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,
1995 1996 1997 1998 1999
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
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.
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
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.
Goran Capital Inc.
Year Ended December 31,
(in thousands)
State 1997 1998 1999
-------- -------- -------
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
======== ======== =======
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:
Reinsurance Recoverables
Reinsurers A.M. Best Rating as of December 31, 1999 (1)
Constitution Reinsurance Corporation (2) A+ 1,492
Lloyds of London Not Rated 818
Trans Atlantic Reinsurance Corporation (2) A++ 1,062
(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:
(in thousands) Year Ended December 31,
1997 1998 1999
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
======= ======= =======
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.
Year Ended December 31, 1999 (1)
(in thousands, except footnotes)
A.M. Best Ceded
Reinsurers Rating Premiums
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
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.
The following table presents MPCI and crop hail premiums written by IGF
by state for the periods indicated.
(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
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
======== ======== ======== ======== ======== ======== ======== ========
(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.
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
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)
(A) Includes Superior loss and loss expense reserves of $44,423 acquired on
April 29, 1996 and subsequent development thereon.
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
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)
Activity in the liability for unpaid loss and loss adjustment expenses for
nonstandard automobile insurance is summarized below:
Reconciliation of Nonstandard Auto Reserves (1)
1999 1998 1997
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
(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:
Reconciliation of Crop Reserves (1)
1999 1998 1997
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
(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.
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
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)
ASSETS 1998 (1) 1999
---- ----
Assets:
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
======= =======
(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.
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)
1997 1998 1999
---- ---- ----
Revenues
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)
======== ======== ========
(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.
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended
December 31, 1997, 1998 and 1999 (In Thousands)
1997 1998 1999
---- ---- ----
Cash Flows from Operations
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
====== ==== ====
(1) Amounts for 1998 exclude consideration of $1,777 for the issuance of common
shares received in the form of share purchase loans.
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)
Property and Liability Insurance 1997 1998 1999
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%
- ----------------------------------- ----- ----- -----
GORAN CAPITAL INC.- CONSOLIDATED SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1997, 1998 and 1999 (In Thousands)
1997 1998 1999
Allowance for Allowance for Allowance for
Doubtful Accounts Doubtful Accounts Doubtful Accounts
Additions:
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
===== ===== =====
(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.
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)
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
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
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.
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