixed income securities. There can be no
assurance that compliance with these restrictions and other provisions of the
indenture for the Preferred Securities will not adversely affect the Company's
ability to improve its operating results.
Problems with Policy Administration Systems Have Been Identified
As previously reported, three out of the five policy administration
systems utilized by the nonstandard auto segment during 1999 were implemented in
the 1998 and 1999 time frames and did not have fully automated financial
reporting functionality. The other two policy administration systems being used
are systems that were used with mature financial reporting capabilities.
Implementation of the three new systems without mature financial
reporting capabilities resulted in the usage of an accounts receivable
estimation methodology. Accounts receivable as of September 30, 1999, related to
policies administered by new systems based on estimates. As of December 31, 1999
accounts receivable systems reports that were not reliant on the faulty systems
were put in place and were used for all non-standard auto reporting as of
December 31, 1999. As a result, receivables are no longer being estimated.
Two of the three new policy administration systems mentioned above were
implemented in December 1998 and August 1999. After the systems were
implemented, system problems were identified which resulted in additional bad
debt expense being recorded. The additional bad debt expense was due to problems
in billing policies contained within the two systems. Of the $4.5 million of
estimated premium receivables administered by the two systems, the Company has
estimated $2.9 million of that amount to be uncollectible primarily as a result
of policy billing and cancellation problems. As previously reported, that amount
was written off in the third quarter of 1999. The Company finished converting
policies from the two systems back to a mature policy administration system
which the Company had used before prior to December 31, 1999. The Company no
longer has the cancellation or billing problems that were previously reported.
The third new policy administration system has also experienced
reporting problems. Approximately 75% of all of the Company's nonstandard
automobile policies are on this policy administration system As previously
reported, these reporting problems appear to be due to programming changes in
the manner in which data was extracted from the policy administration system for
reporting purposes. During the fourth quarter compensating controls were put in
place to help ensure that data extracted for reporting purposes is accurate and
the effects of programming changes are being monitored. The effect of the
identified problems was recorded in the third quarter 1999.
Weaknesses in Internal Control Systems
The Company's systems of internal control contained within key
processes and information technology systems are continuing to be evaluated
through an ongoing review. The Company's systems of internal control are
intended to insure reliable financial reporting as well as provide for the
safeguarding of the Company's assets. The following specific weaknesses were
previously reported: general ledger options integration with operating systems,
financial reporting controls, the relationship of actuarial analysis with claims
processing and specific technical documentation. Technological inadequacies
arising during the migration of systems continue to be addressed on an ongoing
basis. An action plan has been created to insure that attention is given to
identified areas. The four part action plan includes: 1) specific human resource
initiatives designed to increase financial accounting staffing and core
competency and the hiring of experienced financial management; 2) imposition of
task force direction headed by senior management designed to integrate and
automate the information technology and financial reporting applications; 3)
increased emphasis on internal audit functional responsibilities including the
development of comprehensive internal audit programs designed to monitor and
report on compliance with established control systems; and 4) ongoing use of
external consulting resources in the oversight of system documentation,
development of financial reporting procedures, re-engineering of
interdepartmental integration processes and the implementation and enhancement
of existing policies and procedures.
The areas previously reported concerning year 2000 compliance of certain
operating systems in the nonstandard operations and general ledger systems
integration are no longer a problem.
The Company Needs to Improve its Ability to Produce Financial Information on a
Timely Basis
Many of the Company's problems with its policy administration systems
and the weaknesses in internal controls previously reported have been resolved.
The problems discussed in that report resulted in the Company being unable to
prepare certain otherwise routine monthly and quarterly financial statements and
information on a timely basis. Such statements and information are necessary for
the Company's internal use, for filings with regulators and for compliance with
the Company's periodic reporting obligations.
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty
industry is that its products are priced before losses are reported and its
costs are known. 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 level of claims can
not be accurately determined for periods after the sale of policies, therefore
reserves are estimated and these estimates are used to set price, if they are
low then resulting rates could be inadequate.
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.
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. 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 premiums 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 the private sector in 1980, and some of these modifications
have been significant. As noted earlier, there are additional program reforms
currently being contemplated by Congress that would become effective, if passed
into law for 2001 crop year. No assurance can be given that future changes will
not significantly affect the MPCI program and the Company's crop insurance
business.
Total MPCI Gross Premium for each farmer depends upon the kinds of
crops grown, acreage planted, commodity prices, insurance rates and other
factors determined by the FCIC. Each year, the FCIC sets, by crop, the maximum
prices per commodity unit known as the price election to be used in computing
MPCI Gross Premiums. Any reduction of the price election by the FCIC will reduce
the MPCI Gross Premium charged per policy, and accordingly will adversely impact
MPCI Gross Premium volume.
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.
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. The crop insurance industry has become increasingly
consolidated. From the 1985 crop year to the 1999 crop year, the number of
insurance companies that have entered into agreements with the FCIC to sell and
service MPCI policies has declined from a number in excess of 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.
Geographic Concentration
The Company's nonstandard automobile insurance business in the U.S. 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 U.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.
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.
ITEM 2 - PROPERTIES
Headquarters
The headquarters for the Company is located at 2 Eva Road, Suite 200,
Etobicoke, Ontario, Canada in leased space.
SIG
SIG is located at 4720 Kingsway Drive, Indianapolis, Indiana. All
corporate administration, accounting and management functions are contained at
this location.
Pafco
Pafco is also located at 4720 Kingsway Drive, Indianapolis, Indiana.
All underwriting, claims, administration and accounting activities are contained
at this location for Pafco. The Indianapolis building is an 80,000 square foot
multilevel structure; approximately 50% of which is utilized by the Company. The
remaining space is leased to third parties at a price of approximately $10 per
square foot. Pafco owns 100% of the property with no encumbrances. In addition,
Pafco owns an investment property located at 2105 North Meridian, Indianapolis,
Indiana. The property is a 21,700 square foot, multilevel building leased
entirely to third parties.
Superior
Superior's operations are conducted at leased facilities 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 43,338
square feet at this location. Superior also had 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. That location has
been moved to 5483 West Waters Avenue, Suite 1200, Tampa, Florida and consists
of approximately 33,861 square feet of space leased for a term extending through
December 2007. In addition, Superior occupies an office at 1745 West Orangewood,
Orange, California consisting of 3,264 square feet leased for a term extending
through May 2001. All administration and accounting activities are housed at the
Atlanta location. Underwriting and claims activities are split between the
Atlanta and Tampa locations. The Tampa location underwrites for Florida and
Tennessee whereas the remaining states are processed in Atlanta. Claims
activities, excluding personal injury protection (PIP), are handled at the
Atlanta location. All PIP claims are processed at the Tampa location. Customer
service for Texas, California, and Arizona are handled in Tampa whereas the
remaining states are handled in Atlanta.
IGF
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. All underwriting, claims, administration and
entity accounting activities are directed out of this location.
IGF owns two buildings with 12,592 and 3,000 square feet, respectively,
in Henning, Minnesota. The 3,000 square foot building is leased to a third
party.
IGF owns a 5,624 square foot building in Lubbock, Texas with 800 square
feet being leased to a third party.
IGF leases office space in Mississippi, Illinois, Missouri, Washington,
Texas, California, North Carolina and Montana. This office space houses crop
service offices which handle underwriting and other servicing functions for
selected states.
The Company considers all of its properties suitable and adequate for
its current operations.
ITEM 3 - LEGAL PROCEEDINGS
Superior Guaranty is a defendant in a case filed on November 26, 1996,
in the Circuit Court for Lee County, Florida entitled Raed Awad v. Superior
Guaranty Insurance Company, et al., Case No. 96-9151 CA LG. The case purports to
be brought on behalf of a class consisting of purchasers of insurance from
Superior Guaranty. Plaintiffs allege that the defendant charged premium finance
service charges in violation of Florida law. Superior Guaranty believes that the
allegations of wrongdoing as alleged in the complaint are without merit and
intends to vigorously defend the claims brought against it.
IGF is a party to a number of pending legal proceedings relating to the
Discontinued Product. See Note 16 "Commitments and Contingencies" in the
consolidated financial statements. IGF remains a defendant in six lawsuits
pending in California state court (King and Fresno counties) having settled four
other suits including two declaratory judgment actions that were brought by IGF
in Federal District Court in California. In addition, IGF has settled 13
arbitration proceedings involving policyholders of the Discontinued Product and
has no outstanding arbitrations relating to this product. The first of these
proceedings was commenced in July 1999. All discovery in the remaining
proceedings has been stayed pending a June hearing on IGF's appeal of an order
denying a dismissal of the cases and a remanding of these disputes to
arbitration as called for in the policy provisions. The policyholders involved
in the open proceedings have asserted that IGF is liable to them for the face
amount of their policies, an aggregate of approximately $14.7 million, plus an
unspecified amount of punitive damages and attorney's fees. As of December 31,
1999, IGF had paid an aggregate of approximately $7 million to the policyholders
involved in these legal proceedings. The Company increased its reserves by $9.5
million in the fourth quarter of 1999 and reserved a total of $34.5 million in
1999 of which $22.3 million was paid through December 31, 1999. The Company
believes that it has meritorious defenses to any claims in excess of the amounts
it has already paid and that the loss payments made and LAE reserves established
with respect to the claims from the Discontinued Product as of December 31,
1999, are adequate with regard to all of the policies sold. However, there can
be no assurance that the Company's ultimate liability with respect to these and
any future legal proceedings involving such policies will not have a material
adverse effect on the Company's results of operations or financial position.
Superior Guaranty is a defendant in a case filed on October 8, 1999, in
the Circuit Court for Manatee County, Florida entitled Patricia Simmons v.
Superior Guaranty Insurance Company, Case No. 1999 CA-4635. The case purports to
be brought on behalf of a class consisting of purchasers of insurance from
Superior Guaranty. The Plaintiff alleges that the defendant charged interest in
violation of Florida law. Superior Guaranty believes that the allegations of
wrongdoing as alleged in the complaint are without merit and intends to
vigorously defend the claims brought against it.
The Company is a defendant in a case filed on February 23, 2000, in the
United States District Court for the Southern District of Indiana entitled
Robert Winn, et al. v. Symons International Group, Inc., et al., Cause No. IP
00-0310-C-B/S. Other parties named as defendants are SIG, three individuals who
were or are officers or directors of the Company or of SIG,
PricewaterhouseCoopers, LLP and Schwartz Levitsky Feldman, LLP. The case
purports to be brought on behalf of a class consisting of purchasers of the
Company's stock or SIG's stock during the period February 27, 1998, through and
including November 18, 1999. Plaintiffs allege, among other things, that
defendants misrepresented the reliability of the Company's reported financial
statements, data processing and financial reporting systems, internal controls
and loss reserves in violation of Section 10(b) of the Securities Exchange Act
of 1934 ("1934 Act") and SEC Rule 10b-5 promulgated thereunder. The individual
defendants are also alleged to be liable as "controlling persons" under Section
20 of the 1934 Act. Defendants' response to the complaint is not yet due.
However, the Company believes that the allegations of wrongdoing as alleged in
the complaint are without merit and intends to vigorously defend the claims
brought against it.
The California Department of Insurance (CDOI) has advised the Company
that it is 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 brokers fees charged to policyholders by
independent agents who placed business with Superior. 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 from Superior. The
Company did not receive any of such brokers fees. Although the assessment has
not been formally made by the CDOI at this time, the Company will vigorously
defend any potential assessment and believes it will prevail.
The Company's insurance subsidiaries are parties to other litigation
arising in the ordinary course of business. The Company believes that the
ultimate resolution of these lawsuits will not have a material adverse effect on
its financial condition or results of operations. The Company, through its
claims reserves, reserves for both the amount of estimated damages attributable
to these lawsuits and the estimated costs of litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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
Gregg Albacete 38 Chief Information Officer of SIG
Dennis G. Daggett 45 Chief Executive Officer
of IGF Insurance Company
Mary E. DeLaat 45 Vice President, Chief Accounting
Officer of the Company and SIG
Bruce K. Dwyer 51 Vice President, Chief Financial
Officer and Treasurer of the
Company and SIG
Mr. Albacete has served as Chief Information Officer of SIG since January,
2000. Mr. Albacete served as Vice President and Chief Information Officer of
Leader Insurance from December, 1987 to January, 2000. From March, 1982 to
February, 1985 Mr. Albacete worked for Transport Insurance. Prior to that time,
Mr. Albacete was a self-employed consultant.
Mr. Daggett, Chief Executive Officer of IGF, served as the Chief
Operating Officer of IGF from 1994 to 1999, from 1996 to 1999 as its President.
He has served as a director of IGF since 1989. From 1992 to 1996, Mr. Daggett
served as an Executive Vice President of IGF. Mr. Daggett also served as IGF's
Vice President of Marketing from 1988 to 1993. Prior to joining IGF, Mr. Daggett
was an initial employee of a crop insurance managing general agency, McDonald
National Insurance Services, Inc., from 1984 until 1988. From 1977 to 1983, Mr.
Daggett was employed as a crop insurance specialist with the FCIC.
Ms. DeLaat, C. P. A., has served as Vice President, Chief Accounting
Officer of the Company and SIG since July, 1999. Prior to that time, Ms. DeLaat
served as a General Auditor with American United Life from 1992 to 1999, Audit
Director of Property/Casualty Operations with Lincoln National Corporation from
1983 to 1992, and as a Senior Auditor with Ernst and Whinney 1980 to 1983.
Mr. Dwyer, C. A., has served as Vice President, Chief Financial Officer and
Treasurer of the Company and SIG since October, 1999, when he returned to the
Company after serving in a similar position from 1981 to 1996. From 1996 to 1999
Mr. Dwyer conducted his own consulting practice.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's common
stock, the range of selling prices for each quarterly period since January 1,
1998, and the approximate number of holders of common stock as of December 31,
1999 and other matters is included under the caption "Market and Dividend
Information" on page __of the 1999 Annual Report, included as Exhibit 13, which
information is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The data included on page 5 of the 1999 Annual Report, included as
Exhibit 13, under "Selected Financial Data" is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion entitled "Management Discussion and Analysis of
Financial Condition and Results of Operations" included in the 1999 Annual
Report on pages 6 through 22 included as Exhibit 13 is incorporated herein by
reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The discussion entitled "Quantitative and Qualitative Disclosures About Market
Risk" is included in the 1999 Annual report on pages 20 through 21 included as
Exhibit 13 is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements in the 1999 Annual Report,
included as Exhibit 13, and listed in Item 14 of this Report are incorporated
herein by reference from the 1999 Annual Report.
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 2000 annual meeting of common stockholders filed with the
Commission pursuant to Regulation 14A (the "2000 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Company's 2000 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 2000 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the Company's 2000 Proxy Statement.
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 1999 Annual
Report indicated below are incorporated into Item 8 of this Report
by reference.
Description of Financial Statement Item Location in 1999 Annual Report
Report of Independent Accountants Page 54
Consolidated Balance Sheets, December 31,
1999 and 1998 Page 23
Consolidated Statements of Earnings, Years
Ended December 31, 1999, 1998 and 1997 Page 25
Consolidated Statements of Changes In
Shareholders' Equity, Years Ended
December 31, 1999, 1998 and 1997 Page 26
Consolidated Statements of Cash Flows,
Years Ended December 31, 1999, 1998 and 1997 Page 27
Notes to Consolidated Financial Statements,
Years Ended December 31, 1999, 1998 and 1997
Page 29 through 53
2. Financial Statement Schedules. The following financial statement
schedules are included beginning on Page 2.
Report of Independent Accountants
Schedule II - Condensed Financial Information of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
Schedule VI - Supplemental Information Concerning Property -
Casualty Insurance Operations
3. Exhibits. The Exhibits set forth on the Index to Exhibits are
incorporated herein by reference .
Reports on Form 8-K. None.
<PAGE>
Board of Directors and Stockholders of
Symons International Group, Inc. and Subsidiaries
The audit referred to in our report dated March 14, 2000, except for note 21,
which is as of March 23, 2000 relating to the consolidated financial statements
of Symons International Group, Inc., which is incorporated in Item 8 of the Form
10-K by reference to the annual report to stockholders for the year ended
December 31, 1999 included the audit of the financial statement schedules listed
in the accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based upon our audit.
In our opinion such financial statement schedules present fairly, in all
material respects, the information set forth therein.
SCHWARTZ, LEVITSKY FELDMAN LLP
March 14, 2000, except for note 21,
which is as of March 23, 2000
<PAGE>
GORAN CAPITAL INC.-
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES.
The information required by this schedule is included in note 4 of Notes to
Consolidated Financial Statement.
GORAN CAPITAL INC.- CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT As Of December 31,
1998 and 1999 (In Thousands) (Unaudited) <TABLE> <CAPTION>
ASSETS 1998 (1) 1999
---- ----
Assets:
<S> <C> <C>
Cash and Short-term Investments $233 $213
Loans to Related Parties 605 2,723
Capital and Other Assets 519 26
Investment in Subsidiaries, at Cost 9,636 10,295
----- ------
Total Assets $10,993 $13,257
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans from Related Parties and Other Liabilities $--- $2,735
Total Liabilities $--- $2,735
==== ======
Shareholders' Equity:
Common Shares 17,940 19,017
Cumulative Translation Adjustment 1,367 931
Deficit (8,314) (9,426)
Total Shareholders' Equity 10,993 10,522
------ ------
Total Liabilities and Shareholders' Equity $10,993 $13,257
======= =======
</TABLE>
(1) Certain prior year balances have been reclassed to reflect the restatement
of cash advances in the amount of $9,953. Please refer to Note (1) on Statement
of Earnings (Loss) and Accumulated Deficit.
<PAGE>
GORAN CAPITAL INC. -
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF EARNINGS (LOSS) AND ACCUMULATED DEFICIT For The Years Ended
December 31, 1997, 1998 and 1999 (In Thousands) (Unaudited) <TABLE> <CAPTION>
1997 1998 1999
---- ---- ----
Revenues
<S> <C> <C> <C>
Management Fees $336 $108 $75
Dividend Income ---- ---- ----
Other Income 52 ---- ----
Net Investment Income 15 40 46
-- -- --
Total Revenues 403 148 121
--- --- ---
Expenses
Debenture Interest Expense ---- ---- ----
Amortization ---- ---- ----
General, Administrative, Acquisition Expenses and Taxes (234) 1,380 1,233
----- ----- -----
Total Expenses (234) 1,380 1,233
----- ----- -----
Net Income (Loss) 637 (1,232) (1,112)
Other-Purchase of Common Shares ---- (522) ----
Deficit, Beginning of Year (17,150) (16,513) (18,267)
Prior Period Adjustmnet (1) 9,953 9,953 9,953
----- ---- ----
Deficit, Beginning of Year, Restated (7,197) (6,560) (8,314)
------- ------- -------
Deficit End of Year $(6,560) $(8,314) $(9,426)
======== ======== ========
</TABLE>
(1) Cash advances of $9,953 from a subsidiary to November 30, 1996 were
previously recorded as loans from related parties. Reinterpretation of the facts
available at the time has resulted in the Company restating such cash advances
as a dividend received on shares of the subsidiary.
<PAGE>
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended
December 31, 1997, 1998 and 1999 (In Thousands) <TABLE> <CAPTION>
1997 1998 1999
---- ---- ----
Cash Flows from Operations
<S> <C> <C> <C>
Net Income (Loss) $637 $(1,232) $(1,112)
Items Not Involving Cash:
Amortization and Depreciation ---- ---- ----
Gain on Sale of Capital Assets ---- ---- ----
Decrease (Increase) in Accounts Receivable (1) (163) 560 (2,118)
Decrease (Increase) in Other Assets (54) 779 (166)
Increase (Decrease) in Accounts Payable (867) 613 2,735
Translation Adjustment ---- (230) (436)
---- ----- -----
Net Cash Provided (Used) by Operations (447) 490 (1,097)
----- --- -------
Cash Flows From Financing Activities:
Proceeds on Sale of Capital Assets ---- ---- ----
Purchase of Common Shares ---- (748) ----
----
Issue of Common (1) 843 (675) 1,077
--- ----- -----
Net Cash Provided by Financing Activities 843 (1,423) 1,077
--- ------- -----
Cash Flows From Investing Activities:
Other, net 451 ---- ----
Reduction of Debentures ---- ---- ----
---- ---- ----
Net Cash Provided By Investing Activities 451 ---- ----
--- ---- ----
Net Increase (Decrease) in Cash 847 (933) (20)
Cash at Beginning of Year 319 1,166 233
--- ----- ---
Cash at End of Year $1,166 $233 $213
====== ==== ====
Cash Resources are Comprised of:
Cash 78 104 73
Short-Term Investments 1,088 129 140
----- --- ---
$1,166 $233 $213
====== ==== ====
</TABLE>
(1) Amounts for 1998 exclude consideration of $1,777 for the issuance of common
shares received in the form of share purchase loans.
<PAGE>
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended
December 31, 1997, 1998 and 1999
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, 1997, 1998 and 1999
(In Thousands)
<TABLE>
<CAPTION>
Property and Liability Insurance 1997 1998 1999
<S> <C> <C> <C>
Direct Amount $420,443 $419,966 $385,655
- ------------- -------- -------- --------
Assumed From Other Companies 28,539 126,805 88,032
- ---------------------------- ------ ------- ------
Ceded to Other Companies (167,086) (184,665) (216,124)
- ------------------------ --------- --------- ---------
Net Amounts $281,896 $362.106 $257,563
- ------------ -------- -------- --------
Percentage of Amount Assumed to Net 10.1% 35.0% 34.2%
- ----------------------------------- ----- ----- -----
</TABLE>
<PAGE>
GORAN CAPITAL INC.- CONSOLIDATED SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1997, 1998 and 1999 (In Thousands)
<TABLE>
<CAPTION>
1997 1998 1999
Allowance for Allowance for Allowance for
Doubtful Accounts Doubtful Accounts Doubtful Accounts
Additions:
<S> <C> <C> <C>
Balance at Beginning of Period $1,480 $1,993 $6,393
Charged to Costs and Expenses(1) 9,519 12,690 8,775
Charged to Other Accounts --- --- ---
Deductions from Reserves 9,006 8,290 12,249
----- ----- ------
Balance at End of Period $1,993 $6,393 $2,919
===== ===== =====
</TABLE>
(1) The Company continually monitors the adequacy of its allowance for
doubtful accounts and believes the balance of such allowance at
December 31, 1997, 1998 and 1999 was adequate.
<PAGE>
GORAN CAPITAL INC.- CONSOLIDATED SCHEDULE VI - SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS For The Years Ended December
31, 1997, 1998 and 1999 (In Thousands)
<TABLE>
<CAPTION>
Deferred Reserves Discount, Unearned Earned Net Claims and Amorti-zatiPaid Premiums
Policy for if any, Premiums Premiums Invest-menAdjustment Expenses of Claims Written
AcquisitionUnpaid deducted Income Incurred Deferred and
Costs Claims in Related to: Policy Claim
and Column C Acqui-sitioAdjust-
Claim Costs ment
Adjust- Expense
ment
Expense
- --------- ---------- ---------- ---------- ----------- ----------- --------- -------------------- ---------- ---------- -----------
Consolidated property - casualty entities Current Prior
Years Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 11,849 152,871 --- 118,616 276,540 12,777 201,483 9,516 19,356 203,012 448,982
1998 16,332 218,233 --- 110,664 342,177 13,401 268,750 12,142 51,558 236,179 546,771
1999 13,920 219,918 --- 90,007 276,040 13,418 243,747 32,886 46,126 248,682 473,687
</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.
<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 14, 2000 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 14, 2000, on behalf of
the Registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial Officer:
/s/ Bruce K. Dwyer
Vice President and Chief Financial Officer,
Principal Accounting Officer
(3) The Board of Directors:
/s/ G. Gordon Symons /s/ J. Ross Schofield
Chairman of the Board Director
/s/ John K. McKeating /s/ Douglas H. Symons
Director Director
/s/ David B. Shapira /s/ Alan G. Symons
Director Director
<PAGE>
GORAN LOGO
1999 Annual Report
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 46 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 68.0% of Symons International Group, Inc.
("SIG") trades on The NASDAQ Stock Market's National Market under the symbol
"SIGC". SIG owns niche insurance companies principally in the crop and
nonstandard automobile insurance markets, IGF Insurance Company of Des Moines,
Iowa is the fifth largest crop insurer in the United States. SIG also owns
Superior Insurance Company of Tampa, Florida and Pafco General Insurance Company
of Indianapolis, Indiana, which provide nonstandard automobile insurance and
combined are the twelfth largest writers of such insurance in the United States.
Granite Reinsurance Company Ltd. underwrites finite (limited risk) reinsurance
in Bermuda, the United States and Canada.
The common stock of Goran Capital Inc. trades on The Toronto Stock Exchange
under the symbol "GNC" and The NASDAQ Stock Market's National Market under the
symbol "GNCNF".
All dollar amounts shown in this report are in U.S. currency unless otherwise
indicated. The conversion rates for 1999 and as of December 31, 1999 were
$1.4871 and $1.4432, respectively.
Table of Contents
Page
Financial Highlights 2
Chairman's Report 3
Selected Financial Data 5
Management's Discussion and Analysis of
Financial condition and Results of Operations 6
Consolidated Financial Statements 23
Notes to Consolidated Financial Statements 27
Report of Independent Accountants 53
Stockholder Information 54
Board of Directors and Executive Officers 1BC
Subsidiary and Brance Offices 1BC
GRAPH 1995 1996 1997 1998 1999
$146,303 $299,376 $448,982 $546,771 $473,687
Gross Premiums Written By Year
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
(in thousands, except per share data)
For the years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross premiums written $473,687 $546,771 $448,982 $299,376 $146,303
Earnings (loss) from continuing operations $(62,373) $(9,139) $15,763 $14,128 $6.652
Earnings (loss) per share from continuing $(10.61) $(1.56) $2.82 $2.67 $1.33
Operations
Stockholders' equity $(18,061) $49,524 $61,462 $47,258 $12,761
Book Value per share $(3.07) $8.48 $10.53 $8.74 $2.52
Market Value per share $2.00 $10.38 $29.41 $20.08 $8.57
1) 1995 figures have been restated to reflect accounting policy changes
and adopted in 1998 (see Note 1(0) to the financial statements); 1996
and 1997 figures were not materially impacted by the changes.
</TABLE>
CORPORATE STRUCTURE
[graphic omitted]
Goran Capital, Inc.
Toronto, Ontario
|
- --------------------------------------------------------------------------------
|
68% 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.
Florida
|------------------------|
IGF Holdings, Inc. Superior Insurance Group Management, Inc.
| |
North American IGF Insurance
Crop Underwriters Company
Inc.
---------------------------------------
| |
Pafco General Superior Insurance
Insurance Company Company
||
--------------------------------------
| |
Superior Guaranty Superior American
Insurance Company Insurance Company
Chairman's Report to our Shareholders
On this Millennium New Year, I gathered with my family for a New Year's repast,
hopeful that it would see the beginning of a better business period for our
companies and us. During the past two years we had concentrated money and time
on extensive adjustments in our reporting and operational systems and in the
past year accelerated our search for people who could add expertise and
experience to the basic divisions of the Company nonstandard auto and crop
insurance.
Many of our problems stemmed from our active acquisition program, our premium
income rising from $127 million in 1994 to $546 million in 1998. The integration
of this business with its diverse data processing systems, has been an expensive
and difficult experience, but I'm pleased to say we have made substantial
improvements and I expect these modifications to show tangible benefits in the
near future. These systems play an important role in the functionality of the
Company and its subsidiaries but in addition can have a significant effect on
the expense ratio of our insurance entities. I will not dwell further on this
aspect of our operations, but those shareholders who have been active in
business, know that it is impossible to survive without a compliant and
functional EDP program.
Our shareholders know that we had significant losses in our Crop Operations in
1998 and 1999, the most devastating losses coming from a relatively new program
called AgPI. This is a form of business interruption insurance designed
initially to fill a coverage requirement for processors of crops such as grain
dealers and companies that purchase the products grown by the farms. This
business produced in 1998 approximately $7 million of premium and we have paid
losses or established loss reserves against liabilities totaling approximately
$35 million. The reserves are established by our staff, then reviewed by
professional actuaries. The business was issued on policies of a third-party
insurance company licensed in California and elsewhere and reinsured to us. A
portion of the losses incurred resulted from the actions of certain independent
brokers who sold the policies to insured's who knew they had losses before they
applied for the coverage. The issuing company settled certain losses over our
objections, which calls into question whether we have an obligation to meet
liabilities of this magnitude. All of this business and its resultant losses,
whether reserved or paid arose in 1998. However, the major increase in reserves
took place in 1999 when the magnitude of the loss could finally be estimated.
The losses are excessive by any standard, but regardless of our feelings on the
quantum of the losses and practices employed to write this business, we have to
pay some losses and reserve for others. The company is pursuing all applicable
recovery rights.
Unlike many other forms of insurance, crop insurance is a year-by-year thing. As
the coverage is against loss occurring in the growing season it has no "long
tail" exposure and it is generally possible to determine the profit or loss to
the insurers at the end of the term. We start with a clean sheet, so to speak,
the exception being rare. There is cause for some optimism, concerning Crop Year
2000, for not only has there been upward movement in the price of the products
we insure but farmers realize that the Federal Government program is the safety
net to the farmer and bankers are demanding more coverage. These two factors
will increase the premium volume and we have seen this in the number and value
of the applications received to date. With the substance of our reinsurance
program and our emphasis on increased fee income, we are optimistic about our
results for the current year.
Fee income is earned from such programs as our Geo Ag, which uses global
positioning satellites to grid map the farm and match with soil sampling for
precision farming. Our agronomy-trained staff is proving to farmers the benefits
of no-till techniques, to increase yields and stop soil run-off and air blown
run-off. These techniques create carbon credits from the stalks remaining in the
ground over the winter and we assist the farmers by marketing these credits to
the power companies. We maintain a large staff of agronomists whose services are
sold to the farmers on such matters as to the types of seed to plant for better
results, the best fertilizer to use in certain areas of the farm, such
information coming as a product of the GPS information we obtain on a specific
piece of land.
<PAGE>
In the past three years the nonstandard auto insurance market was overly
competitive as the larger companies fought to increase their market share. The
resultant poor underwriting results has led to a return to sounder underwriting
principles in the past short while. Our problems in the auto division were two
fold; excessive competition coupled with a rising expense ratio. One of our
system providers went out of business and flaws in other systems inherited from
acquisitions needed to be overhauled. At considerable expense this has been
attended to and we look for a return to lower expense ratios which previously
prevailed. Rates have been rising in most states as many companies have reduced
their market share in an attempt to return to profitability, while other
nonstandard companies have withdrawn from the business.
We inaugurated a program to find the best man available to head up our
nonstandard business. We believe Gene Yerant who had an impressive record
building Leader National Insurance Company, a nonstandard provider, is the right
man for the job, and in January he assumed the Presidency of Superior Insurance
Group. The Board has been impressed with the progress he has made in the
relatively short time since he joined us. He has effected changes in key
positions of senior personnel and has achieved a major improvement in the flow
of business. The agents, several of them returning to the Company with business,
have been most complimentary to these changes.
I believe we are returning to the position we maintained when results were
profitable and that evidence of that should not be very distant.
It has been a hard haul for our staff as changes were implemented and I would
like to express my gratitude to those who have remained with us through these
changing times. I specifically wish to thank the Board members for their support
as we tussled with these problems, and while we are not out of the woods yet,
there is realistic cause for optimism.
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
OF GORAN CAPITAL INC.
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company and its Subsidiaries and should
be read in conjunction with the consolidated financial statements of the Company
and the notes thereto, included elsewhere in this Report.
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data (1):
(in thousands, except per share amounts and ratios)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Gross Premiums Written $473,687 $546,771 $448,982 $299,376 $146,303
Net Premiums Earned 276,040 342,177 276,540 214,346 72,102
Fee Income 15,791 20,203 17,821 9,286 2,170
Net Investment Income 13,418 13,401 12,777 7,745 3,686
NET EARNINGS (LOSS) $(62,373) $(12,076) $12,218 $31,296 $6,666
========= ========= ======= ======= ======
Per Common Share Data:
Basic Earnings Per Share From Continuing Operations
$(10.61) $(1.56) $2.82 $2.67 $1.33
Basic Earnings Per Share $(10.61) $(2.07) $2.19 $5.89 $1.33
GAAP Ratios:
Loss and LAE Ratio 100.2% 82.1% 76.5% 68.3% 71.0%
Expense Ratio 35.5% 30.4% 22.9% 22.7% 21.5%
Combined Ratio 135.7% 112.5% 99.4% 91.0% 92.5%
Consolidated Balance Sheet Data:
Investments $220,740 $240,866 $236,797 $198,594 $44,174
Assets 512,111 571,204 564,471 381,972 160,032
Losses and LAE 219,918 207,432 154,636 128,306 88,982
Trust Preferred Securities 135,000 135,000 135,000 48,000 5,811
Equity (Deficit) $(18,061) $49,524 $61,462 $47,984 $11,977
Book Value $(3.07) $8.43 $10.73 $8.88 $2.37
(1) The financial statements of the Company have been prepared in
conformance with U.S. GAAP. See Note 22 to the financial statements.
(2) 1995 figures have been restated to reflect accounting policy changes
adopted in 1998 (see Note 1(0) to the financial statements); 1996 and
1997 figures were not materially impacted by the changes.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or trends in the Company's operations
or financial results, as well as other statements including words such as
"anticipate," "could," "feel(s)," "believe," "believes," "plan," "estimate,"
"expect," "should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks;
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) general economic conditions, including
prevailing interest rate levels and stock market performance; (ii) factors
affecting the Company's crop insurance operations such as weather-related
events, final harvest results, commodity price levels, governmental program
changes, new product acceptance and commission levels paid to agents; (iii)
factors affecting the Company's nonstandard automobile operations such as
premium volume; and (iv) the factors described in this section and elsewhere in
this report.
Overview
Goran Capital Inc. (the "Company" or "Goran") owns insurance companies that
underwrite and market nonstandard private passenger automobile insurance and
crop insurance. The Company's principal insurance company subsidiaries are Pafco
General Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and
IGF Insurance Company ("IGF"). The Company also provides finite risk, stop loss
and quota share reinsurance through Granite Reinsurance Company Ltd. ("Granite
Re").
Nonstandard Automobile Insurance Operations
Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty"), and
Superior American Insurance Company ("Superior American"), are engaged in the
writing of insurance coverage for automobile physical damage and liability
policies for nonstandard risks. Nonstandard risk insureds are those individuals
who are unable to obtain insurance coverage through standard market carriers due
to factors such as poor premium payment history, driving experience or
violations, particular occupation or type of vehicle. The Company offers several
different policies which are directed towards different classes of risk within
the nonstandard market. Premium rates for nonstandard risks are higher than for
standard 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.
<PAGE>
Crop Insurance Operations
General
The two principal components of the Company's crop insurance business are
multiple-peril crop insurance (MPCI) and private named peril crop insurance,
primarily crop hail insurance. Crop insurance is purchased by farmers to reduce
the risk of crop loss from adverse weather and other uncontrollable events.
Farms are subject to drought, floods and other natural disasters that can cause
widespread crop losses and, in severe cases, force farmers out of business.
Historically, one out of every twelve acres planted by farmers has not been
harvested because of adverse weather or other natural disasters. Because many
farmers rely on credit to finance their purchases of such agricultural inputs as
seed, fertilizer, machinery and fuel, the loss of a crop to a natural disaster
can reduce their ability to repay these loans and to find sources of funding for
the following year's operating expenses.
The Company generates revenue like other private insurers participating in MPCI
program in two ways. First, it markets, issues and administers policies, for
which it receives administrative fees; and second, it participates in a
profit-sharing arrangement with the federal government. However, the Company may
also pay a portion of the aggregate loss, in respect of the business it writes,
if the losses exceed certain levels. The Company writes MPCI and crop hail
insurance through approximately 2,850 independent agencies in 46 states.
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and involves no
federal participation. The Company also offers a proprietary product which
combines the application and underwriting process for MPCI and hail coverages -
HailPlus(TM). This product tends to produce less volatile loss ratios than the
stand alone product since the combined product generally insures a greater
number of acres, thereby spreading the risk of damage over a larger insured
area. Approximately 37% of the Company's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide coverage against
hail damage, the private crop hail coverages allow farmers to receive payments
for hail damage which would not be severe enough to require a payment under an
MPCI policy. The Company believes that offering crop hail insurance enables it
to sell more policies than it otherwise would.
In addition to crop hail insurance, the Company also sells insurance against
crop damage from other specific named perils. These products cover specific
crops and are generally written on terms that are specific to the kind of crop
and farming practice involved and the amount of actuarial data available. The
Company plans to seek potential growth opportunities in this niche market by
developing basic policies on a diverse number of named crops grown in a variety
of geographic areas.
The Company has started three new business initiatives related to agriculture
risk management: agronomy services, price risk management, and carbon emission
reduction credits. Each will provide the opportunity to increase fee revenue.
Fee revenue provides the Company with limited risk and high profit margins from
its same base of operations and thus contributes to capital and surplus growth.
The Company, through its IGF subsidiary, has launched additional pilot programs
- - IGF Agronomics, IGF Price Risk Management, and Carbon Credits - aimed at
generating fee income in addition to continuing its GeoAgPLUS services. IGF
Agronomics is a new program where farmer-clients work hand-in-hand with IGF
employed professional agronomists to maximize the producer's return by helping
lower costs and increase yields. This is accomplished through the employment of
best management practices ranging from tillage techniques to seed selection to
fertilizer and pesticide application programs. Research shows that every dollar
spent by farmers on agronomy services yields a multiple positive return per
acre. IGF Price Risk Management is then designed to help farmers market their
crop so as to generate a return sufficient to at least cover costs of
production, if not generate a profit. Finally, IGF is established as a solicitor
and accumulator of Carbon Emission Reduction Credits (CERC1s). CERCs are a
tradable commodity sought by power companies and other industries with
operations resulting in a net addition of carbon dioxide (CO2) to the atmosphere
due to upcoming restrictions on such emissions imposed by regulators under
international treaties. Certain agricultural practices, many already employed by
American farmers, result in a net "sink" or actual reduction of emissions by
avoidance or substitution (removing CO2) thereby generating CERCs. IGF has
already participated in one large sale of CERCs and is awaiting federal
standards criteria for expanding this initiative.
Geo AgPLUS(TM) Services ("Geo Ag") 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 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 precision farming
service operating through a division that is now marketing its fee based
services to the farmer.
Seasonality
The crop insurance business is seasonal by geographic region; spring crops in
northern and midwestern states, fall crops in southern states such as fruit and
nuts, winter crops in coastal states such as California and summer cash crops
grown in all states. The Company also insures long term crops such as timber and
nurseries. While this seasonality is time specific for each crop, the associated
tasks of sales and marketing primarily occur before each respective crop growing
season. The customer support, applications and claims processing tasks are time
and event driven within the mid to later part of the growing season; many times
being finished after the growing season and harvest is completed. The bulk of
the loss adjustment activities for the spring and fall crops occur between May
and November. These same activities occur for winter crops, such as fruits, in
January and February, and for cash crops throughout the year.
Throughout the year the Company provides to its customers services such as
education, agronomy training, soil sampling, grid mapping for precision farming,
insurance advice and loss adjusting.
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 ("GAAP"), gross premiums written consist of the aggregate amount of
MPCI premiums paid by farmers for buy-up coverage (MPCI coverage in excess of
catastrophic ("CAT") coverage - the minimum available level of MPCI coverage),
and any related federal premium subsidies, but do not include MPCI imputed
premiums 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 under a
Standard Reinsurance Agreement (SRA). For 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
(made on the farmer's behalf) equal to a percentage of gross premiums written
for each Buy-Up Coverage policy it writes and (ii) a loss adjustment expense
("LAE") reimbursement payment equal to a percentage of MPCI imputed premiums for
each CAT coverage policy it writes. The Buy-Up Expense Reimbursement Payment was
reduced in 1999 to 24.5%, from 27.0% in 1998 of the MPCI Premium on regular MPCI
yield-based policies and 21.1% Crop Revenue Coverage (CRC) revenue-based
policies. For GAAP 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. 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, it also contained
the Expense Reimbursement reductions noted above that began in 1999. In addition
the new law reduced the CAT LAE Reimbursement Payment from 14.1% to 11% of
imputed premium and the $60 CAT administrative fee previously retained by
private carriers must, beginning in 1999, be remitted in full to the FCIC.
Although the Company had hoped to offset these reductions through growth in fee
income from non-federally subsidized programs, it was not fully able to do so in
1999.
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, (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 and (iv) an estimate of underwriting profit based on historic results.
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 and growing
conditions. 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 development. In the third and fourth quarters, a
reconciliation amount is recognized for the underwriting gain or loss based on
final premium and latest available loss information. The growing seasons vary by
region and crop. The determination of amounts of risk and volume of premium
often is arrived at after the attachment of risk. For these reasons, management
believes that the best method to arrive at an allocation of premium, expense and
estimate of profit and loss is as stated above.
Currently, the National Association of Insurance Commissioners ("NAIC") does not
provide guidelines for the reporting of underwriting gains/losses. The Company's
position is embedded in the understanding that these amounts more closely relate
to ceding commission rather than normal revenues. Underwriting gain is a
function of premiums less loss, which in non-MPCI insurance would result in
commissions, which are returned to the Company from the reinsurer. Amounts are a
function of the ceding commission related to the MPCI business and have been
reported as such (included with the other commission expense items). These
amounts are reported as a reduction to commission expense (gain) from a
statutory basis. The Company's position has been to maintain consistency.
The Company is currently involved with an industry taskforce working with the
NAIC and the FCIC to develop standard accounting and reporting procedures for
this line of business. The taskforce's goal is to provide to the NAIC the
standard methodology, which can be incorporated no earlier than the year 2000
codification. Currently there are seventeen companies writing this line of
business with varying reporting formats.
<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.
<TABLE>
<CAPTION>
Year Ended December 31,
Nonstandard - Automobile Insurance Operations:
(in thousands, except ratios) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross premiums written $235,773 $303,737 $323,915
-------- -------- --------
Net premiums written $244,826 $269,741 $256,745
-------- -------- --------
Net premiums earned $249,094 $264,022 $251,020
Fee income 15,185 16,431 15,515
Net investment income 12,339 11,958 10,969
Net realized capital gain (loss) (281) 4,124 9,462
----- ----- -----
Total Revenues 276,337 296,535 286,966
------- ------- -------
Losses and loss adjustment expenses 230,973 217,916 195,900
Policy acquisition and general administrative expenses 91,859 73,346 72,463
------ ------ ------
Total Expenses 322,832 291,262 268,363
------- ------- -------
Earnings before income taxes $(46,495) $5,273 $18,603
--------- ------ -------
GAAP RATIOS (Nonstandard Automobile Only)
Loss and LAE ratio (1) 92.7% 82.5% 78.0%
Expense ratio, net of billing fees (2) 30.8% 21.6% 22.7%
----- ----- -----
Combined ratio (3) 123.5% 104.1% 100.7%
Crop Insurance Operations:
Gross premiums written $237,286 $243,026 $126,401
-------- -------- --------
Net premiums written $12,737 $62,467 $20,796
------- ------- -------
Net premiums earned $14,240 $60,901 $20,794
Fee income 456 3,772 2,276
Net investment income 293 275 191
Net realized capital gain (loss) 21 217 (18)
-- --- ----
Total Revenues 15,010 65,165 23,243
------ ------ ------
Losses and loss adjustment expenses 34,225 52,550 16,550
Policy acquisition and general and administrative expenses (4) 215 21,906 (14,404)
Interest and amortization of intangibles 1,113 502 235
----- --- ---
Total Expenses 35,553 74,958 2,381
------ ------ -----
Earnings (loss) before income taxes $(20,543) $(9,793) $20,862
========= ======== =======
</TABLE>
(1) Loss and LAE ratio: The ratio of losses incurred during the financial
reporting year plus the cost to settle losses during the same period as a
percentage of premiums earned.
(2) Expense ratio: The ratio of policy acquisition, general administrative
expenses, as percentage of premiums earned.
(3) Combined ratio: The sum of the loss, plus LAE, plus the expense ratio as a
percentage of premiums earned. Loss is the claims incurred on policies
written. LAE is loss adjusting expense on claims for which policies have
been written.
(4) Negative crop expenses are caused by inclusion of MPCI expense
reimbursements and underwriting gain as a set off to expense. See certain
accounting policies for crop insurance operations.
[photograph of automobiles and crop field down left side]
Results of Operations
Overview
1999 Compared To 1998
The Company recorded a net loss of $(62,373,000) or $(10.61) per share (basic
and diluted) compared to a net loss of $(12,076,000) or $(2.07) per share (basic
and diluted) in 1998. The loss in 1999 was due to reduced earnings in both crop
and nonstandard automobile operations. Results for 1999 for the crop operations
were significantly impacted by an increase in claims settlements and reserves
for an agricultural business interruption product that was offered in 1998 and
has since been discontinued ("AgPI"). The MPCI produced a profit while the named
perils and hail programs had combined loss and expense ratios of 117.5% and
84.6%, respectively. Results for 1999 for the nonstandard automobile operations
were impacted by a higher loss ratio and lower premium volume. These were the
result of problems encountered with untimely 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 $16.4 million
in 1999 due to adverse loss development.
1998 Compared To 1997
The Company recorded a net loss of $(12,076,000) or $(2.07) per share (basic and
fully diluted) compared to net earnings of $12,218,000 or $2.19 per share
(basic) and $2.08 (fully diluted) in 1997. The loss 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 alliance with
Continental Casualty Company ("CNA") for its crop insurance business (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 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 $13.0 million
in 1998 due to adverse loss development.
Years Ended December 31, 1999 and 1998
Gross Premiums Written
Consolidated Gross Premiums Written decreased 13.4% in 1999 due to a withdrawal
from certain areas of hail sales, a reduction in the price of crops leading to
less insurable values upon which to price insurance, a reduction in nonstandard
auto sales due to increased competition, rate increases and withdrawal from
certain small volume states. The following shows gross premiums written for crop
insurance products:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
---- ----
<S> <C> <C>
CAT imputed $39,727 $50,127
MPCI 179,727 157,225
Crop Hail 53,647 76,198
Named perils 3,816 2,074
AgPI 96 7,529
-- -----
$277,013 $293,153
Less CAT imputed (39,727) (50,127)
-------- --------
Total $237,286 $243,026
</TABLE>
Net Premiums Written
Net premiums written decreased 29.2% in 1999 as compared to 1998 due to a larger
quota share reinsurance cover for hail, from 25.0% in 1998 to 69.0% in 1999,
along with lower written premiums in the auto segment.
Net Premiums Earned
Net premiums earned decreased 19.3% in 1999 as compared to the prior year,
reflecting reduction in gross and net premiums written. The ratio of net
premiums earned to net premiums written for the nonstandard automobile segment
was 101.7% in 1999 due to lower written premium in the auto segment.
Fee Income
Fee income decreased 21.8% in 1999 compared to 1998. Fee income on nonstandard
automobile operations decreased as a result of lower gross premiums written.
Crop fees primarily include CAT fees and service fees such as GeoAg which
totaled $456,000 in 1999 compared to $3,772,000 in 1998, a decline of 87.9%. The
primary reason for the decline is due to the law change prohibiting company
retention of the CAT fee.
Net Investment Income
Net investment income increased .1% in 1999 compared to 1998, such increase was
due to higher yields.
Net Realized Capital Gains (Losses)
In 1999, the investment portfolio realized a small gain of $65,000 compared to a
realized gain in 1998 of $4,104,000 which emanated from a high level of activity
in the equity portfolio in 1998.
Losses and LAE
The loss and LAE ratio (the ratio of claims and loss adjusting expense as a
percentage of earned premiums) ("Loss and LAE Ratio") for the nonstandard
automobile segment was 92.7% for 1999 as compared to 82.5% for 1998. The crop
hail Loss and LAE Ratio was 240.6% in 1999 compared to 79.4% in 1998. The
increase in the Loss and LAE Ratio for the nonstandard automobile segment
reflects adverse development on prior years of approximately 6.6%. The Company
estimates its nonstandard automobile 1999 accident year loss ratio was 86.2% as
compared to its current estimate of 81.1% in accident year 1998. The increase in
the accident year loss ratio results from product and pricing decisions and
increases in claim frequency. The increase in the crop hail Loss and LAE Ratio
primarily reflects the adverse reserve development on 1998 AgPI losses. In
addition, the pricing for crop insurance was inadequate and crop experience in
the whole market was poor. The reinsurance program helped reduce the net effect
to the Company as detailed in the reinsurance section. During 1998, premiums of
$7.5 million were recognized from AgPI; however, the Company suffered losses
during 1999 from this program. Adverse development, almost exclusively
associated with AgPI, on 1998 crop Loss and LAE reserves affected 1999 by $14.1
million.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses have increased as a
result of the following: As previously reported, the Company had problems with
its policy administration systems which resulted in higher expenses being
incurred in 1999. The crop operation wrote approximately the same number of
policies but at a lower average premium than in 1998 due to depressed commodity
prices. Thus, as a percentage, the Company experienced an increase in its
expense ratio in 1999. Policy acquisition and general and administrative
expenses reduced to $97,950,000 or 35.5% of net premiums earned in 1999 compared
to $103,926,000 or 30.4% of net premiums earned for 1998.
The following represents the breakdown of crop policy acquisition and general
and administrative expenses:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
<S> <C> <C>
MPCI expense reimbursements $(38,580) $(37,982)
MPCI underwriting gain, net of stop loss
and CNA reinsurance in 1998 (18,404) (14,902)
Commissions 44,797 50,089
Ceding commission income (12,266) (6,899)
Operating expenses 24,668 31,600
------ ------
Total $215 $21,906
==== =======
</TABLE>
MPCI expense reimbursements declined to 21.5% of MPCI premiums for 1999 as
compared to 24.2% in 1998 due to federally mandated reductions. Commission
expense as a percentage of gross written premiums were, in 1999, 16.2% of gross
written premiums compared to 17.1% in 1998. Operating expenses as a percentage
of gross written premiums were 9.3% in 1999 compared to 10.8% in 1998.
Nonstandard automobile expenses net of fee income were 30.8% of earned premiums
in 1999 compared to 21.6% in 1998.
In 1998 the Company reserved for uncollectable items as a result of issues with
the operating system acquired as part of the CNA Transaction.
Amortization of Intangibles
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest portion of
Superior Insurance Group Management, Inc. ("Superior Group Management",
formerly, GGS Management Holdings, Inc. ("GGSH")), the acquisition of North
American Crop Underwriters, Inc. ("NACU") and debt or preferred security
issuance costs. Amortization expense in 1999 of $2,297,000 is a decrease of 3.4
% over 1998.
Interest Expense
Interest expense in 1999 represents the crop segment's borrowings on its
seasonal line of credit at weighted average rate of 7.02% and from the FCIC, at
15% interest. Due to the payments of approximately $21.9 million for gross
losses in 1999 on AgPI, the cash reserves of IGF were lower than in 1998.
Therefore, IGF deferred remittance to the FCIC of uncollected premiums in
accordance with the SRA.
Income Tax Expense (Benefit)
The variance in the rate from the U.S. federal statutory rate of 35% is
primarily due to tax exempt income, nondeductible goodwill amortization,
alternative minimum taxes, tax versus book basis in capital assets and
securities disposed.
At December 31, 1999 the Company's net deferred tax assets are fully offset by a
valuation allowance. The Company will continue to assess the valuation allowance
and to the extent it is determine that such allowance is no longer required, the
tax benefit of the remaining net deferred tax assets will be recognized in the
future.
Approximately $21.4 million of the 1999 net operating loss ("NOL") was carried
back to the 1997 tax year which resulted in a refund claim. The ability of the
Company to utilize the 1999 NOL is dependent upon future taxable income
generated by the Company.
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 business from the CNA Transaction,
internal growth and AgPI revenue. Crop gross premiums written increased 92.3% in
1998 from 1997.
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 disclosed. Remaining gross premiums written represent
reinsurance business.
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 and the Company received a
return of unearned premiums and loss reserves from such treaties as of that
date. 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.
Net Premiums Earned
Net premiums earned increased in 1998 as compared to 1997 reflecting growth in
gross and net premiums written. 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 included CAT fees. CAT fees increased in 1998 as
compared to 1997 due to growth in premium volume. Fees in 1998 also increased
due to the introduction of Geo Ag Plus 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.
<PAGE>
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 loss ratio was 100% in 1998 due to losses on certain
coverages due to unusual weather related events estimated to be $3.3 million.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses increased in 1998
over 1997 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.
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 $4,861,000 in 1998 as a result of the CNA
Transaction) 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 business from the
CNA Transaction 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 business from the CNA
Transaction. These additional one-time expenses, due to a reduction of offices,
severances and write down of assets, were recorded as normal operating expenses
and were deducted in 1998 as incurred in accordance with APB16. 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 business from the CNA Transaction. This increase in reserve was
due to the integration of a processing system acquired in the CNA Transaction
that did not reconcile properly. The Company reserved for this unreconciled
amount as at December 31, 1998. The Company has determined that the amount is
not recoverable, therefore it was properly reserved as at December 31, 1998.
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
Superior Group Management and the acquisition of NACU and debt or preferred
security issuance costs. The increase in 1998 over 1997 reflected a full year's
impact of amortization of goodwill associated with the purchase of the minority
interest position in Superior Group Management and a full year's amortization of
deferred issuance costs on the Company's manditorily redeemable preferred
securities issued by SIG's trust subsidiary ("Preferred Securities").
<PAGE>
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 Superior Insurance Group, Inc. ("Superior
Group" formerly GGS Management, Inc. ("GGS")) Senior Credit Facility which was
repaid in 1997 from the proceeds of the offering of the Preferred Securities.
Income Tax Expense (Benefit)
The variance in the rate from the U.S. statutory rate of 35% is primarily due to
nondeductible goodwill amortization.
Distributions on Preferred Securities
Distributions on the Preferred Securities are calculated at 9.5% net of U.S.
federal income taxes from the offering date of August 12, 1997.
Symons International Group, Inc. - Florida
Goran's wholly-owned subsidiary, Symons International Group, Inc. - Florida
("SIGF") is a specialized surplus lines underwriting unit. SIGF's operations no
longer fit the Company's strategic operating plan of concentrating on the
business segments of nonstandard automobile, crop and reinsurance. Accordingly,
the majority of the book of business was sold effective January 1, 1999. A small
amount of premium remained after the sale. In 1999, the premium volume from this
operation reduced to $526,000 from $6,427,000 in 1998 and $9,560,000 in 1997. In
1999, SIGF recognized a loss of $861,000 primarily as a result of closing
expenses and the write down of capitalized software, compared to operating
losses of $2,937,000 in 1998 and $3,545,000 in 1997.
Non-U.S. Operations
Granite Insurance Company
Granite Insurance Company ("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 moderate redundancies
appeared in the most recent year. Granite's invested assets increased to $3.0
million from $2.6 million in 1998. This is the result of realized profits for
the year. Total net outstanding claims decreased to $368,000 in 1999 from
$400,000 in 1998. It is expected that the run-off of outstanding claims will
continue at least through 2000. Granite recorded a net profit of $179,000 in
1999, compared to a $403,000 net loss in 1998 and $261,000 net loss in 1997.
This is a reflective of the realization of gains and losses in the investment
portfolio.
Granite Reinsurance Company Ltd.
Granite Reinsurance Company Ltd. ("Granite Re") is managed by Atlantic Security
Ltd. of Bermuda and a corporate services management company in Barbados. Granite
Re underwrites finite risk, stop loss and quota share reinsurance, through
various programs in Bermuda, the United States and Canada. During 1999, 1998 and
1997, Granite Re participated in certain quota share and stop loss programs for
Goran's crop insurance subsidiary, IGF. These covers were in accordance with
third party placements whereby Granite Re assumed a portion of these treaties as
third party reinsurers. In 1998 and 1997, Granite Re participated in Goran's
nonstandard automobile subsidiaries through a quota share treaty. On January 1,
1999, the nonstandard automobile treaty was commuted resulting in a return
premium of $11.2 million. There was no other assumed automobile reinsurance in
1999. 1999 gross premiums written relating to crop were effectively offset by
the automobile commutation disclosed above. However, net premiums earned in 1999
of $12.7 million compared to $21.8 million in 1998 and $12.7 million in 1997. A
break even year in 1999 resulted in a $.2 million loss compared to a loss of
$1.1 million in 1998 and a profit of $2.1 million in 1997.
Granite Re's capital and surplus reduced by approximately $10 million from $16.2
million as reported in 1998 to $6.6 million as at December 31, 1999, primarily
as a result of a deemed dividend to Goran relating to prior years activities.
Liquidity and Capital Resources
The primary source of funds for Goran is through dividend and other
funding from Granite Re, its offshore subsidiary.
The primary source of funds available to SIG are fees from policy holders,
management fees and dividends from its subsidiaries. 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.
Superior Group collects billing fees charged to policyholders of Pafco and
Superior who elect to make their premium payments in installments. Superior
Group 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 Superior Group Management, it prohibited
Superior from paying any dividends (whether extraordinary or not) for four years
from the date of acquisition (May 1, 1996) 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 Superior Group are subject to review by the Indiana Department of
Insurance ("Indiana Department") and Florida Department.
The nonstandard automobile insurance subsidiaries' primary source of
funds are premiums, investment income and proceeds from the maturity or sale of
invested assets. Such funds are used principally for the payment of claims,
payment of claims settlement costs, operating expenses (primarily management
fees), commissions to independent agents, dividends and the purchase of
investments. There is variability to cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, the
Company maintains investment programs intended to provide adequate funds to pay
claims. During 1999, due to a slow down in premium volume, the Company began
liquidating investments to pay claims. The Company historically has tried to
maintain duration averages of 3.5 years. However, the reduction in new funds due
to lower premium has and will cause the Company to shorten duration. The Company
may incur a cost of selling longer bonds to pay claims. Claim payments tend to
lag premium receipts. Due to the decline in premium volume, the Company has
experienced a reduction in its investment portfolio but to date has not
experienced any problems meeting its obligations for claims payments.
Cash flows in the Company's MPCI business differ from cash flows from
certain more traditional lines. The Company pays insured losses to farmers as
they are incurred during the growing season, with the full amount of such
payments being reimbursed to the Company by the federal government within three
business days. MPCI premiums are not received from farmers until covered crops
are harvested. Collected and uncollected premiums are required to be paid in
full to the FCIC by the Company, with interest at 15%, if not paid by a
specified date during the crop year.
During 1999, IGF borrowed funds under its revolving line of credit to finance
payables to the FCIC for collected and uncollected premiums (the "IGF
Revolver"). In 1999, the maximum borrowing amount under the IGF Revolver was
$15,000,000. The IGF Revolver carried a weighted average interest rate of 8.75%,
6.96% and 7.02% in 1997, 1998 and 1999, 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 .75% in 1999 (prime rate plus 1.00% in 1998), IGF avoids the
higher interest expense 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 the 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, 1999, IGF had borrowed
the full amount available. This line of credit has been extended through
December 15, 2000; however, the authorized line of credit has been reduced to
$8,000,000 as of March 17, 2000, all of which was available April 1, 2000. At
December 31, 1999, IGF was not in compliance with a minimum statutory surplus
covenant; however, IGF received a waiver of such covenant for December 31, 1999.
IGF does expect to meet the minimum statutory surplus covenant for 2000.
During 1999 IGF deferred remittance of uncollected premium amounts to the FCIC
and therefore incurred interest of 15% on such amounts. The Company expects to
continue this practice in 2000.
On August 12, 1997, the SIG's trust subsidiary issued $135 million in
Preferred Securities at a rate of 9.5% paid semi-annually. The Preferred
Securities are backed by Senior Subordinated Notes to the trust from the
Company. The proceeds of the Preferred Securities offering were used to
repurchase the remaining minority interest in Superior Insurance Group
Management, Inc. (formerly GGS Management Holdings, Inc.) ("GGSH") for $61
million, repay the balance of the Superior Group 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, the Company wrote off the
remaining unamortized costs of the Superior Group Senior Credit Facility of
approximately $1.1 million pre-tax or approximately $0.07 per share (basic) as
an extraordinary item.
The Preferred Securities have a term of 30 years with semi-annual
interest payments which commenced February 15, 1998. The Preferred Securities
may be redeemed in whole or in part after 10 years.
The Preferred Security interest obligation of approximately $13 million
was funded from SIG's nonstandard automobile management company and surplus
funds available in SIG in 1999. During 1999 SIG paid the two Preferred
Securities interest payments. Semi-annual interest payments of $6,412,500 were
made in February and August 1999. In February 2000, the Company deferred the
interest payment in accordance with the terms of the Trust Indenture. SIG may
defer payment of any or all interest payments for up to five years. The unpaid
interest installment amounts accrue interest at 9.5%. SIG presently intends to
defer interest payments in the year 2000; however, it will reconsider this
intention depending upon cash flow and profitability.
The Trust Indenture contains certain restrictive covenants. These
covenants are based upon the SIG's Consolidated Coverage Ratio of earnings
before interest, taxes, depreciation and amortization (EBITDA) whereby if the
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 in
force. 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 (4.9) in 1999, and will continue to apply until SIG's consolidated coverage
ratio is in compliance with the terms of the Trust Indenture. SIG is in
compliance with these additional restrictions and, therefore, this does not
represent a default by the SIG on the Preferred Securities.
Net cash provided/(used) by operating activities in 1999 aggregated
$(20,619,000) compared to $11,716,000 in 1998 due to reduced cash provided by
operations as a result of the net loss.
<PAGE>
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 and operating expenses 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
borrowings for this segment. 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 the IGF Revolver or
deferring remittance of premiums to the FCIC. 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 crop business. 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 operating debt service (not including the
Preferred Securities) for the foreseeable future and, therefore, does not
anticipate additional borrowings.
While GAAP shareholders' equity reflected a deficit of $18 million at December
31, 1999, it does not reflect the statutory equity upon which the company
conducts its various insurance operations. Its insurance subsidiaries had
statutory surplus of approximately $50 million at December 31, 1999.
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 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 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
On March 4, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position No. 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 was issued to address
diversity in practice regarding whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The Company has adopted
the new requirements of the SOP in 1999. There is no material impact on the net
earnings in 1999.
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 December 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 the accounting methodology that 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 income.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which replaced 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 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 Department and the Florida Department will
adopt the Codification or make any changes to the guidance. The Company has not
estimated the potential effect of the Codification guidance if adopted by the
departments of insurance. 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.
In June 1998 SFAS No. 133, as amended, "Accounting for Derivative Instruments
and Hedging Activities" was issued, to be effective for fiscal quarters and
fiscal years beginning after June 15, 2000. The Company does not have any
derivative instruments or hedging activities, therefore, the Company believes
that SFAS No. 133 will have no material impact on the Company's financial
statements or notes thereto.
Quantitative And Qualitative Disclosures About Market Risk
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
.9% of the Company's aggregate investments. The investment portfolios of the
Company at December 31, 1999, consisted of the following:
<TABLE>
<CAPTION>
Cost or
Type of Investment (in thousands) Amortized Cost Market Value
-------------- ------------
Fixed maturities:
United States Treasury securities and obligations of United
<S> <C> <C>
States government corporation and agencies $63,857 $61,187
Obligations of states and political subdivisions 42 38
Corporate securities 113,272 110,391
------- -------
Total Fixed Maturities 177,171 171,616
Equity Securities:
Common Stocks 15,511 13,555
Short-Term investments 32,634 32,634
Mortgage loans 1,990 1,990
Other invested assets 945 945
--- ---
Total Investments $228,251 $220,740
======== ========
</TABLE>
<PAGE>
The following table sets forth composition of the fixed maturity securities
portfolio of the Company by time to maturity as of December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1999
Percent Total Percent Total
Time to Maturity Market Value Market Value Market Value Market Value
----------------
<S> <C> <C> <C> <C>
1 year or less 7,937 4.0% 4,268 2.5
More than 1 year through 5 years 53,327 27.0% 89,901 52.4
More than 5 years through 10 years 38,236 19.4% 38,566 22.5
More than 10 years 23,034 11.7% 35,641 20.7
------ ----- ------ ----
122,534 62.1% 168,376 98.1
Mortgage-backed securities 74,717 37.9% 3,420 1.9
------ ----- ----- ---
Total 197,251 100.0% 171,616 100.00
======= ====== ======= ======
</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) 1998 1999
Percent Total Percent Total
Rating (1) Market Value Market Value Market Value Market Value
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Aaa or AAA 76,484 38.8% 106,547 62.1
Aa or AA 2,256 1.1% 3,381 2.0
A 81,271 41.2% 25,718 15.0
Baa or BBB 23,504 11.9% 21,576 12.5
Ba or BB 13,736 7.0% 13,691 8.0
Other below investment grade ---- 0.0% 702 .4
---- ---- --- --
Total 197,251 100.0% 171,616 100.0
======= ====== ======= =====
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available, are based on ratings assigned by Standard & Poor's
Corporation.
</TABLE>
The investment results of the Company for the periods indicated are set forth
below:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31,
1997 1998 1999
<S> <C> <C> <C>
Net investment income (1) 13,418 13,401 12,777
Average investment portfolio (2) 215,894 236,197 233,423
Pre-tax return on average investment portfolio 5.7% 5.7% 5.9%
Net realized gains (losses) 9,393 4,104 65
(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.
</TABLE>
The Company has the ability to hold its fixed maturity securities to maturity.
If interest rates were to increase 10% from the December 31, 1999 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.
<PAGE>
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; and liquidity needs, as
well as 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.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
Fair Value
There-after 12/31/99
----------- --------
2000 2001 2002 2003 2004 Total
---- ---- ---- ---- ---- -----
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale 4,278 22,056 20,268 24,072 27,113 87,189 184,976 171,616
Average interest rate 6.5% 7.1% 7.3% 6.0% 6.3% 6.4% 6.5% 7.0%
Liabilities
IGF line of credit $15,000 $ -- $ -- $ -- $ -- $ -- $15,000 $15,000
Preferred securities $ -- $ -- $ -- $ -- $ -- $135,000 $135,000 $135,000
Average interest rate 8.5% --% --% --% --% 9.5% 9.4% 9.4%
</TABLE>
Impact of the Year 2000 Issue
The Company successfully completed the appropriate assessment, remediation and
testing processes necessary in all of its primary locations, Des Moines,
Atlanta, Indianapolis and Tampa, to resolve the year 2000 issue. No significant
issues were identified by management, and there was no interruption to the
Company's business processing system as a result of the year 2000 issue. Total
costs associated with the year 2000 issue were $9.4 million, of which $7.7
million was capitalized. The Company had already made the decision to transition
off all of its nonstandard auto legacy systems and this process had been in
progress since 1996. These new systems are Y2K compliant and were completed
prior to December 31,1999. The majority of costs capitalized are hardware and
software costs.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1999 and 1998
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS:
Investments:
Available for sale:
<S> <C> <C>
Fixed maturities, at market $171,616 $197,251
Equity securities, at market 13,555 12,988
Short-term investments, at amortized cost, which approximates market 32,634 27,637
Mortgage loans, at cost 1,990 2,100
Other invested assets 945 890
--- ---
TOTAL INVESTMENTS 220,740 240,866
Investments in and advances to related parties 1,346 2,118
Reinsurance recoverable on paid and unpaid losses, net 88,293 67,885
Cash and cash equivalents 3,173 15,123
Receivables, Net of allowances 92,446 123,690
Prepaid reinsurance premiums 10,259 17,486
Federal income taxes recoverable 6,820 12,711
Deferred policy acquisition costs 13,920 16,332
Deferred income taxes 0 5,146
Property and equipment, net of accumulated depreciation 21,967 19,350
Intangible assets 43,812 46,300
Other assets 9,335 4,197
----- -----
TOTAL ASSETS $512,111 $571,204
======== ========
LIABILITIES
LIABILITIES:
Losses and loss adjustment expenses $219,918 $207,432
Unearned premiums 90,007 110,665
Reinsurance payables 37,603 12,353
Notes payable 16,929 13,744
Distributions payable on preferred securities 4,809 4,809
Other 25,906 17,474
------ ------
TOTAL LIABILITIES $395,172 $366,477
-------- --------
Minority interest:
Equity in net assets of subsidiaries -- 20,203
Company obligated mandatorily redeemable preferred stock of trust subsidiary
holding solely parent debentures 135,000 135,000
SHAREHOLDERS EQUITY (DEFICIT)
Common Stock 19,017 17,940
Additional paid in capital 2,775 2,775
Unrealized gain (loss), net of deferred tax (4,874) 1,176
Cumulative translation adj. 13 252
Retained earnings (accumulated deficit) (34,992) 27,381
-------- ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (18,061) 49,524
-------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $512,111 $571,204
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 1999, 1998,
and 1997 (in thousands, except per share data)
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross premiums written $473,687 $546,771 $448,982
Less ceded premiums $(217,188) $(184,665) $(167,086)
---------- ---------- ----------
NET PREMIUMS WRITTEN $256,499 $362,106 $281,896
======== ======== ========
NET PREMIUMS EARNED $276,040 $342,177 $276,540
Fee income 15,791 20,203 17,821
Net investment income 13,418 13,401 12,777
Net realized capital gain -- ----- -----
TOTAL REVENUES 305,314 379,885 316,531
------- ------- -------
Expenses:
Losses and loss adjustment expenses 276,633 279,127 211,503
Policy acquisition and general and administrative expenses 97,950 103,926 63,344
Interest expense 620 163 3,087
Amortization of intangibles 2,687 2,379 1,197
----- ----- -----
TOTAL EXPENSES 377,890 385,595 279,131
------- ------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND
UNDERNOTED ITEMS (72,576) (5,710) 37,400
-------- ------- ------
ITEM
Income taxes:
Current (6,617) (1,706) 12,720
Deferred 7,865 1,643 (1,301)
----- ----- -------
TOTAL INCOME TAXES 1,248 (63) 11,419
----- ---- ------
NET EARNINGS (LOSS) BEFORE MINORITY INTEREST UNDERNOTED ITEMS (73,824) (5,647) 25,981
Minority Interest (19,787) (4,919) 7,098
Distributions on preferred securities, net of tax 8,336 8,411 3,120
----- ----- -----
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (62,373) (9,139) 15,763
Net earnings (loss) from discontinued operations ---- (2,937) (3,545)
NET EARNINGS (LOSS) $(62,373) $(12,076) $12,218
========= ========= =======
Weighted average shares outstanding - Basic 5,876,398 5,841,329 5,590,576
========= ========= =========
Earnings (loss) per share from continuing operations $(10.61) $(1.56) $2.82
======== ======= =====
Earnings (loss) per share from continuing operations - diluted $(10.61) $(1.56) $2.68
======== ======= =====
Net earnings (loss) per share $(10.61) $(2.07) $2.19
======== ======= =====
Net earnings (loss) per share -diluted $(10.61) $(2.07) $2.08
======== ======= =====
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1999, 1998, and 1997 (in thousands, except
number of shares) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Unrealized Cumulative Total
Common Stock Paid Retained Gain/(Loss) Transulation Stockholders'
Adjustment
Shares Amount In Capital Earnings On Equity
Investments
BALANCE AT JANUARY 1, 1997 (1) (1)
<S> <C> <C> <C> <C> <C> <C> <C>
5,405,820 $16,821 $2,775 $27,761 $820 $(334) $47,843
Comprehensive Income:
Net earnings 12,218 12,218
Change in unrealized gains
(losses) on securities and
Cumulative Translation Adjustments 516 42 558
Comprehensive income 12,218 516 42 12,776
Adjustments of offering costs
Issuance of shares 324,456 594 594
Change in loans to acquire shares 249 249
BALANCE AT DECEMBER 31, 1997
5,730,276 17,664 2,775 39,979 1,336 (292) 61,462
Comprehensive Income:
Net loss (12,076) (12,076)
Change in unrealized gains
(losses) on securities and
Cumulative Translation Adjustments (160) 544 384
Comprehensive income (loss) (12,076) (160) 544 11,692
Exercise of stock options 215,922 1,533 1,533
Shares acquired (69,800) (226) (522) (748)
Change in loans to acquire shares (1,031) 1,031
BALANCE AT DECEMBER 31, 1998
5,876,398 17,940 2,775 27,381 1,176 252 49,524
Comprehensive Income:
Net earnings (loss) (62,373) (62,373)
Change in unrealized gains
(losses) on securities (6,050) (239) (6,289)
Comprehensive loss
(62,373) (6,050) (239) (68,662)
Change in loans to acquire shares 1,077 1,077
BALANCE AT DECEMBER 31, 1999
5,876,398 $19,017 $2,775 $(34,992) $(4,874) $13 $(18,061)
(1) Capital stock and retained earnings have been restated by
$(595) and $(360) respectively, to reflect the adoption of
U.S. GAAP. (See Note 22)
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1999, 1998, and 1997 (in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
1999 1998 1997
---- ---- ----
Cash flows from operating activities
Net earnings (loss) (62,373) (12,076) 12,218
Adjustments to reconcile net earnings (loss) to net cash provided
from operations:
<S> <C> <C> <C>
Minority interest (19,787) (4,919) 7,098
Depreciation, amortization and other 7,722 6,032 5,258
Deferred income tax expense (benefit) 8,462 (1,752) (1,301)
Net realized capital (gain) loss (65) (4,371) (9,393)
Net changes in operating assets and liabilities (net of assets
acquired):
Receivables 40,354 (10,396) (6,644)
Reinsurance recoverable on losses, net (32,552) 40,321 (61,311)
Prepaid reinsurance premiums 7,227 19,121 (21,624)
Federal income taxes recoverable 5,891 0 0
Deferred policy acquisition costs 2,412 (4,483) 2,011
Other assets and liabilities 5,012 (11,836) (4,083)
Losses and loss adjustment expenses 12,486 52,796 26,330
Unearned premiums (20,658) (7,951) 27,409
Reinsurance payables 25,250 (48,770) 37,810
------ -------- ------
NET CASH PROVIDED FROM (USED IN) OPERATIONS (20,619) 11,716 13,778
-------- ------ ------
Cash flow from investing activities net of assets acquired:
Purchase of minority interest and subsidiaries 0 (1,208) (61,000)
Net sales (purchases) of short-term investments (13,168) (8,807) 11,638
Proceeds from sales, calls and maturities of fixed maturities 206,208 129,951 227,604
Purchases of fixed maturities (182,453) (148,417) (268,542)
Proceeds from sales of equity securities 11,215 69,379 36,101
Purchase of equity securities (9,850) (42,909) (35,558)
Net proceeds from (purchase) sales of other investments (2,045) (390) 41
Purchase of property and equipment (7,278) (9,348) (5,803)
Cash paid for NACU 0 (3,000) 0
Other, net (71) 0 1,130
---- - -----
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 2,558 (14,749) (94,389)
----- -------- --------
Cash flow from financing activities net of assets acquired:
Proceeds from issuance of preferred securities 0 0 129,877
Proceeds from (purchase) issue of share capital 1,077 (675) 843
Redemption of share capital 0 (748) 0
Proceeds from (payments made on) term debt 3,185 7,855 (43,818)
Proceeds from consolidated subsidiary minority interest owner 0 0 2,354
Loans from and (repayments to) related parties 1,849 (1,600) 0
----- ------- -
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
6,111 4,832 89,256
----- ----- ------
Increase (decrease) in cash and cash equivalents (11,950) 1,799 8,645
Cash and cash equivalents, beginning of year 15,123 13,324 4,679
------ ------ -----
Cash and cash equivalents, end of year 3,173 15,123 13,324
===== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
[HEADER]
GORAN CAPITAL INC AND SUBSIDIARIES
1. Nature of Operations and Significant Accounting Policies:
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:
Symons International Group, Inc. ("SIG") is a 68% owned subsidiary of Goran
Capital Inc. ("Goran"). The Company is primarily involved in the sale of
nonstandard automobile insurance and crop insurance. The Company's products are
marketed through independent agents and brokers. Its insurance subsidiaries are
licensed in 35 states, primarily in the Midwest and Southern United States.
The following is a description of the significant accounting policies and
practices employed:
a. Basis of Presentation: The consolidated financial statements include
the accounts, after intercompany eliminations, of the
Company and its wholly-owned subsidiaries as follows:
Superior Insurance Group Management, Inc ("Superior Group Management")
(formerly, GGS Management Holdings, Inc. ("GGSH")) -a holding company for
the nonstandard automobile operations which includes:
Superior Insurance Group, Inc. ("Superior Group") (formerly,
GGS Management, Inc. ("GGS")) -a management company for the
nonstandard automobile operations;
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;
IGF Holdings, Inc. ("IGFH")-a holding company for the crop operations which
includes IGF and Hail Plus Corp.;
IGF Insurance Company ("IGF")-an insurance company domiciled in
Indiana;
North American Crop Underwriters, Inc. ("NACU") - a managing general
agency with exclusive focus on crop insurance.
Granite Reinsurance Company Ltd. ("Granite Re") - a finite
risk reinsurance company based in Barbados.
Granite Insurance Company ("Granite") - a Canadian federally licensed
insurance company which ceased writing new insurance policies on January 1,
1990.
Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIGF") -
a Florida based surplus lines insurance agency. These
operations have been discontinued effective January 1, 1999.
On August 12, 1997, the Company acquired the remaining 48% minority
interest in Superior Group Management from Goldman Funds through a purchase
business combination. (See Note 2.)
On July 8, 1998, the Company acquired NACU through a purchase business
combination. The Company'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 2.)
b. 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 the future as more information becomes known
which could impact the amounts reported and disclosed herein.
c. Premiums: Premiums are recognized as income ratably over the life of the
related policies and are stated net of ceded premiums.
Unearned premiums are computed on the semimonthly pro rata basis.
d. Investments: Investments are presented on the following basis:
Fixed maturities and equity securities are classified as available for sale
and are carried at market value with the unrealized gain or loss as a
component of stockholders' equity, net of deferred tax, and accordingly,
has no effect on net income.
Real estate-at cost, less allowances for depreciation.
Mortgage loans-at outstanding principal balance.
Realized gains and losses on sales of investments are recorded on the trade
date and are recognized in net income on the specific identification basis.
Interest and dividend income are recognized as earned.
e. Cash and Cash Equivalents: For purposes of the statement of cash flows,
the Company includes in cash and cash equivalents all
cash on hand and demand deposits with original maturities of three months
or less.
f. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are
comprised of agents' commissions, premium taxes, certain other costs and
investment income (starting in 1999) which are related directly to the
acquisition of new and renewal business, net of expense allowances received
in connection with reinsurance ceded, which have been accounted for as a
reduction of the related policy acquisition costs. These costs are deferred
and amortized over the terms of the policies to which they relate.
Acquisition costs that exceed estimated losses and loss adjustment expenses
and maintenance costs are charged to expense in the period in which those
excess costs are determined.
g. Property and Equipment: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5
years and the straight-line method for other property and equipment over
their estimated useful lives ranging from five to seven years. Asset and
accumulated depreciation accounts are relieved for dispositions, with
resulting gains or losses reflected in net income.
h. Intangible Assets: Intangible assets consists primarily of goodwill,
and debt acquisition costs. Goodwill is amortized
over a 25-year period on a straight-line basis based upon management's
estimate of the expected benefit period. Deferred debt
acquisition costs are amortized over the term of the debt.
i. Losses and Loss Adjustment Expenses: Reserves for losses and loss
adjustment expenses include estimates for reported unpaid
losses and loss adjustment expenses and for estimated losses
incurred but not reported. These reserves have not been
discounted. The Company's loss and loss adjustment expense reserves
include an aggregate stop-loss program. Reserves are
established using individual 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 provisions
for losses and loss adjustment expenses are necessarily based on estimates
and are subject to considerable variability. Changes
in the estimated reserves are charged or credited to operations as
additional information on the estimated amount of a claim
becomes known during the course of its settlement. The reserves for
losses and loss adjustment expenses are reported net of the
receivables for salvage and subrogation of approximately $8,506 and
$10,684 at December 31, 1999 and 1998, respectively.
j. Preferred Securities: Preferred securities represent Company-obligated
mandatorily redeemable securities of subsidiary holding solely parent
debentures and are reported at their liquidation value under minority
interest. Distributions on these securities are charged against
consolidated earnings.
k. Income Taxes: The Company utilizes the liability method of accounting for
deferred income taxes. Under the liability method, companies will establish
a deferred tax liability or asset for the future tax effects of temporary
differences between book and taxable income. Changes in future tax rates
will result in immediate adjustments to deferred taxes. (See Note 11.)
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.
l. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and
reserves related to reinsured business are accounted for on basis
consistent with those used in accounting for the original policies and the
terms of the reinsurance contracts. Premiums ceded to other companies have
been reported as a reduction of premium income.
m. Asset Impairment Policy: The Company reviews the carrying values of its
long-lived and identifiable intangible assets for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. Any long-lived assets held for
disposal are reported at the lower of their carrying amounts or fair value
less cost to sell.
n. Certain Accounting Policies for Crop Insurance Operations: In 1996, IGF
instituted a policy of recognizing (i) 35% of its estimated multiple peril
crop insurance (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 a rate of 25%
in 1999, 27% in 1998, and 29% in 1997 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 IGF, IGF's
policy is to recognize MPCI gross premiums written for the first nine
months based on a reestimate which takes into account actual gross premiums
processed. If an insufficient volume of policies has been processed, IGF'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. IGF
recognizes MPCI underwriting gain or loss during the first and second
quarters, as well as the third quarter, reflecting IGF'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. o. Accounting Changes: In 1998, the
Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS 130 requires companies to disclose comprehensive
income in their financial statements. In addition to items included in net
income, comprehensive income includes items currently charged or credited
directly to stockholders' equity, such as the change in unrealized
appreciation (depreciation) of securities. SFAS 131 established new
standards for reporting operating segments, products and services,
geographic areas and major customers. Segments are defined consistent with
the basis management used internally to assess performance and allocate
resources.
On March 4, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position No. 98-1 (SOP 98-1), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 was
issued to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized. SOP
98-1 is effective for financial statements for years beginning after
December 15, 1998. In 1999, the Company adopted the new requirements of the
SOP which did not have significant effect on net earnings during 1999.
In June 1998 SFAS No. 133, as amended, "Accounting for Derivative
Instruments and Hedging Activities" was issued, to be effective for fiscal
quarters and fiscal years beginning after June 15, 2000. The Company does
not have any derivative instruments or hedging activities therefore, the
Company believes that SFAS No. 133 will have no material impact on the
Company's financial statements or notes thereto.
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 which does
not take into account the impact of discounting. The new policy is
consistent with United States generally accepted accounting principles
("GAAP").
p. Earnings Per Share: The Company's basic earnings per share calculations are
based upon the weighted average number of shares of common stock
outstanding during each period. Due to the net loss in 1998 and 1999, fully
diluted earnings per share is the same as basic earnings per share.
2. Corporate Reorganization and Acquisitions:
On August 12, 1997, the Company purchased the remaining minority interest in
Superior Group Management for $61 million in cash. The excess of the acquisition
price over the minority interest liability aggregated approximately $36,045 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
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
(in thousands):
Assets acquired $21,035
Liabilities assumed 19,705
------
Net assets acquired 1,330
Purchase price 4,000
-----
Excess purchase price (goodwill) $2,670
======
The Company's results from operations for the year ended December 31, 1998
include the results of NACU subsequent to July 8, 1998.
<PAGE>
3. Investments:
<TABLE>
<CAPTION>
Investments are summarized as follows:
Cost or Estimated
Amortized Unrealized Market
December 31, 1999 (in thousands) Cost Gain Loss Value
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
<S> <C> <C> <C> <C>
government corporations and agencies $63,857 $103 $(2,773) $61,187
Foreign governments ---- ----- ---- ----
Obligations of states and political subdivisions 42 ----- (4) 38
Corporate securities 113,272 14 (2,895) 110,391
------- -- ------- -------
TOTAL FIXED MATURITIES 177,171 117 (5,672) 171,616
Equity securities 15,511 884 (2,840) 13,555
Short-term investments 32,634 ---- ---- 32,634
Mortgage loans 1,990 ---- ---- 1,990
Other invested assets 945 --------- --------- 945
--- --------- --------- ---
TOTAL INVESTMENTS $228,251 $1,001 $(8,512) $220,740
======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Cost or Estimated
Amortized Unrealized Market
December 31, 1998 (in thousands) Cost Gain Loss Value
Fixed Maturities:
U.S. Treasury securities and obligations of U.S.
<S> <C> <C> <C> <C>
government corporations and agencies $74,060 $2,193 $(174) $76,079
Foreign governments ---- ---- ---- ----
Obligations of states and political subdivisions 7,080 3 (115) 6,968
Corporate securities 113,137 1,766 (699) 114,204
------- ----- ----- -------
TOTAL FIXED MATURITIES 194,277 3,962 (988) 197,251
------- ----- ----- -------
Equity securities 13,691 755 (1,458) 12,988
Short-term investments 27,637 ---- ---- 27,637
Mortgage loans 2,100 ---- ---- 2,100
Other invested assets 890 ---- ---- 890
--- ---- ---- ---
TOTAL INVESTMENTS $238,595 $4,717 $(2,446) $240,866
======== ====== ======== ========
</TABLE>
At December 31, 1999, 91.4% of the Company's fixed maturities were considered
investment grade by The Standard & Poors Corporation or Moody's Investor
Services, Inc. Securities with quality ratings Baa and above are considered
investment grade securities. In addition, the Company's investments in fixed
maturities did not contain any significant geographic or industry concentration
of credit risk.
The amortized cost and estimated market value of fixed maturities at December
31, 1999, by contractual maturity, are shown in the table which follows.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalty:
<TABLE>
<CAPTION>
Estimated Market
Amortized Cost Value
(in thousands)
Maturity:
<S> <C> <C>
Due in one year or less $4,276 $4,268
Due after one year through five years 91,708 89,901
Due after five years through ten years 40,779 38,566
Due after ten years 37,099 35,641
Mortgage-backed securities 3,309 3,240
----- -----
TOTAL $177,171 $171,616
======== ========
</TABLE>
Gains and losses realized on sales of investments are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales $206,208 $129,951 $227,604
Gross gains realized $3,375 $10,901 $10,639
Gross losses realized $(3,310) $ (6,797) $(1,246)
</TABLE>
Net investment income for the years ended December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $12,301 $11,931 $11,213
Equity securities 401 596 340
Cash and short-term investments 1,475 1,346 1,544
Mortgage loans 152 173 182
Other (173) 32 (40)
----- -- ----
Total investment income 14,156 14,078 13,239
Investment expenses (738) (677) (462)
----- ----- -----
Net investment income $13,418 $13,401 $12,777
======= ======= =======
</TABLE>
Investments with a market value of $12,728 and $14,950 (amortized cost of
$12,760 and $14,726) as of December 31, 1999 and 1998, respectively, were on
deposit in the United States and Canada. The deposits are required by various
insurance departments and others to support licensing requirements and certain
reinsurance contracts, respectively.
4. Deferred Policy Acquisition Costs:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
During 1999 the Company changed its method of calculating deferred policy
acquisition costs by including investment income in the computation. Prior
period calculations did not consider investment income. The effect of the change
was to increase policy acquisition costs by approximately $4,071 in 1999. Policy
acquisition costs both acquired and deferred, and the related amortization
charged to income were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $16,332 $11,849 $13,860
Costs deferred during year 43,714 56,041 17,345
Amortization during year (46,126) (51,558) (19,356)
-------- -------- --------
Balance, end of year $13,920 $16,332 $11,849
======= ======= =======
</TABLE>
5. Property and Equipment:
Property and equipment at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
1999 Cost Depreciation 1999 Net 1998 Net
--------- ------------ -------- --------
<S> <C> <C> <C> <C>
Land $260 $---- $260 $260
Buildings 7,412 1,232 6,180 6,348
Office furniture and equipment 7,626 4,853 2,773 3,182
Automobiles 160 57 103 70
Computer equipment 20,889 8,238 12,651 9,490
------ ----- ------ -----
Total $36,347 $14,380 $21,967 $19,350
======= ======= ======= =======
</TABLE>
Accumulated depreciation at December 31, 1998 was $9,719. Depreciation expense
related to property and equipment for the years ended December 31, 1999, 1998
and 1997 were $4,887, $3,151 and $1,754, respectively.
6. Intangible Assets:
Intangible assets at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
1999 Cost Depreciation 1999 Net 1998 Net
--------- ------------ -------- --------
<S> <C> <C> <C> <C>
Goodwill $43,376 $4,641 $38,735 $39,851
Deferred debt costs 5,131 413 4,718 4,889
Other 1,299 940 359 1,560
----- --- --- -----
$49,806 $5,994 $43,812 $46,300
======= ====== ======= =======
</TABLE>
Accumulated amortization at December 31, 1998 was $3,697. Amortization expense
related to intangible assets for the years ended December 31, 1999, 1998 and
1997 was $2,297, $2,379 and $1,197 respectively.
7. Unpaid Losses and Loss Adjustment Expenses (in thousands):
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $207,432 $154,636 $128,306
Less reinsurance recoverables 67,885 108,206 33,113
------ ------- ------
NET BALANCE AT JANUARY 1 139,547 46,430 95,193
------- ------ ------
Incurred related to:
Current year 237,817 267,395 200,566
Prior years 38,816 11,732 10,937
------ ------ ------
TOTAL INCURRED 276,633 279,127 211,503
------- ------- -------
Paid related to:
Current year 167,262 165,336 180,925
Prior years 117,293 61,677 79,341
------- ------ ------
TOTAL PAID 284,555 227,013 260,266
------- ------- -------
NET BALANCE AT DECEMBER 31 131,625 139,547 46,430
Plus reinsurance recoverables 88,293 67,885 108,206
------ ------ -------
BALANCE AT DECEMBER 31 $219,918 $207,432 $154,636
======== ======== ========
</TABLE>
Reserve estimates are regularly adjusted in subsequent reporting periods,
consistent with sound insurance reserving practices, as new facts and
circumstances emerge which indicate a modification of the prior estimate is
necessary. The adjustment, referred to as "reserve development," is inevitable
given the complexities of the reserving process and is recorded in the
statements of earnings in the period the need for the adjustments becomes
apparent. The foregoing reconciliation indicates that deficient reserve
developments of $30,461, $12,996 and $10,967 in the December 31, 1999, 1998, and
1997 loss and loss adjustment expense reserves, respectively, emerged in the
following year. The 1997 and 1998 deficient reserve development occurred
primarily due to volatility in the historical trends for the nonstandard
automobile business as a result of significant growth during 1996 and 1997. The
deficient reserve development during 1999 resulted from a higher than expected
frequency and severity on nonstandard automobile claims and from higher than
expected losses on 1998 AgPI policies (see Note 17).
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and loss adjustment expenses. While anticipated price
increases due to inflation are considered in estimating the ultimate claim
costs, the increase in average severities of claims is caused by a number of
factors that vary with the individual type of policy written. Future average
severities are projected based on historical trends adjusted for implemented
changes in underwriting standards, policy provisions, and general economic
trends. Those anticipated trends are monitored based on actual development and
are modified if necessary.
Liabilities for loss and loss adjustment expenses have been established when
sufficient information has been developed to indicate the involvement of a
specific insurance policy. In addition, a liability has been established to
cover additional exposure on both known and unasserted claims. The effects of
changes in settlement costs, inflation, growth and other factors have all been
considered in establishing the current year reserve for unpaid losses and loss
adjustment expenses.
8. Notes Payable:
At December 31, 1999, IGF maintained a revolving bank line of credit in the
amount of $15,000 (the "IGF Revolver"). At December 31, 1999 and 1998, the
outstanding balance was $15,000 and $12,000 respectively. Interest on this line
of credit was at the New York prime rate (8.50% at December 31, 1999) minus .75%
adjusted daily. 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 the ratio of net written premiums to
surplus. At December 31, 1999, IGF was not in compliance with the minimum
statutory surplus covenant. However, IGF has received a waiver from the bank for
December 31, 1999.
The weighted average interest rate on the line of credit was 7.02%, 6.96%, and
8.75% during 1999, 1998 and 1997, respectively.
Notes payable at December 31, 1999 also includes a $1,000 note due 2001 on the
purchase of NACU at no interest. The balance of notes payable at December 31,
1999 includes three smaller notes (less than $300 each) assumed in the
acquisition of NACU due 2002-2006 with periodic payments at interest rates
ranging from 7% to 9.09%.
9. Company-Obligated Mandatorily Redeemable Preferred Stock of Trust
Subsidiary Holding
On August 12, 1997, SIG's wholly owned trust subsidiary issued $135 million in
preferred securities ("Preferred Securities") at a rate of 9.5% paid
semi-annually. The principal asset of the wholly owned trust subsidiary are
Senior Subordinated Notes of SIG in the principal amount of $135 million with an
interest rate and maturity date substantially identical to those of the
Preferred Securities. The 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 Superior Group Management for $61 million, repay the balance of the
term debt of $44.9 million the balance, after expenses, of approximately $24
million was contributed 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, the Company wrote off the remaining unamortized costs of
the term debt of approximately $1.1 million pre-tax or approximately $0.09 per
share which was recorded as an extraordinary item.
The Preferred Securities represent company-obligated mandatorily redeemable
securities of a subsidiary holding solely its parent debentures and 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 the Company'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.
The Trust Indenture for the Preferred Securities contains certain restrictive
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 the SIG's consolidated coverage ratio was
(4.89) in 1999, and will continue to apply until the SIG's Consolidated Coverage
Ratio is in compliance with the terms of the Trust Indenture. SIG is in
compliance with these additional restrictions and therefore, this does not
represent a default by the Company on the Preferred Securities.
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:
Unaudited
(In thousands)
Revenues $319,019
Net earnings from continuing operations $11,163
Net earnings from continuing operations per common $1.99
share (fully diluted)
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, 1999 (1998-nil)
(b) Common Shares
An unlimited number of common shares of which 5,876,398 are outstanding as at
December 31, 1999 (1998 - 5,876,398). During the year, pursuant to the exercise
of warrants and options, the Company issued nil (1998 - 215,992) common shares
for aggregate consideration in the amount nil (1998 - $1,533) of which $1,177 of
the consideration was in the form of a loan. During 1998, the Company purchased
69,800 of its common shares for an aggregate consideration of $748.
11. Income Taxes:
The Company and its subsidiaries have net operating loss carryovers of $66,152.
Of that amount, $43,325 is attributable to SIG, $15,983 is attributable to Goran
and its non U.S. subsidiaries, and $6,844 is attributable to SIGF a U.S.
subsidiary which does not qualify for filing consolidated tax returns with SIG.
These losses are usable only against future income in these respective operating
units.
As of December 31, 1999, the Company has unused net operating loss carryovers
available as follows (in thousands):
Years ending not later than December 31: Goran &
<TABLE>
<CAPTION>
-------
Canadian Total
SIG Subsidiaries SIGF
--- ------------ ----
<S> <C> <C> <C> <C>
2000 541 1,571 2,112
2001 1,537 1,537
2002 126 865 991
2003 1,120 1,120
2004 511 511
2005 1,659 1,659
2006 1,113 1,113
2017 4,688 4,688
2018 1,295 1,295
2019 42,658 -- 861 43,519
Capital Losses -- 7,607 -- 7,607
-- ----- -- -----
TOTAL 43,325 15,983 6,844 66,152
====== ====== ===== ======
</TABLE>
SIG files a consolidated U.S. federal income tax return with its wholly-owned
subsidiaries. Intercompany tax sharing agreements between SIG and its
wholly-owned subsidiaries provide that income taxes will be allocated based upon
separate return calculations in accordance with the Internal Revenue Code of
1986, as amended. Intercompany tax payments are remitted at such times as
estimated taxes would be required to be made to the Internal Revenue Service
("IRS"). Refunds received from the IRS are distributed in a timely manner to the
appropriate subsidiaries.
A reconciliation of the differences between federal tax computed by applying the
federal statutory rate of 35% to income before income taxes and the income tax
provision is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed income taxes (benefit) at statutory rate $(25,509) (2,953) $13,266
Alternative minimum taxes 1,203 55 ----
Dividends received deduction (92) (130) (78)
Goodwill and acquisition costs 793 621 179
Other (1,649) (1,243) (346)
Tax Exempt (Income) Loss 88 689 (134)
Application of Operating Loss Carry Forward (82) ---- (1,291)
(25,248) (2,961) 11,596
Valuation allowance change 23,859 923 ----
------ --- ----
Income Tax Expense (Benefit) $(1,389) $(2,038) $11,596
======== ======== =======
</TABLE>
The net deferred tax asset at December 31, 1999 and 1998 is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
Deferred tax assets:
<S> <C> <C>
Unpaid losses and loss adjustment expenses $4,271 $3,548
Unearned premiums and prepaid insurance 5,568 5,972
Allowance for doubtful accounts 1,022 1,118
Unrealized losses on investments 2,637 ----
Net operating loss carryforwards 23,779 8,129
Other 303 1,468
--- -----
DEFERRED TAX ASSET $37,580 $20,235
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs $(4,872) $(5,716)
Unrealized gains on investments ---- (680)
Other (799) (602)
----- -----
DEFERRED TAX LIABILITY $(5,671) $(6,998)
-------- --------
31,909 13,237
VALUATION ALLOWANCE $31,909 (8,090)
------- -------
NET DEFERRED TAX ASSET $---- $5,147
===== ======
</TABLE>
<PAGE>
At December 31, 1999 the Company's net deferred tax assets are fully offset by a
valuation allowance. The company will continue to assess the valuation allowance
and to the extent it is determined that such allowance is no longer required,
the tax benefit of the remaining net deferred tax assets will be recognized in
the future.
12. Leases:
The Company leases buildings, furniture, cars and equipment under operating
leases. Operating leases generally include renewal options for periods ranging
from two to seven years and require the Company to pay utilities, taxes,
insurance and maintenance expenses.
The following is a schedule of future minimum lease payments under cancelable
and non-cancelable operating leases for each of the five years succeeding
December 31, 1999 and thereafter, excluding renewal options (in thousands):
Year Ending December 31:
2000 $4,316
2001 2,529
2002 2,270
2003 1,411
2004 and Thereafter $2,586
Rental expense charged to operations in 1999, 1998 and 1997 amounted to $3,607,
$2,939 and $1,176, respectively, including amounts paid under short-term
cancelable leases.
13. Reinsurance:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. In addition, the Company assumes reinsurance on
certain risks. The Company remains contingently liable with respect to
reinsurance, which would become an ultimate liability of the Company in the
event that such reinsuring companies might be unable, at some later date, to
meet their obligations under the reinsurance agreements.
On March 2, 1998, the Company announced that it had signed an agreement with
Continental Casualty Company ("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 reinsures a small portion of the
Company's total crop book of business (approximately 22% MPCI and 15% crop hail)
with CNA. Starting in the year 2000, assuming no event of change in control as
defined in the agreement, the Company can purchase the reinsurance from CNA
through a call provision or CNA can require the Company to buy the premiums
reinsured with 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.
<PAGE>
Reinsurance activity for 1999, 1998 and 1997, which includes reinsurance with
related parties, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 Gross Ceded Net
---- ----- ----- ---
<S> <C> <C> <C>
Premiums Written $473,687 $(217,188) $256,499
Premiums Earned 495,019 (218,979) 276,040
Incurred losses and loss adjustment expenses 494,725 (218,092) 276,633
Commission expenses (income) $76,679 $(73,088) $3,591
1998
Premiums Written 546,771 (184,665) 362,106
Premiums Earned 554,722 (212,545) 342,177
Incurred losses and loss adjustment expenses 519,711 (240,584) 279,127
Commission expenses (income) 94,818 (80,272) 14,546
1997
Premiums Written 448,982 (167,086) 281,896
Premiums Earned 422,200 (145,660) 276,540
Incurred losses and loss adjustment expenses 312,583 (101,080) 211,503
Commission expenses (income) 65,529 (77,279) (11,750)
</TABLE>
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were $88,293 and $67,885, as of December 31, 1999 and 1998,
respectively. These amounts are reported as assets and are not netted against
the liability for loss and loss adjustment expenses in the accompanying
Consolidated Balance Sheets.
14. Related Party Transactions
The 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 investments and advances to related parties are $300 (1998 - $1,377)
due from certain shareholders and directors which relate to the purchase of
common shares of the company. Approximately $300 of the amounts due bear
interest and are subject to principal repayment schedules. Other receivables at
December 31, 1999, also includes $1,046 due from certain shareholders unrelated
to stock purchases, the majority of which bear interest and are subject to
principal repayment terms.
SIG paid $3,112, $2,832 and $1,034 in 1999, 1998 and 1997, 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 1999, Stargate was owned beneficially by
certain directors of the Company and a relative of those directors. Also
included in consulting fees to related parties is $520 and $270 in 1999 and 1998
respectively, for payments to Onex, Inc., an officer of which is on SIG's Board
of Directors, for employment related matters.
15. Regulatory Matters:
Pafco and IGF, domiciled in Indiana, prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance (IDOI). Statutory requirements place
limitations on the amount of funds which can be remitted to the Company from
Pafco and IGF. The Indiana statute allows 10% of surplus as regard to
policyholders or 100% of net income, whichever is greater, to be paid as
dividends only from earned surplus. The Superior entities, domiciled in Florida,
prepare their statutory financial statements in accordance with accounting
practices prescribed or permitted by the Florida Department of Insurance (FDOI).
In the consent order approving the Acquisition of Superior, the FDOI (the
"Acquisition Consent Order") has prohibited Superior from paying any dividends
for four years without the prior written approval of the FDOI which prohibition
was in effect through the 1999 calendar year. Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
IGF received written approval through December 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, 1999, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit results of the FCIC business, net of
reinsurance of $18,206, $18,405 and $31,595, are netted with policy acquisition
and general and administrative expenses for the years ended December 31, 1999,
1998 and 1997, respectively, in the accompanying Consolidated Statements of
Earnings.
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 IDOI has permitted the
Company to continue for its statutory financial statements through December 31,
1999 its practice of recording its MPCI business as 100% ceded to the FCIC with
net underwriting results recognized in ceding commissions, the IDOI 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 IDOI. 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 consistently with this
methodology for comparability. The Company cannot predict what accounting
methodology will eventually be implemented, but believe 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.
Net income (loss) of the U.S. insurance subsidiaries, as determined in
accordance with statutory accounting practices (SAP), was $(20.5) million,
$(21.5) million and $7.7 million, for 1999, 1998 and 1997, respectively.
Consolidated statutory capital and surplus was approximately $50 million and
$105 million at December 31, 1999 and 1998, respectively.
<PAGE>
As of December 31, 1999, the risk-based capital of IGF was in excess of the
company action level. Superior's risk-based capital ratio was at 199% or
$151,000 below the company action level and Pafco's risk-based ratio was at 72%
or $10.5 million below the company action level using the NAIC guidelines. To
address IDOI concerns relating to Pafco, on February 17, 2000, Pafco agreed to
an order under which the IDOI may monitor more closely the ongoing operations of
Pafco. Among other matters, Pafco must:
o Refrain from doing any of the following without the IDOI's prior written
consent: selling assets or business in force or transferring property,
except in the ordinary course of business; disbursing funds, other than for
specified purposes or for normal operating expenses and in the ordinary
course of business (which does not include payments to affiliates, other
than under written contracts previously approved by the IDOI, and does not
include payments in excess of $10,000); lending funds; making investments,
except in specified types of investments; incurring debt, except in the
ordinary course of business and to unaffiliated parties; merging or
consolidating with another company, or entering into new, or modifying
existing, reinsurance contracts.
o Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the year 2000 ratio of gross written premium
to surplus and net written premium to surplus does not exceed 4.0 and 2.4,
respectively; and provide the IDOI with regular reports demonstrating
compliance with these monthly writings limitations. Further restrictions in
premium writings would result in lower premium volume. Management fees
payable to Superior Group are based on gross written premium therefore
lower premium volume would result in reduced management fees paid by Pafco.
o Provide a summary of affiliate transactions to the IDOI.
o Continue to comply with prior IDOI agreements and orders to correct
business practices, under which (as previously disclosed) Pafco must
provide monthly financial statements to the IDOI, obtain prior IDOI
approval of reinsurance arrangements and of affiliated party transactions,
submit business plans to the IDOI that address levels of surplus and net
premiums written, and consult with the IDOI on a monthly basis.
Pafco's inability or failure to comply with any of the above could result in the
IDOI requiring further reductions in Pafco's permitted premium writings or in
the IDOI instituting future proceedings against Pafco. No report has yet been
issued by the IDOI on its previously disclosed target examination of Pafco,
covering loss reserves, pricing and reinsurance.
Pafco has also agreed with the Iowa Department of Insurance (IADOI) to (i) limit
its policy counts on automobile business in Iowa and (ii) provide the IADOI with
policy count information on a monthly basis until June 30, 2000 and thereafter
on a quarterly basis.
In addition Pafco has agreed to provide monthly financial information to other
departments of insurance in states in which it writes business.
As previously disclosed, with regard to IGF and as a result of the losses
experienced by IGF in the crop insurance operations, IGF has agreed with the
IDOI to provide monthly financial statements and consult monthly with the IDOI,
and to obtain prior approval for affiliated party transactions. IGF currently is
in compliance with its agreement to provide monthly financial statements to
IDOI; however, IGF is working with the IDOI to provide this information on a
timely basis.
IGF has agreed with the IADOI that it will not write any nonstandard business,
other than that which it is currently writing until such time as IGF has: (i)
increased surplus; (ii) a net written premium to surplus ratios less than three
to one; and (iii) surplus reasonable to its risk.
The FDOI has initiated examinations covering Superior. The scope of these
examinations has covered or will cover market conduct, data processing systems,
Year 2000 readiness and financial examinations as of June 30, 1999 and December
31, 1999. Although no report has been issued or other action taken by the FDOI,
Superior expects to maintain ongoing discussions with the FDOI to address these
and other issues, including reserve levels and financial review and reporting.
The Company's operating subsidiaries, their business operations, and their
transactions with affiliates, including the Company, are subject to regulation
and oversight by the IDOI, the FDOI, and the insurance regulators of other
states in which the subsidiaries write business. The Company is a holding
company and all of its operations are conducted by its subsidiaries. Regulation
and oversight of insurance companies and their transactions with affiliates is
conducted by state insurance regulators primarily for the protection of
policyholders and not for the protection of other creditors or of shareholders.
Failure to resolve issues with the IDOI and the FDOI in a manner satisfactory to
the Company could result in future regulatory actions or proceedings that
materially and adversely affect the Company.
In 1998, the 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 also be effective
upon implementation. The NAIC has recommended an effective date of July 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 IDOI or the FDOI 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 of insurance. However, the actual effect of adoption could
differ as changes are made to the Codification guidance, prior to its
recommended effective date of July 1, 2001.
16. Commitments and Contingencies:
On February 23, 2000, a complaint for a class action alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 was filed
against the Company, SIG, certain officers, and certain directors in the United
States District Court for the Southern District of Indiana. The complaint
alleges, among other things, that the defendants rendered false and misleading
statements and/or omissions concerning financial condition and business
prospects of the Company, as well as the financial benefits that would inure to
the Company and its shareholders. The Company intends to vigorously defend the
claims brought against it.
The California Department of Insurance (CDOI) has advised the Company that it is
reviewing a possible assessment which could total $3 million. This possible
assessment relates to the charging of brokers fees charged to policyholders by
independent agents who placed business with Superior. 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. 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 will vigorously
defend any potential assessment and believes it will prevail.
In 1998, IGF sold a total of 157 policies for agricultural business
interruption insurance called AgPI that were intended to protect businesses that
depend upon a steady flow of crop (or crops) to stay in business. This product
was sold to a variety of businesses involved in agribusiness, including farmers,
as well as grain elevator operators, produce shippers, custom harvesters, cotton
gins, agriculture chemical dealers and other processing businesses whose income
is heavily dependent on a stable supply of raw product (i.e., cotton), or whose
product sales are negatively affected if crop yields fall (i.e., chemical
dealers). Most of the policies were sold to California policyholders. The policy
form required that the county in which crops reside must suffer a minimum level
of crop loss before a loss recovery by a policyholder is possible. After the
county loss test was met, then the policyholder must demonstrate an insurable
economic loss on an individual basis under the policy.
The Company recognized approximately $7.6 million in written premium in 1998, of
which $6 million was earned in 1998 and $1.6 million earned in the first quarter
of 1999. Adverse weather conditions and resultant crop damage in parts of the
country where the policies were sold, led the Company to begin establishing
reserves for its possible exposure. However, the lack of National Agricultural
Statistical Service ("NASS") and policyholder loss data adversely affected the
Company's ability to establish the amount of their exposure. At December 31,
1998, the Company set its reserves at an amount equal to 100% of the earned
premium. County loss data, as well as policyholder loss data, gradually became
known starting in late April 1999. As of May 28, 1999, the Company recognized
that it was experiencing unexpected adverse loss development on these policies
and increased its incurred losses related to 1998 policies to $15 million. When
the Company published second quarter results, NASS data was complete, and the
Company had received policyholder data on nearly all policies to determine its
exposure. The Company's estimated gross ultimate incurred loss and loss
adjustment expense ("LAE") related to these policies was $25 million (gross loss
before reinsurance recoveries). As the Company continued to investigate and
reevaluate these claims, it increased its estimated ultimate gross incurred loss
and loss adjustment expense related to these policies to $34.5 million.
IGF is a party to a number of pending legal proceedings relating to AgPI. IGF
remains a defendant in six lawsuits pending in California state court (King and
Fresno counties) having settled four other suits including two declaratory
judgment actions that were brought by IGF in Federal District Court in
California. In addition, IGF has settled 13 arbitration proceedings involving
policyholders of AgPI and has no outstanding arbitrations relating to this
product. The first of these proceedings was commenced in July 1999. All
discovery in the remaining proceedings has been stayed pending a June 2000
hearing on IGF's appeal of an order denying a dismissal of the cases and a
remanding of these disputes to arbitration as called for in the policy
provisions. The policyholders involved in the open proceedings have asserted
that IGF is liable to them for the face amount of their policies, an aggregate
of approximately $14.7 million, plus an unspecified amount of punitive damages
and attorney's fees. As of December 31, 1999, IGF had paid an aggregate of
approximately $7 million to the policyholders involved in these legal
proceedings. The Company increased its reserves by $9.5 million in the fourth
quarter of 1999 and reserved a total of $34.5 million in 1999 of which $22.3
million was paid through December 31, 1999.
Less than $0.1 million of 1999 gross written AgPI premiums have been written and
assumed by the Company in 1999; in addition the policy language was revised
materially. Based on the information presently available, the Company believes
that it has recognized, through loss and LAE payments and reserves, its ultimate
loss exposure related to the AgPI product. The Company feels its financial
reserves for the lawsuits and arbitrations are sufficient to cover the resulting
liability, if any, that may arise from these matters. However, there can be no
assurance that the Company's ultimate liability for AgPI related claims will not
be materially greater than the $34.5 million in gross losses already recorded in
the consolidated financial statements related to this product and will not have
a material adverse effect on the Company's results of operations or financial
condition. Of the $34.5 million AgPI losses reserved approximately $21 million
has been paid to date.
During the first quarter of 1999, the Company entered into reinsurance
arrangements covering a portion of the AgPI business. Under those arrangements,
during the first quarter the Company recorded $4.7 million of ceded gross
premium and a $9.4 million reinsurance recovery, deferring the resulting net
gain of $4.7 million. The $4.7 million deferred gain was recognized as income in
the second quarter. The Company subsequently negotiated a change to the
reinsurance in the fourth quarter which resulted in approximately $4.2 million
additional gain being recorded as of December 31, 1999. The Company is not
entitled to any further recoveries under these reinsurance arrangements.
The Company is a joint and several guarantor in a $7.25 million debt
collateralized by operating assets held in an entity in which the company is a
50% owner. The estimated fair market value of the assets approximates the debt.
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
receivable balance. In 1999, the Company resolved the discrepancy and reduced
the allowance to $0.
Two assertions have been made in Florida alleging that service charges or
finance charges are in violation of Florida law. The plaintiffs are attempting
to obtain class certification in these actions. The Company believes that it has
substantially complied with the premium financing statute and intends to
vigorously defend any potential loss.
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.
17. Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
Cash paid for interest and income taxes are summarized as follows:
(in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid for interest $515 $260 $3,467
Cash paid/(received) for federal income taxes, net of refunds $(17,910) $5,351 $11,670
refunds
</TABLE>
18. Disclosures About Fair Values of Financial Instruments:
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and, accordingly,
the estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
a) Fixed Maturity, Equity Securities, and Other Investments: Fair values
for fixed maturity and equity securities are based on quoted market
prices.
b) Short-term Investments, and Cash and Cash Equivalents: The carrying
value for assets classified as short-term investments,
and cash and cash equivalents in the accompanying Consolidated Balance
Sheets approximates their fair value.
c) Short-term Debt: The carrying value for short-term debt approximates
fair value.
d) Preferred Securities: The December 31, 1999 estimated market value
of the Preferred Securities was $40,500 based on quoted
market prices.
19. Segment Information:
The Company has two reportable segments based on products: nonstandard
automobile insurance and crop insurance. The nonstandard automobile segment
offers personal nonstandard automobile insurance coverages through a network of
independent general agencies. The crop segment writes MPCI and crop hail
insurance through independent agencies with its primary concentration in the
Midwest. The accounting policies of the segments are the same as those described
in "Nature of Operations and Significant Accounting Policies." There are no
significant intersegment transactions. The Company evaluates performance and
allocates resources to the segments based on profit or loss from operations
before income taxes.
<PAGE>
The following is a summary of the Company's segment data and a reconciliation of
the segment data to the Consolidated Financial Statements. The "Corporate and
Other" includes operations not directly related to the reportable business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated overhead expenses). Segment
assets are those assets in the Company's operations in each segment. "Corporate
and Other" assets are principally cash, short-term investments, related-party
assets, intangible assets, and property and equipment.
<TABLE>
<CAPTION>
Nonstandard Segment Corporate Consolidated
------------ -------- ---------- ------------
Auto Crop Totals & Other Totals
---- ---- ------ ------- ------
(in thousands)
Year Ended December 31, 1999
<S> <C> <C> <C> <C> <C>
Premiums earned $249,094 $14,240 $263,334 $12,706 $276,040
Fee income 15,185 456 15,641 150 15,791
Net investment income 12,339 293 12,632 786 13,418
Net realized capital gain (loss) (281) 21 (260) 325 65
----- -- ----- --- --
Total Revenue 276,337 15,010 291,347 13,967 305,314
------- ------ ------- ------ -------
Loss and loss adjustment expenses 230,973 34,225 265,198 11,435 276,633
Operating expenses 91,859 215 92,074 5,876 97,950
Amortization of intangibles -- 493 493 2,194 2,687
Interest expense -- 620 620 -- 620
-- --- --- -- ---
Total expenses 322,832 35,553 358,385 19,505 377,890
------- ------ ------- ------ -------
Loss before income taxes, minority
interest and other items
$(46,495) $(20,543) $(67,038) $(5,538) $(72,576)
========= ========= ========= ======== =========
Segment assets $229,640 $145,622 $375,262 $136,849 $512,111
======== ======== ======== ======== ========
Year Ended December 31, 1998
Premiums earned $264,022 $60,901 $324,923 $17,254 $342,177
Fee income 16,431 3,772 20,203 -- 20,203
Net investment income 11,958 275 12,233 1,168 13,401
Net realized capital gain (loss) 4,124 217 4,341 (237) 4,104
----- --- ----- ----- -----
Total revenue $296,535 65,165 361,700 18,185 379,885
-------- ------ ------- ------ -------
Loss and loss adjustment expenses
(recovery) 217,916 52,550 270,466 8,661 279,127
Operating Expenses 73,346 21,906 95,252 8,674 103,926
Amortization of intangibles -- 339 339 2,040 2,379
Interest expense -- 163 163 -- 163
-- --- --- -- ---
Total expenses 291,262 74,958 366,220 19,375 385,595
------- ------ ------- ------ -------
Earnings (loss) before income taxes,
minority interest and other items
$5,273 $(9,793) $(4,520) $(1,190) $(5,710)
====== ======== ======== ======== ========
Segment assets $376,831 $143,434 $520,265 $50,939 $571,204
======== ======== ======== ======= ========
Year Ended December 31, 1997
Premiums earned $251,020 $20,794 $271,814 4,726 $276,540
Fee income 15,515 2,276 17,791 30 17,821
Net investment income 10,969 191 11,160 1,617 12,777
Net realized capital gain (loss) 9,462 (18) 9,444 (51) 9,393
----- ---- ----- ---- -----
Total revenue $286,966 $23,243 $310,209 $6,322 $316,531
-------- ------- -------- ------ --------
Loss and loss adjustment expenses
(recovery) 195,900 16,550 212,450 (947) 211,503
Operating Expenses 72,463 (14,404) 58,059 5,285 63,344
Amortization of intangibles -- 2 2 1,195 1,197
Interest expense -- 233 233 2,854 3,087
-- --- --- ----- -----
Total expenses 268,363 2,381 270,744 8,387 279,131
------- ----- ------- ----- -------
Earnings (loss) before income taxes,
minority interest and other items
$18,603 $20,862 $39,465 $(2,065) $37,400
======= ======= ======= ======== =======
Segment assets $363,864 $119,660 $483,524 $80,947 $564,471
======== ======== ======== ======= ========
</TABLE>
20. Stock Option Plans:
Information regarding the Goran Stock Option Plan is summarized below (in
Canadian dollars):
<TABLE>
<CAPTION>
1999 1998 1997
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 695,572 $29.92 546,856 $17.86 526,899 $8.76
year
Granted -- -- 363,970 $36.57 188,355 $29.57
Exercised -- -- (215,254) $10.53 (166,831) $2.26
Forfeited/Surrendered (34,864) $14.69 -- -- (1,567) $25.45
-------- ------ -- -- ------- ------
Outstanding at the end of the year 660,708 $14.17 695,572 $29.92 546,856 $17.86
======= ====== ======= ====== ======= ======
Options exercisable at year end 619,035 -- 569,126 -- 349,141 --
Available for future grant 251,865 -- 175,428 -- 40,062 --
</TABLE>
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 the 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 the
SIG's stock at date of grant. All of the 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. In November 1999, certain officers and non
employee directors of SIG surrendered a total of 1,153,600 stock options.
Information regarding the SIG Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
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 1,457,833 $6.3125 1,000,000 $6.3125 830,000 $12.50
year
Granted -- $6.3125 478,000 6.3125 185,267 15.35
Exercised (1,667) $6.3125 (4,332) 6.3125 (1,667) 12.50
Forfeited/Surrendered (1,243,133) $6.3125 (15,835) 6.3125 (13,600) 12.50
----------- ------- -------- ------ -------- -----
Outstanding at the end of the year 213,033 $6.3125 1,457,833 $6.3125 1,000,000 $13.03
======= ======= ========= ======= ========= ======
Options exercisable at year end 120,366 $6.3125 760,289 $6.3125 521,578 $12.50
Available for future grant 1,286,967 42,167 --
</TABLE>
The weighted average remaining life of the SIG options as of December 31, 1999
is 7.9 years.
The Board of Directors of Superior Group Management adopted the GGS Management
Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option
Plan"), effective April 30, 1996. The Superior Group Management 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 Superior Group Management. Options granted under the Superior Group
Management 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 Superior Group Management Stock Option Plan is
subject to the following formula: 50% of each grant of options having an
exercise price determined by the Board of Directors of Superior Group Management
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.
<PAGE>
Information regarding the Superior Group Management Stock Option Plan is
summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares(1) Price Shares(1) Price
------ ----- --------- ----- --------- -----
Outstanding at the beginning of the
<S> <C> <C> <C> <C> <C> <C>
year 94,732 $51.75 95,282 $51.75 27,777 $51.75
Granted -- -- -- -- 68,855 --
Forfeited (2,500) $51.75 (550) 51.75 (1,350) 51.75
------- ------ ----- ----- ------- -----
Outstanding at the end of the year 92,232 $51.75 94,732 $51.75 95,282 $51.75
====== ====== ====== ====== ====== ======
Options exercisable at year end 42,448 24,601 5,555
Available for future grant 18,879 16,379 15,829
</TABLE>
(1) Prior years outstanding share options have been restated to properly reflect
outstanding options as at those respective dates.
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
Weighted weighted Weighted
Average Average Average
Number Remaining Life Exercise Price Number Exercise Price
----- ----- -----
Range of Exercise Prices Outstanding (in years) Exercisable
- ------------------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$44.17 - $53.45 64,561 6.8 $46.13 39,668 $47.35
$58.79-$71.14 27,671 6.8 64.87 2,777 $58.79
------ --- ----- ----- ------
92,232 42,445
====== ======
</TABLE>
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>
1999 1999 1998 1998 1997 1997
As Pro- As Pro- As Pro-
Reported Forma Reported Forma Reported Forma
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) from continuing operations $(62,373) (65,969) $(9,139) $(12,109) $15,763 $13,592
Basic EPS from continuing operations $(10.61) $(11.23) $(1.56) $(2.07) $2.82 $2.43
Fully diluted EPS continuing operations $(10.61) $(11.23) $(1.56) $(2.07) $2.68 $2.31
Net earnings (loss) (62,373) $(65,969) $(12,076) $(15,046) $12,218 $10,047
Basic EPS $(10.61) $(11.23) $(2.07) $(2.58) $2.19 $1.80
Fully diluted EPS $(10.61) $(11.23) $(2.07) $(2.58) $2.08 $1.71
</TABLE>
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>
SIG Goran SIG SIG
1998 1998 1997 1997
Grants Grants Grants Grants
<S> <C> <C> <C> <C>
Risk-free interest rates 5.53% 5.40% 6.03% 6.40%
Dividend yields --- --- --- ---
Volatility factors 0.41 0.41 0.40 0.39
Weighted average expected life 2.5 years 3.2 years 2.0 years 3.3 years
Weighted average fair value per share $7.20 $5.73 $5.28 $5.54
</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.
21. Quarterly Financial Information (unaudited):
<TABLE>
<CAPTION>
Quarterly financial information is as follows:
(in thousands) First Second Third Fourth Total
----- ------ ----- ------ -----
1999
<S> <C> <C> <C> <C> <C>
Gross written premiums $152,022 $173,870 $67,685 $80,110 $473,687
Net premiums written 67,271 79,150 55,228 54,850 256,499
Net premiums earned 67,124 76,527 68,164 64,225 276,040
Total revenues 73,774 83,553 74,272 73,715 305,314
Net earnings (loss) $123 $(5,882) $(13,907) $(42,707) $(62,373)
Net earnings (loss) per share - basic $.02 $(1.00) $(2.37) $(7.26) $(10.61)
Net earnings (loss) per share - fully diluted $.02 $(1.00) $(2.37) $(7.26) $(10.61)
1998
Gross premiums written $177,196 $170,505 $95,887 $103,183 $546,771
Net premiums written 98,361 109,729 72,469 81,547 362,106
Net premiums earned 71,885 99,618 94,168 76,506 342,177
Total revenues 82,149 109,085 102,407 86,244 379,885
Net earnings $3,517 $4,775 $( 10,233) $(10,135) $(12,076)
Net earnings (loss) per share - basic $0.61 $0.82 $(1.76) $(5.23) $(2.07)
Net earnings (loss) per share - fully diluted $0.59 $0.78 $(1.76) $(5.19) $(2.07)
</TABLE>
In the fourth quarter of 1999, the Company provided for a valuation allowance on
its net deferred tax assets of $23.1 million.
In the fourth quarter of 1999, the Company provided for additional AgPI loss
reserves of $5.3 million, net of reinsurance.
During the fourth quarters of 1999 and 1998, the Company increased reserves on
its nonstandard automobile business by $6.9 million and $3.0 million
respectively for both current and prior accident years.
In the fourth quarter of 1998, the Company provided a $3.2 million reserve for
potential processing errors in the crop business assumed from CNA. The Company
also increased its reserves on AgPI exposures by approximately $1.8 million. As
is customary in the crop insurance industry, insurance company participants in
the FCIC program receive more precise financial results from the FCIC in the
fourth quarter based upon business written on spring-planted crops. On the basis
of FCIC-supplied financial results, IGF recorded, in the fourth quarter, an
additional underwriting gain (loss), net of reinsurance, on its FCIC business of
$791, $(3,506) and $6,979 during 1999, 1998 and 1997, respectively.
22. Reconciliation Of Canadian And United States Generally Accepted Accounting
Principles ("GAAP") And Additional Information
The consolidated financial statements are prepared in accordance with U.S. GAAP
Material differences between Canadian and U.S. GAAP are described below.
(a) Earnings per share
Earnings per share, as determined in accordance with Canadian GAAP are set out
below.
The following average number of shares were used for the compilation of basic
and fully diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
Basic 5,876,398 5,841,329 5,590,576
<S> <C> <C> <C>
Fully Diluted 5,876,398 5,841,329 5,886,211
Earnings per share, as determined in accordance with U.S. GAAP,
are as follows:
Basic earnings per share from continuing operations $(10.61) $(1.56) $2.82
Fully diluted earnings per share from continuing operations $(10.61) $(1.56) $2.68
Basic earnings per share $(10.61) $(2.07) $2.19
Fully diluted earnings per share $(10.61) $(2.07) $2.08
</TABLE>
(b) 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 has been reduced by $300 and $1,377
at December 31, 1999 and December 31, 1998, respectively to reflect the loans
due from certain shareholders which relate to the purchase of common shares of
the Company.
(c) Unrealized gain (loss) on investments
U.S. GAAP requires 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 (losses) on
investment portfolio for year-ends commencing after December 15, 1993. As a
result, shareholders' equity was increased by $(4,874) and by $1,176, which is
net of deferred tax of $2,637 and $679 and related minority interest of $416 and
$658, as at December 31, 1999 and 1998, respectively.
(d) Changes in shareholders's equity
A reconciliation of shareholders' equity from US GAAP to Canadian GAAP is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Shareholders equity in accordance with U.S. GAAP $(18,061) $49,524 $61,462
Add (deduct) effect of difference in account for:
Receivables from sale of capital stock (see note (f)) 300 1,377 346
Unrealized gain on investments (see note (g)) 4,874 (1,176) (1,336)
----- ------- -------
Shareholder's equity in accordance with Canadian GAAP $(12,887) $49,725 $60,472
========= ======= =======
</TABLE>
23. Subsequent Events
On March 23, 2000, the FDOI notified SIG that Superior is required to not exceed
a written premiums to surplus ratio of 4 to 1 as computed on an annualized basis
and to file on a monthly basis a schedule that verifies its compliance with the
net writing limitation of 4 to 1.
On February 29, 2000, SIG contributed $2.0 million in capital to Pafco.
24. Management's Plans
The Company reported net losses of $62.4 million and $12.1 million for the years
1999 and 1998 respectively. While the stockholders equity at December 31, 1999
is a deficit of approximately $18.1 million, SIG has a thirty year mandatorily
redeemable preferred stock outstanding of $135 million at an interest rate of
9.5%. This Trust Preferred is not due for redemption until 2027. The insurance
subsidiaries have statutory surplus of approximately $57 million upon which the
Company conducts its insurance operations. The management has initiated
substantial changes in operational procedures and business in an effort to
return the Company to profitable levels and to improve its financial condition.
The nonstandard auto insurance segment hired a new President, a new Chief
Information Officer, and pricing and claims management since the year end. The
Company has and is continuing to raise its rates in a market environment where
increasing rates and withdrawal from the market by other companies shows
positive trends for an improving profitability of the nonstandard auto division.
The crop insurance company has experienced a substantial increase in gross sales
in its major product lines and strong demand for its new innovative products.
Management believes that despite the recent losses and the deterioration in
stockholders equity and statutory surplus, it has developed a business plan that
if successfully implemented, can substantially improve operating results and its
financial condition.
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 has audited and reported on the Company's consolidated financial statements.
Their opinion is based upon audits conducted by them in accordance with
generally accepted auditing standards to obtain 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
Chief Executive Officer
April 14, 2000
<PAGE>
Board of Directors And Stockholders of Goran Capital Inc.
REPORT OF INDEPENDENT AUDITOR"S
We have audited the accompanying consolidated balance sheets of Goran Capital
Inc. (incorporated in Canada) as of December 31, 1999 and 1998, and the related
consolidated statements of income (loss), changes in stockholders' equity, and
cash flows for each of the years ended December 31, 1999, 1998 and 1997. These
consolidated 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 did not audit the financial statements of
Symons International Group, Inc., a 68% owned subsidiary, which statements
reflect total assets of $499,811 as of December 31, 1999, and total revenues of
$291,207 for the year then ended. Those 1999 statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Symons International Group, Inc., is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform our audits to obtain reasonable assuranco about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Goran Capital Inc. as
of December 31, 1999 and 1998, and the results of their operations and their
cash flows for the years ended, December 31, 1999 and 1998 and 1997 in
conformity with general accepted accounting principles in the United States of
America.
Since the accompanying consolidated financial statements have been prepared and
audited in accordance with generally accepted accounting principles and auditing
standards in the United States of America, they may not satisfy the reporting
requirements of Canadian statutes and regulations. Significant differences
between the accounting principles applied in the accompanying consolidated
financial statements and those under Canadian generally accepted accounting
principles are quantified and explained in note 22 to the consolidated financial
statements.
/s/ Schwartz Levitsky Feldman, LLP
Chartered Accountants
Toronto, Ontario, Canada M6A 2X1 March 14, 2000, except for Note 23, which is as
of March 23, 2000
<PAGE>
Stockholder Information
Registrar and Transfer Agent
CIBC Mellon Trust Company
Toronto, Ontario
Independent Public Accountants
Schwartz Levitsky Feldman LLP
Toronto, Ontario
Annual Meeting of Stockholders May 30, 2000 10:00 a.m.
Location to be announced
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K for Goran Capital Inc. for the year
ended December 31, 1999, filed with the Securities and Exchange Commission, may
be obtained, without charge, upon request to the individual and address noted
under Shareholder Inquiries.
Market and Dividend 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, 1999 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, 1999 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 1999, 1998 and 1997.
<TABLE>
<CAPTION>
TORONTO STOCK EXCHANGE
1999 1998 1997
High Low High Low High Low
Quarter Ended
<S> <C> <C> <C> <C> <C> <C> <C>
March 31 $12.37 $7.73 $31.93 $25.84 $29.15 $18.98
June 30 $9.75 $7.06 $29.61 $23.89 $26.05 $19.31
September 30 $12.78 $7.40 $28.10 $20.38 $39.35 $24.27
December 30 $8.74 $1.95 $21.40 $8.04 $39.32 $27.75
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NASDAQ
1999 1998 1997
High Low High Low High Low
Quarter Ended
<S> <C> <C> <C> <C> <C> <C>
March 31 $10.73 $8.38 $31.50 $25.25 $29.25 $18.75
June 30 $10.19 $7.31 $30.50 $23.50 $26.25 $19.75
September 30 $13.25 $7.75 $28.50 $19.75 $40.00 $24.50
December 30 $8.38 $2.00 $21.06 $8.00 $39.50 $27.75
</TABLE>
On March 22, 2000, SIG received notice from Nasdaq - Amex that the Listing
Qualifications Panel has determined that SIG was not in compliance with certain
listing qualifications. On or before June 30, 2000, SIG must make a filing with
the SEC and Nasdaq - Amex evidencing complete compliance with the required
qualifications including net tangible assets excluding Preferred Securities, of
at least $15,000,000, market value of public float of at least $5,000,000 for a
period of ten consecutive days immediately thereafter, and a minimum $1.00 per
share bid price requirement. In the event that SIG fails to comply with any of
the terms of these requirements, SIG securities will be delisted from The Nasdaq
National Market. There can be no assurance that SIG will be able to comply with
such requirements. In that event, SIG expects that its common stock may then be
traded on the OTC Bulletin Board. The Company intends to appeal the decision of
the Listing Qualifications Panel.
The Company was scheduled to appear before the Nasdaq-Amex Listing
Qualifications Panel on April 6, 2000. Nasdaq advised the Company that it no
longer met the minimum $15 million market value of public float and $5.00 bid
price requirements pursuant to certain Nasdaq listing requirements. On April 4,
2000, the Company received a communication from Nasdaq that it was recommending
to the Listing Qualifications Panel that Goran be granted a similar period to
correct its listing deficiencies, as had previously been granted to the
Company's 68% owned subsidiary, SIG. To date, the Company has not received any
further communication from Nasdaq regarding this issue and therefore cannot
evaluate its ability to comply with any current or future listing requirements
that may be established by Nasdaq. Should Goran's common shares be delisted from
the Nasdaq National Market, the Company expects that its shares may then be
traded on the OTC Bulletin Board. Regardless of the outcome of the Nasdaq
Listing Qualifications Panel, the Company expects to continue the listing of the
commons shares on the Toronto Stock Exchange.
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Goran Capital Inc.
Tel: (317) 259-6302
E-mail: [email protected]
Board of Directors
G. Gordon Symons
Chairman of the Board
Goran Capital Inc.
Symons International Group, Inc.
Alan G. Symons
President, Chief Executive Officer
Goran Capital Inc.
Douglas H. Symons
Vice President, Chief Operating Officer
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
J. Ross Schofield
President
Schofield Insurance Brokers
David B. Shapira
President Medbers Limited
John K. McKeating
Former Partner
Vision 2120, Inc.
Executive Officers
Alan G. Symons
President, Chief Executive Officer
Goran Capital Inc.
Douglas H. Symons
Vice President, Chief Operating Officer
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
Bruce K. Dwyer
Vice President, Chief Financial Officer and Treasurer
Goran Capital Inc.
Symons International Group, Inc.
Gene Yerant
Executive Vice President
Goran Capital Inc.
Symons International Group, Inc.
Chief Operating Officer and President
Superior Insurance Group, Inc.
Mary E. DeLaat
Vice President, Chief Accounting Officer
Goran Capital Inc.
Symons International Group, Inc.
<PAGE>
Company, Subsidiaries and Branch Offices
HEAD OFFICE - CANADA
Goran Capital Inc.
2 Eva Road, Suite 200
Etobicoke, Ontario Canada M9C 2A8
Tel: 416-622-0660
Fax: 416-622-8809
HEAD OFFICE - US
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6400
Fax: 317-259-6395
Website: www.sigins.com
<PAGE>
SUBSIDIARIES AND BRANCHES
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
IGF Southwest
Pafco General Insurance Company 7914 Abbeville Avenue
4720 Kingsway Drive Lubbock, Texas 79424
Indianapolis, Indiana 46205 Tel: 806-783-3010
Tel: 317-259-6300 Fax: 806-783-3017
Fax: 317-259-6395
IGF South
Superior Insurance Company 101 Business Park Drive,
280 Interstate North Circle, N.W., Suite 500 Ridgeland, Mississippi 39157
Atlanta, Georgia 30339 Tel: 601-957-9780
Tel: 770-952-4885 Fax: 601-957-9793
Fax: 770-988-8583
IGF West
Superior Insurance Company 1700 Bullard Avenue, Suite106
5483 W. Waters Avenue Fresno, California 93710
Suite 1200, Building P Tel: 559-432-0196
Tampa, Florida 33634 Fax: 559-432-0294
Tel: 813-887-4878
Fax: 813-287-8362 IGF North
116 South Main, Box 1090
Superior Insurance Company Stanley, North Dakota 58784
1745 West Orangewood Road, Suite 210 Tel: 701-628-3536
Orange, California 92826 Fax: 701-628-3537
Tel: 714-978-6811
Fax: 714-978-0353 IGF - NACU
Highway 210 West, Box 375
IGF Insurance Company Henning, Minnesota 56551
Corporate Office Tel: 218-583-4800
6000 Grand Avenue Fax: 218-583-4852
Des Moines, Iowa 50312
Tel: 515-633-1000
Fax: 515-633-1010
IGF Mid East
3921 Pintail Drive
Springfield, Illinois 62707
Tel: 217-726-2450
Fax: 217-726-2451
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000925600
<NAME> Goran Capital Inc.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 177,171,000
<DEBT-MARKET-VALUE> 171,616,000
<EQUITIES> 13,555,000
<MORTGAGE> 1,990,000
<REAL-ESTATE> 400,000
<TOTAL-INVEST> 220,740,000
<CASH> 3,173,000
<RECOVER-REINSURE> 88,293,000
<DEFERRED-ACQUISITION> 13,920,000
<TOTAL-ASSETS> 512,111,000
<POLICY-LOSSES> 219,918,000
<UNEARNED-PREMIUMS> 90,007,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,929,000
0
135,000,000
<COMMON> 19,017,000
<OTHER-SE> (37,078,000)
<TOTAL-LIABILITY-AND-EQUITY> 512,111,000
276,040,000
<INVESTMENT-INCOME> 13,418,000
<INVESTMENT-GAINS> 65,000
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</TABLE>
