FORM 10-K/A 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 (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes 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. AUDITORS' REPORT To the Shareholders of Goran Capital Inc. We have audited the consolidated balance sheets of Goran Capital Inc. (incorporated in Canada) as of December 31, 1999 and 1998, and the related consolidated statements of earnings (loss), changes in shareholders' equity (deficit), and cash flows for each of the years ended December 31, 999, 1998 and 1997. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examing, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the consolidated financial position of Goran Capital Inc. as of December 31, 1999 and 1998, and the results of its operations and cash flows for the years ended December 31, 1999, 1998 and 1997, in accordance with Canadian general accepted accounting principles. On March 14,, 2000, except for Note 23 which is as of March 23, 2000, we also reported separately and issued an unqualified opinion to the shareholders of Goran Capital Inc. on the financial statements for the same period, prepared in accordance with United States of America generally accepted accounting principles are reference should be made to that report. Schwartz Levitsky Feldman, llp Chartered Accountants Toronto, Ontario March 14, 2000, except for Note 23, which is as of March 23, 2000 CONSOLIDATED FINANCIAL STATEMENTS as of December 31, 1999 and 1998 (in thousands, except share data) CONSOLIDATED BALANCE SHEETS 1999 1998 ASSETS: Investments: Available for sale: Fixed maturities $177,171 $194,277 Equity securities 15,511 13,691 Short-term investments, at amortized cost, which approximates market 32,634 27,637 Mortgage loans, at cost 1,990 2,100 Other invested assets 945 890 TOTAL INVESTMENTS 228,251 238,595 Investments in and advances to related parties 1,646 3,495 Reinsurance recoverable on paid and unpaid losses 88,293 67,885 Cash and cash equivalents 3,173 15,123 Receivables, net of allowances 92,446 123,690 Prepaid reinsurance premiums 10,259 17,486 Federal income taxes recoverable 6,820 12,711 Deferred policy acquisition costs 13,920 16,332 Future income taxes 0 5,825 Capital assets, net of accumulated amortization 21,967 19,350 Intangible assets 43,812 46,300 Other assets 9,335 4,197 TOTAL ASSETS $519,922 $570,989 LIABILITIES: Losses and loss adjustment expenses $219,918 $207,432 Unearned premiums 90,007 110,665 Reinsurance payables 37,603 12,353 Notes payable 16,929 13,744 Distributions payable on preferred securities 4,809 4,809 Other 28,543 17,474 TOTAL LIABILITIES $397,809 $366,477 Minority interest: Equity in net assets of subsidiaries -- 19,787 Company obligated mandatorily redeemable preferred stock of trust subsidiary holding solely parent debentures 135,000 135,000 SHAREHOLDERS' EQUITY (DEFICIT) Common Stock 19,317 19,317 Contributed surplus 2,775 2,775 Cumulative translation adjustment 13 252 Retained earnings (accumulated deficit) (34,992) 27,381 TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (12,887) 49,725 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $519,922 $570,989 The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 1999, 1998, and 1997 (in thousands, except per share data) CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) 1999 1998 1997 Gross premiums written $473,687 $546,771 $448,982 Less ceded premiums $(217,188) $(184,665) $(167,086) NET PREMIUMS WRITTEN $256,499 $362,106 $281,896 NET PREMIUMS EARNED $276,040 $342,177 $276,540 Fee income 15,791 20,203 17,821 Net investment income 13,418 13,401 12,777 Net realized capital gain 65 4,104 9,393 TOTAL REVENUES 305,314 379,885 316,531 Expenses: Losses and loss adjustment expenses 276,633 280,892 210,999 Policy acquisition and general and administrative expenses 97,950 103,926 63,344 Interest expense 620 163 3,087 Amortization of intangibles 2,687 2,379 1,197 TOTAL EXPENSES 377,890 387,360 278,627 EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST AND UNDERNOTED (72,576) (7,475) 37,904 ITEMS Income taxes: Current (6,617) (1,706) 12,720 Future 7,865 (332) (1,124) TOTAL INCOME TAXES 1,248 (2,038) 11,596 NET EARNINGS (LOSS) BEFORE MINORITY INTEREST AND UNDERNOTED ITEMS (73,824) (5,437) 26,308 Minority Interest (19,787) (4,849) 7,205 Distributions on preferred securities, net of tax 8,336 8,411 3,120 NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (62,373) (8,999) 15,983 Net earnings (loss) from discontinued operations ---- (2,937) (3,545) NET EARNINGS (LOSS) $(62,373) $(11,936) $12,438 Weighted average shares outstanding - Basic 5,876,398 5,841,329 5,590,576 Earnings (loss) per share from continuing operations $(10.61) $(1.54) $2.86 Earnings (loss) per share from continuing operations - fully diluted $(10.61) $(1.54) $2.70 Net earnings (loss) per share $(10.61) $(2.04) $2.22 Net earnings (loss) per share - fully diluted $(10.61) $(2.04) $2.12 The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 1999, 1998, and 1997 (in thousands, except number of shares) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) Cumulative Total Transulation Stockholders' Capital Stock Contributed Retained Adjustment Shares Amount Surplus Earnings Equity (Deficit) BALANCE AT JANUARY 1, 1997 5,405,820 $17,416 $2,775 $27,401 $(334) $47,258 Net earnings 12,438 12,438 Change in Cumulative Translation Adjustment 42 42 Issuance of common shares 324,456 594 594 BALANCE AT DECEMBER 31, 1997 ________ _______ __________ ________ _________ _________ 5,730,276 18,010 2,775 39,839 (292) 60,332 Net loss (11,936) (11,936) Change in Cumulative Translation Adjustment 544 544 Issuance of common shares 215,922 1,533 1,533 Purchase of common shares (69,800) (226) (522) (748) BALANCE AT DECEMBER 31, 1998 __________ _______ _________ ________ ________ ________ 5,876,398 19,317 2,775 27,381 252 49,725 Net earnings (loss) (62,373) (62,373) Change cumulative translation adjustment (239) (239) BALANCE AT DECEMBER 31, 1999 _________ _______ _________ ________ _________ __________ 5,876,398 $19,317 $2,775 $(34,992) $13 $(12,887) The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 1999, 1998, and 1997 (in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS 1999 1998 1997 Cash flows from operating activities Net earnings (loss) (62,373) (11,936) 12,438 Adjustments to reconcile net earnings (loss) to net cash provided from operations: Minority interest (19,787) (4,849) 7,205 Amortization and other 7,722 6,032 5,258 Future income tax expense (benefit) 8,462 (3,727) (1,124) Loss (gain) on sale of investments (65) (4,104) (9,393) Gain on sale of capital assets -- (267) -- Net changes in operating assets and liabilities (net of assets acquired): Receivables 31,244 (11,427) (6,395) Reinsurance recoverable on losses (20,208) 40,321 (61,311) Prepaid reinsurance premiums 7,227 19,121 (21,624) Federal income taxes recoverable 5,891 0 0 Deferred policy acquisition costs 2,412 (4,483) 2,011 Other assets and liabilities 3,055 (11,836) (4,083) Losses and loss adjustment expenses 12,486 54,561 25,826 Unearned premiums (20,658) (7,951) 27,409 Reinsurance payables 25,250 (48,770) 37,810 NET CASH PROVIDED FROM (USED IN) OPERATIONS (19,542) 10,685 14,027 Cash flow from investing activities net of assets acquired: Purchase of minority interest and subsidiaries 0 (1,208) (61,000) Net sales (purchases) of short-term investments (13,168) (8,807) 11,638 Proceeds from sales, calls and maturities of fixed maturities 206,208 129,951 227,604 Purchases of fixed maturities (182,453) (148,417) (268,542) Proceeds from sales of equity securities 11,215 69,379 36,101 Purchase of equity securities (9,850) (42,909) (35,558) Net proceeds from (purchase) sales of other investments (2,045) (390) 41 Purchase of capital assets (7,278) (9,348) (5,803) Cash paid for NACU -- (3,000) -- Other, net (71) -- 1,130 NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 2,558 (14,749) (94,389) Cash flow from financing activities net of assets acquired: Proceeds from issuance of preferred securities -- -- 129,877 Proceeds from issue of share capital -- 356 594 Redemption of share capital -- (748) -- Proceeds from (payments made on) term debt 3,185 7,855 (43,818) Proceeds from consolidated subsidiary minority interest owner -- -- 2,354 Loans from and (repayments to) related parties 1,849 (1,600) -- NET CASH PROVIDED FROM FINANCING ACTIVITIES 5,034 5,863 89,007 Increase (decrease) in cash and cash equivalents (11,950) 1,799 8,645 Cash and cash equivalents, beginning of year 15,123 13,324 4,679 Cash and cash equivalents, end of year 3,173 15,123 13,324 The accompanying notes are an integral part of the consolidated financial statements. GORAN CAPITAL INC AND SUBSIDIARIES - ------------------------------------------------------------------- 1. Nature of Operations and Significant Accounting Policies: These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. Goran Capital Inc. ("Goran" or the "Company") is the parent company of the Goran group of companies. The consolidated financial statements include the accounts of all subsidiary companies of Goran as follows: Symons International Group, Inc. ("SIG") is a 68% owned subsidiary of Goran. SIG is primarily involved in the sale of nonstandard automobile insurance and crop insurance. It's products are marketed through independent agents and brokers. Its insurance subsidiaries are licensed in 35 states, primarily in the Midwest and Southern United States. SIG's wholly-owned subsidiaries are as follows: Superior Insurance Group Management, Inc ("Superior Group Management") (formerly, GGS Management Holdings, Inc. ("GGSH")) -a holding company for the nonstandard automobile operations which includes: Superior Insurance Group, Inc. ("Superior Group") (formerly, GGS Management, Inc. ("GGS")) -a management company for the nonstandard automobile operations; Superior Insurance Company ("Superior")-an insurance company domiciled in Florida; Superior American Insurance Company ("Superior American")-an insurance company domiciled in Florida; Superior Guaranty Insurance Company ("Superior Guaranty")-an insurance company domiciled in Florida; Pafco General Insurance Company ("Pafco")-an insurance company domiciled in Indiana; IGF Holdings, Inc. ("IGFH")-a holding company for the crop operations which includes IGF and Hail Plus Corp.; IGF Insurance Company("IGF")-an insurance company domiciled in Indiana; North American Crop Underwriters, Inc. ("NACU") - a managing general agency with exclusive focus on crop insurance. Granite Reinsurance Company Ltd. ("Granite Re") - a finite risk reinsurance company based in Barbados. Granite Insurance Company ("Granite") - a Canadian federally licensed insurance company which ceased writing new insurance policies on January 1, 1990. Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIGF") - a Florida based surplus lines insurance agency. These operations have been discontinued effective January 1, 1999. On August 12, 1997, the Company acquired the remaining 48% minority interest in Superior Group Management from Goldman Funds through a purchase business combination. (See Note 2.) On July 8, 1998, the Company acquired NACU through a purchase business combination. The Company's Consolidated Statement of Earnings for the year ended December 31, 1998 includes the results of operations of NACU subsequent to July 8, 1998. (See Note 2.) a. Basis of Presentation: The consolidated financial statements include the accounts, after intercompany eliminations, of Goran and its subsidiary companies. b. Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. c. Premiums: Premiums are recognized as income ratably over the life of the related policies and are stated net of ceded premiums. Unearned premiums are computed on the semimonthly pro rata basis. d. Investments: Investments are presented on the following basis: Fixed maturities and equity securities are classified as available for sale and are carried at market value with the unrealized gain or loss as a component of stockholders' equity, net of deferred tax, and accordingly, has no effect on net income. Real estate-at cost, less allowances for depreciation. Mortgage loans-at outstanding principal balance. Realized gains and losses on sales of investments are recorded on the trade date and are recognized in net income on the specific identification basis. Interest and dividend income are recognized as earned. e. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company includes in cash and cash equivalents all cash on hand and demand deposits with original maturities of three months or less. f. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are comprised of agents' commissions, premium taxes, certain other costs and investment income (starting in 1999) which are related directly to the acquisition of new and renewal business, net of expense allowances received in connection with reinsurance ceded, which have been accounted for as a reduction of the related policy acquisition costs. These costs are deferred and amortized over the terms of the policies to which they relate. Acquisition costs that exceed estimated losses and loss adjustment expenses and maintenance costs are charged to expense in the period in which those excess costs are determined. g. Capital Assets: Capital Assets are recorded at cost. Amortization for buildings is based on the straight-line method over 31.5 years and the straight-line method for other property and equipment over their estimated useful lives ranging from five to seven years. Asset and accumulated amortization accounts are relieved for dispositions, with resulting gains or losses reflected in net income. h. Intangible Assets: Intangible assets consists primarily of goodwill, and debt acquisition costs. Goodwill is amortized over a 25-year period on a straight-line basis based upon management's estimate of the expected benefit period. Deferred debt acquisition costs are amortized over the term of the debt. i. Losses and Loss Adjustment Expenses: Reserves for losses and loss adjustment expenses include estimates for reported unpaid losses and loss adjustment expenses and for estimated losses incurred but not reported. These reserves have not been discounted. The Company's loss and loss adjustment expense reserves include an aggregate stop-loss program. Reserves are established using individual case-basis valuations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves are adequate, the provisions for losses and loss adjustment expenses are necessarily based on estimates and are subject to considerable variability. Changes in the estimated reserves are charged or credited to operations as additional information on the estimated amount of a claim becomes known during the course of its settlement. The reserves for losses and loss adjustment expenses are reported net of the receivables for salvage and subrogation of approximately $8,506,000 and $10,684,000 at December 31, 1999 and 1998, respectively. j. Preferred Securities: Preferred securities represent Company-obligated mandatorily redeemable securities of subsidiary holding solely parent debentures and are reported at their liquidation value under minority interest. Distributions on these securities are charged against consolidated earnings. k. Income Taxes: The Company utilizes the liability method of accounting for future income taxes. Under the liability method, companies will establish a future tax liability or asset for the future tax effects of temporary differences between book and taxable income. Changes in future tax rates will result in immediate adjustments to future taxes. (See Note 11.) Valuation allowances are established when necessary to reduce future assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in future tax assets and liabilities. l. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on basis consistent with those used in accounting for the original policies and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. m. Asset Impairment Policy: The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell. n. Certain Accounting Policies for Crop Insurance Operations: In 1996, IGF instituted a policy of recognizing (i) 35% of its estimated multiple peril crop insurance (MPCI) gross premiums written for each of the first and second quarters, 20% for the third quarter and 10% for the fourth quarter; (ii) commission expense at the applicable rate of MPCI gross premiums written recognized; and (iii) Buy-up Expense Reimbursement at a rate of 25% in 1999, 27% in 1998, and 29% in 1997 of MPCI gross premiums written recognized along with normal operating expenses incurred in connection with premium writings. In the third quarter, if a sufficient volume of policyholder acreage reports have been received and processed by IGF, IGF's policy is to recognize MPCI gross premiums written for the first nine months based on a reestimate which takes into account actual gross premiums processed. If an insufficient volume of policies has been processed, IGF's policy is to recognize in the third quarter 20% of its full year estimate of MPCI gross premiums written, unless other circumstances require a different approach. The remaining amount of gross premiums written is recognized in the fourth quarter, when all amounts are reconciled. IGF recognizes MPCI underwriting gain or loss during the first and second quarters, as well as the third quarter, reflecting IGF's best estimate of the amount of such gain or loss to be recognized for the full year, based on, among other things, historical results, plus a provision for adverse developments. In the third and fourth quarters, a reconciliation amount is recognized for the underwriting gain or loss based on final premium and latest available loss information. o. Comparative Figures: Certain Comparative figures have been reclassified to conform with the basis of presentation adopted in 1999. p. Accounting Changes: In the consolidated financial statements, the Company has adopted the following pronouncements: Segmented Information - Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1701 and United States Financial Accounting Standards Board ("FASB") Statement of Accounting Standard No. 131; the adoption of these standards is consistent with the Company"s previously established segment disclosures. Income Taxes - CICA Handbook Section 3465; the standard is consistent with FASB Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes". These standards require an asset and liability approach that takes into account changes in tax rates when valuing the future tax amounts reported in the balance sheet. Valuation allowances are established when necessary, to reduce future tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in future tax assets and liabilities. Losses and Loss Adjustment Expense - the Company's accounting policy prior to 1998 was to discount the reserves for direct claims for the time value of money. Effective January 1, 1998, the Company adopted its current policy (see Note 1 (i)) which does not take into the account the impact of discounting. The new policy is consistent with United States generally accepted accounting principals ("GAAP"). The net impact of the changes in accounting for income taxes and loss and loss adjustment expense has been applied prospectively in the accounts with no material effect for 1998 and prior year. The impact of the previously applied policies on the 1997 financial statements is presented in the reconciliation of Canadian and United States GAAP in Note 22. q. Earnings Per Share: The Company's basic earnings per share calculations are based upon the weighted average number of shares of common stock outstanding during each period. Due to the net loss in 1998 and 1999, fully diluted earnings per share is the same as basic earnings per share. 2. Corporate Reorganization and Acquisitions: On August 12, 1997, the Company purchased the remaining minority interest in Superior Group Management for $61 million in cash. The excess of the acquisition price over the minority interest liability aggregated approximately $36,045,000 and was assigned to goodwill as the fair market value of assets and liabilities approximated their carrying value. In July 1998, IGFH acquired all of the outstanding shares of common stock of NACU, a Henning, Minnesota based managing general agency which focuses exclusively on crop insurance. The acquisition price for NACU was $4,000,000 of which $3,000,000 was paid in cash and the remaining $1,000,000 payable July 1, 2001 without interest. The acquisition of NACU was accounted for as a purchase and recorded as follows (in thousands): Assets acquired $21,035 Liabilities assumed 19,705 Net assets acquired 1,330 Purchase price 4,000 Excess purchase price (goodwill) $2,670 The Company's results from operations for the year ended December 31, 1998 include the results of NACU subsequent to July 8, 1998. 3. Investments: Investments are summarized as follows (in thousands): Cost or Estimated Amortized Unrealized Market December 31, 1999 Cost Gain Loss Value Fixed Maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $63,857 $103 $(2,773) $61,187 Foreign governments ---- ----- ---- ---- Obligations of states and political subdivisions 42 ----- (4) 38 Corporate securities 113,272 14 (2,895) 110,391 TOTAL FIXED MATURITIES 177,171 117 (5,672) 171,616 Equity securities 15,511 884 (2,840) 13,555 Short-term investments 32,634 ---- ---- 32,634 Mortgage loans 1,990 ---- ---- 1,990 Other invested assets 945 --------- --------- 945 TOTAL INVESTMENTS $228,251 $1,001 $(8,512) $220,740 Cost or Estimated Amortized Unrealized Market December 31, 1998 Cost Gain Loss Value Fixed Maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $74,060 $2,193 $(174) $76,079 Foreign governments ---- ---- ---- ---- Obligations of states and political subdivisions 7,080 3 (115) 6,968 Corporate securities 113,137 1,766 (699) 114,204 TOTAL FIXED MATURITIES 194,277 3,962 (988) 197,251 Equity securities 13,691 755 (1,458) 12,988 Short-term investments 27,637 ---- ---- 27,637 Mortgage loans 2,100 ---- ---- 2,100 Other invested assets 890 ---- ---- 890 TOTAL INVESTMENTS $238,595 $4,717 $(2,446) $240,866 At December 31, 1999, 91.4% of the Company's fixed maturities were considered investment grade by Standard & Poors Corporation or Moody's Investor Services, Inc. Securities with quality ratings Baa and above are considered investment grade securities. In addition, the Company's investments in fixed maturities did not contain any significant geographic or industry concentration of credit risk. The amortized cost and estimated market value of fixed maturities at December 31, 1999, by contractual maturity, are shown in the table which follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty (in thousands): Estimated Market Amortized Cost Value (in thousands) Maturity: Due in one year or less $4,276 $4,268 Due after one year through five years 91,708 89,901 Due after five years through ten years 40,779 38,566 Due after ten years 37,099 35,641 Mortgage-backed securities 3,309 3,240 TOTAL $177,171 $171,616 Gains and losses realized on sales of investments are as follows (in thousands): 1999 1998 1997 Proceeds from sales $206,208 $129,951 $227,604 Gross gains realized $3,375 $10,901 $10,639 Gross losses realized $(3,310) $ (6,797) $(1,246) Net investment income for the years ended December 31 are as follows (in thousands): 1999 1998 1997 Fixed maturities $12,301 $11,931 $11,213 Equity securities 401 596 340 Cash and short-term investments 1,475 1,346 1,544 Mortgage loans 152 173 182 Other (173) 32 (40) Total investment income 14,156 14,078 13,239 Investment expenses (738) (677) (462) Net investment income $13,418 $13,401 $12,777 Investments with a market value of $23,374,000, $31,201,000 and $42,367,000 (amortized cost of $23,426,000, $30,958,000 and $40,690,000) as of December 31, 1999, 1998 and 1997, respectively, were on deposit in the United States and Canada. The deposits are required by various insurance departments and others to support licensing requirements and certain reinsurance contracts, respectively. 4. Deferred Policy Acquisition Costs: Policy acquisition costs are capitalized and amortized over the life of the policies. Policy acquisition costs are those costs directly related to the issuance of insurance policies including commissions, premium taxes, and underwriting expenses net of reinsurance commission income on such policies. During 1999 the Company changed its method of calculating deferred policy acquisition costs by including investment income in the computation. Prior period calculations did not consider investment income. The effect of the change was to increase policy acquisition costs by approximately $4,071,000 in 1999. Policy acquisition costs both acquired and deferred, and the related amortization charged to income were as follows (in thousands): 1999 1998 1997 Balance, beginning of year $16,332 $11,849 $13,860 Costs deferred during year 43,714 56,041 17,345 Amortization during year (46,126) (51,558) (19,356) Balance, end of year $13,920 $16,332 $11,849 5. Capital Assets: Capital Assets at December 31 are summarized as follows (in thousands): Accumulated 1999 Cost Amortization 1999 Net 1998 Net Land $260 $---- $260 $260 Buildings 7,412 1,232 6,180 6,348 Office furniture and equipment 7,626 4,853 2,773 3,182 Automobiles 160 57 103 70 Computer equipment 20,889 8,238 12,651 9,490 Total $36,347 $14,380 $21,967 $19,350 Accumulated amortization at December 31, 1998 was $9,719,000. Amortization expense related to property and equipment for the years ended December 31, 1999, 1998 and 1997 were $4,887,000 $3,151,000 and $1,754,000 respectively. 6. Intangible Assets: Intangible assets at December 31 are as follows (in thousands): Accumulated 1999 Cost Amortization 1999 Net 1998 Net Goodwill $43,376 $4,641 $38,735 $39,851 Deferred debt costs 5,131 413 4,718 4,889 Other 1,299 940 359 1,560 $49,806 $5,994 $43,812 $46,300 Accumulated amortization at December 31, 1998 was $3,697,000. Amortization expense related to intangible assets for the years ended December 31, 1999, 1998 and 1997 was $2,297,000 $2,379,000 and $1,197,000 respectively. 7. Unpaid Losses and Loss Adjustment Expenses: Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows (in thousands): 1999 1998 1997 Balance at January 1 $207,432 $152,871 $127,045 Less reinsurance recoverables 67,885 108,206 33,113 NET BALANCE AT JANUARY 1 139,547 44,665 93,932 Incurred related to: Current year 237,817 265,715 200,566 Prior years 38,816 15,177 10,433 TOTAL INCURRED 276,633 280,892 210,999 Paid related to: Current year 167,262 135,473 180,925 Prior years 117,293 50,537 79,341 TOTAL PAID 284,555 186,010 260,266 NET BALANCE AT DECEMBER 31 131,625 139,547 44,665 Plus reinsurance recoverables 88,293 67,885 108,206 BALANCE AT DECEMBER 31 $219,918 $207,432 $152,871 Reserve estimates are regularly adjusted in subsequent reporting periods, consistent with sound insurance reserving practices, as new facts and circumstances emerge which indicate a modification of the prior estimate is necessary. The adjustment, referred to as "reserve development," is inevitable given the complexities of the reserving process and is recorded in the statements of earnings in the period the need for the adjustments becomes apparent. The foregoing reconciliation indicates that deficient reserve developments of $30,461,000 $12,996,000 and $10,967,000 in the December 31, 1999, 1998, and 1997 loss and loss adjustment expense reserves, respectively, emerged in the following year. The 1997 and 1998 deficient reserve development occurred primarily due to volatility in the historical trends for the nonstandard automobile business as a result of significant growth during 1996 and 1997. The deficient reserve development during 1999 resulted from a higher than expected frequency and severity on nonstandard automobile claims and from higher than expected losses on 1998 AgPI policies (see Note 16). The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. Liabilities for loss and loss adjustment expenses have been established when sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, a liability has been established to cover additional exposure on both known and unasserted claims. The effects of changes in settlement costs, inflation, growth and other factors have all been considered in establishing the current year reserve for unpaid losses and loss adjustment expenses. 8. Notes Payable: At December 31, 1999, IGF maintained a revolving bank line of credit in the amount of $15,000,000 (the "IGF Revolver"). At December 31, 1999 and 1998, the outstanding balance was $15,000,000 and $12,000,000 respectively. Interest on this line of credit was at the New York prime rate (8.50% at December 31, 1999) minus .75% adjusted daily. This line is collateralized by the crop-related uncollected premiums, reinsurance recoverable on paid losses, Federal Crop Insurance Corporation (FCIC) annual settlement, and a first lien on the real estate owned by IGF. The IGF Revolver contains certain covenants which (i) restricts IGF's ability to accumulate common stock; (ii) sets minimum standards for investments and policyholder surplus; and (iii) limits the ratio of net written premiums to surplus. At December 31, 1999, IGF was not in compliance with the minimum statutory surplus covenant. However, IGF has received a waiver from the bank for December 31, 1999. The weighted average interest rate on the line of credit was 7.02%, 6.96%, and 8.75% during 1999, 1998 and 1997, respectively. Notes payable at December 31, 1999 also includes a $1,000,000 note due 2001 on the purchase of NACU at no interest. The balance of notes payable at December 31, 1999 includes three smaller notes (less than $300,000 each) assumed in the acquisition of NACU due 2002-2006 with periodic payments at interest rates ranging from 7% to 9.09%. 9. Company-Obligated Mandatorily Redeemable Preferred Stock of Trust Subsidiary Holding Soley Parent Debentures. On August 12, 1997, SIG's wholly owned trust subsidiary issued $135 million in preferred securities ("Preferred Securities") at a rate of 9.5% paid semi-annually. The principal asset of the wholly owned trust subsidiary are Senior Subordinated Notes of SIG in the principal amount of $135 million with an interest rate and maturity date substantially identical to those of the Preferred Securities. The Preferred Securities were offered under Rule 144A of the SEC ("Preferred Securities Offering") and, pursuant to the Registration Rights Agreement executed at closing, SIG filed a Form S-4 Registration Statement with the SEC on September 16, 1997 to effect the Exchange Offer. The S-4 Registration Statement was declared effective on September 30, 1997 and the Exchange Offer successfully closed on October 31, 1997. The proceeds of the Preferred Securities Offering were used to repurchase the remaining minority interest in Superior Group Management for $61 million, repay the balance of the term debt of $44.9 million the balance, after expenses, of approximately $24 million was contributed to the nonstandard automobile insurers of which $10.5 million was contributed in 1997. Expenses of the issue aggregated $5.1 million and are amortized over the term of the Preferred Securities (30 years). In the third quarter of 1997, the Company wrote off the remaining unamortized costs of the term debt of approximately $1.1 million pre-tax or approximately $0.09 per share which was recorded as an extraordinary item. The Preferred Securities represent company-obligated mandatorily redeemable securities of a subsidiary holding solely its parent debentures and have a term of 30 years with semi-annual interest payments commencing February 15, 1998. The Preferred Securities may be redeemed in whole or in part after 10 years. The Preferred Security obligations of approximately $13 million per year is funded from the Company's nonstandard automobile management company and dividend capacity from the crop operations. The nonstandard auto funds are the result of management and billing fees in excess of operating costs. The Trust Indenture for the Preferred Securities contains certain restrictive covenants. These covenants are based upon SIG's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) whereby if SIG's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Security distributions) for the most recent four quarters the following restrictions become effective: o SIG may not incur additional indebtedness or guarantee additional indebtedness. o SIG may not make certain restricted payments including loans or advances to affiliates, stock repurchases and a limitation on the amount of dividends is inforce. o SIG may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply as SIG's consolidated coverage ratio was (4.89) in 1999, and will continue to apply until SIG's Consolidated Coverage Ratio is in compliance with the terms of the Trust Indenture. SIG is in compliance with these additional restrictions and therefore, this does not represent a default by the Company on the Preferred Securities. Assuming the Preferred Securities Offering took place at January 1, 1997, the proforma effect of this offering on the Company's consolidated statement of earnings from continuing operations for the year ended December 31, 1997 is as follows (in thousands): Unaudited Revenues $319,019 Net earnings from continuing operations $11,163 Net earnings from continuing operations per common $1.99 share (fully diluted) The pro forma results are not necessarily indicative of what actually would have occurred if these transactions had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results. 10. Capital Stock The Company's authorized share capital consists of: (a) First Preferred shares An unlimited number of first preferred shares of which none are outstanding at December 31, 1999 (1998-nil) (b) Common Shares An unlimited number of common shares of which 5,876,398 are outstanding as at December 31, 1999 (1998 - 5,876,398). During the year, pursuant to the exercise of warrants and options, the Company issued nil (1998 - 215,992) common shares for aggregate consideration in the amount nil (1998 - $1,533,000) of which $1,177,000 of the consideration was in the form of a loan. During 1998, the Company purchased 69,800 of its common shares for an aggregate consideration of $748,000. 11. Income Taxes: The Company and its subsidiaries have net operating loss carryovers of $66,152,000. Of that amount, $43,325,000 is attributable to SIG, $15,983,000 is attributable to Goran and its non U.S. subsidiaries, and $6,844,000 is attributable to SIGF a U.S. subsidiary which does not qualify for filing consolidated tax returns with SIG. These losses are usable only against future income in these respective operating units. As of December 31, 1999, the Company has unused net operating loss carryovers available as follows (in thousands): Expiring in years ending not later than Goran & December 31: Canadian Total SIG Subsidiaries SIGF 2000 541 1,571 2,112 2001 1,537 1,537 2002 126 865 991 2003 1,120 1,120 2004 511 511 2005 1,659 1,659 2006 1,113 1,113 2017 4,688 4,688 2018 1,295 1,295 2019 42,658 -- 861 43,519 Capital Losses -- 7,607 -- 7,607 TOTAL 43,325 15,983 6,844 66,152 SIG files a consolidated U.S. federal income tax return with its wholly-owned subsidiaries. Intercompany tax sharing agreements between SIG and its wholly-owned subsidiaries provide that income taxes will be allocated based upon separate return calculations in accordance with the Internal Revenue Code of 1986, as amended. Intercompany tax payments are remitted at such times as estimated taxes would be required to be made to the Internal Revenue Service ("IRS"). Refunds received from the IRS are distributed in a timely manner to the appropriate subsidiaries. A reconciliation of the differences between federal tax computed by applying the federal statutory rate of 35% to income before income taxes and the income tax provision is as follows (in thousands): 1999 1998 1997 Computed income taxes (benefit) at statutory rate $(22,872) (2,953) $13,266 Alternative minimum taxes 1,203 55 ---- Dividends received deduction (92) (130) (78) Goodwill and acquisition costs 793 621 179 Other (1,649) (1,243) (346) Tax Exempt (Income) Loss 88 689 (134) Application of Operating Loss Carry Forward (82) ---- (1,291) (22,611) (2,961) 11,596 Valuation allowance change 23,859 923 ---- Income Tax Expense (Benefit) $1,248 $(2,038) $11,596 The net future tax asset at December 31, 1999 and 1998 is comprised of the following (in thousands): 1999 1998 Future tax assets: Unpaid losses and loss adjustment expenses $4,271 $3,548 Unearned premiums and prepaid insurance 5,568 5,972 Allowance for doubtful accounts 1,022 1,118 Net operating loss carryforwards 23,779 8,129 Other 2,940 1,468 FUTURE TAX ASSET $37,580 $20,235 Future tax liabilities: Deferred policy acquisition costs $(4,872) $(5,716) Other (799) (604) FUTURE TAX LIABILITY $(5,671) $(6,320) 31,909 13,915 VALUATION ALLOWANCE $(31,909) (8,090) NET FUTURE TAX ASSET $---- $5,825 At December 31, 1999 the Company's net deferred tax assets are fully offset by a valuation allowance. The company will continue to assess the valuation allowance and to the extent it is determined that such allowance is no longer required, the tax benefit of the remaining net deferred tax assets will be recognized in the future. 12. Leases: The Company leases buildings, furniture, cars and equipment under operating leases. Operating leases generally include renewal options for periods ranging from two to seven years and require the Company to pay utilities, taxes, insurance and maintenance expenses. The following is a schedule of future minimum lease payments under cancelable and non-cancelable operating leases for each of the five years succeeding December 31, 1999 and thereafter, excluding renewal options (in thousands): Year Ending December 31: 2000 $4,316 2001 2,529 2002 2,270 2003 1,411 2004 and Thereafter $2,586 Rental expense charged to operations in 1999, 1998 and 1997 amounted to $3,607,000 $2,939,000 and $1,176,000 respectively, including amounts paid under short-term cancelable leases. 13. Reinsurance: The Company limits the maximum net loss that can arise from a large risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain levels of risks with other insurers or reinsurers, either on an automatic basis under general reinsurance contracts known as "treaties" or by negotiation on substantial individual risks. Such reinsurance includes quota share, excess of loss, stop-loss and other forms of reinsurance on essentially all property and casualty lines of insurance. In addition, the Company assumes reinsurance on certain risks. The Company remains contingently liable with respect to reinsurance, which would become an ultimate liability of the Company in the event that such reinsuring companies might be unable, at some later date, to meet their obligations under the reinsurance agreements. On March 2, 1998, the Company announced that it had signed an agreement with Continental Casualty Company ("CNA") to assume its multi-peril and crop hail operations. CNA wrote approximately $80 million of multi-peril and crop hail insurance business in 1997. The Company reinsures a small portion of the Company's total crop book of business (approximately 22% MPCI and 15% crop hail) with CNA. Starting in the year 2000, assuming no event of change in control as defined in the agreement, the Company can purchase the reinsurance from CNA through a call provision or CNA can require the Company to buy the premiums reinsured with CNA. Regardless of the method of takeout of CNA, CNA must not compete in MPCI or crop hail for a period of time. There was no purchase price. The formula for the buyout in the year 2000 is based on a multiple of average pre-tax earnings that CNA received from reinsuring the Company's book of business. Reinsurance activity for 1999, 1998 and 1997, which includes reinsurance with related parties, is summarized as follows (in thousands): 1999 Gross Ceded Net Premiums Written $473,687 $(217,188) $256,499 Premiums Earned 495,019 (218,979) 276,040 Incurred losses and loss adjustment expenses 494,725 (218,092) 276,633 Commission expenses (income) $76,679 $(73,088) $3,591 1998 Premiums Written 546,771 (184,665) 362,106 Premiums Earned 554,722 (212,545) 342,177 Incurred losses and loss adjustment expenses 521,476 (240,584) 280,892 Commission expenses (income) 94,818 (80,272) 14,546 1997 Premiums Written 448,982 (167,086) 281,896 Premiums Earned 422,200 (145,660) 276,540 Incurred losses and loss adjustment expenses 312,079 (101,080) 210,999 Commission expenses (income) 65,529 (77,279) (11,750) Amounts recoverable from reinsurers relating to unpaid losses and loss adjustment expenses were $88,293,000 and $67,885,000 as of December 31, 1999 and 1998, respectively. These amounts are reported as assets and are not netted against the liability for loss and loss adjustment expenses in the accompanying Consolidated Balance Sheets. 14. Related Party Transactions The 1989, the Company wrote off a loan of $5,135,000 owed by a subsidiary of Symons International Group Ltd. ("SIGL"). SIGL, the majority shareholder of Goran, guaranteed this loan and pledged 1.2 million escrowed common shares of Goran (the "escrowed shares") as security for the loan. During 1994, SIGL entered into agreements with Goran whereby as consideration for the release of 766,600 of the escrowed shares, SIGL repaid $1,465,000 of the loan. During 1997, SIGL entered into an agreement with Goran whereby as consideration for release of 333,400 of the escrowed shares, SIGL repaid $1,444,000 of the loan. The balance due to Goran of $2,226,000 continues to be guaranteed by SIGL and is secured by the 100,000 remaining escrowed shares. Included in investments and advances to related parties are $300,000 (1998 - $1,377,000) due from certain shareholders and directors which relate to the purchase of common shares of the company. Approximately $550,000 (1998 - $1,157,000) of these amounts due bear interest and are subject to repayment terms. SIG paid $3,112,000 $2,832,000 and $1,034,000 in 1999, 1998 and 1997, respectively, for consulting and other services relative to the conversion to the company's new non-standard automobile operating system. The Company has capitalized these costs as part of its new non-standard automobile operating system. Approximately 90% of these payments are for services provided by consultants and vendors unrelated to the Company. Stargate Solutions ("Stargate") manages the work of each unrelated consultants and vendors and, as compensation for such work, has retained approximately 10% of the payments referred to above in return for management services provided. During 1999, Stargate was owned beneficially by certain directors of the Company and a relative of those directors. Also included in consulting fees to related parties is $520,000 and $270,000 in 1999 and 1998 respectively, for payments to Onex, Inc., an officer of which is on SIG's Board of Directors, for employment related matters. 15. Regulatory Matters: Pafco and IGF, domiciled in Indiana, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Indiana Department of Insurance (IDOI). Statutory requirements place limitations on the amount of funds which can be remitted to the Company from Pafco and IGF. The Indiana statute allows 10% of surplus as regard to policyholders or 100% of net income, whichever is greater, to be paid as dividends only from earned surplus. The Superior entities, domiciled in Florida, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Florida Department of Insurance (FDOI). In the consent order approving the Acquisition of Superior, the FDOI (the "Acquisition Consent Order") has prohibited Superior from paying any dividends for four years without the prior written approval of the FDOI which prohibition was in effect through the 1999 calendar year. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. IGF received written approval through December 31, 1999 from the IDOI to reflect its business transacted with the FCIC as a 100% cession with any net underwriting results recognized in ceding commissions for statutory accounting purposes, which differs from prescribed statutory accounting practices. As of December 31, 1999, that permitted transaction had no effect on statutory surplus or net income. The underwriting profit results of the FCIC business, net of reinsurance of $18,206,000 $18,405,000 and $31,595,000 are netted with policy acquisition and general and administrative expenses for the years ended December 31, 1999, 1998 and 1997, respectively, in the accompanying Consolidated Statements of Earnings. The NAIC is considering the adoption of a recommended statutory accounting standard for crop insurers, the impact of which is uncertain since several methodologies are currently being examined. Although the IDOI has permitted the Company to continue for its statutory financial statements through December 31, 1999 its practice of recording its MPCI business as 100% ceded to the FCIC with net underwriting results recognized in ceding commissions, the IDOI has indicated that in the future it will require the Company to adopt the MPCI accounting practices recommended by the NAIC or any similar practice adopted by the IDOI. Since such a standard would be adopted industry-wide for crop insurers, the Company would also be required to conform its future GAAP financial statements to reflect the new MPCI statutory accounting methodology and to restate all historical GAAP financial statements consistently with this methodology for comparability. The Company cannot predict what accounting methodology will eventually be implemented, but believe the Company will be required to adopt such methodology. The Company anticipates that any such new crop accounting methodology will not affect GAAP net earnings. Net income (loss) of the U.S. insurance subsidiaries, as determined in accordance with statutory accounting practices (SAP), was $(20.5) million, $(21.5) million and $7.7 million, for 1999, 1998 and 1997, respectively. Consolidated statutory capital and surplus was approximately $50 million and $105 million at December 31, 1999 and 1998, respectively. As of December 31, 1999, the risk-based capital of IGF was in excess of the company action level. Superior's risk-based capital ratio was at 199% or $151,000 below the company action level and Pafco's risk-based ratio was at 72% or $10.5 million below the company action level using the NAIC guidelines. To address IDOI concerns relating to Pafco, on February 17, 2000, Pafco agreed to an order under which the IDOI may monitor more closely the ongoing operations of Pafco. Among other matters, Pafco must: o Refrain from doing any of the following without the IDOI's prior written consent: selling assets or business in force or transferring property, except in the ordinary course of business; disbursing funds, other than for specified purposes or for normal operating expenses and in the ordinary course of business (which does not include payments to affiliates, other than under written contracts previously approved by the IDOI, and does not include payments in excess of $10,000); lending funds; making investments, except in specified types of investments; incurring debt, except in the ordinary course of business and to unaffiliated parties; merging or consolidating with another company, or entering into new, or modifying existing, reinsurance contracts. o Reduce its monthly auto premium writings, or obtain additional statutory capital or surplus, such that the year 2000 ratio of gross written premium to surplus and net written premium to surplus does not exceed 4.0 and 2.4, respectively; and provide the IDOI with regular reports demonstrating compliance with these monthly writings limitations. Further restrictions in premium writings would result in lower premium volume. Management fees payable to Superior Group are based on gross written premium therefore lower premium volume would result in reduced management fees paid by Pafco. o Provide a summary of affiliate transactions to the IDOI. o Continue to comply with prior IDOI agreements and orders to correct business practices, under which (as previously disclosed) Pafco must provide monthly financial statements to the IDOI, obtain prior IDOI approval of reinsurance arrangements and of affiliated party transactions, submit business plans to the IDOI that address levels of surplus and net premiums written, and consult with the IDOI on a monthly basis. Pafco's inability or failure to comply with any of the above could result in the IDOI requiring further reductions in Pafco's permitted premium writings or in the IDOI instituting future proceedings against Pafco. No report has yet been issued by the IDOI on its previously disclosed target examination of Pafco, covering loss reserves, pricing and reinsurance. Pafco has also agreed with the Iowa Department of Insurance (IADOI) to (i) limit its policy counts on automobile business in Iowa and (ii) provide the IADOI with policy count information on a monthly basis until June 30, 2000 and thereafter on a quarterly basis. In addition Pafco has agreed to provide monthly financial information to other departments of insurance in states in which it writes business. As previously disclosed, with regard to IGF and as a result of the losses experienced by IGF in the crop insurance operations, IGF has agreed with the IDOI to provide monthly financial statements and consult monthly with the IDOI, and to obtain prior approval for affiliated party transactions. IGF currently is in compliance with its agreement to provide monthly financial statements to IDOI; however, IGF is working with the IDOI to provide this information on a timely basis. IGF has agreed with the IADOI that it will not write any nonstandard business, other than that which it is currently writing until such time as IGF has: (i) increased surplus; (ii) a net written premium to surplus ratios less than three to one; and (iii) surplus reasonable to its risk. The FDOI has initiated examinations covering Superior. The scope of these examinations has covered or will cover market conduct, data processing systems, Year 2000 readiness and financial examinations as of June 30, 1999 and December 31, 1999. Although no report has been issued or other action taken by the FDOI, Superior expects to maintain ongoing discussions with the FDOI to address these and other issues, including reserve levels and financial review and reporting. The Company's operating subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to regulation and oversight by the IDOI, the FDOI, and the insurance regulators of other states in which the subsidiaries write business. The Company is a holding company and all of its operations are conducted by its subsidiaries. Regulation and oversight of insurance companies and their transactions with affiliates is conducted by state insurance regulators primarily for the protection of policyholders and not for the protection of other creditors or of shareholders. Failure to resolve issues with the IDOI and the FDOI in a manner satisfactory to the Company could result in future regulatory actions or proceedings that materially and adversely affect the Company. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of July 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. It is not known whether the IDOI or the FDOI will adopt the Codification, and whether the Departments will make any changes to the guidance. The Company has not estimated the potential effect of the Codification guidance if adopted by the departments of insurance. However, the actual effect of adoption could differ as changes are made to the Codification guidance, prior to its recommended effective date of July 1, 2001. 16. Commitments and Contingencies: On February 23, 2000, a complaint for a class action alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 was filed against the Company, SIG, certain officers, and certain directors in the United States District Court for the Southern District of Indiana. The complaint alleges, among other things, that the defendants rendered false and misleading statements and/or omissions concerning financial condition and business prospects of the Company, as well as the financial benefits that would inure to the Company and its shareholders. The Company intends to vigorously defend the claims brought against it. The California Department of Insurance (CDOI) has advised the Company that it is reviewing a possible assessment which could total $3 million. This possible assessment relates to the charging of brokers fees charged to policyholders by independent agents who placed business with Superior. The CDOI has indicated that such broker fees charged by the independent agent to the policyholder were improper and has requested reimbursement to the policyholders by Superior. The Company did not receive any of these broker fees. As the ultimate outcome of this potential assessment is not deemed probable, the Company has not accrued any amount in its consolidated financial statements. Although the assessment has not been formally made by the CDOI at this time, the Company will vigorously defend any potential assessment and believes it will prevail. In 1998, IGF sold a total of 157 policies for agricultural business interruption insurance called AgPI that were intended to protect businesses that depend upon a steady flow of crop (or crops) to stay in business. This product was sold to a variety of businesses involved in agribusiness, including farmers, as well as grain elevator operators, produce shippers, custom harvesters, cotton gins, agriculture chemical dealers and other processing businesses whose income is heavily dependent on a stable supply of raw product (i.e., cotton), or whose product sales are negatively affected if crop yields fall (i.e., chemical dealers). Most of the policies were sold to California policyholders. The policy form required that the county in which crops reside must suffer a minimum level of crop loss before a loss recovery by a policyholder is possible. After the county loss test was met, then the policyholder must demonstrate an insurable economic loss on an individual basis under the policy. The Company recognized approximately $7.6 million in written premium in 1998, of which $6 million was earned in 1998 and $1.6 million earned in the first quarter of 1999. Adverse weather conditions and resultant crop damage in parts of the country where the policies were sold, led the Company to begin establishing reserves for its possible exposure. However, the lack of National Agricultural Statistical Service ("NASS") and policyholder loss data adversely affected the Company's ability to establish the amount of their exposure. At December 31, 1998, the Company set its reserves at an amount equal to 100% of the earned premium. County loss data, as well as policyholder loss data, gradually became known starting in late April 1999. As of May 28, 1999, the Company recognized that it was experiencing unexpected adverse loss development on these policies and increased its incurred losses related to 1998 policies to $15 million. When the Company published second quarter results, NASS data was complete, and the Company had received policyholder data on nearly all policies to determine its exposure. The Company's estimated gross ultimate incurred loss and loss adjustment expense ("LAE") related to these policies was $25 million (gross loss before reinsurance recoveries). As the Company continued to investigate and reevaluate these claims, it increased its estimated ultimate gross incurred loss and loss adjustment expense related to these policies to $34.5 million. IGF is a party to a number of pending legal proceedings relating to AgPI. IGF remains a defendant in six lawsuits pending in California state court (King and Fresno counties) having settled four other suits including two declaratory judgment actions that were brought by IGF in Federal District Court in California. In addition, IGF has settled 13 arbitration proceedings involving policyholders of AgPI and has no outstanding arbitrations relating to this product. The first of these proceedings was commenced in July 1999. All discovery in the remaining proceedings has been stayed pending a June 2000 hearing on IGF's appeal of an order denying a dismissal of the cases and a remanding of these disputes to arbitration as called for in the policy provisions. The policyholders involved in the open proceedings have asserted that IGF is liable to them for the face amount of their policies, an aggregate of approximately $14.7 million, plus an unspecified amount of punitive damages and attorney's fees. As of December 31, 1999, IGF had paid an aggregate of approximately $7 million to the policyholders involved in these legal proceedings. The Company increased its reserves by $9.5 million in the fourth quarter of 1999 and reserved a total of $34.5 million in 1999 of which $22.3 million was paid through December 31, 1999. Less than $0.1 million of 1999 gross written AgPI premiums have been written and assumed by the Company in 1999; in addition the policy language was revised materially. Based on the information presently available, the Company believes that it has recognized, through loss and LAE payments and reserves, its ultimate loss exposure related to the AgPI product. The Company feels its financial reserves for the lawsuits and arbitrations are sufficient to cover the resulting liability, if any, that may arise from these matters. However, there can be no assurance that the Company's ultimate liability for AgPI related claims will not be materially greater than the $34.5 million in gross losses already recorded in the consolidated financial statements related to this product and will not have a material adverse effect on the Company's results of operations or financial condition. Of the $34.5 million AgPI losses reserved approximately $21 million has been paid to date. During the first quarter of 1999, the Company entered into reinsurance arrangements covering a portion of the AgPI business. Under those arrangements, during the first quarter the Company recorded $4.7 million of ceded gross premium and a $9.4 million reinsurance recovery, deferring the resulting net gain of $4.7 million. The $4.7 million deferred gain was recognized as income in the second quarter. The Company subsequently negotiated a change to the reinsurance in the fourth quarter which resulted in approximately $4.2 million additional gain being recorded as of December 31, 1999. The Company is not entitled to any further recoveries under these reinsurance arrangements. SIG is a joint and several guarantor in a $7.25 million debt collateralized by operating assets held in an entity in which SIG is a 50% owner. The estimated fair market value of the assets approximates the debt. At December 31, 1998, the Company provided an allowance of $3.2 million associated with discrepancies identified in connection with the processing of premiums from the assumption of the CNA business and the related premiums receivable balance. In 1999, the Company resolved the discrepancy and reduced the allowance to $0. Two assertions have been made in Florida alleging that service charges or finance charges are in violation of Florida law. The plaintiffs are attempting to obtain class certification in these actions. The Company believes that it has substantially complied with the premium financing statute and intends to vigorously defend any potential loss. The Company, and its subsidiaries, are named as defendants in various lawsuits relating to their business. Legal actions arise from claims made under insurance policies issued by the subsidiaries. These actions were considered by the Company in establishing its loss reserves. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. 17. Supplemental Cash Flow Information: Cash paid for interest and income taxes are summarized as follows (in thousands): 1999 1998 1997 Cash paid for interest $515 $260 $3,467 Cash paid/(received) for federal income taxes, net of refunds $(17,910) $5,351 $11,670 refunds 18. Disclosures About Fair Values of Financial Instruments: The following discussion outlines the methodologies and assumptions used to determine the estimated fair value of the Company's financial instruments. Considerable judgment is required to develop these fair values and, accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of the Company's financial instruments. a) Fixed Maturity, Equity Securities, and Other Investments: Fair values for fixed maturity and equity securities are based on quoted market prices. b) Short-term Investments, and Cash and Cash Equivalents: The carrying value for assets classified as short-term investments, and cash and cash equivalents in the accompanying Consolidated Balance Sheets approximates their fair value. c) Short-term Debt: The carrying value for short-term debt approximates fair value. d) Preferred Securities: The December 31, 1999 estimated market value of the Preferred Securities was $40,500,000 based on quoted market prices. 19. Segment Information: The Company has two reportable segments based on products: nonstandard automobile insurance and crop insurance. The nonstandard automobile segment offers personal nonstandard automobile insurance coverages through a network of independent general agencies. The crop segment writes MPCI and crop hail insurance through independent agencies with its primary concentration in the Midwest. The accounting policies of the segments are the same as those described in "Nature of Operations and Significant Accounting Policies." There are no significant intersegment transactions. The Company evaluates performance and allocates resources to the segments based on profit or loss from operations before income taxes. The following is a summary of the Company's segment data and a reconciliation of the segment data to the Consolidated Financial Statements. The "Corporate and Other" includes operations not directly related to the reportable business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt and unallocated overhead expenses). Segment assets are those assets in the Company's operations in each segment. "Corporate and Other" assets are principally cash, short-term investments, related-party assets, intangible assets, and property and equipment. Nonstandard Segment Corporate Consolidated Auto Crop Totals & Other Totals (in thousands) Year Ended December 31, 1999 Premiums earned $249,094 $14,240 $263,334 $12,706 $276,040 Fee income 15,185 456 15,641 150 15,791 Net investment income 12,339 293 12,632 786 13,418 Net realized capital gain (loss) (281) 21 (260) 325 65 Total Revenue 276,337 15,010 291,347 13,967 305,314 Loss and loss adjustment expenses 230,973 34,225 265,198 11,435 276,633 Operating expenses 91,859 215 92,074 5,876 97,950 Amortization of intangibles -- 493 493 2,194 2,687 Interest expense -- 620 620 -- 620 Total expenses 322,832 35,553 358,385 19,505 377,890 Loss before income taxes, minority interest and other items $(46,495) $(20,543) $(67,038) $(5,538) $(72,576) Segment assets $229,640 $145,622 $375,262 $144,660 $519,922 Year Ended December 31, 1998 Premiums earned $264,022 $60,901 $324,923 $17,254 $342,177 Fee income 16,431 3,772 20,203 -- 20,203 Net investment income 11,958 275 12,233 1,168 13,401 Net realized capital gain (loss) 4,124 217 4,341 (237) 4,104 Total revenue $296,535 65,165 361,700 18,185 379,885 Loss and loss adjustment expenses 217,916 52,550 270,466 10,426 280,892 Operating Expenses 73,346 21,906 95,252 8,674 103,926 Amortization of intangibles -- 339 339 2,040 2,379 Interest expense -- 163 163 -- 163 Total expenses 291,262 74,958 366,220 21,140 387,360 Earnings (loss) before income taxes, minority interest and other items $5,273 $(9,793) $(4,520) $(2,955) $(7,475) Segment assets $376,831 $143,434 $520,265 $50,724 $570,989 Year Ended December 31, 1997 Premiums earned $251,020 $20,794 $271,814 4,726 $276,540 Fee income 15,515 2,276 17,791 30 17,821 Net investment income 10,969 191 11,160 1,617 12,777 Net realized capital gain (loss) 9,462 (18) 9,444 (51) 9,393 Total revenue $286,966 $23,243 $310,209 $6,322 $316,531 Loss and loss adjustment expenses (recovery) 195,900 16,550 212,450 (1,451) 210,999 Operating Expenses 72,463 (14,404) 58,059 5,285 63,344 Amortization of intangibles -- 2 2 1,195 1,197 Interest expense -- 233 233 2,854 3,087 Total expenses 268,363 2,381 270,744 7,883 278,627 Earnings (loss) before income taxes, minority interest and other items $18,603 $20,862 $39,465 $(1,561) $37,904 Segment assets $363,864 $119,660 $483,524 $77,324 $560,848 20. Stock Option Plans: Information regarding the Goran Stock Option Plan is summarized below (in Canadian dollars): 1999 1998 1997 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at the beginning of the 695,572 $29.92 546,856 $17.86 526,899 $8.76 year Granted -- -- 363,970 $36.57 188,355 $29.57 Exercised -- -- (215,254) $10.53 (166,831) $2.26 Forfeited/Surrendered (34,864) $14.69 -- -- (1,567) $25.45 Outstanding at the end of the year 660,708 $14.17 695,572 $29.92 546,856 $17.86 Options exercisable at year end 619,035 -- 569,126 -- 349,141 -- Available for future grant 251,865 -- 175,428 -- 40,062 -- On November 1, 1996, SIG adopted the Symons International Group, Inc. 1996 Stock Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides SIG the authority to grant nonqualified stock options and incentive stock options to officers and key employees of SIG and its subsidiaries and nonqualified stock options to nonemployee directors of SIG and Goran. Options have been granted at an exercise price equal to the fair market value of the SIG's stock at date of grant. All of the outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. On October 14, 1998, all SIG options were repriced to $6.3125 per share. In November 1999, certain officers and non employee directors of SIG surrendered a total of 1,153,600 stock options. Information regarding the SIG Stock Option Plan is summarized below: 1999 1998 1997 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at the beginning of the 1,457,833 $6.3125 1,000,000 $6.3125 830,000 $12.50 year Granted -- $6.3125 478,000 6.3125 185,267 15.35 Exercised (1,667) $6.3125 (4,332) 6.3125 (1,667) 12.50 Forfeited/Surrendered (1,243,133) $6.3125 (15,835) 6.3125 (13,600) 12.50 Outstanding at the end of the year 213,033 $6.3125 1,457,833 $6.3125 1,000,000 $13.03 Options exercisable at year end 120,366 $6.3125 760,289 $6.3125 521,578 $12.50 Available for future grant 1,286,967 42,167 -- The weighted average remaining life of the SIG options as of December 31, 1999 is 7.9 years. The Board of Directors of Superior Group Management adopted the GGS Management Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option Plan"), effective April 30, 1996. The Superior Group Management Stock Option Plan authorizes the granting of nonqualified and incentive stock options to such officers and other key employees as may be designated by the Board of Directors of Superior Group Management. Options granted under the Superior Group Management Stock Option Plan have a term of ten years and vest at a rate of 20% per year for the five years after the date of the grant. The exercise price of any options granted under the Superior Group Management Stock Option Plan is subject to the following formula: 50% of each grant of options having an exercise price determined by the Board of Directors of Superior Group Management at its discretion, with the remaining 50% of each grant of options subject to a compound annual increase in the exercise price of 10%, with a limitation on the exercise price escalation as such options vest. Information regarding the Superior Group Management Stock Option Plan is summarized below: 1999 1998 1997 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares(1) Price Shares(1) Price Outstanding at the beginning of the year 94,732 $51.75 95,282 $51.75 27,777 $51.75 Granted -- -- -- -- 68,855 -- Forfeited (2,500) $51.75 (550) 51.75 (1,350) 51.75 Outstanding at the end of the year 92,232 $51.75 94,732 $51.75 95,282 $51.75 Options exercisable at year end 42,448 24,601 5,555 Available for future grant 18,879 16,379 15,829 (1) Prior years outstanding share options have been restated to properly reflect outstanding options as at those respective dates. Options Options Outstanding Exercisable Weighted weighted Weighted Average Average Average Number Remaining Life Exercise Price Number Exercise Price Range of Exercise Prices Outstanding (in years) Exercisable $44.17 - $53.45 64,561 6.8 $46.13 39,668 $47.35 $58.79-$71.14 27,671 6.8 64.87 2,777 $58.79 92,232 42,445 The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretation in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for such plans. Had compensation cost been determined, based on fair value at the grant dates for options granted under the Company stock option plan as well under both the SIG Stock Option Plan and the GGS Stock Option Plan during 1998, 1997 and 1996 consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's pro-forma net earnings and pro-forma earnings per share for the years ended December 31, 1998, 1997 and 1996 would have been as follows (in thousands, except per share amounts): 1999 1999 1998 1998 1997 1997 As Pro- As Pro- As Pro- Reported Forma Reported Forma Reported Forma Earnings (loss) from continuing operations $(62,373) (65,969) $(8,999) $(11,941) $15,983 $10,047 Basic EPS from continuing operations $(10.61) $(11.23) $(1.54) $(2.04) $2.86 $1.80 Fully diluted EPS continuing operations $(10.61) $(11.23) $(1.54) $(2.04) $2.70 $1.71 Net earnings (loss) (62,373) $(65,969) $(11,936) $(14,678) $12,438 $6,502 Basic EPS $(10.61) $(11.23) $(2.04) $(2.54) $2.22 $1.16 Fully diluted EPS $(10.61) $(11.23) $(2.04) $(2.54) $2.12 $1.11 The fair value of each option grant used for purposes of estimating the pro-forma amounts summarized above is estimated on the grant date using the Black-Scholes option-pricing model with the weighted average assumptions for 1998, 1997 and 1996 shown on the following table: SIG Goran SIG SIG 1998 1998 1997 1997 Grants Grants Grants Grants Risk-free interest rates 5.53% 5.40% 6.03% 6.40% Volatility factors 0.41 0.41 0.40 0.39 Weighted average expected life 2.5 years 3.2 years 2.0 years 3.3 years Weighted average fair value per share $7.20 $5.73 $5.28 $5.54 The Goran stock options are granted and denominated in Canadian dollars. The pro-forma stock based compensation for these options are translated at the average rate for the year. The weighted average fair value per share is translated at the year end rate. 21. Quarterly Financial Information (unaudited): Quarterly financial information is as follows (in thousands): First Second Third Fourth Total 1999 Gross written premiums $152,022 $173,870 $67,685 $80,110 $473,687 Net premiums written 67,271 79,150 55,228 54,850 256,499 Net premiums earned 67,124 76,527 68,164 64,225 276,040 Total revenues 73,774 83,553 74,272 73,715 305,314 Net earnings (loss) $123 $(5,882) $(13,907) $(42,707) $(62,373) Net earnings (loss) per share - basic $.02 $(1.00) $(2.37) $(7.26) $(10.61) Net earnings (loss) per share - fully diluted $.02 $(1.00) $(2.37) $(7.26) $(10.61) 1998 Gross premiums written $177,196 $170,505 $95,887 $103,183 $546,771 Net premiums written 98,361 109,729 72,469 81,547 362,106 Net premiums earned 71,885 99,618 94,168 76,506 342,177 Total revenues 82,149 109,085 102,407 86,244 379,885 Net earnings $3,517 $4,775 $( 10,233) $(9,995) $(11,936) Net earnings (loss) per share - basic $0.61 $0.82 $(1.76) $(5.16) $(2.04) Net earnings (loss) per share - fully diluted $0.59 $0.78 $(1.76) $(5.12) $(2.04) In the fourth quarter of 1999, the Company provided for a valuation allowance on its net deferred tax assets of $23.1 million. In the fourth quarter of 1999, the Company provided for additional AgPI loss reserves of $5.3 million, net of reinsurance. During the fourth quarters of 1999 and 1998, the Company increased reserves on its nonstandard automobile business by $6.9 million and $3.0 million respectively for both current and prior accident years. In the fourth quarter of 1998, the Company provided a $3.2 million reserve for potential processing errors in the crop business assumed from CNA. The Company also increased its reserves on AgPI exposures by approximately $1.8 million. As is customary in the crop insurance industry, insurance company participants in the FCIC program receive more precise financial results from the FCIC in the fourth quarter based upon business written on spring-planted crops. On the basis of FCIC-supplied financial results, IGF recorded, in the fourth quarter, an additional underwriting gain (loss), net of reinsurance, on its FCIC business of $791,000 $(3,506,000) and $6,979,000 during 1999, 1998 and 1997, respectively. 22. Reconciliation Of Canadian And United States Generally Accepted Accounting Principles ("GAAP") And Additional Information The consolidated financial statements are prepared in accordance with Canadian GAAP. Material differences between Canadian and U.S. GAAP are described below. There were no material difference in net earnings in 1999 and 1998 (a) Earnings and retained earnings (in thousands): 1997 Net earnings in accordance with Canadian GAAP $12,438 Add effect of difference in accounting for: Future income taxes (see Note 1(p)) 177 Minority interrest 107 Losses and loss adjustment expenses (see note 1(p)) (504) Net earnings in accordance with U.S. GAAP $12,218 Applying U.S. GAAP, future income tax assets would be increased by $1,975,000 and losses and loss adjustment expenses outstanding would be increased by $1,765,000 as at December 31, 1997. As a result of these adjustments, retained earnings would be increased by $140,000 which is net of related minority interest of $70,000 as at December 31, 1997. The effect of the above noted differences on other individual balance sheet items and on working capital is not significant. (b) Earnings per share Earnings per share, as determined in accordance with U.S. GAAP are set out below. Basic earnings per share are computed based on the weighted average number of common shares outstanding during the year. Fully diluted are calculated using the treasury stock method and assume conversion of securities when the results are dilutive. The following average number of shares were used for the compilation of basic and fully diluted earnings per share: 1997 Basic 5,590,576 Fully Diluted 5,886,211 Earnings per share, as determined in accordance with U.S. GAAP, are as follows (no differences for 1999 and 1998) Basic earnings per share from continuing operations $2.82 Fully diluted earnings per share from continuing operations $2.68 Basic earnings per share $2.19 Fully diluted earnings per share $2.08 (c) Receivables from sale of capital stock The SEC Staff Accounting Bulletins require that accounts or notes receivable arising from transactions involving capital stock should be presented as deductions from shareholders' equity and not as assets. Accordingly, in order to comply with U.S. GAAP shareholders' equity would be reduced by $300,000 and $1,377,000 at December 31, 1999 and December 31, 1998, respectively to reflect the loans due from certain shareholders which relate to the purchase of common shares of the Company. (d) Unrealized gain (loss) on investments U.S. GAAP requires that unrealized gains and losses on investment portfolios be included as a component in determining shareholders' equity. In addition, SFAS No. 115 permits prospective recognition of unrealized gains (losses) on investment portfolio for year-ends commencing after December 15, 1993. As a result, shareholders' equity would be (decreased) increased by $(4,874,000) and by $1,176,000 which is net of future tax of $2,637,000 and $679,000 and related minority interest of nil and $416,000 as at December 31, 1999 and 1998, respectively. (e) Changes in shareholders equity(deficit) A reconciliation of shareholders' equity (deficit) from Canadian GAAP to U.S. GAAP is as follows (in thousands): 1999 1998 Shareholders equity in accordance with Canadian GAAP $(12,887) $49,725 Add (deduct) effect of difference in account for: Receivables from sale of capital stock (see note c) (300) (1,377) Unrealized (loss) gain on investments (see note d) (4,874) 1,176 Shareholder's equity in accordance with U.S. GAAP $(18,061) $49,524 23. Subsequent Events On March 23, 2000, the FDOI notified SIG that Superior is required to not exceed a written premiums to surplus ratio of 4 to 1 as computed on an annualized basis and to file on a monthly basis a schedule that verifies its compliance with the net writing limitation of 4 to 1. On February 29, 2000, SIG contributed $2.0 million in capital to Pafco. 24. Management's Plans The Company reported net losses of $62.4 million and $11.9 million for the years 1999 and 1998 respectively. While the stockholders equity at December 31, 1999 is a deficit of approximately $12.9 million, SIG has a thirty year mandatorily redeemable preferred stock outstanding of $135 million at an interest rate of 9.5%. This Trust Preferred is not due for redemption until 2027. The insurance subsidiaries have statutory surplus of approximately $57 million upon which the Company conducts its insurance operations. The management has initiated substantial changes in operational procedures and business in an effort to return the Company to profitable levels and to improve its financial condition. The nonstandard auto insurance segment hired a new President, a new Chief Information Officer, and pricing and claims management since the year end. The Company has and is continuing to raise its rates in a market environment where increasing rates and withdrawal from the market by other companies shows positive trends for an improving profitability of the nonstandard auto division. The crop insurance company has experienced a substantial increase in gross sales in its major product lines and strong demand for its new innovative products. Management believes that despite the recent losses and the deterioration in stockholders equity and statutory surplus, it has developed a business plan that if successfully implemented, can substantially improve operating results and its financial condition.