UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER:000-24366
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GORAN CAPITAL INC.
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(Exact name of registrant as specified in its charter)
CANADA Not Applicable
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State or other Jurisdiction of IRS Employer Identification No.
Incorporation or Organization
2 Eva Road, Suite 200, Etobicoke, Ontario Canada M9C 2A8
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Address of Principal Executive Offices Zip Code
Registrant's telephone number, including area code:
(416) 622-0660 - Canada, (317) 259-6300 - USA
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
common stock OTC Bulletin Board, Toronto Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
__________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
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The aggregate market value of the 2,333,854 shares of the Registrant's common
stock held by non-affiliates, as of June 6, 2003 was $840,187.
The number of shares of Registrant's no par common stock outstanding as of June
6, 2003 was 5,393,698.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 2002 are incorporated by reference in Parts II and IV hereof.
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 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"):
For The Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Average .6370 .6446 .6733 .6724 .6745
Period End .6329 .6279 .6672 .6929 .6532
High .6583 .6669 .6965 .6929 .7061
Low .6231 .6279 .6416 .6625 .6376
ACCOUNTING PRINCIPLES
The financial information contained in this document is stated in U.S. Dollars
and is expressed in accordance with Canadian Generally Accepted Accounting
Principles unless otherwise stated.
Table of Contents
ITEM . . . . . . . . . PAGE
PART I
Item 1.. . . . . . . . Business 4
Item 2.. . . . . . . . Properties 19
Item 3.. . . . . . . . Legal Proceedings 20
Item 4.. . . . . . . . Submission of Matters to a Vote of Security Holders 21
PART II
Item 5.. . . . . . . . Market for Registrant's Common Equity and Related Shareholder Matters 21
Item 6.. . . . . . . . Selected Consolidated Financial Data 22
Item 7.. . . . . . . . Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 7A. . . . . . . . Quantitative and Qualitative Disclosures About Market Risk 22
Item 8.. . . . . . . . Financial Statements and Supplementary Data 22
Item 9.. . . . . . . . Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure 22
PART III
Item 10. . . . . . . . Directors and Executive Officers of the Registrant 22
Item 11. . . . . . . . Executive Compensation 23
Item 12. . . . . . . . Security Ownership of Certain Beneficial Owners and Management 28
Item 13. . . . . . . . Certain Relationships and Related Transactions 28
PART IV
Item 14. . . . . . . . Controls and Procedures 30
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 31
Signatures 38
PART I
ITEM 1 - BUSINESS
FORWARD-LOOKING STATEMENT
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or the Company's operations or
financial results constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the Act). Forward-looking
statements include statements which are predictive in nature, which depend upon
or refer to future events or conditions, which include words such "anticipate,"
"could," "feel(s)," "believes," "plan," "estimate," "expect," "should,"
"intend," "will," and other similar expressions . In addition, any statements
concerning future financial performance, ongoing business strategies or
prospects and possible future Company actions which may be provided by
management are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and projections
about future events and 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, but
are not limited to, the effect on customers, agents, employees and others due
to SIG's and certain of its subsidiaries' receipt of going concern opinions from
their accountants; general economic conditions, including prevailing interest
rate levels and stock market performance; factors affecting the Company's
nonstandard automobile operations such as rate increase approval, policy
renewals, new business written, and premium volume; and the factors described in
this section and elsewhere in this report. These forward-looking statements are
not guaranties of future performance and the Company has no specific intention
to update these statements.
OVERVIEW OF BUSINESS
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 NONSTANDARD AUTO GROUP Pafco General
Insurance Company ("Pafco") and Superior Insurance Company ("Superior"), which
maintain their headquarters in Indianapolis, Indiana. Goran owns approximately
73.8% of a U.S. holding company, Symons International Group, Inc. ("SIG"). SIG
owns IGF Holdings, Inc. ("IGFH") and Superior Insurance Group Management, Inc.
("Superior Management") which are the holding companies for the insurance
subsidiaries. Superior Management owns Superior Insurance Group, Inc.
("Superior Group") which is the management company for the insurance
subsidiaries. SIG's revenue represents approximately 90% of Goran's
consolidated revenues. Goran's other subsidiaries are Granite Reinsurance
Company Ltd. ("Granite Re"), Granite Insurance Company ("Granite"), and Symons
International Group (Florida) Inc. ("SIGF").
Granite Re is a specialized reinsurance company that underwrites niche products
such as nonstandard automobile, crop, property casualty reinsurance and offers
(on a non-risk bearing, fee basis), rent-a-captive facilities for Bermudian,
Canadian and U.S. reinsurance companies. Through a rent-a-captive program,
Granite Re offers the use of its capital and its underwriting facilities to
write specific programs on behalf of its clients, including certain programs
ceded from IGF and Pafco. Granite Re alleviates the need for a clients to
establish its own insurance company and also offers this facility in an offshore
environment.
Granite, a Canadian federally licensed insurance company, sold its book of
business in January 1990 to an affiliate which subsequently sold to third
parties in June 1990. Granite currently has one outstanding claim and maintains
an investment portfolio sufficient to support this claim liability. Goran
anticipates that the outstanding claim will be resolved by 2004.
SIGF, a Florida corporation, is primarily engaged in the operation of a
property/casualty insurance brokerage and a flood insurance brokerage.
As previously announced, IGF Insurance Company ("IGF") sold its crop insurance
operations to Acceptance Insurance Companies Inc. ("Acceptance") on June 6, 2001
and is now in runoff. Accordingly, the financial statements included in this
report reflect the results of the crop insurance segment as "discontinued
operations."
NONSTANDARD AUTOMOBILE INSURANCE
Overview
The Company's nonstandard automobile insurance operations are conducted by SIG
and its subsidiaries (the "Nonstandard Auto Group"). Specifically, 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, poor driving experience, and type of vehicle. The Nonstandard
Auto Group offer several different policies, which are directed toward different
classes of risk within the nonstandard market. Premium rates for nonstandard
risks are higher than for standard risks. Since it can be viewed as a residual
market, the size of the nonstandard private passenger automobile insurance
market changes with the insurance environment and grows when standard coverage
becomes more restrictive. Nonstandard policies have relatively short policy
periods and low limits of liability. Also, since the nonstandard automobile
insurance business typically experiences a lower rate 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 Nonstandard Auto Group offers both liability and physical damage coverage in
the insurance marketplace, with policies having terms from three to twelve
months. Most nonstandard automobile insurance policyholders choose the basic
limits of liability coverage which, though varying from state to state,
generally is $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 cars or other
property.
Where permitted, Superior offers a tiered product covering the full spectrum of
automobile insurance customers from nonstandard to ultra-preferred.
Marketing
The Nonstandard Auto Group business is concentrated in the states of Florida,
California, Virginia, Georgia, Indiana and Nevada. SIG's insurance subsidiaries
are authorized to write nonstandard automobile insurance in 12 additional
states. States are selected 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 by the Nonstandard Auto Group for the years indicated
sorted in descending order of 2002 volume (in thousands):
State 2002 2001 1999
- ---------------------- -------- -------- --------
Florida. . . . . . . . $ 45,583 $ 49,162 $ 44,070
California . . . . . . 20,891 34,287 32,480
Virginia . . . . . . . 15,661 21,054 20,089
Colorado 1 . . . . . . 7,988 10,112 6,938
Georgia. . . . . . . . 6,565 15,481 13,670
Indiana. . . . . . . . 4,861 6,275 12,804
Nevada . . . . . . . . 1,493 1,980 3,707
Missouri . . . . . . . 698 839 1,929
Tennessee. . . . . . . 676 1,696 9,794
Iowa . . . . . . . . . 504 1,066 2,023
Kentucky . . . . . . . 406 3,135 5,034
Pennsylvania 2 . . . . 288 9,683 -
Oklahoma . . . . . . . 274 635 1,090
Arizona. . . . . . . . 169 1,111 4,484
Other states . . . . . 204 2,972 15,310
-------- -------- --------
Total nonstandard auto 106,261 159,488 173,422
Other property . . . . 1,514 1,604 1,039
Reinsurance. . . . . . 3,619 32,094 7,638
-------- -------- --------
Total. . . . . . . . . $111,394 $193,186 $182,099
======== ======== ========
<FN>
1. During May 2003, the Nonstandard Auto Group ceased writing business in
Colorado.
2. Company All premiums in Pennsylvania were written by IGF, which has been
precluded from writing other than renewal premium after July 30, 2001.
The Nonstandard Auto Group markets its nonstandard products exclusively through
independent agencies. The Nonstandard Auto Group has several territory 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 Nonstandard Auto Group attempts to foster strong service relationships with
its agents and customers. The Nonstandard Auto Group 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 Nonstandard Auto Group provides
state of the art point of sale rating software to agents, which permits them to
rate risks in their offices. All new business applications are electronically
uploaded directly from the agents' offices to the Nonstandard Auto Group through
this software. In most states, an in-house developed point of sale product
allows agents to order motor vehicle, credit and other reports on line at the
time of sale.
Most of the Nonstandard Auto Group's agents have limited authority to sell and
bind insurance coverages in accordance with procedures established by SIG, which
is a common practice in the nonstandard automobile insurance business. The
Nonstandard Auto Group reviews all coverages bound by agents promptly and
generally accepts coverages that fall within their stated underwriting criteria.
The Nonstandard Auto Group has the right within a specified time period to
cancel any policy even if the risk falls within the underwriting criteria. The
Nonstandard Auto Group compensates agents by paying a commission based on a
percentage of premiums produced.
The Company believes having four individual U.S. companies licensed in various
states allows it 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.
Underwriting
The Nonstandard Auto Group 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 and accidents, limits
of liability, deductibles, and, where allowed by law, credit, age, sex and
marital status of the insured. The rate approval process varies from state to
state. Some states allow filing and immediate use of rates, while others 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%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for further
discussion on the combined ratio.
In an effort to maintain and improve underwriting profits, the territory
managers monitor loss ratios of the agencies in their regions and meet
periodically with the agents in order to address any adverse trends in loss
ratios or other profitability indicators.
Claims
The Nonstandard Auto Group claims department handles claims on a regional and
local basis from claim offices in Indianapolis, Indiana; Atlanta, Georgia; Tampa
and West Palm Beach, Florida; and Anaheim, California. The Nonstandard Auto
Group uses a combination of their own adjusters and independent appraisers and
adjusters for estimating physical damage claims and limited elements of
investigation.
Reinsurance
The Company follows the customary industry practice of reinsuring a portion of
its risks. 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 the
Company's internal procedures, the financial condition of each prospective
reinsurer is evaluated before business is ceded 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 under the terms of the respective
reinsurance treaties.
In 2002, Pafco and Superior maintained casualty excess of loss reinsurance on
their nonstandard automobile insurance business covering 35.0% of $700,000 of
losses on an individual occurrence basis in excess of $300,000 up to a maximum
of $3,000,000 at 100.0%.
As of December 31, 2002, amounts recoverable from reinsurers relating to
Reinsurance
Recoverables as of
Reinsurer A.M. Best Rating December 31, 2002(1)
- --------------------------------------- ------------------ ---------------------
National Union Fire Insurance Company
of Pittsburgh, PA. . . . . . . . . . . A++ $ 42,688
Gerling Global Reinsurance Corporation
of America . . . . . . . . . . . . . . B+ 1,197
Lloyds of London (Various Syndicates) . Not Rated 1,272
Transatlantic Reinsurance Company . . . A++ 1,131
<FN>
(1) Only recoverables greater than $200,000 are shown. Total nonstandard
automobile reinsurance recoverables as of December 31, 2002 were
approximately $47,044,000.
(2) An A.M. Best Rating of "A++" is the highest of 15 ratings. An A.M. Best
Rating of "B+" is the sixth highest of 15 ratings.
nonstandard automobile operations follows (in thousands):
Effective January 1, 2000, Pafco and Superior entered into an automobile quota
share agreement with National Union Fire Insurance Company of Pittsburgh, PA.
The amount of cession for Pafco is variable up to a maximum of 60% or $10
million and for Superior is variable up to a maximum of 75% or $60 million for
all new and renewal business. In 2002, Pafco and Superior ceded 71% of their
nonstandard automobile gross written premiums under this treaty.
On April 29, 1996, Pafco also entered into a 100% quota share reinsurance
agreement with Granite Re (no A.M. Best rating), whereby all of Pafco's
commercial business from 1996 and thereafter was ceded effective January 1,
1996. This agreement was in effect during 2002.
Neither Pafco nor Superior has any facultative reinsurance with respect to its
nonstandard automobile insurance business.
Competition
The Nonstandard Auto Group competes with both large national and smaller
regional companies in each state in which it operates. These competitors include
companies that serve the agency market and companies that sell insurance
directly to consumers. 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. Specific
primary competitors are Progressive Casualty Insurance Company and specialty
subsidiaries of a number of insurance groups, including AIG, Allstate, American
Financial Group and GMAC. Generally, these competitors are larger and have
greater financial resources than the Company.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss reserves are estimates, established at a given point in time based on facts
then known, of what an insurer predicts its exposure to be in connection with
incurred losses. Loss adjustment expense ("LAE") reserves are estimates of the
ultimate liability associated with the expense of settling all claims, including
investigation and litigation costs resulting from such claims. The actual
liability of an insurer for its losses and LAE reserves at any point in time
will be greater or less than these estimates.
The Company maintains reserves for the eventual payment of losses and LAE with
respect to both reported and unreported claims. Nonstandard automobile reserves
for reported claims are established on a case-by-case basis. The reserving
process takes into account the type of claim, policy provisions relating to the
type of loss and historically paid loss and LAE for similar claims.
Loss and LAE reserves for claims that have been incurred but not reported are
estimated based on many variables including historical and statistical
information, inflation, legal developments, economic conditions, trends in claim
severity and frequency and other factors that could affect the adequacy of loss
reserves.
The loss reserve development table below illustrates the change over time in the
reserves the Company has established for loss and loss expenses as of the end of
the indicated calendar years for the Nonstandard Auto Group. 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 its Nonstandard Auto Group, emphasized a unified
claim settlement practice as well as reserving philosophy for Superior and
Pafco. Superior had historically provided strengthened case reserves and a
level of IBNR 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.
Symons International Group, Inc.
Nonstandard Automobile Insurance Only
For The Years Ended December 31, (in thousands)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- --------- --------- --------- --------- -------- --------- ------
Gross
Reserves for
Unpaid losses
and LAE. . . . $27,403 $25,248 $71,748 $79,551 $101,185 $121,661 $141,260 $103,441 $79,047 $ 65,915
- ---------------------------------------------------------------------------------------------------------------------------------
Deduct
Reinsurance
Recoverable. . 12,581 10,927 9,921 8,124 16,378 6,515 3,167 18,709 28,511 22,990
- ---------------------------------------------------------------------------------------------------------------------------------
Reserve for
Unpaid losses
and LAE, net
of
reinsurance. . $17,055 14,822 14,321 61,827 71,427 84,807 114,829 138,093 84,732 50,536 42,925
- -------------------------------------------------------------------------------------------------------------------------------
Paid
Cumulative as
of:
One Year
Later. . . . . 10,868 8,875 7,455 42,183 59,410 62,962 85,389 81,444 57,696 36,291
- -------------------------------------------------------------------------------------------------------------------------------
Two Years
Later. . . . . 15,121 11,114 10,375 53,350 79,319 89,285 111,042 107,534 79,316
- -------------------------------------------------------------------------------------------------------------------------------
Three Years
Later. . . . . 16,855 13,024 12,040 58,993 86,298 98,469 121,907 118,316 --
- -------------------------------------------------------------------------------------------------------------------------------
Four Years
Later. . . . . 17,744 13,886 12,822 61,650 89,166 102,854 127,390 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Five Years
Later. . . . . 18,195 14,229 13,133 62,621 90,477 105,252 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Six Years
Later. . . . . 18,408 14,330 13,375 63,031 91,345 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Seven Years
Later. . . . . 18,405 14,426 13,418 63,534 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Eight Years
Later. . . . . 18,460 14,386 13,648 -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Nine Years
Later. . . . . 18,411 14,572 -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Ten Years
Later. . . . . 18,420 -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities re
- -estimated as
of:
One Year
Later. . . . . 17,442 14,788 13,365 59,626 82,011 97,905 131,256 124,012 85,538 63,014
- -------------------------------------------------------------------------------------------------------------------------------
Two Years
Later. . . . . 18,103 13,815 12,696 60,600 91,743 104,821 128,302 121,480 93,483
- -------------------------------------------------------------------------------------------------------------------------------
Three Years
Later. . . . . 18,300 14,051 13,080 63,752 91,641 104,551 127,885 126,321 --
- -------------------------------------------------------------------------------------------------------------------------------
Four Years
Later. . . . . 18,313 14,290 13,485 63,249 91,003 105,012 131,087 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Five Years
Later. . . . . 18,419 14,499 13,441 63,233 91,323 106,813 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Six Years
Later. . . . . 18,533 14,523 13,592 63,373 91,874 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Seven Years
Later. . . . . 18,484 14,584 13,652 63,781 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Eight Years
Later. . . . . 18,508 14,574 13,727 -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Nine Years
Later. . . . . 18,494 14,615 -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Ten Years
Later. . . . . 18,457 -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net
Cumulative
(deficiency)
or
redundancy . . (1,402) 207 594 (1,954) (20,447) (22,006) (16,258) 11,772 (8,751) (12,478)
- -------------------------------------------------------------------------------------------------------------------------------
Expressed as
a percentage
of unpaid
losses and
LAE. . . . . . (8.2%) 1.4% 4.1% (3.2%) (28.6%) (25.9%) (14.2%) 8.5% (10.3%) (24.7%)
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
Revaluation of gross losses
And LAE as of year-end
2002
- --------------------------------------------------------------------------------------------------------------------------------
Cumulative gross paid as of
Year-end 2002 28,231 26,013 74,573 100,359 124,345 131,724 120,166 97,310 64,923
- ------------------------------------------------------------------------------------------------------------------------------
Gross liabilities Re
estimated as of
year-end 2002 28,280 26,101 74,857 100,925 126,303 137,704 130,453 115,537 98,478
- -------------------------------------------------------------------------------------------------------------------------------
Gross cumulative
(deficiency) or
redundancy (877) (853) (3,109) (21,374) (25,118) (16,043) 10,807 (12,096) (19,431)
- -------------------------------------------------------------------------------------------------------------------------------
Activity in the liability for unpaid loss and LAE for nonstandard automobile
insurance is summarized below (in thousands):
2002 2001 2000
------- -------- ---------
Balance at January 1, $81,142 $108,117 $152,455
Less Reinsurance Recoverables 30,600 23,252 13,527
------- -------- ---------
Net Balance at January 1, 50,542 84,865 138,928
Incurred related to
Current Year 35,413 69,667 127,497
Prior Years 12,775 774 (14,118)
------- -------- ---------
Total Incurred 48,188 70,441 113,379
Paid Related to
Current Year 19,211 46,973 85,334
Prior Years 36,374 57,791 82,108
------- -------- ---------
Total Paid 55,585 104,764 167,442
Net Balance at December 31, 43,145 50,542 84,865
Plus Reinsurance Balance 24,059 30,600 23,252
------- -------- ---------
Balance at December 31, $67,204 $81,142 $108,117
======= ======== =========
Reserve estimates are regularly adjusted in subsequent reporting periods as new
facts and circumstances emerge to indicate that 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 operations in the period when the need for the adjustment
becomes known. The foregoing reconciliation indicates unfavorable reserve
development of $12,775,000 on the December 31, 2001 reserves.
The anticipated effect of inflation is implicitly considered when estimating
losses and LAE liabilities. While anticipated price increases due to inflation
are considered in estimating the ultimate claims costs, increases in average
claim severities is caused by a number of factors. Future severities are
projected based on historical trends adjusted for implemented changes in
underwriting standards, policy provisions, claims management practices and
procedures and general economic trends. Anticipated severity trends are
monitored relative to actual development and are modified if necessary.
Liabilities for loss and LAE have been established when sufficient information
has been developed to indicate the involvement of a specific insurance policy.
In addition, reserves have been established to cover additional exposure on both
known and unasserted claims.
RATINGS
A.M. Best currently assigns a "B-" rating to Superior and a "C" rating to Pafco.
A.M. Best's ratings are based upon a comprehensive review of a company's
financial performance, which is supplemented by certain data, including
responses to A.M. Best's questionnaires, phone calls and other correspondence
between A.M. Best analysts and company management, quarterly NAIC filings, state
insurance department examination reports, loss reserve reports, annual reports,
company business plans and other reports filed with state insurance departments.
A.M. Best undertakes a quantitative evaluation, based upon profitability,
leverage and liquidity, and a qualitative evaluation, based upon the composition
of a company's book of business or spread of risk, the amount, appropriateness
and soundness of reinsurance, the quality, diversification and estimated market
value of its assets, the adequacy of its loss reserves and policyholders'
surplus, the soundness of a company's capital structure, the extent of a
company's market presence and the experience and competence of its management.
A.M. Best's ratings represent an independent opinion of a company's financial
strength and ability to meet its obligations to policyholders. A.M. Best's
ratings are not a measure of protection afforded investors. "B-" and "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."
A.M. Best currently assigns an "E" rating (Under Regulatory Supervision) to IGF
reflecting the significant regulatory constraint resulting from the Consent
Order entered into between IGF and the Indiana Department Of Insurance (see
"Regulatory Actions").
REGULATION
General
The Company's U.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 shareholders or other
investors. Depending on whether an 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 U.S. operating subsidiaries. (See "Regulatory
Actions," "Risk-Based Capital Requirements," and "RISK FACTORS").
Regulatory Actions
On June 6, 2001, IGF sold substantially all of its crop insurance assets to
Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets
and as a result of losses experienced by IGF in its crop insurance operations,
the IDOI and IGF entered into a consent order (the "Consent Order") relating to
IGF. IGF has discontinued writing new business and its operations are presently
in run off. The IDOI has continued to monitor the status of IGF. The Consent
Order prohibits IGF from taking any of the following actions without prior
written consent of the IDOI:
- - Sell or encumber any of its assets, property, or business in force;
- - Disburse funds, except to pay direct unaffiliated policyholder claims and
normal operating expenses in the ordinary course of business (which does
not include payments to affiliates except for the reimbursement of costs
for running IGF by the Company, and does not include payments in excess of
$10,000);
- - Lend its funds or make investments, except in specified types of
investments;
- - Incur debts or obligations, except in the ordinary course of business to
unaffiliated parties;
- - Merge or consolidate with another company;
- - Enter into new, or amend existing, reinsurance agreements;
- - Complete, enter into or amend any transaction or arrangement with an
affiliate, and
- - Disburse funds or assets to any affiliate.
The Consent Order also requires IGF to provide the IDOI with monthly written
updates and immediate notice of any material change regarding the status of
litigation with Continental Casualty Company, statutory reserves, number of
non-standard automobile insurance policies in-force by state, and reports of all
non-claims related disbursements. IGF's failure to comply with the Consent
Order could cause the IDOI to begin proceedings to have a rehabilitator or
liquidator appointed for IGF or to extend the provisions of the Consent Order.
Pafco has been subject to an agreed to order of the IDOI since February 17, 2000
that requires Pafco, among other matters, to:
- - 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.
- - Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the 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.
- - Continue to comply with prior IDOI agreements and orders to correct
business practices under which Pafco must provide monthly financial
statements to the IDOI, obtain prior IDOI approval of reinsurance
arrangements and 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 conditions could
result in the IDOI requiring further reductions in Pafco's permitted premium
writings or in the IDOI instituting future proceedings against Pafco.
Restrictions on premium writings result in lower premium volume. Management fees
payable to Superior Group are based on gross written premium; therefore, lower
premium volume results in reduced management fees paid by Pafco to Superior
Group.
In March 2000, Pafco agreed with the Iowa Department of Insurance ("IADOI") that
it will not write any new non-standard business in Iowa, until such time as
Pafco has reduced its overall non-standard automobile policy counts in the state
or:
- - Has increased surplus; or
- - Has achieved a net written premium to surplus ratio of less than three to
one; or
- - Has surplus reasonable to its risk.
Pafco has continued to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance with
IADOI requirements.
Superior and Pafco provide monthly financial information to the departments of
insurance in certain states in which they write business at the states' request.
On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the
Notice and a determination that the order contemplated by the Notice not be
issued was held in February 2001. The administrative law judge entered a
recommended order on June 1, 2001 that was acceptable to the Company. On August
30, 2001, the FDOI rejected the recommended order and issued its final order
which the Company believes improperly characterized billing and policy fees paid
by Superior to Superior Group. On September 28, 2001, Superior filed an appeal
of the final order to the Florida District Court of Appeal. On March 4, 2002,
the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in
and for Leon County, Florida seeking court enforcement of the FDOI's final
order. Superior filed a motion with the FDOI for stay of the FDOI's final order.
Superior also filed a motion for stay with the District Court of Appeal, which
was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a
stay of the final order that was conditional upon the cessation of the payment
of billing fees by Superior to Superior Group and the posting of a $15 million
appeal bond. Superior did not agree to the conditions imposed by the FDOI's
conditional stay. On May 6, 2002 Superior filed a motion with the District
Court of Appeal seeking a stay of the final order pending Superior's appeal or,
in the alternative, a consolidation of the FDOI's enforcement action with the
pending appeal. On June 19, 2002, the District Court of Appeal entered an order
which struck the FDOI's conditional requirement for the stay that Superior post
a $15 million appeal bond. However, the order denied Superior's request to
consolidate the appeal with the enforcement action. On September 26, 2002, the
District Court of Appeal affirmed the final order of the FDOI. On October 31,
2002 the Circuit Court entered a final order which granted the FDOI's petition
for enforcement of the FDOI's final order and which requires Superior to comply
with the FDOI final order.
In accordance with the FDOI's final order, Superior ceased payment of finance
and service fees as of October 1, 2002 and has requested repayment from Superior
Group of $15 million of finance and service fees paid from 1997 through 1999 and
additional finance and service fees paid thereafter in the approximate amount of
$20 million. Without the payment of finance and service fee income to Superior
Group or an amendment to the management agreement or reallocation of operational
responsibilities, Superior Group could not operate profitably. Accordingly, on
October 1, 2002, Superior Group discontinued the provision of certain claims
services to Superior. Superior provided a number of proposals to the FDOI in an
effort to establish an acceptable repayment plan in accordance with the final
order. None of the proposals were acceptable to the FDOI.
On March 21, 2003 the FDOI filed a Motion for Enforcement of Final Order
Granting Petition to Enforce Agency Action in the Circuit Court which seeks to
hold Superior in contempt for failing to obtain the immediate repayment of
approximately $15 million from Superior Group. Superior Group presently does not
have the ability to make a $15 million repayment, and Superior believes that
this petition seeks to fashion a remedy not intended by the Circuit Court's
November 1, 2002 order and contravenes the spirit of numerous discussion between
the FDOI and Superior to resolve the issues during the pendency of Superior's
appeal to the District Court of Appeal and the original enforcement action.
Superior intends to vigorously defend the recent action brought by the FDOI.
On September 10, 2002, the FDOI filed a petition in the Circuit Court of the
Second Judicial Circuit in and for Leon County, Florida for an order to show
cause and notice of automatic stay which sought the appointment of a receiver
for the purpose of rehabilitation of Superior. The court entered an order to
show cause, temporary injunction and notice of automatic stay on September 13,
2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court
entered an order that denied the FDOI's petition for appointment of a receiver.
On November 8, 2002, the FDOI filed a motion for rehearing, which was denied on
December 17, 2002.
On November 20, 2002, the FDOI issued a notice and order to show cause which
seeks to suspend or revoke Superior's certificate of authority principally based
upon allegations that Superior did not comply with the FDOI's August 30, 2001
final order during the pendency of the appeal of the order to the District Court
of Appeal. Superior believes that it has fully and timely complied with the
final order and that the action brought by the FDOI is barred by res judicata. A
formal administrative hearing to review the notice and a determination that the
order or administrative action contemplated by the notice not be issued was held
in May 2003. The administrative law judge has not yet issued a recommended
order, which the FDOI may accept or reject.
On March 21, 2003, the FDOI filed a Motion for Enforcement of Final Order
Granting Petition to Enforce Agency Action in the Circuit Court of the Second
Judicial Circuit in and for Leon County, Florida which seeks to hold Superior in
contempt for failure to comply with the FDOI's final order during the pendency
of Superior's appeal to the Florida District Court of Appeal. On May 7, 2003 a
hearing was held on the Motion for Enforcement and an order has not yet been
issued.
On October 9, 2001, the State Corporation Commission of Virginia ("Virginia
Commission") issued an order to take notice regarding an order suspending
Superior's license to write business in that state. An administrative hearing
for a determination that the suspension order not be issued was held March 5,
2002. On May 3, 2002, the hearing examiner issued his report and recommended
that Superior's license not be suspended and that Superior file its risk based
capital plans and monthly and quarterly financial information with the Virginia
Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission
entered an order which adopted the findings of the hearing examiner, continued
the matter until such time as the Bureau requests further action and requires
the continued monitoring of the financial condition of Superior by the Bureau.
On October 11, 2002, the Virginia Commission filed an administrative Rule to
Show Cause. A hearing was scheduled for November 18, 2002 to determine whether
Superior's license to transact insurance business in Virginia should be
suspended. Because of Superior's improved financial condition, the Virginia
Commission continued the hearing indefinitely. The nonstandard automobile
insurance policies written in Virginia by Superior accounted for approximately
13.1% and 14.5% of the total gross written premiums of SIG in 2001 and in 2002,
respectively.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding companies in
Florida and Indiana, the domiciliary states of its insurance company
subsidiaries. These laws, among other things, (i) require SIG 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 SIG, 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 SIG's voting securities without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of common stock of SIG
would be presumed to have acquired control of Pafco and IGF unless the Indiana
Commissioner 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 SIG 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 U.S. insurance subsidiaries are subject to
restrictions and limitations under applicable law, and under those laws an
insurance subsidiary may not pay dividends without prior notice to, or approval
by, the subsidiary's domiciliary insurance regulator. As a result of regulatory
actions taken by the IDOI with respect to Pafco and IGF, those subsidiaries may
not pay dividends without prior approval by the IDOI (see "Regulatory Actions"
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 IDOI or the FDOI would permit any of the Company's U.S.
insurance subsidiaries to pay dividends at this time or in the future (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. The management agreement
between SIG 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 IDOI or the FDOI
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 IDOI (see "Regulatory
Actions" 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.
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
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; (iv)
off-balance sheet risk arising from adverse experience from non-controlled
asset, guarantees for affiliates, contingent liabilities and reserve and premium
growth. Pursuant to the model law, insurers having less statutory surplus that
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
decreases. The first level, the Company Action Level (as defined by the NAIC),
requires and insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory action level re
quires an insurer to submit a plan containing corrective actions and requires
the relevant insurance commissioner to perform and 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 70% of the RBC amount.
At the time of filing of the unaudited annual statutory financial statements of
the Company's U.S. insurance subsidiaries with the FDOI and the IDOI for the
year ended December 31, 2002, the RBC calculations for Pafco and Superior were
in excess of 200% of the RBC amount, a level which required no corrective
action. The RBC calculation for IGF as of December 31, 2002 was in excess of
100% of the RBC amount, which was above the authorized control level.
In May 2003, pursuant to a reserve analysis completed by the consulting actuary
engaged by BDO Seidman, LLP, the Company's and SIG's independent auditor, the
loss and LAE reserves of Superior and Pafco were increased as of December 31,
2002. These reserve adjustments, along with resulting adjustments to the
permitted carrying values of certain assets of Superior, investments in Superior
American and Superior Guaranty, were recorded in the 2002 audited statutory
financial statement filed for Superior with the FDOI. Based on the adjusted
audited statutory financial statements, the surplus for Superior fell below 70%
of the RBC amount and the surplus level for Pafco was above 150% of the RBC
amount as of December 31, 2002. As a result, there may be additional regulatory
actions taken by the insurance regulators in states in which the companies write
business.
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. 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.
Based on the December 31, 2002 statutory financials filed with the NAIC, Pafco
had values outside of the acceptable ranges for five IRIS tests. These included
the two-year overall operating ratio, the investment yield ratio, the change in
surplus ratio, the liabilities and liquid assets ratio, and the estimated
current reserve deficiency to policyholders' surplus ratio.
Based on the December 31, 2002 statutory financials filed with the NAIC,
Superior had values outside of the acceptable ranges for six IRIS tests. These
included the surplus aid to policyholders' surplus ratio, the two-year overall
operating ratio, the change in surplus ratio, the liabilities to liquid assets
ratio, the one-year reserve development to policyholders' surplus ratio, and the
two-year reserve development to policyholders' surplus ratio.
As of December 31, 2002, IGF had values outside of the acceptable ranges for
five IRIS tests. These included the change in net writings ratio, the two-year
overall operating ratio, the change in surplus ratio, the liabilities to liquid
assets ratio, and the agent's balances to policyholders' surplus ratio.
Guaranty Funds; Residual Markets
The insurance company subsidiaries 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 insurance company subsidiaries in pools or funds to provide
some types of insurance coverage that 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 consequences of changes in 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.
Employees
At March 1, 2003, the Company and its subsidiaries employed approximately 233
full and part-time employees. None of the Company's employees is represented by
either unions or collective bargaining agreements. 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.
The Financial Condition of the Company Has Continued to Decline
The Company reported losses from continuing operations of $(29,745,000),
$(31,937,000) and $(63,224,000) for 2002, 2001 and 2000, respectively. Results
from continuing operations before the effects of income taxes, minority interest
and amortization expense were losses of $(21,589,000), $(20,188,000) and
$(18,387,000) for 2002, 2001 and 2000 respectively. Further, the deficit in
shareholder's equity increased from $(89,146,000) at December 31, 2001 to
$(90,752,000) at December 31, 2002. There can be no assurance that the Company
can continue in business if these operating losses continue.
SIG's Accountants Have Issued Going Concern Opinions
SIG's accountants have issued reports on their audits of the Consolidated
Financial Statements of SIG as of December 31, 2002 and 2001 which express doubt
as to SIG's ability to continue as a going concern given the recurring operating
losses experienced by SIG over the past several years and SIG's net capital
deficiency.
Regulatory Actions May Affect the Company's Future Operations
The Company's U.S. insurance company subsidiaries, their business operations,
and their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the IDOI, the FDOI and the insurance
regulators of other states in which the insurance company subsidiaries write
business. Moreover, the U.S. 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 U.S. insurance company subsidiaries and have resulted in enhanced
scrutiny and regulatory action by several regulators. (See "Regulatory Actions"
and "Risk-Based Capital Requirements"). The primary purpose of insurance
regulation is the protection of policyholders rather than shareholders. Failure
to resolve issues with the IDOI and the FDOI, and with other regulators, in a
manner satisfactory to the Company could impair the Company's ability to execute
its business strategy or result in future regulatory actions or proceedings that
could otherwise materially and adversely affect the Company's operations.
The Company is Subject to a Number of Pending Legal Proceedings
As discussed elsewhere in this report, the Company and/or its subsidiaries are
involved in a number of pending civil legal proceedings (see "Legal
Proceedings"). 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
material adverse effect on the Company's financial position or results of
operations. Furthermore, the existence of these lawsuits diverts the time and
attention of management, and they are costly to defend.
The Terms of the Trust Preferred Securities May Restrict SIG'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 at 9.5% paid semi-annually. The obligations of the Preferred Securities
were expected to be funded from SIG's nonstandard automobile insurance
management company. SIG elected to defer the semi-annual interest payments due
in February and August 2000, 2001 and 2002 and the payment due in February 2003
and may continue to defer such payments for up to an aggregate of five years as
permitted by the indenture for the Preferred Securities. All of the deferred
interest (if all payments due in 2003 and 2004 are deferred) approximating $84
million will become due and payable in February 2005. Although there is no
present default under the indenture that would accelerate the payment of the
Preferred Securities, the indenture contains a number of covenants that 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 or
increase its level of 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 cash flow of SIG and the Company.
SIG May Not Be Able to Satisfy Its Obligations to the Holders of the Trust
Preferred Securities
SIG may continue to defer the semi-annual interest payments on the Preferred
Securities for up to an aggregate of five (5) years as permitted by the
indenture for the Preferred Securities. All of the deferred interest
(approximately $84 million, if all payments due in 2003 and 2004 are deferred)
will become due and payable in February 2005. SIG relies on the payment of
finance and service fees by its subsidiaries to fund its operations, including
its payment of interest on the Preferred Securities. Certain state regulators,
including the FDOI, have issued orders prohibiting SIG's subsidiaries from
paying such fees to SIG. In the event such orders continue, SIG may not have
sufficient revenue to fund its operations or to pay the deferred interest on the
Preferred Securities. Such failure to pay could result in a default under the
indenture and acceleration of the payment of the Preferred Securities.
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 final 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 experience with such products' performance. The level of claims cannot 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 that
require prior approval of rates, it may be more difficult for SIG's insurance
subsidiaries to achieve premium rates that are commensurate with its
underwriting experience with respect to risks located in those states.
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 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.
Uncertainty Associated with Estimating Reserves for Unpaid losses and LAE
The reserves for unpaid losses and LAE established by the Company's insurance
subsidiaries 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 U.S. nonstandard automobile insurance
business is primarily short-tail, the establishment of adequate reserves is an
inherently uncertain process, provides 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 historical 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.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many factors that
can cause fluctuation in the results of operations of this business. Many of
these factors are not subject to the control of the Company or its subsidiaries.
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 SIG writes business could result in fewer new car sales and reduced
demand for automobile insurance. These factors, together with competitive
pricing and other considerations, could result in fluctuations in SIG's
underwriting results.
Highly Competitive Business
Nonstandard automobile insurance is a highly competitive business. Many of the
Company's competitors have substantially greater financial 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 with both large national writers and smaller regional
companies. These competitors include companies which, like the Company, serve
the independent agency market and companies that sell insurance directly to
consumers. Direct writers may have certain competitive advantages over agency
writers, including increased name recognition, loyalty of the customer base to
the insurer, 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, assigned risk
plans may provide nonstandard automobile insurance products at a lower price
than private insurers. In addition, because the Company's nonstandard automobile
insurance products are only marketed through independent insurance agencies
which represent more than one insurance company, the Company faces competition
within each agency.
Reliance on Independent Insurance Agents
The NAG market and sell their insurance products through independent,
non-exclusive insurance agents and brokers. The agents and brokers also sell
competitors' insurance products. The NAG' business depends, in part, on the
marketing efforts of those agents and brokers and the NAG must offer insurance
products that meet the requirements of their customers. If those agents and
brokers fail to market the NAG' products successfully, the NAG' business may be
adversely affected.
Reliance upon reinsurance
In order to reduce risk and to increase underwriting capacity, the Nonstandard
Auto Group purchases reinsurance. Reinsurance does not relieve the Nonstandard
Auto Group of liability to the insureds for the risks ceded to reinsurers. As
such, the Nonstandard Auto Group is subject to credit risk with respect to the
risks ceded to reinsurers. Although the Nonstandard Auto Group places
reinsurance with reinsurers that it 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 SIG's, and
the Company's, financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing in
property and casualty insurance is subject, in large part, to prevailing market
conditions beyond the control of such companies. The Nonstandard Auto Group's
ability to provide insurance at competitive premium rates and coverage limits on
a continuing basis depends upon their ability to obtain adequate reinsurance in
amounts, and at rates, that will not adversely affect their competitive
position.
Due to continuing market uncertainties regarding reinsurance capacity, no
assurances can be given as to the Nonstandard Auto Group's ability to maintain
current reinsurance facilities, which generally are subject to annual renewal.
If the Nonstandard Auto Group is unable to renew such facilities upon their
expiration and is unwilling to bear the associated increase in net exposures, it
may need to reduce its levels of underwriting commitments.
ITEM 2 - PROPERTIES
The Company's headquarters is located at 2 Eva Road, Suite 200, Etobicoke,
Ontario, Canada in leased space.
The Company's U.S. offices are located at 4720 Kingsway Drive, Indianapolis,
Indiana in office space subleased from Superior Group. SIG's headquarters are
located at 4720 Kingsway Drive, Indianapolis, Indiana in a building that is
owned 100% by Pafco with no encumbrances. Superior Group leases office space at
4720 Kingsway Drive, Indianapolis, Indiana from Pafco. The building is an
80,000 square foot multilevel structure; approximately 50% of which is utilized
by the Company and certain of its subsidiaries. The remaining space is leased to
third parties at a price of approximately $10 per square foot. All corporate
administration, accounting and management functions are contained at this
location.
Superior's operations are conducted at leased facilities in Atlanta, Georgia;
Anaheim, California; and Tampa and West Palm Beach, Florida. Under a lease term
that extends through 2003, Superior leases an office at 280 Interstate North
Circle, N.W., and Suite 500, Atlanta, Georgia. Superior leases an office
located at 5483 West Waters Avenue, Suite 1200, Tampa, Florida for a lease term
extending through December 2007. Superior occupies a leased office located at
1745 West Orangewood, Anaheim, California for a lease term extending through May
2006. Superior occupies a leased office at 4500 PGA Blvd., Suite 304A, West Palm
Beach, Florida for a lease term extending through September 2007.
Claims activities are conducted in Atlanta, Indianapolis, Tampa and Anaheim.
Underwriting, customer service, and accounting and administration activities are
conducted in Indianapolis.
SIGF is located at 2300 Glades Road, Suite 135E, Boca Raton, Florida in leased
space.
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 purported to be
brought on behalf of a class consisting of purchasers of insurance from Superior
Guaranty. The plaintiffs alleged that the defendant charged premium finance
service charges in violation of Florida law. The parties have reached a class
settlement which has been approved by the court that is not expected to be
material to Superior Guaranty.
As previously reported, IGF, which is a wholly owned subsidiary of the Company,
had been a party to a number of pending legal proceedings and claims relating to
agricultural production interruption insurance policies (the "AgPI Program")
which were sold during 1998. All of the policies of insurance which were issued
in the AgPI Program were issued by and under the name of Mutual Service Casualty
Insurance Company ("MSI"), a Minnesota corporation with its principal place of
business located in Arden Hills, Minnesota. Sales of this product resulted in
large underwriting losses by IGF.
Approximately $29 million was paid through December 31, 2002 in settlement of
legal proceedings and policyholder claims related to the AgPI Program. All AgPI
policyholder claims were settled during 2000. However, on January 12, 2001 a
case was filed in the Superior Court of California, County of Fresno, entitled
S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought
by four AgPI policyholders who had previously settled their AgPI claims pursuant
to binding settlement agreements who now seek additional compensation by
asserting through litigation that IGF and the third party carrier paid less than
the policy limits they were promised when they purchased the policy and that
each settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. The plaintiff's amended their complaint four times during
2002. A demurrer to the fourth amended complaint was filed by MSI and a motion
to strike was filed by IGF, which were denied. IGF filed a motion for summary
judgment to dismiss the claims in the plaintiff's fourth amended complaint on
the basis that releases previously executed by the plaintiffs are binding. The
court granted the motion for summary judgment. The cross claims between the
selling brokers and MSI and IGF remain pending. The trial is scheduled to begin
in August 2003.
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 Plaintiffs alleged that the defendant charged interest in
violation of Florida law. The parties have settled the case in an amount that is
not material to the Company's financial condition.
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 (the "1934 Act") and SEC Rule 10b-5
promulgated thereunder. The individual defendants are also alleged to be liable
as "controlling persons" under Sec.20 (a) of the 1934 Act. As previously
reported in the Company's September 30, 2002 Form 10-Q, the Company, SIG and the
individual defendants entered into an agreement with the plaintiffs for
settlement. The settlement is subject to certain terms and conditions and court
approval.
As previously reported, SIG and two of its subsidiaries, IGFH and IGF, were
parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA")
with Continental Casualty Company ("CNA"), pursuant to which IGF acquired
certain crop insurance operations of CNA. The obligations of the Company, IGFH,
IGF and CNA under the SAA are the subject of an action filed on June 4, 2001 and
pending in United States District Court for the Southern District of Indiana,
Indianapolis Division. Claims have also been asserted in the action against
SIG, Granite Re, Pafco, Superior and certain members of the Symons family.
Discovery is proceeding. Although the Company continues to believe that it has
claims against CNA and defenses to CNA's claims which may offset or reduce
amounts owing by the Company or its affiliates to CNA, there can be no assurance
that the ultimate resolution of the claims asserted by CNA against the Company
and its affiliates will not have a material adverse effect upon the Company's
and its affiliates' financial condition or results of operations.
Superior was a defendant in a case filed on May 8, 2001 in the United States
District Court Southern District of Florida entitled The Chiropractic Centre,
Inc. v. Superior Insurance Company, Case No. 01-6782. The case purported to be
brought on behalf of a class consisting of healthcare providers improperly paid
discounted rates on services to patients based upon a preferred provider
contract with a third party. The plaintiff alleged that Superior breached a
third party beneficiary contract, committed fraud and engaged in racketeering
activity in violation of federal and Florida law by obtaining discounted rates
offered by a third party with whom the plaintiff contracted directly. On
September 30, 2002, the court issued an administrative order which dismissed the
case. The court's order administratively closing the case could be temporary or
permanent. Superior believes that the allegations of wrongdoing as alleged in
the complaint were without merit and in the event the order is temporary,
Superior intends to vigorously defend the claims brought against it.
IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of
Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al.,
Case No. 102CC5135. Other parties named as defendants are the Company, SIGF,
Granite Re, Superior Group Management, Superior, Superior American, Superior
Guaranty, Pafco and three individuals who were or are officers or directors of
the Company. These defendants have filed motions to dismiss for lack of
personal jurisdiction which are pending. The case purports to be brought on
behalf of an IGF insured seeking to recover alleged damages based on allegations
of bad faith, negligent claims handling and breach of fiduciary duties with
respect to a claim which arose from an accident caused by the IGF insured. IGF
believes that the allegations of wrongdoing as alleged in the complaint are
without merit and intends to vigorously defend the claims brought against it.
See footnote 15 ("Commitment and Contingencies") and footnote 14 ("Regulatory
Matters") to the Company's consolidated financial statements in Part I of this
report, incorporated herein by reference, for additional legal matters.
The Company and its subsidiaries are named as defendants in various other
lawsuits relating to their business and arising in the ordinary course of
business. Legal actions arise from claims made under insurance policies issued
by the Company's subsidiaries. The Company, through its claims reserves,
reserves for both the amount of estimated damages attributable to these lawsuits
and the estimate costs of litigation. The Company believes that the ultimate
disposition of these lawsuits will not materially affect its operations or
financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Information regarding the trading market for the Company's common stock, the
range of selling prices for each quarterly period since January 1, 2000, and the
approximate number of holders of common stock as of December 31, 2002 and other
matters is included under the caption "Market and Dividend Information" on page
43 of the 2002 Annual Report, included as Exhibit 13, which information is
incorporated herein by reference.
The following table sets forth certain information as of December 31, 2002
regarding securities of the Registrant authorized for issuance under the
Company's equity compensation plans. As of December 31, 2002, all of the
Company's equity compensation plans were approved by the Company's shareholders.
Number of securities
remaining available for
Number of securities Weighted-average future issuance under
to be issued upon exercise price of equity compensation plans
exercise of outstanding (excluding securities
Plan category outstanding options options reflected in column (a))
- ----------------------------- ----------------------- ------------------ --------------------------
Equity compensation plans
approved by shareholders . . 428,750 $ 0.85 442,250
Equity compensation plans not
approved by shareholders . . -- -- --
Total . . . . . . . . . . . . 428,750 $ 0.85 442,250
he Company's Share Option Plan provides it with the authority to grant
nonqualified stock options and incentive stock options to officers and key
employees of the Company and its subsidiaries and nonqualified stock options to
non-employee directors of the Company. Options have been granted at an exercise
price equal to the fair market value of the Company's stock at date of grant.
The outstanding stock options vest and become exercisable at varying terms
ranging from immediate vesting to equal installments over terms up to 5 years.
ITEM 6 - SELECTED FINANCIAL DATA
The data included on page 4 of the 2002 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's Discussion and Analysis of Financial
Condition and Results of Operations" included in the 2002 Annual Report on pages
5 through 14 included as Exhibit 13 is incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion entitled "Quantitative and Qualitative Disclosures About Market
Risk" included in the 2002 Annual Report on pages 12 through 13 included as
Exhibit 13 is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements in the 2002 Annual Report included as
Exhibit 13, and listed in Item 15 of this Report, are incorporated herein by
reference.
ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The following table sets forth certain information regarding current directors
of the Company:
NAME AGE DIRECTOR SINCE
Ron L. Foxcroft 57 2001
John K. McKeating 67 1995
J. Ross Schofield 62 1992
David B. Shapira 56 1989
Douglas H. Symons 51 1989
G. Gordon Symons 81 1986
Robert C. Whiting 71 2002
Dr. Ron L. Foxcroft is the Chairman and Founder of Fox 40 International, Inc.,
a manufacturing and distribution company and Chairman of Hamilton Terminals Inc.
Dr. Foxcroft was named by Profit Magazine as Entrepreneur of the Decade. Dr.
Foxcroft received an honourary Doctor of Law Degree from McMaster University in
Canada and was the recipient of the Award of Merit from B'Nai Brith Canada.
John K. McKeating is the retired former President of Vision 2120, Inc., an
optometry company
J. Ross Schofield is the Chairman of Hargraft Schofield Ltd., an insurance
brokerage company.
David B. Shapira is the President, Medbers Limited, an investment holding
company
Douglas H. Symons served as the Company's Chief Operating Officer from July 1996
until he became its Chief Executive Officer in November 1999. Mr. Symons also
served as Chief Executive Officer of the Company from 1989 until July 1996. Mr.
Symons has been a director of Goran since 1989 and served as Goran's Chief
Operating Officer and Vice President from 1989 until May 31, 2002 when he became
Chief Executive Officer and President. Mr. Symons is the son of G. Gordon
Symons.
G. Gordon Symons has been Chairman of the Board of Directors of the Company
since its formation in 1987. Mr. Symons founded the predecessor to Goran, the
73.8% shareholder of the Company, in 1964 and has served as the Chairman of the
Board of Goran since its formation in 1986. Mr. Symons also served as the
President of Goran until 1992 and the Chief Executive Officer of Goran until
1994. Mr. Symons currently serves as a director of Symons International Group
Ltd. ("SIGL"), a Canadian corporation controlled by him, which together with
members of the Symons family, controls Goran. Mr. Symons also serves as
Chairman of the Board of Directors of all of the subsidiaries of Goran. Mr.
Symons is the father of Douglas H. Symons.
Robert C. Whiting is the President of Prime Advisors Ltd., a Bermuda based
insurance consulting firm. From its inception until June 1994, Mr. Whiting
served as President and Chairman of the Board of Jardine Pinehurst Management
Co., Ltd., a Bermuda based insurance management and brokerage firm.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, as well as persons who own more than 10% of the
outstanding common shares of the Company, to file reports of ownership with the
Securities and Exchange Commission. Officers, directors and greater than 10%
shareholders are required to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of copies of such forms
received by it, or written representations from certain reporting persons that
no reports were required for those persons, the Company believes that during
2002, all filing requirements applicable to its officers, directors and greater
than 10% shareholders were met with the exception of a Form 4 for the
acquisition of shares of the Company.
EXECUTIVE OFFICERS
Presented below is certain information regarding the executive officer of the
Company who is not also a director. His age and positions with the Company are
as follows:
NAME AGE POSITION
John G. Pendl 42 Vice President, Chief Financial Officer
and Treasurer
Mr. Pendl has served as Vice President, Chief Financial Officer and Treasurer
since October 2002. From 1998 to September 2002, Mr. Pendl served as M&A
Analyst and Divisional Controller for Collision Team of America, Inc., a
subsidiary of Ford Motor Company. Mr. Pendl also held various corporate
financial positions between 1991 and 1998, primarily with The Corange Group.
Finally, Mr. Pendl served as a tax consultant with the firm of Price Waterhouse
from 1984 through 1990. Mr. Pendl holds an MBA degree from Indiana University
and is a Certified Public Accountant in the State of Indiana.
ITEM 11 - EXECUTIVE COMPENSATION
The following table shows the cash compensation paid by the Company or any of
its subsidiaries and other compensation paid during the last three calendar
years to the Company's Chief Executive Officer during 2002 and the Company's
four other most highly paid executive officers during 2002 (the "named executive
officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Awards
- -------------------------------------------------------------------------------------
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus OptionsC Compensation
- --------------------- ---------- ---------- -------- -------- ------------------
G. Gordon Symons, . . 2002 $ 0 $ 0 0 $ 400,613R
Chairman of the Board 2001 $ 0 $ 0 250,000 $ 448,672D
2000 $ 0 $ 0 0 $ 403,638O
---------- ---------- -------- -------- ------------------
Alan G. Symons,S. . . 2002 $ 0 $ 0 0 $ 464,119Q
CEO and President . . 2001 $ 0 $ 0 200,000 $ 400,000H
2000 $ 0 $ 0 0 $ 401,638G
---------- ---------- -------- -------- ------------------
Douglas H. Symons,. . 2002 $ 461,463 $250,368I 0 $ 17,526E
CEO and President . . 2001 $ 375,000 $ 0 60,000 $ 1,651N
2000 $ 375,000 $ 0 0 $ 45,846F
---------- ---------- -------- -------- ------------------
John G. PendlJ. . . . 2002 $ 72,361 $ 0 1,000 $ 1,981E
Vice President, CFO . 2001 $ 14,807 $ 0 0 $ 0
- --------------------- ---------- ---------- -------- -------- ------------------
Gene S. YerantK . . . 2002 $ 235,105 $ 0 0 $ 262,371P
President, Superior . 2001 $ 500,000 $ 912 0 $ 11,223M
Insurance Group, Inc. 2000 $ 500,000 $250,000 100,000 $ 21,635L
- --------------------- ---------- ---------- -------- ------- ----------------
<FN>
Note A Salary, bonus and other compensation are stated in U.S. dollars as the majority of payments are actually made in
U.S. dollars.
Note B Aggregate amounts are not greater than the lesser of $50,000 and 10% of the total of the annual salary and bonus.
Note C No stock appreciation rights, restricted shares, or restricted share units were granted during any of the past
three completed fiscal years. Amounts reflect stock options granted during 2000, 2001 and 2002.
Note D Includes $400,000 paid by a subsidiary of the Corporation, Granite Reinsurance Company Ltd., a Barbados company
("Granite Re"), to companies owned by Mr. G. Gordon Symons and $48,672 of other compensation paid by the
Corporation and Granite Re.
Note E Includes $1,981 of health and life insurance premiums and $15,545 of medical expense reimbursement paid by SIG.
Note F Includes $43,510 of accrued vacation and $2,336 of health and life insurance premiums paid by SIG.
Note G Includes a consulting fee paid to SIG Capital Fund, Ltd. of $400,000 and health insurance premiums of $1,638 paid
by SIG.
Note H Consulting fee of $400,000 paid to SIG Capital Fund, Ltd.
Note I Includes $25,368 paid by SIG.
Note J Mr. Pendl joined the Corporation on October 8, 2001.
Note K Mr. Yerant joined the Corporation on January 10, 2000. Mr. Yerant's employment terminated May 20, 2002.
Note L Includes $19,067 of relocation expenses and $2,568 of health and life insurance premiums paid by SIG.
Note M Includes $1,990 of health and life insurance premiums paid by SIG.
Note N Health and life insurance premiums paid by SIG.
Note O Includes consulting fee of $400,000 paid by Granite Re and $1,638 of health and life insurance premiums paid by
SIG.
Note P Includes a severance payment of $250,000 and $12,371 of insurance premiums.
Note Q Includes consulting fee of $182,051 paid to SIG Capital Fund, Ltd. and $282,068 paid pursuant to a consulting
agreement effective May 31, 2002 between the Corporation, Granite and AGS Capital Ltd.
Note R Includes consulting fee of $400,000 paid by Granite Re and $613 of health and life insurance premiums paid by
SIG.
Note S Alan G. Symons retired on May 31, 2002.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows grants of options made during the fiscal year ended
December 31, 2002 to each of the named executive officers:
Individual Grants Grant Date Value
-------------------
Number of
Securities Percent of total
Underlying options granted to
Options employees in fiscal Exercise of Expiration Grant Date Present
Name granted year Base Price date Value $
- ----------------- ---------------- -------------------- ------------- ---------- --------------------
Douglas H. Symons -- -- -- --
---------------- -------------------- ------------- ----------
G. Gordon. Symons -- -- -- --
---------------- -------------------- ------------- ----------
Alan G. Symons. . -- -- -- --
---------------- -------------------- ------------- ----------
John G. Pendl . . 1,000 3.8% $ .23 (Cdn) 10/1/2012 $ 230 (Cdn)
---------------- -------------------- ------------- ---------- --------------------
Gene S. Yerant. . -- -- -- -- --
- ----------------- ---------------- -------------------- ------------- ---------- --------------------
OPTION EXERCISES AND YEAR-END VALUES
The following table shows unexercised stock options held by the Company's named
executive officers at December 31, 2002. In addition, this table includes the
number of shares covered by both exercisable and non-exercisable stock options.
The closing TSX stock price as of December 31, 2002 was $.60 (Cdn), which was
lower than the option exercise prices; therefore, there were no unexercised
in-the-money options. There were no exercises of stock options by the named
executive officers during 2002.
VALUE OF
COMMON NUMBER OF UNEXERCISED UNEXERCISED IN THE
SHARES OPTIONS AT FY END MONEY OPTIONS ($)
ACQUIRED ON AGGREGATE EXERCISABLE/UNEXERCIS EXERCISABLE/
NAME EXERCISE VALUE REALIZED ABLE UNEXERCISABLE1
- ----------------- ----------- --------------------- ---------------------- --------------
G. Gordon Symons. 0 0 250,000/0 0/0
----------- --------------------- ---------------------- --------------
Alan G. Symons. . 0 0 0/0 2 0/0
----------- --------------------- ---------------------- --------------
Douglas H. Symons 0 0 60,000/0 0/0
----------- --------------------- ---------------------- --------------
John G. Pendl . . 0 0 0/1,000 0/0
----------- --------------------- ---------------------- --------------
Gene S. Yerant. . 0 0 0/0 3 0/0
- ----------------- ----------- --------------------- ---------------------- --------------
<FN>
1 Based on the TSX closing price as of December 31, 2002 of $.60 (Cdn.).
2 Alan G. Symons forfeited his options upon retirement.
3 Mr. Yerant forfeited his options upon termination of employment.
LONG TERM INCENTIVE PLAN AWARDS IN 2002
There were no long-term incentive plan awards to the Company's named executive
officers in 2002.
REPORT ON EXECUTIVE COMPENSATION
The Corporation's Executive Compensation Policy (the "Policy") considers an
individual's experience, market conditions (including industry surveys),
individual performance and the overall financial performance of the Corporation.
The Corporation's total compensation program for officers includes base
salaries, bonuses and the grant of stock options pursuant to the Option Plan.
The Corporation's primary objective is to achieve above-average performance by
providing the opportunity to earn above-average total compensation (base salary,
bonus, and value derived from stock options) for above-average performance.
Each element of total compensation is designed to work in concert. The total
program is designed to attract, motivate, reward and retain the management
talent required to serve shareholder, customer and employee interests. The
Corporation believes that this program also motivates the Corporation's officers
to acquire and retain appropriate levels of share ownership. It is the opinion
of the Compensation Committee that the total compensation earned by the
Corporation's officers during 2002 achieves these objectives and is fair and
reasonable.
Compensation comprises base salary, annual cash incentive (bonus) opportunities,
and long-term incentive opportunities in the form of stock options. Individual
performance is determined in relation to short and long-term objectives that are
established and maintained on an on-going basis. Performance of these
objectives is formally reviewed annually and base salary adjusted as a result.
Bonus rewards are provided upon the attainment of corporate financial
performance objectives as well as the individual's direct responsibilities and
their attainment of budget and other objectives.
The Policy also strives to establish long-term incentives to executive officers
by aligning their interests with those of the Corporation's shareholders through
award opportunities that can result in the ownership of the Corporation's common
shares.
The compensation of Alan G. Symons, Chief Executive Officer of the Corporation
until May 31, 2002, was determined pursuant to the arrangement between the
Corporation and SIG Capital Fund, Ltd. Under the arrangement, a consulting fee
was paid to SIG Capital Fund, Ltd. with respect to the provision of services by
Alan G. Symons. Alan G. Symons was not paid a salary by the Corporation. Upon
the resignation of Alan G. Symons, Douglas H. Symons was appointed Chief
Executive Officer, President and Secretary of the Corporation. The Compensation
Committee reviewed and increased the salary of Douglas H. Symons upon his
appointment as Chief Executive Officer and President of the Corporation and
approved the payment by the Corporation of the annual salary obligations of SIG
and the Corporation. The Compensation Committee also approved a retention bonus
in 2002 for Douglas H. Symons. During 2002, the board of directors did not
grant any additional stock options to the Chief Executive Officer. The board of
directors also approved the grant of 26,000 additional stock options to certain
officers, directors and employees of the Corporation during 2002.
COMPENSATION COMMITTEE
Dr. Ron Foxcroft, Chairman
J. Ross Schofield
Douglas H. Symons
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consisted of Dr. Ron Foxcroft, J. Ross
Schofield and Douglas H. Symons. Neither Dr. Foxcroft nor Mr. Schofield has any
interlocks reportable under Item 402(j)(3) of Regulation S-K. Douglas H. Symons
has served as a director and executive officer of the Company since 1989.
Douglas H. Symons is also an executive officer of each of the Company's
subsidiaries. G. Gordon Symons, Chairman of the Company, is a director of each
of the Company's subsidiaries and is empowered to determine the compensation of
the executive officers of the Company's subsidiaries. Alan G. Symons was an
executive officer and director of the Company and its subsidiaries until May 31,
2002.
COMPENSATION OF DIRECTORS
In 2002, the Company's directors received a flat annual fee of $10,000 for each
director and a $1,000 fee for each committee meeting attended. In addition,
committee chairmen received an additional $1,500 per quarter. During 2002, the
Company also paid Robert C. Whiting a $10,000 fee for services as an officer of
Granite Reinsurance Company Ltd., a subsidiary of the Company.
EMPLOYMENT AGREEMENTS
Certain of the Company's officers have entered into employment contracts with
the Company or one of its subsidiaries.
Douglas H. Symons, Chief Executive Officer of the Company, is subject to an
employment agreement, with such agreement calling for a base salary of not less
than $500,000 per year. This agreement became effective on May 31, 2002 and
continues in effect for an initial period of two years. Upon the expiration of
the initial two-year period, the term of the agreement is automatically extended
from year to year thereafter and is cancelable upon six months' notice. This
agreement contains customary restrictive covenants respecting confidentiality
and non-competition during the term of employment and for a period of two years
after the termination of the agreement. In addition to annual salary, Douglas
H. Symons may earn a bonus in an amount ranging from 0 to 100% of base salary.
At the discretion of the board, bonus awards may be greater than the amounts
indicated if agreed upon financial targets are exceeded. Upon a change of
control of the Company or Symons International Group, Inc. and in the event of a
non-renewal of Douglas H. Symons' employment agreement, Douglas H. Symons is
entitled to a severance amount equal to two years salary. Douglas H. Symons
became the Chief Executive Officer and President of the Company on May 31, 2002,
and the Company approved the payment of the Company's and Symons International
Group, Inc.'s annual salary obligations under the employment agreement effective
as of May 31, 2002.
The Company and Granite Reinsurance Company Ltd. have entered into a consulting
agreement with AGS Capital Ltd. under which Alan G. Symons, the Chief Executive
Officer of the Company until May 31, 2002, provides certain consulting services
to the Company and Granite Re. The agreement provides compensation in the
amount of $500,000 per year, is for an initial term of one year, and the term of
the agreement is automatically extended from year to year thereafter unless
terminated upon ninety days' prior notice.
The Company, Symons International Group, Inc. and Granite Reinsurance Company
Ltd. have entered into an employment agreement with G. Gordon Symons, Chairman
of the Board of the Company, pursuant to which G. Gordon Symons is entitled to
receive from Granite Re an annual sum of $150,000. Upon a change of control of
the Company or Symons International Group, Inc., G. Gordon Symons is entitled to
a payment in the amount of $1,125,000. In the event Granite Re shall fail to pay
the annual amount due under the agreement, the Company and Symons International
Group, Inc. become jointly and severally liable for such amounts.
The Company, Symons International Group, Inc., Granite Reinsurance Company Ltd.,
Goran Management Bermuda Ltd. ("Goran Bermuda") and G. Gordon Symons have
entered into a consulting agreement pursuant to which Goran Bermuda, an entity
controlled by G. Gordon Symons, is entitled to an annual sum of $250,000. Upon
a change of control of the Company or Symons International Group, Inc., Goran
Bermuda is entitled to a payment in the amount of $1,875,000. In the event
Granite Re shall fail to pay the annual amount due under the agreement, the
Company and Symons International Group, Inc. become jointly and severally liable
for such amounts.
The Company and Symons International Group, Inc. entered into an employment
agreement with David N. Hafling under which he serves as Vice President and
Chief Actuary of Symons International Group, Inc. The agreement became
effective on October 15, 2001 and continues until December 31, 2004. The
agreement is automatically renewed for one year periods thereafter unless
earlier terminated upon 60 days advance notice. The agreement provides that Mr.
Hafling will receive a base salary of not less than $150,000 annually and an
annual bonus of up to $30,000.
The Company and Symons International Group, Inc. entered into an employment
agreement with Gregg F. Albacete, Vice President and Chief Information Officer
of Symons International Group, Inc. The agreement became effective on January
26, 2000 for an initial term of three years and was automatically renewable for
one-year periods thereafter unless sooner terminated. The agreement provided
for a base salary of not less than $175,000 annually and an annual bonus of up
to $75,000. This agreement terminated on January 31, 2003.
The Company and Symons International Group, Inc. entered into an employment
agreement with Gene S. Yerant under which he served as Executive Vice President
of the Symons International Group, Inc. and President of Superior Insurance
Group, Inc., a subsidiary of the Company. The agreement became effective on
January 10, 2000 and was terminated on May 20, 2002. The agreement provided for
a base salary of $500,000 annually and a bonus of up to 100% of salary based
upon achievement of certain performance objectives. Following the termination
of the employment of Gene S. Yerant on May 20, 2002, the Company and Symons
International Group, Inc. entered into an agreement with Mr. Yerant which
provided for two separation payments of $250,000 each, both of which were paid
as of January 31, 2003.
PERFORMANCE GRAPH
The following performance graph compares the cumulative total shareholder return
on the Corporation's common stock with the TSX/S&P Composite Index for the years
1998 through 2002.
[GRAPHIC OMITED]
Notwithstanding anything to the contrary set forth in any of the Corporation's
previous filings under the Securities Act of 1993, as amended or the Securities
Exchange Act of 1934, as amended, that may incorporate future filings (including
this Management Proxy Circular, in whole or in part), the preceding Report on
Executive Compensation and the historical Performance Graph shall not be
incorporated by reference in any such filings.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of April 21, 2003, the number and percentage of
shares of common stock of the Company held by each person known to the Company
to own beneficially more than five percent of the issued and outstanding common
stock of the Company, and the ownership interests of each of the Company's
directors and named executive officers, and all directors and executive officers
of the Company as a group, in the common stock of the Company and in the common
stock of the Company's 73.8% shareholder, Goran. Unless otherwise indicated in
a footnote to the following table, each beneficial owner possesses sole voting
and investment power with respect to the shares owne
SYMONS INTERNATIONAL GROUP, INC. GORAN CAPITAL INC.
-------------------------------- -------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
NAME OWNERSHIP CLASS OWNERSHIP CLASS
- ------------------------------------- -------------------------------- ------------------- ---------- -----------
G. Gordon Symons1 . . . . . . . . . . 520,000 4.8% 2,375,524 42.1%
-------------------------------- ------------------- ---------- -----------
Douglas H. Symons3. . . . . . . . . . 245,500 2.3% 311,455 5.7%
-------------------------------- ------------------- ---------- -----------
Alan G. Symons2 . . . . . . . . . . . 72,691 * 568,065 10.5%
-------------------------------- ------------------- ---------- -----------
J. Ross Schofield4. . .. . . . . . . 28,500 * 29,800 *
-------------------------------- ------------------- ---------- -----------
David B. Shapira4 . . . . . . . . . . 28,500 * 115,000 2.1%
-------------------------------- ------------------- ---------- -----------
John K. McKeating5. . . . . . . . . . 51,000 * 17,000 *
-------------------------------- ------------------- ---------- -----------
Dr. Ron Foxcroft6. . . . . . . . . . . 0 0 31,000 *
-------------------------------- ------------------- ---------- -----------
Robert C. Whiting7 . . . . . . . . . . 77,800 * 35,000 *
-------------------------------- ------------------- ---------- -----------
Goran Capital Inc.. . . . . . . . . . 7,666,283 73.8% 0 0
-------------------------------- ------------------- ---------- -----------
All executive officers and directors
as a group (9 persons) . . . . . . . 858,191 7.7% 3,487,844 60.5%
- ------------------------------------- -------------------------------- ------------------- ---------- -----------
<FN>
* Less than 1% of class.
1 With respect to the shares of SIG, 10,000 shares are owned directly and
510,000 shares may be purchased pursuant to stock options that are
exercisable within 60 days. With respect to the shares of the Company,
479,111 shares are held by trusts of which Mr. Symons is the beneficiary,
1,646,413 of the shares indicated are owned by Symons International Group
Ltd., of which Mr. Symons is the controlling shareholder, and 250,000
shares are subject to options exercisable within 60 days.
2 With respect to the shares of the Company, 387,215 are held by a trust over
which Mr. Symons exercises limited direction, and 180,850 are owned
directly.
3 With respect to shares of SIG, 35,500 shares are owned directly and 210,000
shares may be purchased pursuant to stock options that are exercisable
within 60 days. With respect to shares of the Company, 251,455 shares are
owned directly and 60,000 shares are subject to options that are
exercisable within 60 days.
4 With respect to shares of SIG, 27,500 shares may be purchased pursuant to
stock options exercisable within 60 days. With respect to shares of the
Company, 15,000 shares may be purchased pursuant to stock options
exercisable within 60 days.
5 With respect to shares of SIG, 47,000 shares may be purchased pursuant to
stock options that are exercisable within 60 days. With respect to shares
of the Company, 15,000 shares may be purchased pursuant to stock options
exercisable within 60 days.
6 With respect to shares of the Company, 15,000 shares may be purchased
pursuant to stock options that are exercisable within 60 days.
7 With respect to shares of SIG, 28,000 shares may be purchased pursuant to
stock options exercisable within 60 days, and with respect to shares of the
Company, 15,000 shares may be purchased pursuant to stock options
exercisable within 60 days.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1997, Symons International Group, Inc. a subsidiary of the Corporation ("SIG"),
guaranteed a personal loan by an unrelated third party lender to Douglas H.
Symons in the amount of $250,000. During 2002, the loan was renewed by the
unrelated third party lender, and SIG did not renew its guarantee.
As of December 31, 2002, Symons International Group Ltd., a private company
("SIGL"), was indebted to the Corporation in the amount of approximately (U.S.)
$1,743,000. This indebtedness does not bear interest. During 2002, the
Corporation paid SIGL $400,000 for consulting services which include
reinsurance, investment banking and other miscellaneous matters. G. Gordon
Symons, a director of the Corporation, is the majority shareholder of SIGL
(which is an insider of the Corporation), and Alan G. Symons (who is an insider
of the Corporation) and Douglas H. Symons (who is a director and officer of the
Corporation) own a minority interest in SIGL.
As of December 31, 2002, Symons Underwriting Managers Ltd., a private company
("SUML"), was indebted to the Corporation in the amount of approximately (Cdn.)
$3,340,000. This indebtedness does not bear interest and is secured by the
pledge of 100,000 shares of the Corporation. SIGL is the sole shareholder of
SUML.
SIG paid $12,967 to Stargate Solutions Group, Inc. ("Stargate") in 2002 for
consulting and other services related to the Corporation's non-standard
automobile operating system. Stargate is owned by Kirk Symons, son of G. Gordon
Symons and brother of Alan G. Symons and Douglas H. Symons.
Superior Insurance Group, Inc., a wholly owned subsidiary of the Corporation,
owns a less than 1% limited partnership interest in Monument Capital Partners I.
The amount of the investment was $100,000. Larry S. Wechter, a director of SIG
until August 12, 2002, is Managing Director and Chief Executive Officer of
Monument Advisors, Inc. and Alan G. Symons is a director of Monument Advisors,
Inc. Monument Advisors, Inc. is the general partner of Monument Capital
Partners I.
The Corporation leases office space in Toronto, Canada from Tritech Financial
Systems Inc. ("Tritech"). Tritech is owned by Robert T. Symons, son of G.
Gordon Symons and brother of Alan G. Symons and Douglas H. Symons. The total
amount paid during 2002 was $34,000.
In 1999, Granite Reinsurance Company Ltd. issued a performance bond in favor of
Tritech in the amount of $328,000. In August 2000 the creditor called the bond.
The bond is secured by a guarantee from Tritech, a personal guarantee from
Robert T. Symons and a pledge of 50,000 shares of the Corporation's common stock
owned by Robert T. Symons. Tritech is paying interest on the outstanding
balance at an annual rate of 7.5%. During 2002, Tritech paid interest to the
Corporation on the bond of $24,600.
During 2002, SIG paid David G. Symons approximately $7,076 for legal services.
David G. Symons is the son of Alan G. Symons.
INDEBTEDNESS OF OFFICERS AND DIRECTORS OF THE CORPORATION
The following directors and officers of the Corporation and their associates
were indebted to the Corporation, or its subsidiaries, in amounts exceeding
(Cdn.) $25,000 during 2002. All amounts listed in this section are denominated
in U.S. Dollars based upon the March 28, 2003 inter-bank market rate for
currency exchange. The approximate aggregate indebtedness of all officers,
directors, employees and former officers, directors and employees of the
Corporation or any of its subsidiaries entered into primarily in connection with
a purchase of securities of the Corporation or its subsidiary as of April 21,
2003 was $1,746,264. The aggregate indebtedness of all other indebtedness of
all officers, directors, employees and former officers and directors and
employees of the Corporation or any of its subsidiaries as of April 21, 2003 was
$1,680,887.
LARGEST LOAN BALANCE BALANCE AS OF
NAME AND PRINCIPAL POSITION DATE OF LOAN DURING 2002 APRIL 21, 2003
--------------------- -------------- ---------------
June 27, 1986 $115,8071 $0
June 30, 1986 $156,4951 $129,112
G. Gordon Symons Prior to 1997 $30,0242 $30,752
Chairman of the Board July 12, 2001 $832,7513 $29,733
- ---------------------------- --------------------- -------------- ---------------
June 30, 1986 $6,6174 $0
February 25, 1988 $27,3094 $27,309
March 19, 1998 $15,2935 $15,293
October 28, 1999 $119,5006 $121,125
Alan G. Symons November 17, 2000 $1,145,8207 $1,149,398
CEO and President (14) July 26, 2002 $130,7947 $131,203
--------------------- -------------- ---------------
Prior to 1997 $66,25613 $66,256
June 30, 1986 $9,79813 $0
February 24, 1988 $2,2198 $2,219
September 29, 1999 $119,5009 $121,125
October 20, 1999 $418,25010 $423,938
June 28, 2000 $80,00013 $80,000
Douglas H. Symons (15) November 17, 2000 $675,9347 $678,042
CEO, President and March 23, 2001 $103,37211 $103,630
Secretary June 4, 2001 $50,00013 $50,000
October 15, 2001 $202,72112 $180,317
July 26, 2002 $76,6547 $77,898
- ---------------------------- --------------------- --------------
<FN>
1 The loans by the Corporation to G. Gordon Symons in 1986 were made to
facilitate the purchase of common shares of the Corporation. Such loans are
collateralized by pledges of the common shares of the Corporation acquired,
are payable on demand and are interest free.
2 The loan by the Corporation prior to 1997 was made to an entity controlled
by G. Gordon Symons, is unsecured and bears no interest.
3 The loan by Granite Reinsurance Company Ltd. to G. Gordon Symons in the
principal amount of $800,000 was made during 2001 at 6% interest. The
principal amount was repaid on April 1, 2002. The balance remaining
represents interest on the loan.
4 The loans by the Corporation to Alan G. Symons in 1986 and 1988 were made
to facilitate the purchase of common shares of the Corporation, are
collateralized by a pledge of the common shares of the Corporation
acquired, are payable on demand and are interest free.
5 The loan by SIG to Alan G. Symons on March 19, 1998 was made to satisfy
obligations to third parties. Such loan was inadvertently referred to in
the Corporation's 2002 Proxy Statement as a loan by the Corporation. Such
loan was secured by a pledge of his options to purchase shares in Superior
Insurance Group Management, Inc. (formerly, GGS Management Holdings, Inc.),
a subsidiary of the Corporation, and bore interest at the rate of 5.85% per
year. The principal of the loan was repaid during 1999. The balance
remaining represents interest on the loan.
6 The loan by SIG to Alan G. Symons on October 28, 1999 was made to pay third
party indebtedness secured by common shares of the Corporation and SIG.
Such loan was inadvertently referred to in the Corporation's 2002 Proxy
Statement as a loan by the Corporation. Such loan is unsecured and bears
interest at the rate of 6.5% per year and is payable on demand.
7 In April 1999, the Corporation guaranteed loans from an unrelated third
party to Alan G. Symons and Douglas H. Symons in the approximate amounts of
$1,552,000 and $945,000, respectively. Such guarantee was in place until
November 17, 2000 at which time the Corporation made loans to Alan G.
Symons and Douglas H. Symons in the amounts of $630,392 and $369,608
respectively. On April 19, 2001, the Corporation made additional loans to
Alan G. Symons and Douglas H. Symons in the amounts of $470,250 and
$279,750, respectively, and Alan G. Symons and Douglas H. Symons executed
amended promissory notes in the aggregate amount of $1,100,642 and
$649,358, respectively. These notes bear interest at variable rate based
upon the Royal Bank of Canada's rate paid on deposits. At December 31,
2002, the total accrued interest on the amended promissory notes of Alan G.
Symons and Douglas H. Symons was $45,178 and $26,576, respectively. The
proceeds of all of such loans were used to reduce the principal outstanding
on the third party loans. The Corporation's guarantee to the unrelated
third party is with regard to the remaining balance of the third party
loans ($358,189 and $212,748 to Alan G. Symons and Douglas H. Symons,
respectively) secured by a pledge of certain shares of SIG owned by the
Corporation. In turn, Alan G. Symons and Douglas H. Symons have executed
guarantees in favor of the Corporation which are triggered in the event
that the Corporation is required to perform its guarantee to such unrelated
third party. The guarantees by Alan G. Symons and Douglas H. Symons are
secured by all shares of SIG and the Corporation held respectively by Alan
G. Symons and Douglas H. Symons. On July 26, 2002 additional loans were
made to Alan G. Symons and Douglas H. Symons in the amounts of $125,480 and
$74,520, respectively. These notes bear interest at variable rate based
upon the Royal Bank of Canada's rate paid on deposits. At December 31,
2002, accrued interest on these loans was $5,314 and $3,134, respectively.
8 The loans by the Corporation to Douglas H. Symons in 1988 were made to
facilitate the purchase of common shares of the Corporation. Such loans are
collateralized by pledges of the common shares of the Corporation acquired,
are payable on demand and are interest free.
9 The loan by SIG to Douglas H. Symons on September 29, 1999 was made to
satisfy indebtedness to third parties. Such loan is unsecured, bears
interest at the rate of 6.5% per year and is payable on demand.
10 The loan by the Corporation to Douglas H. Symons on October 20, 1999 was
made to satisfy indebtedness to third parties. Such loan is unsecured,
bears interest at the rate of 6.5% per year and is payable on demand.
11 The loan by the Corporation was an advance and bears interest at the
Corporation's short term funds rate.
12 The loan by Symons International Group (Florida), Inc., a subsidiary of the
Corporation, on October 15, 2001, was an advance against bonus for 2002.
Such loan is unsecured, bears interest at the rate of 6% per year or the
applicable federal rate, whichever is higher and was due no later than
March 31, 2003. Douglas H. Symons was unable to repay the loan upon
maturity and has agreed to enter into a repayment plan with the
Corporation.
13 The loan by SIG represents an advance and does not bear interest.
14 Alan G. Symons retired on May 31, 2002.
15 Douglas H. Symons became CEO and President of the Corporation on May 31,
2002.
PART IV
ITEM 14 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company and SIG maintain disclosure controls and procedures designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. Within the 90 days prior to the
date of filing this Annual Report on Form 10-K, the Company and SIG carried out
evaluations, under the supervision and with the participation of the Company's
and SIG's management, including the Company's CEO, the Company's CFO and SIG's
CFO, of the effectiveness of the design and operation of the Company's and SIG's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's CEO, the Company's CFO and SIG's CFO
concluded that the Company's and SIG's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company and SIG (including their consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's or SIG's internal
controls, or in other factors that could significantly affect internal controls,
subsequent to the date of the evaluation described above ("EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES"). No corrective actions were required with
regard to significant deficiencies and material weaknesses.
ITEM 15 - 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 consolidated financial statements
found on the pages of the 2002 Annual Report are incorporated into Item 8 of
this Report by reference:
Location in
Description of Financial Statement Item 2002 Annual Report
- ------------------------------------------- --------------------
Reports of Independent Accountants Page 42
Consolidated Balance Sheets, December 31,
2002 and 2001 Page 15
Consolidated Statements of Operations, Years
Ended December 31, 2002, 2001 and 2000 Page 16
Consolidated Statements of Changes In
Stockholders' Equity (Deficit), Years Ended
December 31, 2002, 2001 and 2000 Page 17
Consolidated Statements of Cash Flows,
Years Ended December 31, 2002, 2001 and 2000 Page 18
Notes to Consolidated Financial Statements,
Years Ended December 31, 2002,2001 and 2000 Pages 19 - 40
2. Financial Statement Schedules. The following financial statement
schedules are included beginning on page 27:
Reports 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.
4. Reports on Form 8-K: No reports on Form 8-K were filed during the fourth
quarter of 2002.
Board of Directors and Stockholders of
Goran Capital Inc. and Subsidiaries
The audit referred to in our report dated May 9, 2003, relating to the
consolidated financial statements of Goran Capital, Inc. and subsidiaries, which
is incorporated in Item 8 of this Form 10-K by reference to the annual report to
shareholders for the year ended December 31, 2002 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 audits.
In our opinion, such financial statement schedules present fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Grand Rapids, Michigan
May 9, 2003
GORAN CAPITAL INC.- CONSOLIDATED
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES.
The information required by this schedule is included in note 3 of Notes to
Consolidated Financial Statement.
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As Of December 31, 2002 and 2001
(in thousands, except share data)
2002 2001
--------- ---------
Assets:
Cash and Short-term Investments. . . . . . . . . $ 178 $ 2,618
Loans to Related Parties . . . . . . . . . . . . - 219
Capital and Other Assets . . . . . . . . . . . . 29 531
Investment in Subsidiaries, at Cost. . . . . . . 10,437 10,639
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . 10,644 14,007
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans from Related Parties and Other Liabilities $ 8,325 $ 10,800
--------- ---------
Total Liabilities. . . . . . . . . . . . . . . . 8,325 10,800
--------- ---------
Stockholders' Equity:
Common Shares. . . . . . . . . . . . . . . . . . 18,561 18,502
Cumulative Translation Adjustment. . . . . . . . 545 570
Deficit. . . . . . . . . . . . . . . . . . . . . (16,787) (15,865)
--------- ---------
Total Stockholders' Equity . . . . . . . . . . . 2,319 3,207
--------- ---------
Total Liabilities and Stockholders' Equity . . . $ 10,644 $ 14,007
========= =========
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENT OF EARNINGS (LOSS) AND ACCUMULATED DEFICIT
For The Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
--------- --------- ---------
Revenues
Management Fees . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
Net Investment Income . . . . . . . . . . . . . . . . . 29 173 5
Non-Compete Fee Income. . . . . . . . . . . . . . . . . 1,500 875 --
--------- --------- ---------
Total Revenues. . . . . . . . . . . . . . . . . . . . . 1,529 1,048 5
--------- --------- ---------
Expenses:
General, Administrative, Acquisition Expenses and Taxes 2,451 6,235 1,257
--------- --------- ---------
Total Expenses. . . . . . . . . . . . . . . . . . . . . 2,451 6,235 1,257
--------- --------- ---------
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . (922) (5,187) (1,252)
Deficit, Beginning of Year. . . . . . . . . . . . . . . (15,865) (10,678) (9,426)
--------- --------- ---------
Deficit End of Year . . . . . . . . . . . . . . . . . . $(16,787) $(15,865) $(10,678)
========= ========= =========
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For The Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
-------- -------- --------
Cash Flows from Operations
Net Loss . . . . . . . . . . . . . . . . . $ (922) $(5,187) $(1,252)
Adjustments:
Foreign Exchange Losses. . . . . . . . . . (118) (165) --
Non-Compete Agreement Receipts . . . . . . (1,500) 4,622 --
Items Not Involving Cash:
Decrease (Increase) in Accounts Receivable (580) 3,987 (975)
Decrease (Increase) in Other Assets. 3 (449) (485)
Increase (Decrease) in Accounts Payable. . (240) 1,165 2,970
Translation Adjustment . . . . . . . . . . (25) (503) (89)
-------- -------- --------
Net Cash Provided (Used) by Operations . . (3,382) 3,470 169
-------- -------- --------
Cash Flows From Financing Activities:
Purchase of Investments. . . . . . . . . . (1,130) (218) (185)
Sale of Investments. . . . . . . . . . . . 2,072 (831) --
-------- -------- --------
Net Cash Provided by Financing Activities. 942 (1,049) (185)
-------- -------- --------
Net Increase (Decrease) in Cash. . . . . . (2,440) 2,421 (16)
Cash at Beginning of Year. . . . . . . . . 2,618 197 213
-------- -------- --------
Cash at End of Year. . . . . . . . . . . . 178 2,618 $ 197
======== ======== ========
Cash Resources are Comprised of:
Cash . . . . . . . . . . . . . . . . . . . $ 171 $ 34 $ 56
Short-Term Investments . . . . . . . . . . 7 2,584 141
-------- -------- --------
$ 178 $ 2,618 $ 197
======== ======== ========
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, 2002, 2001 and 1999
(in thousands)
Property and Liability Insurance 2002 2001 1999
--------- ---------- ---------
Direct Amount . . . . . . . . . . . $107,775 $ 161,092 $168,626
--------- ---------- ---------
Assumed From Other Companies. . . . 3,619 32,094 13,473
--------- ---------- ---------
Ceded to Other Companies. . . . . . (77,403) (106,324) (78,637)
--------- ---------- ---------
Net Amounts . . . . . . . . . . . . $ 33,991 $ 86,862 $103,462
========= ========== =========
Percentage of Amount Assumed to Net 10.6% 36.9% 13.0%
--------- ---------- ---------
GORAN CAPITAL INC.- CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1999, 2001 and 2002
(in thousands)
2002 2001 1999
Allowance for Allowance for Allowance for
Doubtful Accounts Doubtful Accounts Doubtful Accounts
------------------ ------------------ ------------------
Additions:
Balance at Beginning of Period $1,526 $1,940 $1,479
Charged to Costs and Expenses(1) 1,448 6,122 9,623
Charged to Other Accounts - - -
Deductions from Reserves 2,730 6,536 9,162
------------------ ------------------ ------------------
Balance at End of Period $244 $1,526 $1,940
================== ================== ==================
<FN>
(1) The Company continually monitors the adequacy of its allowance for doubtful accounts
and believes the balance of such allowance at December 31, 2002, 2001 and 1999 was adequate.
GORAN CAPITAL INC.- CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31, 2002, 2001 and 1999
(in thousands)
CONSOLIDATED PROPERTY - CASUALTY ENTITIES
Reserves
For
Unpaid Amorti-
Claims zation of
Deferred And Deferred Paid Claims
Policy Claim Net Claims and Policy and Claim
Acquisi- Adjust- Invest Adjustment Expenses Acqui- Adjust-
tion ment Unearned Earned ment Incurred sition Ment Premium
Year Costs Expense Premiums Premiums Income Related to: Costs Expense Written
- ---- ---------------------------------------------------------------------------------------------------------------
Current Prior
Years Years
------- ------
2000 6,454 113,149 62,386 145,532 12,171 132,781 (19,013) 37,453 174,412 182,099
2001 763 84,876 59,216 108,197 6,998 94,556 660 33,747 132,599 193,186
2002 - 72,809 35,797 41,037 4,388 38,497 13,016 19,624 57,893 111,394
<FN>
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, reserves for unpaid claims and
claim adjustment expense 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.
____________________________
June 3, 2003 By: /s/ Douglas H. 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 June 3, 2003, on behalf of the
Registrant in the capacities indicated:
(1) Principal Executive Officer:
____________________
/s/ Douglas H. Symons
Chief Executive Officer
(2) Principal Financial Officer:
____________________
/s/ John G. Pendl
Chief Financial Officer,
Principal Accounting Officer
(3) The Board of Directors:
____________________ ____________________ ____________________
/s/ G. Gordon Symons /s/ J. Ross Schofield /s/ John K.
McKeating
Chairman of the Board Director Director
____________________ ____________________
/s/ Ron L. Foxcroft /s/ David B. Shapira
Director Director
____________________ __________________
/s/ Douglas H. Symons /s/ Robert C. Whiting
Director Director
GORAN CAPITAL INC.
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Douglas H. Symons, certify that:
1. I have reviewed this annual report on Form 10-K of Goran Capital Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report.
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: June 3, 2003 By: /s/ Douglas H. Symons
-------------- ------------------------
Douglas H. Symons
Chief Executive Officer
GORAN CAPITAL INC.
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, John G. Pendl, certify that:
1. I have reviewed this annual report on Form 10-K of Goran Capital Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report.
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: June 3, 2003 By: /s/ John G. Pendl
-------------- --------------------
John G. Pendl
Chief Financial Officer