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GORAN CAPITAL INC.
2002 ANNUAL REPORT
GORAN CAPITAL INC.
ANNUAL REPORT TO SHAREHOLDERS
DECEMBER 31, 2002
BUSINESS ACTIVITIES
Goran Capital Inc. ("Goran") owns subsidiaries engaged in a number of business
activities. The most extensive of these is the property and casualty insurance
business conducted in the United States, Canada and Barbados, on both a direct
and reinsurance basis through a number of subsidiaries collectively referred to
in this report as Goran. The common stock of Goran trades on The Toronto Stock
Exchange under the symbol "GNC.TO" and the OTC Bulletin Board under the symbol
"GNCNF.OB."
Goran owns 73.8% of Symons International Group, Inc. ("SIG") which trades on the
OTC Bulletin Board under the symbol "SIGC.OB." SIG owns insurance companies
principally engaged in the nonstandard automobile insurance market.
Superior Insurance Company and Pafco General Insurance Company underwrite
nonstandard automobile insurance in the United States. Nonstandard automobile
insurance is marketed and sold through independent agents to drivers who are
unable to obtain coverage from insurers at standard or preferred rates.
Prior to 2001, the Company was also engaged in the crop insurance business. On
June 6, 2001, the Company exited the crop insurance business when IGF Insurance
Company sold its crop insurance operations to a third party. Accordingly, the
financial statements included in this report reflect the results of the crop
insurance segment as "discontinued operations."
Granite Reinsurance Company Ltd. underwrites finite (limited risk) reinsurance
in Bermuda, the United States and Canada.
All dollar amounts shown in this report are in U.S. currency unless otherwise
indicated. The conversion rates between U.S. and Canadian dollars for
transactions occurring during the year 2002 was 1.57021 and for balances as of
December 31, 2002 the rate is 1.57690.
TABLE OF CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Chairman's Report to Stockholders 3
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . 5
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 15
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 19
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Stockholder Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Board of Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Subsidiaries and Branch Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
FINANCIAL HIGHLIGHTS 1
(In thousands, except per share data)
For the years ended December 31,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Gross premiums written. . . . . . . . . . . . . $111,394 $193,186 $182,099 $236,401 $303,745
Net operating earnings
(loss) from continuing
operations 2. . . . . . . . . . . . . . . . . . $(18,187) $(19,011) $(12,417) $(49,883) $ 471
Net loss from discontinued
operations . . . . . . . . . . . . . . . . . . $ -- $ (2,156) $(17,041) $(15,373) $ (9,421)
Net loss. . . . . . . . . . . . . . . . . . . . $(29,745) $(34,093) $(80,265) $(62,373) $(11,936)
Basic operating earnings
(loss) per share from continuing operations 2. $ (3.37) $ (3.34) $ (2.13) $ (8.49) $ 0.08
Basic loss per share from
discontinued operations. . . . . . . . . . . . $ -- $ (0.38) $ (2.93) $ (2.61) $ (1.61)
Basic loss per share. . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79) $ (10.61) $ (2.04)
Stockholders' equity
(deficit). . . . . . . . . . . . . . . . . . . $(90,752) $(89,146) $(72,668) $(12,887) $ 49,725
Return on average equity 3. . . . . . . . . . . N/A N/A N/A N/A (21.7%)
Book value (deficit) per
share. . . . . . . . . . . . . . . . . . . . . $ (16.82) $ (15.65) $ (12.48) $ (2.19) $ 8.51
Market Value per share. . . . . . . . . . . . . $ 0.22 $ 0.61 $ 0.34 $ 2.00 $ 10.38
<FN>
1. The financial statements of the Company have been prepared in accordance
with Canadian GAAP presented in U.S. dollars.
2. Operating earnings and per share amounts exclude amortization, interest,
taxes, realized capital gains and losses, minority interest, and any
extraordinary items.
3. Return on average equity cannot be calculated due to the accumulated
deficit in stockholders' equity in 2002, 2001, 2000 and 1999.
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CORPORATE STRUCTURE
- ------
Chairman's Report to Stockholders
- ------------------------------------
May 27, 2003
Dear Fellow Stockholder:
Despite a difficult market that permeated the insurance industry since September
11, 2001, we are seeing improvement in our company's operations as a result of
key changes we have made.
The company reached a pinnacle in its operations in the late 1990's. We were
writing premiums in excess of $500 million and realizing pre-tax profits in
excess of $20 million. The latter part of that era saw a change in the
underwriting of insurance in those fields that we were most active, nonstandard
auto insurance and crop insurance.
The largest writer in the nonstandard field with premiums in the area of $10
billion decided in the latter half of the 90's that it would undertake a program
of rate cutting to gain market share of the business. This forced other
nonstandard insurers to reduce or hold the rates at levels that were not
economical in an attempt to maintain business that would be otherwise lost. The
results were that we, like others in the same field of insurance activity,
struggled with increasing losses. This came at a time when the markets were
unable to effectively increase rates to meet the added cost of deteriorating
loss experience.
We cut costs of operations in an effort to produce a profitable portfolio of
this class of business. We took the dramatic step of releasing employees,
including several of the top personnel in the company. We culminated these
changes in 2002 by appointing Douglas Symons as Chief Executive Officer of Goran
Capital Inc.
Further, the company stopped writing business in jurisdictions where rates were
inadequate and concentrated on renewing the business that was performing best.
We received some help earlier on when the principal writer of nonstandard auto
insurance decided that the loss of profits they encountered by their zeal to
capture a larger share of the business was not favoring them. This return to a
more normal market assisted us, and along with other changes we made, we now see
improving results.
We put the business of IGF on the block two years ago and sold it to a leading
writer of this class of insurance. 2002 was their first full year with the
business they acquired from us. They were hit with net losses that exceeded
earned premiums by approximately $50 million, which is an indication of the
feast or famine nature of the crop insurance business.
It has been a hard grind over the past several years. Not only have we had to
deal with the matters I mentioned, the insurance industry has been in turmoil
since September 11, 2001 when terrorist losses exceeded $150 billion.
We have reduced the number of staff from 342 to 209 and our marketing, claims,
and accounting departments have been placed under new management. They are
doing an admirable job and with the strong executive team Douglas has assembled,
I am encouraged that we are on the road back to sensibility and profits.
The Board of Directors has stuck with us through these trying times and I would
be remiss if I did not thank them and congratulate the executives of the company
and our employees for the brightening picture I feel they are bringing to us.
/s/ G. Gordon Symons
Chairman
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
OF GORAN CAPITAL INC.
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company and its subsidiaries for the
years ended December 31. This information should be read in conjunction with
the consolidated financial statements of the Company and the notes thereto,
included elsewhere in this report. All information is in thousands, except
share, per share and ratio data.
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Gross Premiums Written. . . . . . . . . . . $111,394 $193,186 $182,099 $236,401 $303,745
Net Premiums Earned . . . . . . . . . . . . 41,037 108,197 145,532 261,800 281,276
Fee Income. . . . . . . . . . . . . . . . . 10,318 12,425 14,239 15,335 16,431
Net Investment Income . . . . . . . . . . . 4,390 6,998 12,171 13,125 13,126
Loss from Continuing Operations 4 . . . . . (29,745) $(31,937) $(63,224) $(47,000) $ (2,515)
Loss from Discontinued Operations . . . . . -- $ (2,156) $(17,041) $(15,373) $ (9,421)
--------- --------- --------- --------- ---------
Net Loss. . . . . . . . . . . . . . . . . . (29,745) $(34,093) $(80,265) $(62,373) $(11,936)
========= ========= ========= ========= =========
PER COMMON SHARE DATA:
Basic Loss from Continuing
Operations. . . . . . . . . . . . . . . . $ (5.51) $ (5.61) $ (10.86) $ (8.00) $ (0.43)
Basic Loss from Discontinued
Operations. . . . . . . . . . . . . . . . -- $ (0.38) $ (2.93) $ (2.61) $ (1.61)
Basic Net Loss. . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79) $ (10.61) $ (2.04)
Basic Weighted Average Shares Outstanding . 5,394 5,696 5,822 5,876 5,841
GAAP RATIOS:
Loss and LAE Ratio 1. . . . . . . . . . . . 125.5% 88.0% 78.2% 92.6% 81.2%
Expense Ratio 2 . . . . . . . . . . . . . . 36.8% 37.7% 38.7% 31.5% 23.3%
Combined Ratios 3 . . . . . . . . . . . . . 162.3% 125.7% 116.9% 124.1% 104.5%
CONSOLIDATED BALANCE SHEET DATA:
Investments . . . . . . . . . . . . . . . . $ 58,479 $113,795 $148,890 $225,168 $236,144
Total Assets. . . . . . . . . . . . . . . . 161,966 376,319 440,032 519,922 570,989
Losses and LAE. . . . . . . . . . . . . . . 72,809 84,876 113,149 157,425 140,484
Trust Preferred Securities. . . . . . . . . 67,994 94,540 112,000 135,000 135,000
Total Shareholders' Equity (Deficit). . . . (90,752) (89,146) (72,668) (12,887) 49,725
Book Value (Deficit) Per Share. . . . . . . $ (16.82) $ (15.65) $ (12.48) $ (2.19) $ 8.51
<FN>
1. Loss and LAE ratio: The ratio of loss and loss adjustment expenses ("LAE")
incurred during the period, as a percentage of premiums earned.
2. Expense ratio: The ratio of policy acquisition, general and administrative
expenses less billing fees, as a percentage of premiums earned.
3. Combined ratio: The sum of the loss and LAE ratio plus the expense ratio as
a percentage of premiums earned.
4. Loss from continuing operations for the year 2000 includes a write-down of
$33.5 million for goodwill. See Note 6 to the consolidated financial
statements for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information herein contained relative
to markets for the Company's products and/or 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 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
Goran Capital Inc. (the "Company" or "Goran") owns insurance companies that
underwrite and market nonstandard private passenger automobile insurance. The
Company's principal insurance company subsidiaries are Pafco General Insurance
Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance
Company ("IGF").
STRATEGIC ALIGNMENT
As previously announced, in the fourth quarter of 2000, management initiated a
strategic review of the Company's U.S. operations. This review resulted in a
plan to divest of the Company's crop insurance segment, allowing management to
focus on nonstandard automobile insurance. In June 2001, the Company sold its
crop insurance segment and adopted a plan to wind-down the remaining crop
insurance segment obligations.
Accordingly, financial results of the crop insurance segment are presented as
discontinued operations in the Company's financial statements. Continuing
operations of the Company consist primarily of the nonstandard automobile
insurance segment.
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS
The Company's nonstandard automobile insurance operations are conducted by SIG
and its subsidiaries. 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 for nonstandard risks.
Nonstandard risk insureds are those individuals who are unable to obtain
insurance coverage through standard market carriers due to factors such as poor
premium payment history, driving experience or violations, particular occupation
or type of vehicle. The U.S. insurance company subsidiaries offer several
different policies that are directed towards different classes of risk within
the nonstandard market. Premium rates for nonstandard risks are higher than for
standard risks. Since it can be viewed as a residual market, the size of the
nonstandard private passenger automobile insurance market changes with the
insurance environment, for example, expanding when the standard coverage becomes
more restrictive. Nonstandard policies have relatively short policy periods and
low limits of liability. Due to the low limits of coverage, the period of time
that elapses between the occurrence and settlement of losses under nonstandard
policies is shorter than many other types of insurance. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW
Years Ended December 31, 2002 and 2001
The loss on continuing operations was $(29,745,000) or $(5.51) per share (basic
and diluted) and $(31,937,000) or $(5.61) per share (basic and diluted) for 2002
and 2001, respectively. The loss before income taxes and distributions on
minority interest was $(21,675,000) and $(21,568,000) for 2002 and 2001,
respectively. Operating earnings (loss) from continuing operations, measured as
income (loss) before amortization, interest, taxes, realized capital gains and
losses and minority interest was $(18,187,000) or $(3.37) per share (basic and
diluted) and $(19,011,000) or $(3.34) per share (basic and diluted) in 2002 and
2001, respectively. The loss from discontinued operations was $0 and
$(2,156,000) for 2002 and 2001, respectively.
Although the Company has taken a number of actions to address factors
contributing to these past losses, there can be no assurance that operating
losses will not continue. See "Liquidity and Capital Resources" for further
discussion of recent trends and uncertainties that are reasonably likely to have
a material effect on the Company's financial condition and results of
operations.
Year Ended December 31, 2000
For the year 2000, the Company reported a loss on continuing operations of
$(63,224,000) or $(10.86) per share (basic and diluted) which includes a
one-time write down of goodwill in the amount of $33,464,000. Loss before income
taxes and distribution on minority interest was $(53,347,000). Operating
earnings (loss) from continuing operations, measured as income/(loss) before
amortization, interest, taxes, realized capital gains and losses, minority
interest, and any extraordinary items, was $(12,417,000) or $(2.13) per share
(basic and diluted). The loss from discontinued operations was $(17,041,000).
GORAN CAPITAL INC.
Goran Capital Inc. is an investment holding company that holds subsidiary
investments and engages in the identification and evaluation of potential
investment opportunities. The net loss was $(922,000) and $(5,187,000) for 2002
and 2001, respectively. The higher loss in 2001 is attributable mainly to
higher legal costs and an increase in reserves for uncollectibility of certain
loans during 2001. Net cash flow was $(2,475,000) and $2,421,000 for 2002 and
2001, respectively.
SYMONS INTERNATIONAL GROUP, INC.
YEARS ENDED DECEMBER 31, 2002 AND 2001
Gross Premiums Written
Gross premiums written decreased 33.1% or $53,317,000 in 2002 from 2001 levels.
Premium rate increases of approximately 11.0% were implemented throughout 2002
and were offset by a reduction in policies in force of 46.9%. The primary
reasons for this decline were SIG's withdrawal from certain highly competitive
markets, additional strict underwriting initiatives intended to increase
profitability, and the regulatory and strategic actions accompanied with a
reduction in policies in force.
Net Premiums Written
Net premiums written represent the portion of premiums retained by SIG's
insurance subsidiaries after consideration for risk sharing through reinsurance
contracts. As a result of declines in surplus in SIG's insurance subsidiaries
and to manage overall risk retention, in 2000 SIG's insurance subsidiaries
entered into a reinsurance agreement to cede a portion of their gross written
premiums to National Union Fire Insurance Company ("National") of Pittsburgh,
Pennsylvania, an unrelated third party. During 2002, SIG's insurance
subsidiaries ceded approximately 71.7% of their gross written premiums on new
and renewal business to reinsurers under a quota share reinsurance contract that
was effective January 1, 2000.
Net Premiums Earned
Net premiums earned decreased 51.1% or $39,285,000 for the year ended December
31, 2002 as compared to the same period in 2001. Premiums are earned ratably
over the term of the underlying insurance contracts. The reduction in net
premiums earned reflects the overall reduction in gross premiums written and the
increase in ceded premiums.
Fee Income
Fee income is derived from installment billings and other services provided to
policyholders. For the year ended December 31, 2002, fee income decreased 24.0%
or $2,954,000. The reduction in fee income is attributed to the reduction of
insurance policies in force of 46.9% and the overall decline in written premium.
Net Investment Income
Net investment income decreased 34.1% or $2,147,000 in 2002 as compared to 2001.
This decrease reflects the decline in invested assets during a period of
declining premiums, the liquidation of investments to pay prior year losses
settled in 2002 and to settle the reinsurance payable to National. Furthermore,
return on investments deteriorated due to a highly volatile market dominated by
unfavorable economic conditions due to the worldwide recession.
Net Realized Capital Losses
Net realized capital losses were $(2,807,000) and $(1,185,000) in 2002 and 2001,
respectively. Capital losses resulted primarily from the continued liquidation
of longer duration fixed income securities in 2002 in order to fund operational
expenses, claim payments and reinsurance payments to AIG under unfavorable
market conditions and permanent impairment of other than temporary investments.
Losses and Loss Adjustment Expenses
SIG's loss and LAE ratio for the year ended December 31, 2002, was 127.9% of net
premiums earned as compared to 91.5% of net premiums earned for 2001. A portion
of LAE, unallocated loss adjustment expense ("ULAE"), is not ceded as part of
the quota share reinsurance contract mentioned above and accounts for
approximately 5 points of the increased loss ratio in 2002 with the remainder of
the increase due to adverse loss experience.
Policy Acquisition and General and Administrative Expense
SIG reduced policy acquisition and general and administrative expenses for the
year 2002 to $20,677,000 from the 2001 level of $40,535,000, a reduction of
approximately 49.0%. This reduction reflects the decline in gross written
premiums, an increase in ceding commissions associated with the quota share
reinsurance contract and overall operating expense reduction initiatives. As a
percentage of gross premiums earned, SIG experienced a decrease in its operating
expense ratio, net of fee income, from 36.7% in 2001 to 30.1% in 2002.
Amortization of Deferred Financing Costs
Amortization expense totaled $171,000 for the years-ended December 2002 and
2001.
Income Taxes
At December 31, 2002, SIG's net deferred tax assets were fully offset by a 100%
valuation allowance that resulted in no tax benefit in 2002.
YEARS ENDED DECEMBER 31, 2001 AND 2000
Gross Premiums Written
Gross premiums written decreased 7.7% or $13,369,000 in 2001 from 2000 levels.
Premium rate increases of approximately 24.8% were implemented throughout 2001
that were offset by a reduction in policies in force of 23.3%. The decline in
gross premiums also resulted from SIG's exit of certain highly competitive
markets and instituting other underwriting initiatives intended to increase
profitability, which had the effect of reducing premium. Regulatory action in
certain states also limited premiums written.
Net Premiums Written
Net premiums written represent the portion of premiums retained by SIG after
consideration for risk sharing through reinsurance contracts. As a result of
losses in SIG's insurance subsidiaries and to manage overall risk retention,
SIG's insurance subsidiaries entered into a reinsurance agreement to cede a
portion of their gross written premiums to a third party. During 2001, SIG's
insurance subsidiaries ceded approximately 54% of their gross written premiums
on new and renewal business to the reinsurers, under a quota share reinsurance
contract that was effective January 1, 2000. In addition, SIG's insurance
subsidiaries ceded a portion of their unearned premium reserve bringing the
total cession to 79% in 2001.
Net Premiums Earned
Net premiums earned decreased 44.1% or $60,759,000 for the year ended December
31, 2001 as compared to the same period in 2000. Premiums are earned ratably
over the term of the underlying insurance contracts. The reduction in net
premiums earned is reflected of the overall reduction in gross premiums written
and the increase in ceded premiums.
Fee Income
Fee income is derived from installment billings and other services provided to
policyholders. For the year ended December 31, 2001, fee income decreased 13.0%
or $1,845,000 as compared to the same period in 2000. The reduction in fee
income was attributed to the reduction of insurance policies in force of 23.3%
and the overall decline in written premium.
Net Investment Income
Net investment income decreased 37.6% or $3,788,000 in 2001 as compared to 2000.
This decrease reflected the decline in invested assets during a period of
declining premiums and the liquidation of investments to pay prior year losses
settled in 2001. Furthermore, return on investments deteriorated due to a highly
volatile market dominated by unfavorable economic conditions due to the
worldwide recession and effects from the September 2001 terrorist attacks.
Net Realized Capital Losses
Net realized capital losses were $(1,185,000) and $(5,972,000) in 2001 and 2000,
respectively. Capital losses resulted from the liquidation of longer duration
fixed income securities in 2001 in order to rebalance the investment activities
in the portfolio. These transactions resulted in higher cash proceeds that were
reinvested in shorter duration investment instruments. Capital losses were also
realized due to the continued liquidation of investments to fund operations and
claim payments under unfavorable market conditions.
Losses and Loss Adjustment Expenses
SIG's loss and LAE ratio for the year ended December 31, 2001, was 91.5% of net
premiums earned as compared to 82.3% of net premiums earned for 2000. A portion
of LAE, ULAE, is not ceded as part of the quota share reinsurance contract
mentioned above and accounts for approximately 4 points of the increased loss
ratio in 2001 with the reminder of the increase due to adverse loss expense.
Policy Acquisition and General and Administrative Expense
SIG reduced policy acquisition and general and administrative expenses for the
year 2001 to $40,535,000 from the 2000 level of $67,538,000, a reduction of
approximately 40%. This reduction is reflected the decline in gross written
premiums, an increase in ceding commissions associated with the quota share
reinsurance contract and overall operating expense reduction initiatives. As a
percentage of gross premiums earned, SIG experienced a decrease in its operating
expense ratio, net of fee income, from 38.8% in 2000 to 36.7% in 2001. This
decrease in the expense ratio is the result of reduced operating expense
initiatives and an increase in ceding commissions earned under the quota share
reinsurance contract.
Amortization of Intangibles
Amortization expense decreased nearly 100%, or $34,806,000, in 2001 as compared
to 2000 as the goodwill was written to zero at December 31, 2000.
Income Taxes
At December 31, 2001, SIG's net deferred tax assets were fully offset by a 100%
valuation allowance that resulted in no tax benefit in 2001.
SYMONS INTERNATIONAL GROUP (FLORIDA), INC.
Goran's wholly owned subsidiary, Symons International Group (Florida), Inc.
("SIGF"), is primarily engaged in the operation of a property/casualty
insurance brokerage and a flood insurance brokerage. The property
casualty/insurance brokerage operations were acquired effective on November 1,
2001 via an asset purchase transaction. The net commission revenue from this
operation was $802,000 in 2002.
Historically, SIGF was a specialized surplus lines underwriting unit. By late
1998, SIGF's operations no longer fit the Company's strategic operating plan of
concentrating on the business segments of nonstandard automobile and
reinsurance. Accordingly, the majority of the book of business was sold
effective January 1, 1999. A small amount of premium remained after the sale.
The premium volume from this operation was $1,218,000, $1,619,000 and $6,427,000
as of December 31, 2000, 1999 and 1998, respectively. The net loss was $48,000,
$861,000 and $2,937,000 as of December 31, 2000, 1999 and 1998, respectively.
GRANITE INSURANCE COMPANY
Granite Insurance Company ("Granite") is a Canadian federally licensed insurance
company which is presently servicing its investment portfolio and one
outstanding claim. Granite stopped writing business on December 31, 1989.
Granite sold its book of Canadian business in January 1990 to an affiliate which
was subsequently sold to third parties in June 1990. The outstanding claims
continue to be settled in accordance with actuarial estimates. Granite's
invested assets decreased to $2.3 million at December 31, 2002 from $2.5 million
at December 31, 2001. This was the result of claims and operating expenses paid
during 2002. Total net outstanding claims were $42,000 and $88,000 at December
31, 2002 and 2001, respectively. Management expects that the run-off of the one
outstanding claim will be completed by 2004. Granite recorded a net gain (loss)
of $(367,000), $827,000 and $(117,000) in 2002, 2001 and 2000, respectively.
GRANITE REINSURANCE COMPANY LTD.
During 2002 Granite Reinsurance Company Ltd. ("Granite Re") was managed by
Atlantic Security Ltd. of Bermuda and a corporate services management company in
Barbados. Granite Re underwrites finite risk, stop loss and quota share
reinsurance, through various programs in Bermuda, the United States and Canada.
During 2002, 2001 and 2000, Granite Re participated in certain quota share and
stop loss programs for the now discontinued crop operations. These programs
were in accordance with third party placements.
Net premiums earned were $3.5 million in 2002, $31.5 million in 2001 and $7.8
million in 2000. Net earnings (loss) were $(1.6) million in 2002, $0.5 million
in 2001 and $7.5 million in 2000. The net earnings for 2000 were primarily
related to favorable development in the losses incurred on its quota share
reinsurance, which is assumed from a related insurer and interest income on a
book of business assumed from a nonaffiliate.
Granite Re's capital and surplus was $12.1 million and $14.8 million as of
December 31, 2002 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds for Goran is through dividend and other funding from
Granite Re.
The primary sources of funds for SIG are fees from policyholders and management
fees from SIG's subsidiaries.
Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged
to Pafco policyholders who elect to make their premium payments in installments,
and managing general agent ("MGA") fees charged to Superior policyholders.
Superior Group also receives management fees under its management agreement with
its insurance subsidiaries. When the Florida Department of Insurance ("FDOI")
approved the acquisition of Superior by Superior Group, it prohibited Superior
from paying any dividends (whether extraordinary or not) for four years from the
date of acquisition (May 1, 1996) without the prior written approval of the
FDOI, which restriction expired in April 2000. As a result of regulatory
actions taken by the Indiana Department of Insurance ("IDOI") with respect to
Pafco and IGF, those subsidiaries may not pay dividends without prior approval
by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of
the Indiana Insurance Code, without the prior approval of the Indiana Insurance
Commissioner. The management fees charged to Pafco and Superior are subject to
review by the IDOI and FDOI, respectively.
The nonstandard automobile insurance subsidiaries' primary source of funds is
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, payment of
claims settlement costs, operating expenses (primarily management fees),
commissions to independent agents, premium taxes, dividends and the purchase of
investments. There is variability in cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, the
Company maintains investment programs intended to provide adequate funds to pay
claims. Due to reduced premium volume during 2002 and 2001, SIG liquidated
investments to pay claims. SIG historically has tried to maintain duration
averages of 3.5 years. However, the reduction in new funds due to lower premium
volume caused SIG to shorten the duration of its investments. SIG may incur
additional costs in selling longer term bonds to pay claims, as claim payments
tend to lag premium receipts. Due to the decline in premium volume, SIG
experienced a reduction in its investment portfolio, but to date has not
experienced any problems meeting its obligations for claims payments.
On August 12, 1997, SIG issued through a wholly owned trust subsidiary $135
million aggregate principal amount in trust originated preferred securities (the
"Preferred Securities"). The Preferred Securities have a term of 30 years with
semi-annual interest payments of $6.4 million that commenced February 15, 1998.
SIG may redeem the Preferred Securities in whole or in part 10 years after the
issue date.
SIG elected to defer the semi-annual interest payments due in February and
August 2000, 2001 and 2002. SIG elected to defer the semi-annual interest
payments due in February 2003. SIG expects to continue this practice through
2003 and 2004. The unpaid interest installment amounts accrue interest at 9.5%.
The following table sets forth (in thousands) SIG's obligations under the
Preferred Securities as of December 31, 2002:
Payments due by Period
Less than 1 - 3 3 - 5 More than
Contractual Obligation Total 1 year years years 5 years
Interest payments under the
Preferred Securities $378,929 - $ 96,779 $25,650 $256,500
Principal payments under the
Preferred Securities $135,000 - - - $135,000
SIG may continue to defer the semi-annual interest payments 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.
The trust indenture contains certain restrictive covenants based upon SIG's
consolidated coverage ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA). If SIG's EBITDA falls below 2.5 times consolidated
interest expense (including Preferred Securities distributions) for the most
recent four quarters, the following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments including making loans or
advances to affiliates, repurchasing common stock or paying dividends in
excess of a stated limitation.
- - SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply, as SIG's consolidated coverage ratio was
(0.95) in 2002, and will continue to apply until SIG's consolidated coverage
ratio complies with the terms of the trust indenture. SIG complied with these
additional restrictions as of December 31, 2001 and 2002 and was in compliance
as of May 9, 2003.
Net cash used by the Company's operating activities was $(68,801,000) and
$(23,490,000) in 2002 and 2001, respectively.
Beginning in the fourth quarter of 2001 and continuing in January and February
2002, SIG experienced sustained adverse loss experience on a substantial portion
of its new business written in certain markets. In late February and early March
2002, SIG commenced further analysis of loss ratios by individual agency and a
review of claim settlement procedures. Based on this and other analysis, during
2002 SIG took a number of actions to improve its financial position and
operating results including:
- - Eliminated reinstatements in all markets, i.e., upon policy cancellation,
the insured must obtain a new policy at prevailing rates and underwriting
guidelines;
- - Terminated or placed on new-business-moratorium several hundred agents
whose loss ratios were abnormally high when compared to the average for the
remaining agents (these agents accounted for approximately 16% of SIG's
total gross written premium in 2001);
- - Increased underwriting requirements in certain markets including higher
down payments, new policy fees, and shorter policy terms;
- - Hired a new vice president of claims with significant auto claims
experience to improve the claims function.
The above actions were followed by:
- - Replacement of the president of the non-standard automobile business;
- - Consolidation of all underwriting activities, premium accounting and agency
licensing to Indianapolis, IN from Atlanta, GA;
- - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria,
VA; Glendale, CA and Jacksonville, FL;
- - Replacement of the claims department national litigation manager;
- - Replacement of the marketing manager and the product manager;
- - Heavy focus on the improvement of process and customer service; and
- - Continued transition to an improved policy processing system.
Shareholders' equity reflected a deficit of $(90,752,000) at December 31, 2002,
which does not reflect the statutory surplus upon which the Company conducts its
various insurance operations. The Company's U.S. insurance subsidiaries, not
including IGF, had statutory surplus of approximately $13.0 million as reflected
in the Company's U.S. insurance subsidiaries' annual statutory financial
statements filed on February 28, 2003. Following the inclusion in the reserve
amounts pursuant to the consulting actuary's analysis, SIG's insurance
subsidiaries had statutory surplus of $3.0 million as of December 31, 2002. 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, it was
determined that the loss and LAE reserves of Superior and Pafco should be
increased as of December 31, 2002. These reserve adjustments, along with
resulting adjustments to the permitted carrying values of certain assets, were
recorded in the 2002 audited statutory financial statements filed for Superior
and Pafco with the FDOI and the IDOI, respectively.
EFFECTS OF INFLATION
Due to the short term that claims are outstanding in the majority of the
product lines the Company underwrites, inflation does not pose a significant
risk to the Company.
SIGNIFICANT ACCOUNTING POLICIES
The Company's financial statements reflect the selection and application of
accounting policies that require management to make significant estimates and
assumptions. Management believes that the most critical judgment area in the
application of its accounting policies is the reserves for losses and LAE. These
reserves include estimates for reported unpaid losses and LAE and losses
incurred but not reported. These reserves are not discounted. Reserves are
established using individual case-basis evaluations and statistical analysis as
claims are reported. Those estimates are subject to the effects of trends in
loss severity and frequency. While management believes the reserves make
reasonable provisions for unpaid loss and LAE obligations, those provisions are
necessarily based on estimates and are subject to variability. Changes in the
estimated reserves are charged or credited to operations, as additional
information on the estimated amount of a claim becomes known during the course
of its settlement. The gross reserve for losses and LAE is reported net of
anticipated receipts for salvage and subrogation. See Note 7 to the Consolidated
Financial Statements for additional disclosure regarding the reserve for losses
and LAE. The variation between the estimated loss and LAE and actual experience
can be material.
PRIMARY DIFFERENCES BETWEEN GAAP AND SAP
The financial statements contained herein have been prepared in conformity with
Canadian Generally Accepted Accounting Principles ("GAAP") which differ from
Statutory Accounting Practices ("SAP") prescribed or permitted for insurance
companies by regulatory authorities in the following respects: (i) certain
assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii)
costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes; (iii) the investment in wholly-owned
subsidiaries is consolidated for GAAP rather than valued on the statutory equity
method in which the net income or loss and changes in unassigned surplus of the
subsidiaries is reflected in net income for the period rather than recorded
directly to unassigned surplus; (iv) fixed maturity investments are reported at
amortized cost or market value based on their National Association of Insurance
Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment
expenses and unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes; (vi) deferred income taxes are
recognized as specified by statutory guidance; and (vii) credits for
reinsurance are recorded only to the extent considered realizable.
NEW ACCOUNTING STANDARDS
The NAIC adopted the Codification of Statutory Accounting Principles guidance
(the "Codification"), which replaced the Accounting Practices and Procedures
manual, as the NAIC's primary guidance on statutory accounting effective January
1, 2001. The IDOI and the FDOI have adopted the Codification. The changes in
statutory accounting principles resulting from codification that affected the
Company's U.S. insurance subsidiaries, among other things, limit the statutory
carrying value of electronic data processing equipment and deferred tax assets
in determining statutory surplus.
In June 2001, the Financial Accounting Standards Board (the "Board") finalized
FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other
Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In
August 2001, the Board issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. In December 2002, the Board issued
FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. These new standards are effective in 2002 and are not expected to
have a material impact on the Company's financial position or results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Insurance company investments must comply with applicable laws and regulations
that prescribe the kind, quality and concentration of investments. In general,
these laws and regulations permit investments, within specified limits and
subject to certain qualifications in federal, state and municipal obligations,
corporate bonds, preferred and common securities, real estate mortgages and real
estate. The investment portfolios of the Company at December 31, 2002,
consisted of the following (in thousands):
Cost or
Type of Investment. . . . . . . . . . . . . . . . . . . Amortized Cost Market Value
- ------------------------------------------------------- --------------- -------------
Fixed maturities:
United States Treasury securities and other obligations
of the United States government or its agencies. . . . $ 17,814 $ 18,355
Obligations of states and political subdivisions. . . . 4,863 5,041
Corporate securities. . . . . . . . . . . . . . . . . . 13,358 13,720
--------------- -------------
Total fixed maturities. . . . . . . . . . . . . . . . . 36,035 37,116
Equity securities:
Common stocks . . . . . . . . . . . . . . . . . . . . . 10,778 7,331
Short-term investments. . . . . . . . . . . . . . . . . 8,495 8,495
Other investments . . . . . . . . . . . . . . . . . . . 3,171 3,171
--------------- -------------
Total investments . . . . . . . . . . . . . . . . . . . $ 58,479 $ 56,113
=============== =============
The following table sets forth the composition of the fixed maturity securities
portfolio of the Company by time to maturity as of December 31, (in thousands):
2002 2001
------- -------
Time to Maturity Market Value Percent Market Value Percent
- ---------------------- ------------- ------ ------------ -------
1 year or less $ 9,234 24.9% $ 7,998 10.2%
More than 1 year through 5 years 12,077 32.5 26,343 33.6
More than 5 years through 10 years 7,512 20.2 20,554 26.2
More than 10 years 3,288 8.9 4,091 5.2
-------- ------- ------- -------
32,111 86.5 58,986 75.2
Mortgage-backed securities 5,005 13.5 19,380 24.8
-------- ------- ------- -------
Total $ 37,116 100.0% $78,366 100.0%
======== ======= ======= =======
The following table sets forth the ratings assigned to the fixed maturity
securities of the Company as of December 31, (in thousands):
2002 2001
------ -------
Rating1 Market Value Percent Market Value Percent
- ---------------------------- ---------------- -------- -------- -------
Aaa or AAA $ 25,045 67.5% $51,754 66.1%
Aa or AA 971 2.6 3,357 4.3
A 4,262 11.4 9,655 12.3
Baa or BBB 5,479 14.8 7,617 9.7
Ba or BB 281 0.8 4,883 6.2
Other below investment grade 1,078 2.9 1,100 1.4
-------- ------ ------- -----
Total $ 37,116 $100.0% $78,366 100%
======== ======= ======= =====
<FN>
1. Ratings are assigned by Standard & Poor's Corporation, and when not
available, are based on ratings
assigned by Moody's Investors Service, Inc.
The investment results of the Company for the periods indicated are set forth
below (in thousands):
Years Ended December 31,
2002 2001 2000
---------- --------- ---------
Net investment income 1 . . . . . . . . . . . . $ 3,794 $ 6,998 $ 12,171
Average investment portfolio 2. . . . . . . . . $ 86,137 $131,343 $187,243
Pre-tax return on average investment portfolio. 4.4% 5.3% 6.5%
Net realized gains (losses) . . . . . . . . . . $ (2,806) $ (1,177) $ (5,970)
<FN>
1. Includes dividend income received in respect of holdings of common stock.
2. Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio.
If interest rates were to increase 10% from the December 31, 2002 levels, the
decline in fair value of the fixed maturity securities would not significantly
affect the Company's ability to meet its obligations to policyholders and
debtors.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The Company's investment strategy is to invest available funds in a manner that
will maximize the after-tax yield of the portfolio while emphasizing the
stability and preservation of the capital base. The Company seeks to maximize
the total return on investments through active investment management utilizing
third-party professional administrators, in accordance with pre-established
investment policy guidelines established and reviewed regularly by the board of
directors of the Company. Accordingly, the entire portfolio of fixed maturity
securities is available to be sold in response to changes in market interest
rates, changes in relative values of individual securities and asset sectors,
changes in prepayment risks, changes in credit quality, and liquidity needs, as
well as other factors.
The portfolio is invested in types of securities and in an aggregate duration,
which reflect the nature of the Company's liabilities and expected liquidity
needs diversified among industries, issuers and geographic locations. The
Company's fixed maturity and common equity investments are substantially in
public companies.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The Company has
assumed its available for sale securities are similar enough to aggregate those
securities for presentation purposes. The table presents principal cash flows
and related weighted-average interest rates for investment securities and debt
obligations by expected maturity date (in thousands).
Cost or Amortized Cost
--------------------------------------------------------------------Market
2003 2004 2005 2006 2007 Thereafter Total Value
------- ------- ------- ------- ------- ------------ -------- -------
ASSETS
Available for sale. . $9,018 $4,428 $4,456 $4,728 $2,928 $ 10,477 $36,035 $37,116
Average interest rate 6.80% 7.20% 6.45% 5.95% 5.95% 6.98% 6.25% 6.25%
LIABILITIES
Preferred securities. -- -- -- -- -- $ 67,994 $67,994 $ 4,533
Average interest rate -- -- -- -- -- 9.5% 9.5% 9.5%
REVISED ESTIMATE OF LOSS RESERVES RECORDED IN PRIOR YEARS
SIG revised its estimate of the loss reserves recorded in prior years. At the
end of 2001, SIG's net loss and LAE reserves for nonstandard auto insurance were
$50,542,000. As claims that occurred prior to year-end 2001 were reported,
investigated and settled during 2002, SIG reevaluated and, as necessary, revised
its estimates of loss reserves. Based on current information, reserves at the
end of 2001 should have been $63,317,000. In part the reserve increase was the
result of an unanticipated increase in claim frequency during the fourth quarter
of 2001. Because of the normal lag between the occurrence of an accident and the
reporting of that accident, SIG did not realize its claim frequency for the
fourth quarter of 2001 had increased until those claims were reported during
2002. SIG believes that the frequency increase was caused by an increase in
miles driven which resulted from (1) a significant decrease in the price of
gasoline, (2) a reluctance of people to fly on commercial airlines because of
the September 11, 2001 terrorist attacks, and (3) a general improvement in
economic conditions. In addition, during 2002 Superior experienced an unusual
number of reopened claims from older accident quarters. At year-end 2001 SIG
believed that these claims were closed with no outstanding liability. In
response to this unusual activity SIG took appropriate action to enhance its
claims function.
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, it was
determined that the loss and LAE reserves of Superior and Pafco should be
increased as of December 31, 2002. These reserve adjustments, along with
resulting adjustments to the permitted carrying values of certain assets, were
recorded in the 2002 audited statutory financial statements filed for Superior
and Pafco with the FDOI and the IDOI. In the statutory financial statements of
the Company's U.S. insurance subsidiaries, the estimates of gross loss and LAE
reserves were $59,971,000 and of net loss and LAE reserves were $37,886,000.
Following the adjustment pursuant to the consulting actuary's analysis, the
revised estimates of gross loss and LAE reserves were $67,204,000 and net loss
and LAE reserves were $43,145,000. These reserves are based on analysis of
historical data. Based on actions taken to enhance SIG's claim function,
management anticipates that the majority of claims will be adjusted and settled
more quickly which will reduce the overall costs while those claims of a
questionable nature will be investigated more thoroughly. Also, SIG is focusing
on reducing defense costs and is negotiating more favorable rates from
attorneys. Finally, SIG is taking steps to increase the amounts of salvage and
subrogation it collects as an offset to paid losses while reducing the expenses
associated with collecting those amounts.
The business written by the Company did not expose it to highly uncertain
exposures such as claims for asbestos-related illnesses, environmental
remediation or product liability. The surplus lines insurance written by the
Company also did not include these types of highly uncertain exposures.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001
(U.S. dollars in thousands, except share data)
2002 2001
---------- ----------
ASSETS:
Investments:
Fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,035 $ 77,325
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,778 21,610
Short-term investments, at amortized cost, which approximates market. . . 8,495 13,266
Mortgage loans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . - -
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3,171 1,594
---------- ----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,479 113,795
Investments in and advances to related parties. . . . . . . . . . . . . . . . 83 1,130
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 2,131 11,263
Receivables, net of allowances of $1,526 and $1,940 . . . . . . . . . . . . . 28,302 47,441
Reinsurance recoverable on paid and unpaid losses, net. . . . . . . . . . . . 24,628 29,284
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . . . 25,470 40,039
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . - 763
Property and equipment, net of accumulated depreciation . . . . . . . . . . . 7,084 9,907
Deferred securities issuance costs. . . . . . . . . . . . . . . . . . . . . . 2,119 4,376
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,309 2,421
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . 10,361 115,900
---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161,966 $ 376,319
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT:
LIABILITIES:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . $ 72,809 $ 84,876
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,797 59,216
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,128 58,868
Distributions payable on preferred securities . . . . . . . . . . . . . . 24,793 23,252
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,250 7,250
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,673 21,563
Liabilities of discontinued operations. . . . . . . . . . . . . . . . . . 14,274 115,900
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,724 370,925
---------- ----------
MINORITY INTEREST:
Company-obligated mandatorily redeemable preferred stock of trust subsidiary
holding solely parent debentures . . . . . . . . . . . . . . . . . . . . . . 67,994 94,540
---------- ----------
STOCKHOLDERS' DEFICIT:
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,502 18,502
Contributed surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,864 42,465
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . (1,023) (763)
Retained (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (179,095) (149,350)
---------- ----------
TOTAL STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . . . . . . . . . (90,752) (89,146)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . $ 161,966 $ 376,319
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2002, 2001, and 2000
(U.S. dollars in thousands, except per share data)
2002 2001 2000
--------- ---------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . $111,394 $ 193,186 $182,099
Less ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,403) (106,324) (78,637)
--------- ---------- ---------
NET PREMIUMS WRITTEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,991 $ 86,862 $103,462
========= ========== =========
NET PREMIUMS EARNED . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,037 $ 108,197 $145,532
Fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,318 12,425 14,239
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,390 6,998 12,171
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 1,750 -
Net realized capital gain (loss). . . . . . . . . . . . . . . . . . . . . . (3,402) (1,177) (5,970)
--------- ---------- ---------
TOTAL REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,343 128,193 165,972
--------- ---------- ---------
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . 51,513 95,216 113,768
Policy acquisition and general and administrative expenses. . . . . . . . . 25,419 53,165 70,591
Amortization of deferred securities issuance costs and intangibles. . . . . 86 1,380 34,960
--------- ---------- ---------
TOTAL EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,018 149,761 219,319
--------- ---------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST. . . . . . . . . . . . . . . . . . . . . (21,675) (21,568) (53,347)
--------- ---------- ---------
Income taxes:
Current income tax expense (benefit). . . . . . . . . . . . . . . . . . . . - - 487
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . - - (2,636)
--------- ---------- ---------
TOTAL INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (2,149)
--------- ---------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,675) (21,568) (51,198)
Minority interest:
Earnings in consolidated subsidiary . . . . . . . . . . . . . . . . . . . . - - --
Distributions on preferred securities, net of tax of nil in 2002 and 2001,
$4,489 in 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,070) (10,369) (12,026)
--------- ---------- ---------
LOSS FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . (29,745) (31,937) (63,224)
Discontinued operations:
Loss on disposal of discontinued segment less applicable taxes of nil . . . - - (900)
Loss from operations of discontinued segment, less applicable income
taxes of nil in 2002, 2001 and 1999. . . . . . . . . . . . . . . . . . . . - (2,156) (16,141)
--------- ---------- ---------
LOSS FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . - (2,156) (17,041)
--------- ---------- ---------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(29,745) $ (34,093) $(80,265)
========= ========== =========
Weighted average shares outstanding - basic and fully diluted . . . . . . . 5,394 5,696 5,822
========= ========== =========
Net loss from continuing operations per share - basic and fully diluted . . $ (5.51) $ (5.61) $ (10.86)
========= ========== =========
Net loss of discontinued operations per share - basic and fully diluted . . $ - $ (0.38) $ (2.93)
========= ========== =========
Net loss per share - basic and fully diluted. . . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79)
========= ========== =========
The accompanying notes are an integral part of the consolidated financial
statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 2002, 2001 and 2000
(U.S. dollars in thousands, except number of shares)
Retained Cumulative Total
Common Stocks Contributed Earnings Translation Stockholders'
Shares Amount Surplus (Deficit) Adjustment Equity
---------- --------- --------- ---------- ------------ ---------
Balance at January 1, 2000. . . . 5,876,398 $ 19,317 $ 2,775 $ (34,992) $ 13 $(12,887)
========== ========= ========= ========== ============ =========
Preferred securities purchase . . 20,973 20,973
Purchase of common shares . . . . (100,000) (185) (185)
Comprehensive income (loss):
Net loss. . . . . . . . . . . . . (80,265)
Change in cumulative translation
adjustment . . . . . . . . . . . (304)
______ _____ _______
Comprehensive income (loss) . . . (80,265) (304) (80,569)
---------- --------- --------- ---------- ----------- -------
Balance at December 31, 2000. . . 5,776,398 $ 19,132 $ 23,748 $(115,257) $ (291) $(72,668)
========== ========= ========= ========== ============ =========
Preferred securities purchase . . -- -- 18,717 18,717
Purchase of common shares . . . . (382,700) (218) (218)
Reclassification of organization
expense . . . . . . . . . . . . . (412) (412)
Comprehensive income (loss):
Net loss. . . . . . . . . . . . . (34,093)
Change in cumulative translation
adjustment . . . . . . . . . . . (472)
______ _____ _______
Comprehensive income (loss) . . . (34,093) (472) (34,565)
---------- --------- --------- ---------- ----------- -------
Balance at December 31, 2001. . . 5,393,698 $ 18,502 $ 42,465 $(149,350) $ (763) $(89,146)
========== ========= ========= ========== ============ =========
Preferred securities purchase . . 28,399 28,399
Comprehensive income (loss):
Net loss. . . . . . . . . . . . . (29,745)
Change in cumulative translation
adjustment . . . . . . . . . . . (260)
______ _____ _______
Comprehensive income (loss) . . . (29,745) (260) (30,005)
---------- --------- --------- ---------- ----------- --------
Balance at December 31, 2002. . . 5,393,698 $ 18,502 $ 70,864 $(179,095) $ (1,023) $(90,752)
========== ========= ========= ========== ============ =========
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(U.S. dollars in thousands)
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(29,745) $(34,093) $(80,265)
Adjustments to reconcile net loss to net cash provided by (used in)
operations:
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Depreciation, amortization, impairment and other . . . . . . . . . . . . . 3,745 3,892 38,983
Deferred income tax expense. . . . . . . . . . . . . . . . . . . . . . . . -- -- (2,635)
Net realized capital (gain) loss . . . . . . . . . . . . . . . . . . . . . 3,402 1,177 5,970
Net changes in operating assets and liabilities (net of assets acquired):
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,139 6,929 14,153
Reinsurance recoverable on losses, net . . . . . . . . . . . . . . . . . . 4,656 15,559 (40,053)
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . 14,569 (15,265) (23,896)
Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . 763 5,691 7,454
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . (6,778) 7,509 (9,816)
Losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . . (12,067) (28,273) (44,276)
Unearned premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,419) (3,170) (18,175)
Reinsurance payables . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,740) (4,764) 58,142
Distribution payable on preferred securities . . . . . . . . . . . . . . . 5,471 7,989 10,454
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000) 7,250 --
Net assets from discontinued operations. . . . . . . . . . . . . . . . . . (3,797) 6,079 34,548
--------- --------- ---------
Net cash provided by (used in) operations: . . . . . . . . . . . . . . . . (68,801) (23,490) (49,412)
--------- --------- ---------
Cash flow from investing activities net of assets acquired:
Net sales (purchases) of short-term investments. . . . . . . . . . . . . . 4,771 4,328 15,040
Proceeds from sales, calls and maturities of fixed maturities. . . . . . . 75,108 67,105 77,641
Purchases of fixed maturities. . . . . . . . . . . . . . . . . . . . . . . (30,437) (35,105) (10,181)
Proceeds from sales of equity securities . . . . . . . . . . . . . . . . . 10,374 12,707 16,736
Purchase of equity securities. . . . . . . . . . . . . . . . . . . . . . . (3,824) (12,494) (25,408)
Proceeds from repayment of mortgage loans. . . . . . . . . . . . . . . . . -- 1,870 120
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . (681) (1,314) (1,663)
Net investing activities from discontinued operations. . . . . . . . . . . 5,663 (5,306) (150)
Net proceeds from sales (purchases) of other investments . . . . . . . . . (2,013) (217) (415)
--------- --------- ---------
Net cash provided by (used in) investing activities: . . . . . . . . . . . 58,961 31,574 71,720
--------- --------- ---------
Cash flow from financing activities net of assets acquired:
Purchase of affiliate preferred securities . . . . . . . . . . . . . . . . (2,395) (2,497) (2,027)
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . 9 (630) --
Redemption of share capital. . . . . . . . . . . . . . . . . . . . . . . . -- -- (185)
Net financing activities from discontinued operations. . . . . . . . . . . 2,047 (48) (16,473)
Loans from and (repayments to) related parties . . . . . . . . . . . . . . 1,047 3,124 (2,608)
--------- --------- ---------
Net cash provided by (used in) financing activities: . . . . . . . . . . . 708 (51) (21,293)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . (9,132) 8,033 1,015
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . 11,263 3,230 2,215
--------- --------- ---------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . 2,131 $ 11,263 $ 3,230
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
GORAN CAPITAL INC. AND SUBSIDIARIES
________________________________________________________________________________
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Goran Capital Inc. ("Goran" or the "Company") is the parent
company of the Goran group of companies. The consolidated financial
statements include the accounts of all subsidiary companies of Goran as
described in "Basis of Presentation" below.
The following is a description of the significant accounting policies and
practices employed:
a. BASIS OF PRESENTATION: The consolidated financial statements are prepared
in accordance with Canadian Generally Accepted Accounting Principles. In
addition, the consolidated financial statements are also used to satisfy the
Company's financial filing requirements in the U.S. Consequently, the
consolidated financial statements include disclosures that are not necessarily
required under Canadian GAAP and contain references to U.S. GAAP accounting
pronouncements. Note 20, presents a reconciliation of Canadian and U.S. GAAP.
The consolidated financial statements include the accounts, after
intercompany eliminations, of the Company and its wholly owned subsidiaries as
follows:
1. Symons International Group, Inc. ("SIG") is a 73.8% owned subsidiary
of Goran. SIG's subsidiaries are as follows:
- Superior Insurance Group Management, Inc ("Superior Group
Management"), a holding company for the nonstandard automobile
operations which includes:
Superior Insurance Group, Inc. ("Superior Group"), a
management company for the nonstandard automobile operations;
Superior Insurance Company ("Superior"), an insurance
company domiciled in Florida;
Superior American Insurance Company ("Superior American"),
an insurance company domiciled in Florida;
Superior Guaranty Insurance Company ("Superior Guaranty"),
an insurance company domiciled in Florida;
Pafco General Insurance Company ("Pafco"), an insurance
company domiciled in Indiana;
- IGF Holdings, Inc. ("IGFH"), a holding company
- IGF Insurance Company ("IGF"), an insurance company domiciled in
Indiana (See Note 23);
2. Granite Reinsurance Company Ltd. ("Granite Re"), a finite risk
reinsurance company domiciled in Barbados.
3. Granite Insurance Company ("Granite"), a Canadian federally licensed
insurance company.
4. Symons International Group (Florida), Inc. ("SIGF"), a Florida
domestic corporation.
b. USE OF ESTIMATES: The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
c. SIGNIFICANT ESTIMATES: The most significant estimates in the Company's
balance sheet are the determination of prepaid policy acquisition costs and
the reserve for insurance losses and loss adjustment expenses ("LAE").
Management's estimate of prepaid policy acquisition costs is based on
historical studies and assumptions made regarding costs incurred.
Management's estimate of insurance losses and LAE is based on past loss
experience and consideration of current claim trends as well as prevailing
social, economic and legal conditions. Actual results could differ from
those estimates.
d. PREMIUMS: Premiums are recognized as income ratably over the life of the
policies and are stated net of ceded premiums. Unearned premiums are
computed on the daily pro rata basis.
e. INVESTMENTS: Fixed maturities and equity securities are carried at
amortized cost for fixed maturities and cost for equity securities. Real
estate is carried at cost, less an allowance for depreciation. Mortgage
loans are carried at outstanding principal balance. Realized gains and
losses on sales of investments are recorded on the trade date and are
recognized in net income on the specific identification basis. Interest and
dividend income are recognized as earned.
f. CASH AND CASH EQUIVALENTS: For presentation in the statement of cash flows,
the Company includes in cash and cash equivalents all cash on hand and
demand deposits with original maturities of three months or less.
g. DEFERRED POLICY ACQUISITION COSTS: Deferred policy acquisition costs are
comprised of agents' commissions, premium taxes, certain other costs and
investment income which are related directly to the acquisition of new and
renewal business, net of expense allowances received in connection with
reinsurance ceded, which have been accounted for as a reduction of the
related policy acquisition costs. These costs are deferred and amortized
over the terms of the policies to which they relate. Acquisition costs that
exceed estimated losses and loss adjustment expenses and maintenance costs
are charged to expense in the period in which those excess costs are
determined.
h. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5
years. Depreciation of other property and equipment is based on the
straight-line method over their estimated useful lives ranging from three
to seven years. Asset and accumulated depreciation accounts are relieved
for dispositions, with resulting gains or losses included in net income.
i. INTANGIBLE ASSETS: Intangible assets consist primarily of debt acquisition
costs and, prior to 2001, goodwill. Deferred debt acquisition costs are
amortized over the term of the debt. Prior to 2000, goodwill was amortized
over a 25-year period on a straight-line basis based on management's
estimate of the expected benefit period. See Note 6 regarding the goodwill
impairment charge recorded in 2000.
j. ASSET IMPAIRMENT POLICY: The Company reviews the carrying values of its
long-lived and identifiable intangible assets for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. See Note 6 regarding the
goodwill impairment charge recorded in 2000. Any long-lived assets held for
disposal are reported at the lower of carrying amounts or fair value, less
expected costs to sell.
k. LOSSES AND LOSS ADJUSTMENT EXPENSES: Reserves for losses and LAE include
estimates for reported unpaid losses and LAE, including a portion
attributable to losses incurred but not reported. These reserves have not
been discounted. Reserves are established using individual case-basis
evaluations and statistical analysis as claims are reported. Those
estimates are subject to the effects of trends in loss severity and
frequency. While management believes the reserves make reasonable
provisions for unpaid loss and LAE obligations, those provisions are
necessarily based on estimates and are subject to variability. Changes in
the estimated reserves are charged or credited to operations, as additional
information on the estimated amount of a claim becomes known during the
course of its settlement. The gross reserve for losses and LAE is reported
net of anticipated receipts for salvage and subrogation of approximately
$4,535,000 and $5,822,000 at December 31, 2002 and 2001, respectively.
l. PREFERRED SECURITIES: Preferred Securities represent company-obligated
mandatorily redeemable securities of SIG's trust subsidiary holding solely
parent debentures and are reported at their liquidation value under
minority interest. Distributions on these securities are charged against
consolidated earnings.
m. INCOME TAXES: The Company uses the liability method of accounting for
deferred income taxes. Under the liability method, companies will establish
a deferred tax liability or asset for the future tax effects of temporary
differences between book and taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
n. REINSURANCE: Reinsurance premiums, commissions, and reserves related to
reinsured business are accounted for on a basis consistent with those used
in accounting for the original policies and the terms of the reinsurance
contracts. Premiums ceded to other companies have been reported as a
reduction of premium income.
o. EARNINGS PER SHARE: The Company's basic earnings per share calculations are
based upon the weighted average number of shares of common stock
outstanding during each period. As the Company has reported losses in 2002,
2001, and 2000, common stock equivalents are anti-dilutive. Therefore,
fully diluted earnings per share is the same as basic earnings per share.
p. STOCK-BASED COMPENSATION: As discussed further in note 18, the Company
accounts for stock-based employee compensation using the intrinsic value
method under APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations as permitted under SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148").
Accordingly no compensation expense is recognized if the market price of
the underlying stock does not exceed the exercise price at the date of
grant. However, SFAS 123, "Accounting for Stock-Based Compensation," ("SFAS
123") as amended by SFAS 148 requires the Company to present pro forma
information as if it had accounted for its stock-based compensation under
the fair value method of SFAS 123. The following table illustrates the
effect on net income and earnings per share as if the Company had applied
the fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
2002 2001 2000
--------- --------- ---------
Net (loss) as reported . . . . . . . . . . . . . . . . . $(29,745) $(31,937) $(63,224)
Add: Compensation expense for stock-based
compensation included in reported net income,
net of related tax effects . . . . . . . . . . . . . . . -- -- --
Deduct: Total stock-based compensation expense
determined under fair-value-based method, net of related
tax effects. . . . . . . . . . . . . . . . . . . . . . . (164) (706) (452)
--------- --------- ---------
Pro forma net income . . . . . . . . . . . . . . . . . . $(29,909) $(32,643) $(63,676)
========= ========= =========
Earnings per share:
Basic, as reported . . . . . . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79)
Basic, pro forma . . . . . . . . . . . . . . . . . . . . $ (5.54) $ (6.11) $ (13.86)
Diluted, as reported . . . . . . . . . . . . . . . . . . $ (5.51) $ (5.99) $ (13.79)
Diluted, pro forma . . . . . . . . . . . . . . . . . . . $ (5.54) $ (6.11) $ (13.86)
Q. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting
Standards Board (the "Board") finalized FASB Statements No. 141, Business
Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 143,
Accounting for Asset Retirement Obligations. In August 2001, the Board
issued FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets. In December 2002, the FASB issued SFAS 148, Accounting
for Stock-Based Compensation - Transition and Disclosure which amends SFAS
123, Accounting for Stock-Based Compensation. These new standards are
effective in 2002 and will not have a material impact on the Company's
financial position or results of operations.
R. RECLASSIFICATIONS: Certain amounts from prior periods have been
reclassified to allow for comparability to the 2002 presentation.
2. CORPORATE REORGANIZATION AND ACQUISITIONS: On August 12, 1997, SIG
purchased the remaining minority interest in Superior Group Management for
$61 million in cash. The excess of the acquisition price over the minority
interest liability was assigned to goodwill as the fair market value of
assets and liabilities approximated their carrying value. See Note 6
regarding the goodwill impairment charge recorded in 2000.
Effective on November 1, 2001, SIGF acquired the assets of a property
casualty insurance brokerage located in Boca Raton, Florida. The purchase
price of the assets was $150,000.
3.
INVESTMENTS:
Investments are summarized as follows (in thousands):
Cost or
Amortized Unrealized Market
December 31, 2002 (in thousands) Cost Gain (Loss) Value
---------- ------------- -------
Fixed Maturities:
U.S. Treasury securities and other obligations of
the U.S. government or its agencies . . . . . . . $ 17,814 $ 541 $ - $18,355
Obligations of states and political subdivisions . 4,863 183 (5) 5,041
Corporate securities . . . . . . . . . . . . . . . 13,358 1,211 (849) 13,720
---------- ------------ -------- -------
Total fixed maturities . . . . . . . . . . . . . . 36,035 1,935 (854) 37,116
Equity securities. . . . . . . . . . . . . . . . . 10,778 126 (3,573) 7,331
Short-term investments . . . . . . . . . . . . . . 8,495 -- -- 8,495
Other investments. . . . . . . . . . . . . . . . . 3,171 -- -- 3,171
---------- ------------ -------- -------
Total Investments. . . . . . . . . . . . . . . . . $ 58,479 $ 2,061 $(4,427) $56,113
========== ============ ======== =======
Cost or
Amortized Unrealized Market
December 31, 2001 (in thousands) Cost Gain (Loss) Value
---------- ------------- -------
Fixed Maturities:
U.S. Treasury securities and other obligations of
the U.S. government or its agencies . . . . . . . $ 29,982 $ 609 $ (381) $ 30,210
Obligations of states and political subdivisions . 17,536 1,949 (47) 19,438
Corporate securities . . . . . . . . . . . . . . . 29,807 501 (1,590) 28,718
---------- ------------ -------- --------
Total fixed maturities . . . . . . . . . . . . . . 77,325 3,059 (2,018) 78,366
Equity securities. . . . . . . . . . . . . . . . . 21,610 377 (3,664) 18,323
Short-term investments . . . . . . . . . . . . . . 13,266 -- -- 13,266
Other investments. . . . . . . . . . . . . . . . . 1,594 -- -- 1,594
---------- ------------ -------- --------
Total Investments. . . . . . . . . . . . . . . . . $ 113,795 $ 3,436 $(5,682) $111,549
========== ============ ======== ========
At December 31, 2002, The Standard & Poor's Corporation or Moody's Investor
Services, Inc considered approximately 96.3% of the Company's fixed maturities
investment grade. Securities with quality ratings, Baa and above are considered
investment grade securities. In addition, the Company's investments in fixed
maturities did not contain any significant geographic or industry concentration
of credit risk.
The amortized cost and estimated market value of fixed maturities at December
31, 2002, by contractual maturity, are shown in the table that follows. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalty and securities
may have to be liquidated to cover operational losses (in thousands):
Amortized Cost Market Value
--------------- -------------
Maturity:
Due in one year or less. . . . . . . . $ 9,018 $ 9,234
Due after one year through five years. 11,712 12,077
Due after five years through ten years 7,513 7,512
Due after ten years. . . . . . . . . . 2,964 3,288
Mortgage-backed securities . . . . . . 4,828 5,005
--------------- -------------
Total. . . . . . . . . . . . . . . . . $ 36,035 $ 37,116
=============== =============
Gains and losses realized on sales of investments are as follows (in thousands):
2002 2001 2000
-------- -------- --------
Proceeds from sales . $85,482 $81,682 $94,497
Gross gains realized. $ 2,503 $ 547 $ 1,361
Gross losses realized $(5,905) $(1,724) $(7,331)
Net investment income for the years ended December 31 are as follows (in
thousands):
2002 2001 2000
------- ------- --------
Fixed maturities. . . . . . . . $4,426 $6,202 $ 9,342
Equity securities . . . . . . . (489) 174 344
Cash and short-term investments 231 697 1,269
Mortgage loans. . . . . . . . . -- 65 --
Other . . . . . . . . . . . . . 59 769 1,318
------- ------- --------
Total investment income . . . . 4,228 7,907 12,273
Investment expenses . . . . . . (434) (909) (102)
------- ------- --------
Net investment income . . . . . $3,794 $6,998 $12,171
======= ======= ========
Investments with a market value of approximately $16,338,000 and $17,115,000
(amortized cost of approximately $16,190,000 and $16,799,000) as of December 31,
2002 and 2001, respectively, were on deposit in the United States and Canada.
The deposits are required by various insurance departments and others to support
licensing requirements and certain reinsurance contracts, respectively.
4. DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs are capitalized and amortized over the life of
the policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
Policy acquisition costs both acquired and deferred, and the related
amortization charged to income were as follows (in thousands):
2002 2001 2000
--------- --------- ---------
Balance, beginning of year $ 763 $ 6,454 $ 13,908
Costs deferred during year 18,861 28,056 29,999
Amortization during year . (19,624) (33,747) (37,453)
--------- --------- ---------
Balance, end of year . . . $ - $ 763 $ 6,454
========= ========= =========
5. PROPERTY AND EQUIPMENT: Property and equipment at December 31 are
summarized as follows (in thousands):
2002 Accumulated 2002 2001
Cost Depreciation Net Net
------- ------------- ------ ------
Land . . . . . . . . . . . . . $ 100 $ - $ 100 $ 100
Buildings. . . . . . . . . . . 4,279 1,877 2,402 2,655
Office furniture and equipment 2,249 1,824 425 815
Automobiles. . . . . . . . . . 102 72 30 47
Computer equipment . . . . . . 14,870 10,743 4,127 6,290
------- ------------- ------ ------
Total. . . . . . . . . . . . . $21,599 $ 14,516 $7,084 $9,907
======= ============= ====== ======
Accumulated depreciation at December 31, 2001 was $11,126,000. Depreciation
expense related to property and equipment for the years ended December 31, 2002,
2001 and 2000 was $3,661,000; $3,741,000 and $3,507,000, respectively.
6. INTANGIBLE ASSETS:
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets", SIG determined in 2000 that the carrying value of goodwill that
resulted from the acquisition of Superior Group Management exceeded its fair
value. This determination was made after considering the series of
continued losses which the company had experienced, the reduction in the
volume of premiums written and an evaluation of future cash flows. Based upon
this assessment, a charge of $33,464,000 was recorded in the fourth quarter
of 2000 to write-off the remaining carrying value of the goodwill. This
charge is included as amortization expense in the accompanying financial
statements for 2000.
Intangible assets at December 31 are as follows (in thousands):
2002 Accumulated 2002 2001
Cost Amortization Net Net
------ ------------- ------ ------
Deferred debt
acquisition costs $2,585 $ 466 $2,119 $4,376
====== ============= ====== ======
Accumulated amortization at December 31, 2001 was $755,000. Amortization
expense related to deferred debt acquisition costs and intangible assets for the
years ended December 31, 2002, 2001 and 2000 was $86,000, $1,380,000 and
$34,960,000, respectively.
7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (IN THOUSANDS):
Activity in the liability for unpaid losses and LAE is summarized as follows (in
thousands):
2002 2001 2000
------- -------- ---------
Balance at January 1. . . . . $84,876 $113,149 $157,425
Less reinsurance recoverables 28,889 19,979 3,411
------- -------- ---------
Net balance at January 1. . . 55,987 93,370 154,014
------- -------- ---------
Incurred related to:
Current year. . . . . . . . . 38,497 94,556 132,781
Prior years . . . . . . . . . 13,016 660 (19,013)
------- -------- ---------
Total Incurred. . . . . . . . 51,513 95,216 113,768
------- -------- ---------
Paid related to:
Current year. . . . . . . . . 19,211 69,917 89,612
Prior years . . . . . . . . . 38,682 62,682 84,800
------- -------- ---------
Total paid. . . . . . . . . . 57,893 132,599 174,412
------- -------- ---------
Net balance at December 31. . 49,607 55,987 93,370
Plus reinsurance recoverables 23,202 28,889 19,779
------- -------- ---------
Balance at December 31. . . . $72,809 $ 84,876 $113,149
======= ======== =========
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 $13,016,000 on the December 31, 2001 reserves. See "Revised
Estimate of Loss Reserves recorded in Prior Years" above for an explanation of
the adverse 2001 reserve development.
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.
8. PREFERRED SECURITIES:
On August 12, 1997, SIG's trust subsidiary issued $135 million in preferred
securities ("Preferred Securities") bearing interest at an annual rate of 9.5%.
The principal assets of the trust subsidiary are senior subordinated notes
of SIG in the principal amount of $135 million with an interest rate and
maturity date substantially identical to those of the Preferred Securities.
Expenses of the issue aggregated $5.1 million and the portion attributable to
Preferred Securities held by unrelated parties is amortized over the term of the
Preferred Securities.
The Preferred Securities represent SIG-obligated mandatorily redeemable
securities of a trust subsidiary holding solely parent debentures and have a
term of 30 years with semi-annual interest payments commencing February 15,
1998. SIG may redeem the Preferred Securities in whole or in part after 10
years. The annual Preferred Security obligations of approximately $13 million
per year were to be funded from SIG's nonstandard automobile management
company's management and billing fees in excess of its operating costs. Under
the terms of the indenture, SIG is permitted to defer semi-annual interest
payments for up to five years. SIG elected to defer the interest payments due in
February and August 2000, 2001 and 2002 and February 2003. SIG expects to
continue this practice through 2003 and 2004. 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 Florida Department of Revenue ("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.
The trust indenture for the Preferred Securities contains certain restrictive
covenants. These covenants are based upon SIG's consolidated coverage ratio of
earnings before interest, taxes, depreciation and amortization ("EBITDA"). If
SIG's EBITDA falls below 2.5 times consolidated interest expense (including
Preferred Security distributions) for the most recent four quarters the
following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments including making loans or
advances to affiliates, repurchasing common stock or paying dividends in
excess of a stated limitation.
- - SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply, as SIG's consolidated coverage ratio was
(0.95) in 2002, and will continue to apply until SIG's consolidated coverage
ratio complies with the terms of the trust indenture. SIG complied with these
additional restrictions as of December 31, 2001 and 2002 and was in compliance
as of May 9, 2003.
During 2002, Granite Re purchased Preferred Securities bearing a principal
amount of $26,500,000. During 2001, Granite Re purchased Preferred Securities
bearing a principal amount of $17,460,000. During 2000, Granite Re and Granite
purchased Preferred Securities bearing principal amounts of $18,000,000 and
$5,000,000, respectively. As a result, the Company's balance sheet as of
December 31, 2002 presents a net Preferred Securities balance of $67,994,000.
The Company's total purchases of Preferred Securities resulted in a cumulative
increase of $68,089,000 to the Company's consolidated stockholders' equity as of
December 31, 2002.
9. CAPITAL STOCK:
The Company's authorized share capital consists of:
- - First Preferred shares: An unlimited number of first preferred shares of
which none are outstanding at December 31, 2002 and 2001.
- - Common Shares: An unlimited number of common shares of which 5,393,698 and
5,776,398 were outstanding as of December 31, 2002 and 2001, respectively.
The Company did not issue any common shares during either 2002 or 2001. The
Company purchased 382,700 of its common shares for an aggregate
consideration of $218,000 during 2001. The Company purchased 100,000 of its
common shares for an aggregate consideration of $185,000 during 2000.
10. INCOME TAXES:
Goran and Granite file separate Canadian income tax returns. SIGF files a
separate U.S. federal income tax return. SIG files a consolidated U.S. federal
income tax return with its wholly owned subsidiaries. Intercompany tax-sharing
agreements between SIG and its wholly owned subsidiaries provide that income
taxes will be allocated based upon separate return calculations in accordance
with the Internal Revenue Code of 1986, as amended. Granite Re is exempt from
income tax for a period of 15 years from October 25, 1990. Thereafter, Granite
Re will be subject to tax at a rate of 2% on the first Bds $250,000 of taxable
income and zero percent in respect of all other taxable income in excess of Bds
$250,000.
A reconciliation of the differences between federal tax computed by applying
applicable jurisdictional statutory rates to income before income taxes and the
income tax provision is as follows (in thousands):
2002 2001 2000
-------- -------- ---------
Computed income taxes (benefit) at statutory rate $(7,929) $(7,975) $(17,981)
Goodwill. . . . . . . . . . . . . . . . . . . . . -- -- 12,176
Other . . . . . . . . . . . . . . . . . . . . . . 395 3,377 (4,154)
Tax exempt (income) loss. . . . . . . . . . . . . 840 (223) (3,443)
-------- -------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . $(6,694) $(4,821) $(13,402)
Valuation allowance . . . . . . . . . . . . . . . 6,694 4,821 11,253
-------- -------- ---------
Income tax expense. . . . . . . . . . . . . . . . $ -- $ -- $ (2,149)
======== ======== =========
The net deferred tax asset at December 31, 2002 and 2001 is comprised of the
following (in thousands):
2002 2001
--------- ---------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 1,131 $ 1,358
Unearned premiums. . . . . . . . . . . . . 656 1,159
Allowance for doubtful accounts. . . . . . 2,430 2,582
Unrealized losses on investments . . . . . -- 926
Net operating loss carryforwards . . . . . 22,535 23,268
Capital loss carryforwards . . . . . . . . 8,478 5,544
Accrued interest payable . . . . . . . . . 17,229 11,621
Other. . . . . . . . . . . . . . . . . . . 2,359 2,004
--------- ---------
Deferred tax assets . . . $ 54,818 $ 48,462
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs. . . . . $ 713 $ (168)
Other. . . . . . . . . . . . . . . . . . . (877) (1,157)
--------- ---------
Deferred tax liabilities . . . . . . . . . $ (164) $ (1,325)
--------- ---------
$ 54,654 $ 47,137
Valuation allowance . . . (54,654) (47,137)
--------- ---------
Net deferred tax assets . $ -- $ --
========= =========
At December 31, 2002 and 2001 the Company's net deferred tax assets were fully
offset by a valuation allowance. The Company will continue to assess the
valuation allowance and to the extent it is determined that such allowance is no
longer required, the tax benefit of the corresponding portion of remaining net
deferred tax assets will then be recognized.
As of December 31, 2002, the Company has unused net operating loss carryovers
available as follows (in thousands):
Goran &
Year expiring. SIG Granite SIGF Total
-------- -------- ------ -------
2003 . . . . . $ 4,609 $ 4,609
2004 . . . . . 687 687
2005 . . . . . 1,266 1,266
2006 . . . . . 1,445 1,445
2007 . . . . . 1,835 1,835
2008 . . . . . 3,895 3,895
2009 . . . . . 1,216 1,216
2017 . . . . . $ 4,368 4,368
2018 . . . . . 1,295 1,295
2019 . . . . .$ 21,030 -- 600 21,630
2020 . . . . . 17,095 -- 45 17,140
2021 . . . . . 75 75
2022 . . . . . 225 225
Capital Losses -- 9,614 -- 9,614
-------- -------- ------ -------
Total. . . . . $ 38,125 $ 24,567 $6,928 $69,300
======== ======== ====== =======
SIG's U.S. Federal income tax filings for years prior to 2000 have been examined
by the U.S. Internal Revenue Service.
11. LEASES:
The Company leases buildings, furniture, cars and equipment under operating
leases. Operating leases generally include renewal options for periods ranging
from two to seven years and require the Company to pay utilities, taxes,
insurance and maintenance expenses.
The following is a schedule of future minimum lease payments under cancelable
and non-cancelable operating leases for each of the five years succeeding
December 31, 2002 and thereafter, excluding renewal options (in thousands):
Year Ending December 31:
2003 . . . . . . . . . . $773
2004 . . . . . . . . . . 549
2005 . . . . . . . . . . 423
2006 . . . . . . . . . . 147
2007 and Thereafter. . . 104
Rental expense charged to operations in 2002, 2001 and 2000 amounted to
$1,063,000, $1,749,000 and $1,848,000, respectively, including amounts paid
under short-term cancelable leases.
12. REINSURANCE:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. The Company remains contingently liable with
respect to reinsurance ceded, which would become an ultimate liability of the
Company in the event that such reinsuring companies might be unable, at some
later date, to meet their obligations under the reinsurance agreements. In
addition, the Company assumes reinsurance on certain risk.
Approximately 88% of uncollateralized amounts recoverable are with companies
which maintain an A.M. Best rating of at least A+. Management believes amounts
recoverable from reinsurers are collectible.
Superior commuted the accident year 2001 and 2000 portions of the reinsurance
treaty with National Union Fire Insurance Company of Pittsburgh, PA
("National"). Superior recognized the amounts received from National as a
reduction of losses and LAE paid (thereby increasing losses and LAE incurred) to
recognize the effect of releasing National from its obligations under the
treaty. There was no effect on premiums earned, losses incurred, LAE incurred or
commission in the current year income statement due to this commutation.
IGF sold 100% of its 2001 crop year business to Acceptance Insurance Companies
Inc. ("Acceptance"), effective June 6, 2001. The agreements are without recourse
as they relate to the net profit or loss on the 2001 crop year book of business.
The sale was approved by the Indiana Department of Insurance.
Reinsurance activity for 2002, 2001 and 2000 is summarized as follows (in
thousands):
Direct Assumed Ceded Net
-------- --------- ---------- ---------
2002
--------
Premiums written . . . . . . $111,327 $ 67 $ (77,403) $ 33,991
Premiums earned. . . . . . . 129,370 212 (88,545) 41,037
Incurred losses and LAE. . . 114,056 147 (62,690) 51,513
Commission expenses (income) 11,038 (1) (24,656) (13,619)
2001
--------
Premiums written . . . . . . $191,915 $ 1,271 $(106,324) $ 86,862
Premiums earned. . . . . . . 163,828 2,484 (58,115) 108,197
Incurred losses and LAE. . . 132,532 2,616 (39,932) 95,216
Commission expenses (income) 18,979 151 (25,716) (6,586)
2000
--------
Premiums written . . . . . . $176,264 $ 5,835 $ (78,637) $103,462
Premiums earned. . . . . . . 195,360 4,918 (54,746) 145,532
Incurred losses and LAE. . . 150,101 4,828 (41,161) 113,768
Commission expenses (income) 21,234 1,041 (14,043) 8,232
Amounts recoverable from reinsurers relating to SIG's insurance subsidiaries'
unpaid losses and LAE were $22,087,000 and $30,181,000 as of December 31, 2002
and 2001, respectively. These amounts are reported as assets and are not netted
against the liability for loss and LAE in the accompanying Consolidated Balance
Sheets.
13. RELATED PARTY TRANSACTIONS:
The Company and its subsidiaries have entered into transactions with various
related parties, including transactions with Symons International Group Ltd.
("SIGL"), the Company's majority shareholder.
The following balances were outstanding at December 31 (in thousands):
2002 2001
--------- ---------
Gross amounts due from (to) directors and officers. $ 1,705 $ 3,772
Other gross amounts due from (to) related parties . 10,460 8,844
--------- ---------
Gross receivables (payables). . . . . . . . . . . . $ 12,165 $ 12,616
Reserve for uncollectibility. . . . . . . . . . . . (12,082) (11,486)
========= =========
Net receivables (payables). . . . . . . . . . . . . $ 83 $ 1,130
========= =========
The following transactions occurred with related parties in the years ended
December 31 (in thousands):
2002 2001 2000
----- ------ ------
Consulting fees charged by various related parties $ 864 $ 800 $1,895
Management fees charged by SIGL. . . . . . . . . . $ 400 $(100) $ 900
Approximately 86% and 91% of the amounts due from officers and directors were
non-interest-bearing on December 31, 2002 and 2001, respectively.
SIG paid $1,846,000 in 2000 for consulting and other services to a vendor owned
in part by a relative of certain directors of the Company. The consulting and
other services were for the conversion of SIG's nonstandard automobile operating
system. SIG capitalized these costs as part of its nonstandard automobile
operating system. Approximately 90% of these payments were for services provided
by consultants and vendors unrelated to the Company.
In 1989, the Company fully reserved a loan owed by a subsidiary of SIGL. SIGL
guaranteed the loan and pledged shares of Goran ("escrowed shares") as security
for the loan. The outstanding loan balance was $3,340,000 (Canadian dollars)
for the periods ending December 31, 2002 and 2001. This loan balance continues
to be guaranteed by SIGL and is secured with 100,000 shares of Goran owned by
SIGL.
The Company leases office space in Canada from Tritech Financial Systems Inc.
("Tritech"). Tritech is owned by a relative of certain directors of the Company.
The rent paid was $34,000, $35,000 and $40,000 for 2002, 2001 and 2000,
respectively.
In 1999, Granite Re 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 its president (a relative
of certain directors of the Company) and 50,000 shares of Goran's common stock.
Tritech is paying interest on the outstanding balance at a rate of 7.5%.
Interest received during the years ended December 31, 2002 and 2001 was $24,600
and $24,600, respectively.
Superior Group obtained a line of credit from Granite Re in the amount of $2.5
million and $1 million in December 31, 2001 and October 2002, respectively. At
December 31, 2002, $2.98 million was outstanding under the line. This note bears
interest at the rate of prime plus 5.25% for a total of 9.5% at December 31,
2002. Interest only payments are due monthly. Of the $2.98 million outstanding
at December 31, 20002, $2.5 million is due December 20, 2004 and $480,000 is due
November 30, 2004.
14. REGULATORY MATTERS:
Two of the Company's insurance company subsidiaries, Pafco and IGF, are
domiciled in Indiana and prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Indiana
Department of Insurance ("IDOI"). While neither Pafco nor IGF has surplus from
which to pay dividends, statutory requirements place limitations on the amount
of funds that can be remitted to the Company from Pafco and IGF. The Indiana
statute allows 10% of surplus in regard to policyholders or 100% of net income,
whichever is greater, to be paid as dividends only from earned surplus; however,
the consent orders with the IDOI, described below, prohibit the payment of any
dividends by Pafco and IGF. Another insurance company subsidiary, Superior, and
Superior's insurance company subsidiaries, Superior American and Superior
Guaranty, are domiciled in Florida and prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the FDOI. The Florida statute also contains limitations with regard to the
payment of dividends. Superior, Superior American and Superior Guaranty may pay
dividends of up to 10% of surplus or 100% of net income, whichever is greater,
from earned surplus. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.
On June 6, 2001, IGF sold substantially all of its crop insurance assets to
Acceptance. On June 29, 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 would 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 is currently exchanging proposals with the FDOI
to establish an acceptable repayment plan in accordance with the final order.
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 (the "Motion for Enforcement") in
the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida
which sought 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
14.5% and 13.1% of the total gross written premiums of the Company in 2002 and
2001, respectively.
The Company's U.S. operating subsidiaries, their business operations, and their
transactions with affiliates, including the Company, are subject to regulation
and oversight by the IDOI, the FDOI, and the insurance regulators of other
states in which the subsidiaries write business. The Company is a holding
company and all of its operations are conducted by its subsidiaries. Regulation
and oversight of insurance companies and their transactions with affiliates is
conducted by state insurance regulators primarily for the protection of
policyholders and not for the protection of other creditors or of shareholders.
Failure to resolve issues with the IDOI and the FDOI or other state insurance
regulators in a mutually satisfactory manner could result in future regulatory
actions or proceedings that materially and adversely affect the Company.
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 requires no corrective
action. The RBC calculation for IGF as of December 31, 2002 was in excess of
100% of the RBC amount, which is 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 and Pafco with the FDOI and IDOI,
respectively. 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.
15. COMMITMENTS AND CONTINGENCIES:
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 Superior Guaranty 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 purported to be
brought on behalf of a class consisting of purchasers of insurance from Superior
Guaranty. The Plaintiff 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 SIG, 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 the
Company, 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. Motions to dismiss The Company, SIGF, Granite Re, Superior Group
Management, Superior, Superior American, Superior Guaranty and certain named
individuals for lack of personal jurisdiction 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 Note 14 to the Consolidated Financial Statements, Regulatory Matters, for
additional contingencies involving insurance regulatory 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 the Company's
operations or financial position.
16. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid/(received) for income taxes and interest are summarized as follows (in
thousands):
2002 2001 2000
----- ----- --------
Cash paid/(received) for federal income taxes, net of refunds $ -- $ -- $(6,134)
Cash paid for interest. . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following outlines the methodologies and assumptions used to determine the
estimated fair value of the Company's financial instruments. Considerable
judgment is required to develop these fair values and, accordingly, the
estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
1. Fixed Maturity, Equity Securities, and Other Investments: Fair values for
fixed maturity and equity securities are based on quoted market prices.
2. Short-term Investments, and Cash and Cash Equivalents: The carrying value
for assets classified as short-term investments, and cash and cash
equivalents in the accompanying Consolidated Balance Sheets approximates
their fair value.
3. Short-term Debt: The carrying value for short-term debt approximates fair
value.
4. Preferred Securities: There is not an active market for the Preferred
Securities; however, the estimated market value of the entire issue as of
December 31, 2002 was approximately $9,000,000.
18. STOCK OPTION PLANS:
In June 1986, Goran adopted the Goran Capital Inc. 1986 Share Option Plan (the
"Goran Share Option Plan"). The Goran Share Option Plan provides Goran the
authority to grant nonqualified stock options and incentive stock options to
officers and key employees of Goran and its subsidiaries and nonqualified stock
options to non-employee directors of Goran. Options have been granted at an
exercise price equal to the fair market value of the Goran 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.
Information regarding the Goran Share Option Plan is summarized below (in
Canadian dollars):
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------ -------- ------ --------- ------
Outstanding at the beginning
of the year. . . . . . . . . 791,187 $ 2.09 195,937 $ 8.36 660,708 $14.17
Granted . . . . . . . . . . . 26,000 $ 0.35 633,750 $ 0.90 100,000 $ 2.35
Exercised . . . . . . . . . . -- -- -- -- -- --
Forfeited/Surrendered . . . . (388,437) $ 3.34 (38,500) $14.16 (564,771) $14.15
--------- -------- ---------
Outstanding at the end of the
Year . . . . . . . . . . . . 428,750 $ 0.85 791,187 $ 2.09 195,937 $ 8.36
========= ======== =========
Options exercisable at year
End. . . . . . . . . . . . . 340,917 $ 0.89 682,520 $ 2.29 88,605 $14.62
Available for future grant. . 442,250 -- 79,813 -- 675,063 --
On November 1, 1996, SIG adopted the Symons International Group, Inc. 1996 Stock
Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides
SIG the authority to grant nonqualified stock options and incentive stock
options to officers and key employees of SIG and its subsidiaries and
nonqualified stock options to nonemployee directors of SIG and Goran. Options
have been granted at an exercise price equal to the fair market value of the
SIG's stock at date of grant. All of the outstanding stock options vest and
become exercisable in three equal installments on the first, second and third
anniversaries of the date of grant.
Information regarding the SIG Stock Option Plan is summarized below:
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------- ---------- ------- ---------- -------
Outstanding at the
beginning of the year . . . 1,271,333 $0.8283 1,344,833 $0.9400 213,033 $6.3125
Granted . . . . . . . . . . -- -- -- -- 1,287,000 $0.5436
Exercised . . . . . . . . . -- -- -- -- -- --
Forfeited/Surrendered . . . (386,333) $1.4650 (73,500) $2.8474 (155,200) $5.0391
---------- ---------- ----------
Outstanding at the end of
the year . . . . . . . . . 885,000 $0.5503 1,271,333 $0.8283 1,344,833 $0.9400
========== ========== ==========
Options exercisable at year
end. . . . . . . . . . . . 590,167 $ .5520 465,333 $1.3180 73,500 $6.3125
Available for future grant. 615,000 -- 228,667 -- 155,167 --
Options Options
Outstanding Exercisable
Weighted weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (in years) Price Exercisable Price
- ---------------- ----------- --------------- ------- ----------- ------
0.50 - $0.8750. 884,500 7.4 $ 0.5477 763,000 $ 0.5477
6.3125. . . . . 500 5.5 $ 6.3125 500 $ 6.3125
----------- -----------
885,000 7.4 763,500
============ ========
The Board of Directors of Superior Group Management adopted the GGS Management
Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option
Plan"), effective April 30, 1996. The Superior Group Management Stock Option
Plan authorizes the granting of nonqualified and incentive stock options to such
officers and other key employees as may be designated by the Board of Directors
of Superior Group Management. Options granted under the Superior Group
Management Stock Option Plan have a term of ten years and vest at a rate of 20%
per year for the five years after the date of the grant. The exercise price of
any options granted under the Superior Group Management Stock Option Plan is
subject to the following formula: 50% of each grant of options having an
exercise price determined by the Board of Directors of Superior Group Management
at its discretion, with the remaining 50% of each grant of options subject to a
compound annual increase in the exercise price of 10%, with a limitation on the
exercise price escalation as such options vest.
Information regarding the Superior Group Management Stock Option Plan is
summarized below:
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ------ ------- ------ ------- ------
Outstanding at the beginning
of the year. . . . . . . . . 83,332 $57.65 83,432 $54.42 92,232 $51.75
Granted . . . . . . . . . . . -- -- -- -- -- --
Forfeited . . . . . . . . . . (55,555) $57.65 (100) $57.65 (8,800) $51.48
-------- ------- -------
Outstanding at the end of the
year . . . . . . . . . . . . 27,777 $57.65 83,332 $57.65 83,432 $54.42
======== ======= =======
Options exercisable at year
end. . . . . . . . . . . . . 27,777 $57.65 83,332 $57.65 66,726 $54.42
Available for future grant. . 83,334 -- 27,779 -- 27,679 --
Options Options
Outstanding Exercisable
Weighted weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (in years) Price Exercisable Price
- ---------------- ----------- --------------- --------- ----------- -------
44.17 . . . . . 13,889 3.1 $ 44.17 13,889 $ 44.17
71.14 . . . . . 13,888 3.1 $ 71.14 13,888 $ 71.14
The Company accounts for stock-based employee compensation using the intrinsic
value method under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and interpretations as permitted under SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148").
Accordingly, no compensation cost is recorded if the current market price of the
underlying stock does not exceed the exercise price at the date of grant. See
Note 1 for a pro forma disclosure of the affect stock-based compensation would
have had on net loss and net loss per share had the Company applied the fair
value accounting provisions of SFAS 123 to stock-based employee compensation
and non-employee director compensation.
For purposes of applying SFAS 123, the fair value of each option grant was
estimated using the Black-Scholes option-pricing model with the following
assumptions:
SIG Goran SIG Goran SIG Goran
2002 2002 2001 2001 2000 2000
Grants Grants Grants Grants Grants Grants
------ --------- ------ ----------- -----------
Risk-free interest rates --- 2.28% --- 2.34% 5.00% 5.00%
Dividend yields --- --- --- --- --- ---
Volatility factors --- 132% --- 156% 106% 106%
Weighted average expected life --- 3 years --- 2.6 years 4.0 years 5.0 years
Weighted average fair value per share --- $ 0.22 --- $ 0.68 $ 0.40 $ 1.31
The Goran stock options are granted and denominated in Canadian dollars. The
pro-forma stock based compensation for these options are translated at the
average rate for the year. The weighted average fair value per share is
translated at the year-end rate.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarterly financial information is as follows (in thousands):
First Second Third Fourth Total
-------- -------- -------- --------- ---------
2002
Gross written premiums . . . . . . . . . . . . $45,082 $23,626 $17,618 $ 25,068 $111,394
Net premiums written . . . . . . . . . . . . . 14,109 7,656 4,337 7,889 33,991
Net premiums earned. . . . . . . . . . . . . . 13,093 11,892 7,757 8,295 41,037
Total revenues . . . . . . . . . . . . . . . . 17,273 15,594 12,557 9,919 55,343
Net operating earnings (loss) from continuing
operations 1. . . . . . . . . . . . . . . . . (3,246) (5,686) (1,744) (7,511) (18,187)
Net loss from continuing operations. . . . . . (5,967) (8,386) (3,322) (12,070) (29,745)
Basic operating earnings (loss) per share from
continuing operations 1 . . . . . . . . . . . (0.60) (1.05) (0.32) (1.39) (3.37)
Net loss from continuing operations per share
- - basic and diluted. . . . . . . . . . . . . . (1.11) (1.56) (0.62) (2.24) (5.51)
First Second Third Fourth Total
-------- -------- -------- --------- -------
2001
Gross written premiums . . . . . . . . . . . . $48,338 $49,950 $27,348 $ 67,550 $193,186
Net premiums written . . . . . . . . . . . . . 16,945 27,702 14,684 27,531 86,862
Net premiums earned. . . . . . . . . . . . . . 18,844 26,411 22,943 39,999 108,197
Total revenues . . . . . . . . . . . . . . . . 22,912 31,444 29,671 44,166 128,193
Net operating earnings (loss) from continuing
Operations 1. . . . . . . . . . . . . . . . . (5,803) (1,338) (6,677) (5,193) (19,011)
Net loss from continuing operations. . . . . . (9,547) (3,940) (9,041) (9,409) (31,937)
Basic operating earnings (loss) per share from
Continuing operations 1 . . . . . . . . . . . (1.00) (.23) (1.16) (.95) (3.34)
Net loss from continuing operations per share
- - basic and diluted. . . . . . . . . . . . . . (1.65) (.68) (1.57) (1.71) (5.61)
<FN>
1. Operating earnings (loss) and per share amounts exclude amortization,
interest, taxes, realized capital gains and losses, minority interest and
any extraordinary items.
20. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP")
The consolidated financial statements are prepared in accordance with Canadian
GAAP. Material differences between Canadian and U.S. GAAP are described below.
There were no material differences in net earnings or earnings per share in
2002, 2001 and 2000.
1. Receivables from sale of capital stock: The SEC Staff Accounting Bulletins
require that accounts or notes receivable arising from transactions
involving capital stock be presented as deductions from stockholders'
equity and not as assets. Accordingly, in order to comply with U.S. GAAP
stockholders' equity would be reduced by $1,258,000 at December 31, 2002
and 2001, to reflect the loans due from certain stockholders which relate
to the purchase of common shares of the Company.
2. Unrealized gain (loss) on investments: U.S. GAAP requires that unrealized
gains and losses on investment portfolios be included as a component in
determining stockholders' equity. In addition, SFAS No. 115 permits
prospective recognition of unrealized gains (losses) on investment
portfolio for year-ends commencing after December 15, 1993. As a result,
stockholders' equity would be decreased by $2,366,000 and $2,246,000 for
the years ended December 31, 2002 and 2001, respectively.
3. Discontinued operations: U.S. GAAP requires the netting of all assets and
liabilities of discontinued operations and the presentation of those net
assets as a single line item in the consolidated balance sheets for all
periods presented. There is no impact on stockholders' equity.
4. Changes in stockholder's equity: A reconciliation of stockholders' equity
(deficit) from Canadian GAAP to U.S. GAAP is as follows (in thousands):
2002 2001
--------- ---------
Stockholders' equity in accordance with Canadian GAAP . $(84,941) $(89,146)
Add (deduct) effect of difference in account for:
Receivables from sale of capital stock (see note a) (1,258) (1,258)
Unrealized gain (loss) on investments (see note b). (2,366) (2,246)
--------- ---------
Stockholders' equity in accordance with U.S. GAAP . . . $(88,565) $(92,650)
========= =========
5. Comprehensive Income: U.S. GAAP requires the presentation of a
statement of comprehensive income. Canadian GAAP does not require a similar
disclosure. The Company's comprehensive income is as follows (in thousands):
2002 2001
--------- ---------
Net Income (Loss) per Statement of Operations. $(29,745) $(34,093)
Purchase of Preferred Securities . . . . . . . 28,399 18,717
Change in cumulative translation adjustment. . (260) (472)
Unrealized gain (loss) on investments. . . . . (2,366) (2,246)
--------- ---------
Comprehensive Income (Loss). . . . . . . . . . $ (3,972) $(18,094)
========= =========
21.
MANAGEMENT'S PLANS
SIG reported net losses of $(35.3) million and $(32.9) million for the years
2002 and 2001, respectively, and is a party to a number of legal proceedings and
claims. While shareholders' equity at December 31, 2002 is a deficit of
approximately $(179) million, SIG has partially offsetting thirty-year
mandatorily redeemable trust preferred stock outstanding of $135 million, which
are not due for redemption until 2027. Accumulated interest of approximately $84
million will be due in February 2005. SIG's insurance subsidiaries, excluding
IGF, have statutory surplus of approximately $3.0 million. Management has
initiated substantial changes in operational procedures in an effort to return
SIG to profitable levels and to improve its financial condition. SIG has and is
continuing to raise its rates in a market environment where increasing rates and
withdrawal from the market by other companies show positive trends for improving
profitability of nonstandard automobile insurance underwriters.
During January and February 2002, SIG experienced sustained adverse loss
experience on a substantial portion of its new business written in certain
markets. In late February and early March 2002, SIG commenced further analysis
of loss ratios by individual agency and a review of claim settlement procedures.
Based upon this and other analysis, SIG took a number of actions to improve the
financial position and operating results of SIG including:
- - Eliminated reinstatements in all markets, i.e., upon policy cancellation,
the insured must obtain a new policy at prevailing rates and underwriting
guidelines;
- Terminated or placed on new business moratorium several hundred
agents whose loss ratios were abnormally high when compared to the
average for the remaining agents (these agents accounted for
approximately 16% of the total gross written premium in 2001);
- - Increased underwriting requirements in certain markets including: higher
down payments, new policy fees, and shorter policy terms;
- - Hired a consultant with significant auto claims experience to review
processes and suggest modifications to the claims function.
The above actions were followed by:
- - Replacement of the president of the non-standard automobile business;
- - Hiring of an experienced vice president of claims;
- - Consolidation of all underwriting, premium accounting and agency licensing
activities in Atlanta, GA into Indianapolis, IN;
- - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria,
VA; Glendale, CA; and Jacksonville , FL;
- - Replacement of the national litigation manager;
- - Replacement of the marketing manager and the product manager;
- - Heavy focus on the improvement of process and customer service;
- - Continued transition to an improved policy processing system.
These actions resulted in improved operations and a lower expense ratio. SIG's
employee staffing level decreased 40% from 346 to 209 at December 31, 2001 and
2002, respectively. SIG continues to review all job functions in an effort to
improve efficiencies.
Management believes that despite the historical losses, it has developed a
business plan that can improve SIG's operating results and financial condition
in 2003.
22. DISCONTINUED OPERATIONS
As previously announced, IGF sold its crop insurance operations to Acceptance on
June 6, 2001. This business was predominantly written through IGF. The
divestiture of the crop insurance segment transferred ownership of certain crop
insurance accounts, effective with the 2001 crop cycle.
Management does not expect any remaining crop business to be material to the
consolidated financial statements and accordingly has discontinued reporting
crop insurance as a business segment. The results of the crop insurance segment
have been reflected as "Discontinued Operations" in the accompanying
consolidated financial statements.
Summarized results of operations and financial position for discontinued
operations were as follows (in thousands):
Year Ended December 31,
2002 2001 2000
-------- --------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . $ (314) $256,722 $241,748
======== ========= =========
Net premiums written. . . . . . . . . . . . . . . . . . . $ (5) $ (308) $ 26,466
======== ========= =========
Net premiums earned. . . . . . . . . . . . . . . . $ 8 $ (308) $ 26,531
Net investment and fee income. . . . . . . . . . . 1,058 1,657 1,229
Net realized capital gain. . . . . . . . . . . . . (2,935) 799 10
-------- --------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . (1,869) 2,148 27,770
-------- --------- ---------
Loss and loss adjustment expenses. . . . . . . . . 204 3,559 40,690
Policy acquisition and general and administrative
expenses. . . . . . . . . . . . . . . . . . . . . . (2,073) 654 2,059
Interest and amortization expense. . . . . . . . . -- 91 1,162
-------- --------- ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . . (1,869) 4,304 43,911
-------- --------- ---------
Loss before income taxes. . . . . . . . . . . . . . . . . -- (2,156) (16,141)
Income taxes:
Current income tax (benefit). . . . . . . . . . . -- -- --
Deferred income tax expense . . . . . . . . . . . -- -- --
Total income tax expense (benefit). . . . . . . . . . . . -- -- --
Loss from operations of discontinued segment. . . . . . . -- -- (16,141)
Loss on disposal of discontinued segment. . . . . . . . . -- (2,156) (900)
-------- --------- ---------
Net loss from discontinued operations . . . . . . . . . . $ -- $ (2,156) $(17,041)
======== ========= =========
- -------------------------------------------------------------------------------
MANAGEMENT RESPONSIBILITY
- -------------------------------------------------------------------------------
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which involve the use
of judgement and estimates in applying the accounting principles selected.
Other financial information in this Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains a system of internal controls, which is designed to
provide reasonable assurance that accounting records are reliable and to
safeguard the Company's assets. The independent accounting firm of BDO Seidman,
LLP has audited and reported on the Company's consolidated financial statements
for 2002, 2001 and 2000. Their opinion is based upon audits conducted by them in
accordance with generally accepted auditing standards to obtain assurance that
the consolidated financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representatives to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations
to the Board of Directors.
[GRAPHIC OMITED]
[GRAPHIC OMITED]
Douglas H. Symons
Chief Executive Officer
June 3, 2003
BOARD OF DIRECTORS AND STOCKHOLDERS OF GORAN CAPITAL INC.
Goran Capital inc.
Toronto, Canada
We have audited the accompanying consolidated balance sheets of Goran Capital
Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the years ended December 31, 2002, 2001 and 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and Canada. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Goran
Capital Inc. and subsidiaries at December 31, 2002 and 2001, and the results of
their operations and their cash flows for the years ended December 31, 2002,
2001 and 2000 in conformity with accounting principles generally accepted in
Canada.
/s/ BDO SEIDMAN, LLP
Grand Rapids, Michigan
May 9, 2003
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the company's ability to continue as a going concern, such as those described in
Notes 14, 15 and 21 to the financial statements. Our report to the stockholders
dated May 9, 2003 is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
/s/ BDO SEIDMAN, LLP
Grand Rapids, Michigan
May 9, 2003
STOCKHOLDER INFORMATION
Registrar and Transfer Agent Independent
Public Accountants
CIBC Mellon Trust Company BDO Seidman LLP
Toronto, Ontario Grand Rapids, Michigan
Annual Meeting of Stockholders
2 Eva Road, Suite 200
Toronto, Ontario Canada M9C 2A8
July 8, 2003
10:00 A.M. (EDT)
ANNUAL REPORT ON FORM 10-K
A copy of the Annual Report on Form 10-K for Goran Capital Inc. for the year
ended December 31, 2002, filed with the Securities and Exchange Commission, may
be obtained, without charge, upon request to the individual and address noted
under Shareholder Inquiries.
MARKET AND DIVIDEND INFORMATION
As of July 1, 2001 Goran Capital Inc.'s common stock began trading on the OTC
Bulletin Board under the symbol GNCNF.OB. Prior to this date Goran Capital
Inc.'s stock was traded on the NASDAQ Stock Market's National Market. The
shares also trade on the Toronto Stock Exchange.
As of December 31, 2002 there were approximately 100 common stockholders of
record, including many brokers holding shares for the individual clients. The
number of individual stockholders on the same date is estimated to be 800.
The number of commons shares outstanding on December 31, 2002 totaled 5,393,698.
Information relating to the common shares is available through the Toronto Stock
Exchange and the U.S. OTC Bulletin Board. The following table sets forth the
high and low closing sale prices for the common shares for each quarter of 2002,
2001 and 2000.
TORONTO STOCK EXCHANGE
2002 2001 2000
QUARTER ENDED High Low High Low High Low
- ------------- ----- ----- ----- ----- ----- ----
March 31. . . $1.35 $0.70 $2.70 $0.90 $4.15 $1.50
June 30 . . . $0.80 $0.45 $1.75 $0.80 $3.50 $1.75
September 30. $0.50 $0.25 $1.15 $0.53 $2.84 $1.95
December 31 . $0.70 $0.14 $1.25 $0.60 $2.25 $ .50
U.S. OTC BULLETIN BOARD TRADING PRICES
2002 2001 2000
QUARTER ENDED High. Low High Low High Low
- ------------- ----- ----- ----- ----- ----- ----
March 31. . . $0.85 $0.41 $1.88 $0.75 $2.88 $1.05
June 30 . . . $0.43 $0.32 $1.14 $0.58 $2.44 $1.16
September 30. $0.25 $0.18 $0.80 $0.35 $1.95 $1.25
December 31 . $0.42 $0.08 $0.81 $0.41 $1.38 $0.34
U.S. OTC Bulletin Board quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
Goran Capital Inc. did not declare or pay cash dividends on its common stock
during the years ended December 31, 2002, 2001 and 2000. Goran Capital Inc.
does not plan to pay cash dividends on its common stock in the foreseeable
future. See Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to the Consolidated Financial Statements for
additional discussion regarding restrictions on the payment of dividends.
Shareholder inquiries should be directed to:
DOUGLAS H. SYMONS
President, Chief Executive Officer and Secretary
Goran Capital Inc.
Tel: (317) 259-6413
E-mail: dsymons@sigins.com
BOARD OF DIRECTORS
G. GORDON SYMONS
Chairman of the Board
Goran Capital Inc.
Symons International Group, Inc.
DOUGLAS H. SYMONS
President, Chief Executive Officer and Secretary
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
J. ROSS SCHOFIELD
President, Schofield Insurance Brokers
DAVID B. SHAPIRA
President, Medbers Limited
JOHN K. MCKEATING
Former President, Vision 2120, Inc.
RON L. FOXCROFT
President, Fluke Transportation Group
ROBERT C. WHITING
President, Prime Advisors, Inc.
EXECUTIVE OFFICERS
DOUGLAS H. SYMONS
President, Chief Executive Officer, Chief Operating Officer and Secretary
Goran Capital Inc.
President, Chief Executive Officer and Secretary
Symons International Group, Inc.
JOHN G. PENDL
Vice President, Chief Financial Officer and Treasurer
Goran Capital Inc.
COMPANY, SIG AND SUBSIDIARY OFFICES
HEAD OFFICE - CANADA
Goran Capital Inc.
2 Eva Road, Suite 200
Toronto, Ontario Canada M9C 2A8
Tel: 416-622-0660
Fax: 416-622-8809
US OFFICE
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6400
Fax: 317-259-6395
Website: www.gorancapital.com
--------------------
SIG CORPORATE OFFICE
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Website: www.sigins.com
--------------
OTHER SUBSIDIARY OFFICES
Superior Insurance Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Website: www.sigauto.com
---------------
Pafco General Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Superior Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Superior Insurance Company
280 Interstate North Circle, N.W., Suite 500
Atlanta, Georgia 30339
Tel: 770-952-4885
Fax: 770-988-8583
IGF Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Superior Insurance Company - Claims Office
1745 West Orangewood Road, Suite 210
Orange, California 92826
Tel: 714-978-6811
Fax: 714-978-0353
Superior Insurance Company - Claims Office
5483 W. Waters Avenue, Suite 1200
Tampa, Florida 33634
Tel: 813-887-4878
Fax: 813-243-0268
Superior Insurance Company- Claims Office
4500 PGA Boulevard, Suite 304A
Palm Beach Gardens, Florida 33418
Tel: 561-622-7831
Fax: 561-622-9741