FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the year ended December 31, 1996.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File Number: 000-24366
GORAN CAPITAL INC.
(Exact name of registrant as specified in its charter)
CANADA Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
181 University Avenue, Suite 1101 M5H 3M7
Toronto, Ontario Canada
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (416) 594-1155 (Canada)
(317) 259-6300 (U.S.A.)
Securities registered pursuant to Section 12(b) of the Act: Common Shares
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of the Issuer's Common Stock held by nonaffiliates,
as of March 25, 1997 was $128,101,996 (US).
The number of shares of Common Stock of the Registrant, without par value,
outstanding as of March 25, 1997 was 5,569,652.
Documents Incorporated By Reference:
Portions of the Annual Report to Shareholders and the Proxy Statement for the
1997 Annual Meeting of Shareholders are incorporated into Parts II and III.
Exchange Rate Information
The Company's accounts and financial statements are maintained in U.S. Dollars.
In this Report all dollar amounts are expressed in U.S. Dollars except where
otherwise indicated.
The following table sets forth, for each period indicated, the average exchange
rates for U.S. Dollars expressed in Canadian Dollars on the last day of each
month during such period, the high and the low exchange rate during that period
and the exchange rate at the end of such period, based upon the noon buying
rate in New York City for cable transfers in foreign currencies, as certified
for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate").
Foreign Exchange Rates
U.S. to Canadian Dollars
For The Years Ended December 31,
1996 1995 1994 1993 1992
Average .7339 .7287 .7322 .7733 .8342
Period End .7301 .7325 .7129 .7544 .7865
High .7472 .7465 .7642 .8046 .8757
Low .7270 .7099 .7097 .7439 .7761
Accounting Principles
The financial information contained in this document is stated in U.S. Dollars
and is expressed in accordance with Canadian Generally Accepted Accounting
Principles unless otherwise stated.
GORAN CAPITAL INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1996
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
SIGNATURES
ITEM 1 - BUSINESS
(figures stated in U.S. dollars)
General
Goran Capital Inc. ("Goran" or the "Company") is a Canadian federally
incorporated holding company principally engaged in the business of
underwriting property and casualty insurance through its insurance sub-
sidiaries Pafco General Insurance Company ("Pafco"), Superior Insurance
Company ("Superior") and IGF Insurance Company ("IGF"), which maintain their
headquarters in Indianapolis, Indiana, Atlanta, Georgia and Des Moines, Iowa,
respectively. Goran owns 67% of a U.S. holding company, Symons International
Group, Inc. ("SIG"). SIG owns 100% of IGF and owns 52% of GGS Management
Holdings, Inc. ("GGS Holdings") and GGS Management, Inc. ("GGS") which are
the holding company and management company for Pafco and Superior. The
remaining 48% is owned by funds affiliated with Goldman Sachs & Co. Goran
sold 33% of SIG in an Initial Public Offering in November, 1996. The Company's
other subsidiaries include Granite Reinsurance Company Ltd. ("Granite Re"),
Granite Insurance Company ("Granite"), a Canadian federally licensed insurance
company and Symons International Group, Inc. - Florida ("SIGF"), a surplus
lines underwriter located in Florida.
The Company writes business in the U.S. exclusively through independent
agencies and seeks to distinguish itself by offering high quality, technology
based services for its agents and policyholders. The Company's nonstandard
automobile insurance business, with its principal offices in Indianapolis,
Indiana, Atlanta, Georgia, and Tampa, Florida, writes insurance through
approximately 4,500 independent agencies in 18 states. IGF with its
principal office in Des Moines, Iowa and regional offices in California,
Indiana, Kansas, Mississippi and North Dakota, writes MPCI and crop hail
insurance through approximately 1,200 independent agencies in 31 states.
Based on a Company analysis of gross premiums written in 1995 as reported by
A.M. Best, the Company believes that the combination of Pafco and Superior
makes the Company's nonstandard automotive group the sixteenth largest under-
writer of nonstandard automobile insurance in the United States. Based on
premium information compiled in 1995 by the Federal Crop Insurance Corporation
("FCIC") and National Crop Insurance Service, Inc. ("NCIS"), the Company
believes that IGF is the fifth largest underwriter of MPCI in the United
States.
Granite Re is a specialized reinsurance company that underwrites niche products
such as nonstandard automobile, crop, property casualty reinsurance and offers
(on a non-risk bearing, fee basis), rent-a-captive facilities for Bermudian,
Canadian and U.S. reinsurance companies.
Through a rent-a-captive program, Granite Re offers the use of its capital and
its underwriting facilities to write specific programs on behalf of its
clients, including certain programs ceded from IGF and Pafco. Granite Re
alleviates the need for its clients to establish their own insurance company
and also offers this facility in an offshore environment.
Granite sold its book of business in January 1990 to an affiliate which
subsequently sold to third parties in June 1990. Granite currently has
approximately 40 outstanding claims and maintains an investment portfolio
sufficient to support those claim liabilities which will likely be settled
between now and the year 2000.
On January 31, 1996, Goran, SIG, Fortis, Inc. and its wholly-owned subsidiary,
Interfinancial, Inc., a holding company for Superior entered into a Stock
Purchase Agreement (the "Superior Purchase Agreement") pursuant to which SIG
agreed to purchase Superior from Interfinancial, Inc. (the "Acquisition") for
a purchase price of approximately $66.6 million. Simultaneously with the
execution of the Superior Purchase Agreement, Goran, SIG, GGSH and GS Capital
Partners II, L.P. ("GS Funds"), a Delaware limited partnership, entered into
an agreement (the "GGS Agreement") to capitalize GGSH and to cause GGSH to
issue its capital stock to SIG and to the GS Funds, so as to give SIG
a 52% ownership interest and the GS Funds a 48% ownership interest (the
"Formation Transaction"). Pursuant to the GGS Agreement (a) SIG contributed
to GGSH (i) all the outstanding common stock of Pafco General Insurance
Company ("Pafco"), with a book value of $16.9 Million, (ii) its right to
acquire Superior pursuant to the Superior Purchase Agreement, and (iii)
certain fixed assets, including office furniture and equipment, having value
of approximately $350,000, and (b) the GS Funds contributed to GGSH $21.2
Million in cash. The Formation Transaction and the Acquisition were
completed on April 30, 1996.
Pursuant to the GGS Agreement, prior to the SIG's contribution of Pafco to
GGSH, Pafco transferred all of the outstanding capital stock of IGF Insurance
Company ("IGF") (the "Transfer") in order to improve the risk-based capital
rating of Pafco and to permit GGSH to focus exclusively on the nonstandard
automobile insurance business. Pafco accomplished the Transfer by forming a
wholly-owned subsidiary, IGF Holdings, Inc. ("IGF Holdings"), to which Pafco
contributed all of the outstanding shares of capital stock of IGF. Prior to
the distribution of the IGF Holdings capital stock to the SIG, IGF
Holdings paid to Pafco a dividend in the aggregate amount of approximately
$11.0 Million (the "Dividend"), consisting of $7.5 Million in cash and a
subordinated promissory note in the principal amount of approximately $3.5
Million (the "IGF Note"). Pafco then distributed the outstanding capital
stock of IGF Holdings to SIG. IGF Holdings funded the cash portion
of the Dividend with bank debt in the principal amount of $7.5 Million (the
"IGFH Bank Debt"). The IGFH Bank Debt and the IGF Note were repaid with a
portion of the proceeds from the Offering.
Prior to the Offering, the Company, through Symons International Group, Inc.
- - - - Florida ("SIGF"), its specialized surplus lines underwriting unit based in
Florida, provided certain commercial insurance products through retail
agencies, principally in the southeast United States. SIGF writes these
specialty products through a number of different insurers including Pafco,
United National Insurance Group, Munich American Reinsurance Corp. and
underwriters at Lloyd's of London. Effective January 1, 1996, SIG transferred
to Goran all of the issued and outstanding shares of capital stock of SIGF (the
"Distribution").
The following table sets forth the premiums written by line of business for the
periods indicated:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Nonstandard Automobile<F1>
Gross Premiums Written $ 45,593 $49,005 $187,176
Net Premiums Written 28,114 37,302 186,579
Crop Hail<F2>
Gross Premiums Written $ 10,130 $16,966 $ 27,957
Net Premiums Written 4,565 11,608 23,013
MPCI<F3>
Gross Premiums Written $ 44,325 $53,408 $ 82,102
Net Premiums Written 0 0 0
Commercial
Gross Premiums Written $ 3,086 $ 5,255 $ 9,034
Net Premiums Written 2,460 4,537 9,034
Finite Reinsurance
Gross Premiums Written $ 23,844 $27,083 $ 1,365
Net Premiums Written 23,334 32,914 1,806
Total
Gross Premiums Written<F4> $126,978 $151,717 $307,634
Net Premiums Written $ 58,473 $ 86,361 $220,432
[FN]
<F1>
Does not reflect net premiums written for Superior for the years ended
December 31, 1994 and 1995 and for the four months ended April 30, 1996. For
the years ended December 31, 1994 and 1995, Superior and its subsidiaries had
gross premiums written of $112.9 million and $94.8 million, respectively, and
net premiums written of $112.5 million and $94.1 million, respectively. For
the four months ended April 30, 1996, Superior and its subsidiaries had gross
premiums written of $44.0 million and net premiums written of $43.6 million.
<F2>
Most crop hail insurance policies are sold in the second and third quarters
of the calendar year.
<F3>
For a discussion of the accounting treatment of MPCI premiums, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company".
<F4>
For additional financial segment information concerning the Company's
nonstandard automobile and crop insurance operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company".
Nonstandard Automobile Insurance
Industry Background
The Company, through its 52% owned subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile physical damage and lia-
bility policies for "nonstandard risks". Nonstandard risks are those
individuals who are unable to obtain insurance through standard market carriers
due to factors such as poor premium payment history, driving experience, record
of prior accidents or driving violations, particular occupation or type of
vehicle. Premium rates for nonstandard risks are generally higher than for
standard risks. Total private passenger automobile insurance premiums written
by insurance carriers in the United States in 1995 have been estimated by A.M.
Best to be approximately $106 billion. Since it can be viewed as a residual
market, the size of the nonstandard private passenger automobile insurance
market changes with the insurance environment and grows when standard coverage
becomes more restrictive. Although this factor, as well as industry
differences in the criteria which distinguish standard from nonstandard
insurance, make it difficult to estimate the size of the nonstandard market,
management of the Company believes that the voluntary nonstandard market has
accounted for approximately 15% of total private passenger automobile insurance
premiums written in recent years. According to statistical information derived
from insurer annual statements compiled by A.M. Best, the nonstandard
automobile market accounted for $17.4 billion in annual premium volume for
1995.
Strategy
The Company has multiple strategies with respect to its nonstandard automobile
insurance operations, including:
1. Through GGS Holdings, the Company seeks to achieve profitability through a
combination of internal growth and the acquisition of other insurers and blocks
of business. The Company regularly evaluates acquisition opportunities. There
can be no assurance, however, that any suitable business opportunities will
arise.
2. The Company is committed to the use of integrated technologies which permit
it to rate, issue, bill and service policies in an efficient and cost effective
manner.
3. The Company competes primarily on the basis of underwriting criteria and
service to agents and insureds and generally does not match price decreases
implemented by competitors which are directed towards obtaining market share.
4. The Company encourages agencies to place a large share of their profitable
business with Pafco and Superior by offering, in addition to fixed commissions,
a contingent commission based on a combination of volume and profitability.
5. The Company promptly responds to claims in an effort to reduce the costs of
claims settlements by reducing the number of pending claims and uses computer
databases to verify repair and vehicle replacement costs and to increase
subrogation and salvage recoveries.
6. The Company will seek to expand the multi-tiered marketing approach
currently employed by Superior and its subsidiaries in Florida and other states
in order to offer to its independent agency network a broader range of products
with different premium and commission structures.
Products
The Company offers both liability and physical damage coverage in the insurance
marketplace, with policies having terms of three to twelve months, with the
majority of policies having a term of six months. Most nonstandard automobile
insurance policyholders choose the basic limits of liability coverage which,
though varying from state to state, generally are $25,000 per person and
$50,000 per accident for bodily injury, and in the range of $10,000 to $20,000
for property damage. Of the approximately 228,000 combined policies of Pafco
and Superior in force on December 31, 1996, fewer than 9% had policy limits in
excess of these basic limits of coverage. Of the 63,000 policies of Pafco in
force on December 31, 1996, approximately 88% had policy periods of six months
or less. Of the approximately 165,000 policies of Superior in force as of
December 31, 1996, approximately 74% had policy periods of six months and
approximately 26% had policy periods of twelve months.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Choice
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard marketplace. The Superior Standard policy is intended for risks
which do not qualify for Superior Choice but which nevertheless present a more
favorable risk profile than many other nonstandard risks. The Superior
Specialty policies cover risks which do not qualify for either the Superior
Choice or the Superior Standard. Pafco offers only a single nonstandard policy
which includes multiple discounts and surcharges designed to recognize proof of
prior insurance, driving violations, accident history and other factors
relevant to the level of risk insured. Superior offers a product similar to
the Pafco product in states in which it is not offering a multi-tiered product.
Marketing
The Company's nonstandard automobile insurance business is concentrated in the
states of Florida, California, Indiana, Missouri, Kentucky, Colorado, Texas and
Virginia, and the Company writes nonstandard automobile insurance in eleven
additional states. Management plans to continue to expand selectively into
additional states. GGS Holdings will select states for expansion based on a
number of criteria, including the size of the nonstandard automobile insurance
market, state-wide loss results, competition and the regulatory climate.
The following tables sets forth the geographic distribution of gross premiums
written for SIG and Superior, individually, and for SIG and Superior on a
combined basis for the periods indicated.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
SIG Superior
1994 1995 1996 1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004 $ 0 $ 0 $ 0
California 0 0 0 13,422 15,350 25,131
Colorado 5,629 9,257 10,262 0 0 0
Florida 0 0 0 55,282 54,535 97,659
Georgia 0 0 0 7,342 5,927 7,398
Illinois 0 80 1,380 3,894 2,403 1,614
Indiana 13,648 13,710 16,599 414 132 0
Iowa 3,769 3,832 5,818 0 0 0
Kentucky 9,573 7,840 11,065 0 0 0
Mississippi 0 0 0 4,411 2,721 2,250
Missouri 8,163 8,513 13,423 0 0 0
Nebraska 3,192 3,660 5,390 0 0 0
Ohio 0 0 0 4,325 3,164 3,643
Oklahoma 0 317 2,559 0 0 0
Tennessee 0 0 0 1,829 332 (2)
Texas 0 0 0 10,660 3,464 10,122
Virginia 0 0 0 7,500 5,035 14,733
Washington 0 0 0 3,827 1,693 106
Totals 45,593 49,005 68,500 112,906 94,756 162,654
Goran Capital Inc. and
Superior Insurance Company (Combined)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004
California 13,422 15,350 25,131
Colorado 5,629 9,257 10,262
Florida 55,282 54,535 97,659
Georgia 7,342 5,927 7,398
Illinois 3,894 2,483 2,944
Indiana 14,062 13,842 16,599
Iowa 3,769 3,832 5,818
Kentucky 9,573 7,840 11,065
Mississippi 4,411 2,721 2,250
Missouri 8,163 8,513 13,423
Nebraska 3,192 3,660 5,390
Ohio 4,325 3,164 3,643
Oklahoma 0 317 2,559
Tennessee 1,829 332 (2)
Texas 10,660 3,464 10,122
Virginia 7,500 5,035 14,733
Washington 3,827 1,693 106
Totals $158,499 $143,761 $231,154
SIG and Superior market their nonstandard products exclusively through
approximately 4,500 independent agencies and focus their marketing efforts in
rural areas and the peripheral areas of metropolitan centers. As part of its
strategy, management is continuing its efforts to establish the Company as a
low cost deliverer of nonstandard automobile insurance while maintaining a
commitment to provide quality service to both agents and insureds. This
element of the Company's strategy is being accomplished primarily through the
automation of certain marketing, underwriting and administrative functions.
In order to maintain and enhance its relationship with its agency base, the
Company has twenty-six territorial managers, each of whom resides in a specific
marketing region and has access to the technology and software necessary to
provide marketing, rating and administrative support to the agencies in his or
her region.
The Company attempts to foster strong service relationships with its agencies
and customers. The Company is currently developing computer software that will
provide on-line communication with its agency force. In addition, to
delivering prompt service while ensuring consistent underwriting, the Company
offers rating software to its agents in some states which permits them to
evaluate risks in their offices. The agent has the authority to sell and bind
insurance coverages in accordance with procedures established by the Company,
which is a common practice in the property and casualty insurance business.
The Company reviews all coverages bound by the agents promptly and generally
accepts all coverages which fall within its stated underwriting criteria. In
most jurisdictions, the Company has the right, within a specified time period,
to cancel any policy even if the risk falls within its underwriting criteria.
See "Business - Nonstandard Automobile Insurance - Underwriting".
Pafco and Superior compensate their agents on a commission basis based on a
percentage of premiums produced. Pafco also offers its agents a contingent
commission based on volume and profitability, thereby encouraging the agents to
enhance the placement of profitable business with the Company. Superior has
recently incorporated the contingent commission into the compensation package
for its agents.
The Company believes that the combination of Pafco with Superior and its two
Florida domiciled insurance subsidiaries will allow the Company the flexibility
to engage in multi-tiered marketing efforts in which specialized automobile
insurance products are directed toward specific segments of the market. Since
certain state insurance laws prohibit a single insurer from offering similar
products with different commission structures or, in some cases, premium rates,
it is necessary to have multiple licenses in certain states in order to obtain
the benefits of market segmentation. The Company is currently offering multi-
tiered products in Florida, Texas, Virginia, California and Missouri. The
Company intends to expand the marketing of its multi-tiered products into
other states and to obtain multiple licenses for its subsidiaries in these
states to permit maximum flexibility in designing commission structures.
Underwriting
The Company underwrites its nonstandard automobile business with the goal of
achieving adequate pricing. The Company seeks to classify risks into narrowly
defined segments through the utilization of all available underwriting
criteria. The Company maintains an extensive, proprietary database which
contains statistical records with respect to its insureds on driving and repair
experience by location, class of driver and type of automobile. Management
believes this database gives the Company the ability to be more precise in the
underwriting and pricing of its products. Further, the Company uses motor
vehicle accident reporting agencies to verify accident history information
included in applications.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and
use of rates, while others, such as Florida, Arkansas and California, require
approval of the insurance department prior to the use of the rates.
The Company has begun to integrate its automated underwriting process with the
functions performed by its agency force. For example, the Company has recently
introduced a rating software package for use by agents in some states. In many
instances, this software package, combined with agent access to the automated
retrieval of motor vehicle reports, ensures accurate underwriting and pricing
at the point of sale. The Company believes the automated rating and under-
writing system provides a significant competitive advantage because it (i)
improves efficiencies for the agent and the Company, further linking the agent
to the Company, (ii) makes more accurate and consistent underwriting decisions
possible, and (iii) can be changed easily to reflect new rates and underwriting
guidelines.
Underwriting results of insurance companies are frequently measured by their
combined ratios. However, investment income, federal income taxes and other
non-underwriting income or expense are not reflected in the combined ratio.
The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are generally considered profitable when the combined ratio is under
100% and unprofitable when the combined ratio is over 100%. The following
table sets forth loss and LAE ratios, underwriting expense ratios and combined
ratios for the periods indicated for the nonstandard automobile insurance
business of the Company and Superior individually and on a combined basis.
The ratios shown in the table below are computed based upon GAAP, not SAP.
Goran Capital Inc.
For The Years Ended December 31,
Company Superior
1994 1995 1996 1994 1995 1996
Loss Ratio 62.3% 65.8% 61.8% 72.3% 64.2% 66.1%
LAE Ratio 9.8% 8.0% 8.6% 9.6% 9.9% 9.5%
Underwriting
Expense Ratio 34.3% 37.5% 33.3% 34.5% 33.5% 23.9%
Combined Ratio 106.4% 111.3% 103.7% 116.4% 107.6% 99.5%
Goran Capital Inc.
and Superior Insurance Company (Combined)<F1>
For The Years Ended December 31,
1994 1995 1996
Loss Ratio 70.5% 64.6% 65.1%
LAE Ratio 9.6% 9.4% 8.6%
Underwriting Expense Ratio 34.5% 34.8% 27.7%
Combined Ratio 114.6% 108.8% 101.4%
[FN]
<F1>
These ratios have not been computed on a pro-forma basis but rather have
been derived by adding the premiums, expenses, losses and LAE of each of the
Company and Superior through December 31, 1996.
In an effort to maintain and improve underwriting profits, the territorial
managers regularly monitor loss ratios of the agencies in their regions and
meet periodically with the agencies in order to address any adverse trends in
loss ratios.
Claims
The Company's nonstandard automobile claims department handles claims on a
regional basis from its Indianapolis, Indiana; Atlanta, Georgia; Tampa, Florida
and Anaheim, California locations. Management believes that the employment of
salaried claims personnel, as opposed to independent adjusters, results in
reduced ultimate loss payments, lower LAE and improved customer service. The
Company's generally retains independent appraisers and adjusters on an as
needed basis for estimation of physical damage claims and limited elements of
investigation. The Company uses the Audapoint, Audatex and Certified
Collateral Corporation computer programs to verify, through a central database,
the cost to repair a vehicle and to eliminate duplicate or "overlap" costs from
body shops. Autotrak, which is a national database of vehicles, allows the
Company to locate vehicles nearly identical in model, color and mileage to the
vehicle damaged in an accident, thereby reducing the frequency of disagreements
with claimants as to the replacement value of damaged vehicles. In 1995, the
Company implemented new claims handling procedures designed to reduce the
number of pending claims.
Claims settlement authority levels are established for each adjuster or manager
based on the employee's ability and level of experience. Upon receipt, each
claim is reviewed and assigned to an adjuster based on the type and severity of
the claim. All claims-related litigation is monitored by a home office
supervisor or litigation manager. The claims policy of the Company emphasizes
prompt and fair settlement of meritorious claims, adequate reserving for claims
and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a portion of
its risks and paying for that protection based upon premiums received on all
policies subject to such reinsurance. Insurance is ceded principally to reduce
the Company's exposure on large individual risks and to provide protection
against large losses, including catastrophic losses. Although reinsurance does
not legally discharge the ceding insurer from its primary obligation to pay the
full amount of losses incurred under policies reinsured, it does render the
reinsurer liable to the insurer to the extent provided by the terms of the
reinsurance treaty. As part of its internal procedures, the Company evaluates
the financial condition of each prospective reinsurer before it cedes business
to that carrier. Based on the Company's review of its reinsurers' financial
health and reputation in the insurance marketplace, the Company believes its
reinsurers are financially sound and that they therefore can meet their
obligations to the Company under the terms of the reinsurance treaties.
Reserves for uncollectible reinsurance are provided as deemed necessary.
In 1995, Pafco maintained a 25% quota share reinsurance treaty on its
nonstandard automobile insurance business, as well as an excess of loss treaty
covering 100% of losses on an individual occurrence basis in excess of $200,000
up to a maximum of $1,050,000. As of January 1, 1996, Pafco has terminated all
third party quota share reinsurance with respect to its nonstandard automobile
insurance business. Pafco has entered into a quota share reinsurance agreement
with Superior whereby Pafco shall cede 100% of its gross premiums written on or
after May 1, 1996 that are in excess of three times outstanding capital and
surplus. See "Certain Relationships and Related Transactions - Reinsurance
Arrangements". In 1996, Pafco continues to maintain an excess of loss treaty
on its nonstandard automobile insurance business covering 100% of losses on an
individual occurrence basis in excess of $200,000 up to a maximum of
$1,050,000. Of such reinsurers, those having A.M. Best ratings of A or better
provided 83% of such coverage. The following table provides information with
respect to material third party reinsurers on the foregoing Pafco nonstandard
automobile reinsurance treaties:
Goran Capital Inc.
For The Year Ended December 31, 1996
(In Thousands of U.S. Dollars)
Reinsurers A.M. Best Rating Reinsurance Recoverables<F1>
Chartwell Reinsurance
Company A<F2> $ 290
Constitution Reinsurance
Corporation A+<F3> $1,210
[FN]
<F1>
Only recoverables greater than $200 are shown. Total nonstandard automobile
reinsurance recoverables as of December 31, 1996 were approximately $2,565.
<F2>
An A.M. Best rating of "A" is the third highest of 15 ratings.
<F3>
An A.M. Best rating of "A+" is the second highest of 15 ratings.
In 1995, Superior maintained both automobile casualty and property catastrophe
excess reinsurance. Superior's casualty excess of loss treaties covered losses
in excess of $100,000 up to a maximum of $2 million. Superior's first casualty
excess layer contained limits of $200,000 excess of $100,000, its second
casualty excess layer contained limits of $700,000 excess of $300,000 and its
third casualty excess layer had a limit of $1 million excess of $1 million.
Superior's first layer of property catastrophe excess reinsurance covered 95%
of $500,000 excess of $500,000 with an annual limit of $1 million and its
second layer of property catastrophe excess reinsurance covered 95% of $2
million excess of $1 million with an annual limit of $4 million. In 1996,
Superior maintained the same levels of coverage, except as follows: (i) as to
its third casualty excess layer, the limit was increased to $4 million, and
(ii) Superior added a third layer of property catastrophe excess reinsurance
covering 95% of $2 million excess of $3 million with an annual limit of $4
million. Superior had no quota share reinsurance on its nonstandard automobile
business in either 1995 or 1996.
In 1995, Superior placed all of its reinsurance with Prudential Reinsurance
Company (now Everest Reinsurance Company). In 1996, Superior placed all of its
reinsurance with Everest Reinsurance Company, except for its third layer
casualty excess of loss treaty, which was placed as follows: Zurich
Reinsurance Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%;
Transatlantic Reinsurance Company, 15%; SOREMA North American Reinsurance
Company, 10%; and Winterthur Reinsurance Corporation of America, 10%. The
foregoing reinsurers have the following A.M. Best ratings: Everest Reinsurance
Company - "A"; Skandia America Reinsurance Corporation - "A-" (the fourth
highest of 15 ratings); SOREMA North American Reinsurance Company - "A-";
Transatlantic Reinsurance Company - "A+"; Winterthur Reinsurance Company of
America - "A"; and Zurich Reinsurance Centre, Inc. - "A". For the year ended
December 31, 1996, Superior had $737,000 of ceded premiums to unaffiliated
reinsurers.
On April 29, 1996, Pafco retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Reinsurance Company Ltd.
("Granite Re"), an affiliate, with an effective date of January 1, 1996. On
this date, Pafco also entered into a 100% quote share reinsurance agreement
with Granite Re, whereby all of Pafco's commercial business from 1996 and
forward was ceded to Granite Re effective January 1, 1996. Pafco has a
reinsurance recoverable at December 31, 1996 from Granite Re for $9,230,000,
of which $770,000 is uncollateralized.
Neither Pafco nor Superior has any facultative reinsurance with respect to its
nonstandard automobile insurance business.
Competition
The Company competes with both large national writers and smaller regional
companies in each state in which it operates. The Company's competitors
include other companies which, like the Company, serve the agency market, as
well as companies which sell insurance directly to customers. Direct writers
may have certain competitive advantages over agency writers, including
increased name recognition, increased loyalty of their customer base and,
potentially, reduced acquisition costs. The Company's primary competitors are
Progressive Casualty Insurance Company, Guaranty National Insurance Company,
Integon Corporation Group, Deerbrook Insurance Company (a member of the
Allstate Insurance Group) and the companies of the American Financial Group.
Generally, these competitors are larger and have greater financial resources
than the Company. The nonstandard automobile insurance business is price
sensitive and certain competitors of the Company have, from time to time,
decreased their prices in an apparent attempt to gain market share. Although
the Company's pricing is inevitably influenced to some degree by that of its
competitors, management of the Company believes that it is generally not in the
Company's best interest to match such price decreases, choosing instead to
compete on the basis of underwriting criteria and superior service to its
agents and insureds.
Crop Insurance
Industry Background
The two principal components of the Company's crop insurance business are
MPCI and private named peril, primarily crop hail insurance. Crop insurance
is purchased by farmers to reduce the risk of crop loss from adverse weather
and other uncontrollable events. Farms are subject to drought, floods and
other natural disasters that can cause widespread crop losses and, in severe
cases, force farmers out of business. Because many farmers rely on credit
to finance their purchases of such agricultural inputs as seed, fertilizer,
machinery and fuel, the loss of a crop to a natural disaster can reduce their
ability to repay these loans and to find sources of funding for the following
year's operating expenses.
MPCI was initiated by the federal government in the 1930s to help protect
farmers against loss of their crops as a result of drought, floods and other
natural disasters. In addition to MPCI, farmers whose crops are lost as a
result of natural disasters have, in the past, sometimes been supported by the
federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available
only on major crops in major producing areas. In 1980, Congress expanded the
scope and coverage of the MPCI program. In addition, the delivery system for
MPCI was expanded to permit private insurance companies and licensed agents and
brokers to sell MPCI policies, and the FCIC was authorized to reimburse parti-
cipating companies for their administrative expenses and to provide federal
reinsurance for the majority of the risk assumed by such private companies.
Although expansion of the federal crop insurance program in 1980 was expected
to make crop insurance the farmer's primary risk management tool, participation
in the MPCI program was only 32% of eligible acreage in the 1993 crop year.
Due in part to low participation in the MPCI program, Congress provided an
average of $1.5 billion per year in ad hoc disaster payments over the six years
prior to 1994. In view of the combination of low participation rates in the
MPCI program and large federal payments on both crop insurance (with an average
loss ratio of 147%) and ad hoc disaster payments since 1980, Congress has,
since 1990, considered major reform of its crop insurance and disaster
assistance policies. The Federal Crop Insurance Reform Act of 1994 (the "1994
Reform Act") was enacted in order to increase participation in the MPCI
program and eliminate the need for ad hoc federal disaster relief payments to
farmers.
The 1994 Reform Act required farmers for the first time to purchase at least
CAT Coverage (i.e., the minimum available level of MPCI providing coverage for
50% of farmers' historic yield at 60% of the price per unit for such crop set
by the FCIC) in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of CAT
Coverage by the local United States Department of Agriculture ("USDA") offices.
The Federal Agriculture Improvement and Reform Act of 1996 (the "1996 Reform
Act"), signed into law by President Clinton in April, 1996, limits the role of
the USDA offices in the delivery of MPCI coverage beginning in July, 1996,
which is the commencement of the 1997 crop year, and also eliminates the
linkage between CAT Coverage and qualification for certain federal farm
program benefits. This limitation should provide the Company with the
opportunity to realize increased revenues from the distribution and servicing
of its MPCI product. In accordance with the 1996 Reform Act, the USDA
announced in July, 1996, the following fourteen states in which CAT Coverage
will no longer be available through USDA offices but rather will be solely
available through private agencies: Arizona, Colorado, Illinois, Indiana,
Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South
Dakota, Washington and Wyoming. The FCIC has transferred to the Company
approximately 8,900 insureds for CAT Coverage who previously purchased such
coverage from USDA field offices. The Company believes that any future
potential negative impact of the delinkage mandated by the 1996 Reform Act will
be mitigated by, among other factors, the likelihood that farmers will continue
to purchase MPCI to provide basic protection against natural disasters since
ad hoc federal disaster relief programs have been reduced or eliminated. In
addition, the Company believes that (i) lending institutions will likely
continue to require this coverage as a condition to crop lending; and (ii)
many of the farmers who entered the MPCI program as a result of the 1994
Reform Act have come to appreciate the reasonable price of the protection
afforded by CAT Coverage and will remain with the program regardless of
delinkage. There can, however, be no assurance as to the ultimate effect which
the 1996 Reform Act may have on the business or operations of the Company.
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
1. The Company will seek to enhance underwriting profits and reduce the
volatility of its crop insurance business through geographic diversification
and the appropriate allocation of risks among the federal reinsurance pools and
the effective use of federal and third-party catastrophic reinsurance
arrangements.
2. The Company also limits the risks associated with crop insurance through
selective underwriting of crops based on its historical loss experience
database.
3. The Company continues to develop and maintain a proprietary knowledge-based
underwriting system which utilizes a database of Company-specific underwriting
rules.
4. The Company has further strengthened its independent agency network by
using technology to provide fast, efficient service to its agencies and
providing application documentation designed for simplicity and convenience.
5. Unlike many of its competitors, the Company employs a number of full-time
claims adjusters in order to reduce the losses experienced by IGF.
6. The Company stops selling its crop hail policies after the date on which
the plant growth emerges from the ground in order to prevent farmers from
adversely selecting against IGF when a storm is forecast or hail damage has
already occurred.
7. The Company continues to explore growth opportunities and product
diversification through new specialty coverages, including crop revenue
coverage and named peril insurance.
8. The Company continues to explore new opportunities for advances in
administrative efficiencies and product underwriting presented by advances in
Precision Farming software, Global Positioning System (GPS) software and
Geographical Information System (GIS) technology, all of which continue to be
adopted by insureds in their farming practices.
Products
Description of MPCI Insurance Program
MPCI is a federally-subsidized program which is designed to provide parti-
cipating farmers who suffer insured crop damage with funds needed to continue
operating and plant crops for the next growing season. All of the material
terms of the MPCI program and of the participation of private insurers, such as
the Company, in the program are set by the FCIC under applicable law. MPCI
provides coverage for insured crops against substantially all natural perils.
Purchasing an MPCI policy permits a farmer to insure against the risk that his
crop yield for any growing season will be less than 50% to 75% (as selected by
the farmer at the time of policy application or renewal) of his historic crop
yield. If a farmer's crop yield for the year is greater than the yield
coverage he selected, no payment is made to the farmer under the MPCI program.
However, if a farmer's crop yield for the year is less than the yield coverage
selected, MPCI entitles the farmer to a payment equal to the yield shortfall
multiplied by 60% to 100% of the price for such crop (as selected by the farmer
at the time of policy application or renewal) for that season as set by the
FCIC.
In order to encourage farmers to participate in the MPCI program and thereby
reduce dependence on traditional disaster relief measures, the 1994 Reform Act
established CAT Coverage as a new minimum level of MPCI coverage, which farmers
may purchase upon payment of a fixed administrative fee of $50 per policy
instead of any premium. CAT Coverage insures 50% of historic crop yield at 60%
of the FCIC-set crop price for the applicable commodities standard unit of
measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private
insurers such as the Company or, in certain states, from USDA field offices.
In addition to CAT Coverage, MPCI policies which provide a greater level of
protection than the CAT Coverage level are also offered ("Buy-up Coverage").
Most farmers purchasing MPCI have historically purchased at Buy-up Coverage
levels, with the most frequently sold policy providing coverage for 65% of
historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up
Coverages require payment of a premium in an amount determined by a formula set
by the FCIC. Buy-up Coverage can only be purchased from private insurers.
The Company focuses its marketing efforts on Buy-up Coverages, which have
higher premiums and which the Company believes will continue to appeal to
farmers who desire, or whose lenders encourage or require, revenue protection.
The number of MPCI Buy-up Coverage policies written has historically tended to
increase after a year in which a major natural disaster adversely affecting
crops occurs, and to decrease following a year in which favorable weather
conditions prevail.
The Company, like other private insurers participating in the MPCI program,
generates revenues from the MPCI program in two ways. First, it markets,
issues and administers policies, for which it receives administrative fees; and
second, it participates in a profit-sharing arrangement in which it receives
from the government a portion of the aggregate profit, or pays a portion of the
aggregate loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex profit sharing formula established by the FCIC.
Under this formula, the primary factors that determine the Company's MPCI
profit or loss share are (i) the gross premiums the Company is credited with
having written; (ii) the amount of such credited premiums retained by the
Company after ceding premiums to certain federal reinsurance pools; and (iii)
the loss experience of the Company's insureds. The following discussion
provides more detail about the implementation of this profit sharing formula.
Gross Premiums
For each year, the FCIC sets the formulas for determining premiums for
different levels of Buy-up Coverage. Premiums are based on the type of crop,
acreage planted, farm location, price per bushel for the insured crop as set by
the FCIC for that year, and other factors. The federal government will
generally subsidize a portion of the total premium set by the FCIC and require
farmers to pay the remainder. Cash premiums are received by the Company from
farmers only after the end of a growing season and are then promptly remitted
to the federal government. Although applicable federal subsidies change from
year to year, such subsidies will range up to approximately 40% of the Buy-up
Coverage premium for 1996 depending on the crop insured and the level of
Buy-up Coverage purchased, if any. Federal premium subsidies are recorded on
the Company's behalf by the government. For purposes of the profit sharing
formula, the Company is credited with having written the full amount of
premiums paid by farmers for Buy-up Coverages, plus the amount of any related
federal premium subsidies (such total amount, its "MPCI Premium").
As previously noted, farmers pay an administrative fee of $50 per policy but
are not required to pay any premium for CAT Coverage. However, for purposes of
the profit sharing formula, the Company is credited with an imputed premium
(its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount of
such MPCI Imputed Premium credited is determined by formula. In general, such
MPCI Imputed Premium will be less than 50% of the premium that would be payable
for a Buy-up Coverage policy that insured 65% of historic crop yield at 100% of
the FCIC-set crop price per standard unit of measure for the commodity,
historically the most frequently sold Buy-up Coverage. For income statement
purposes under GAAP, the Company's gross premiums written for MPCI consist only
of its MPCI Premiums and do not include MPCI Imputed Premiums.
Reinsurance Pools
Under the MPCI program, the Company must allocate its MPCI Premium or MPCI
Imputed Premium in respect of a farm to one of three federal reinsurance pools,
at its discretion. These pools provide private insurers with different levels
of reinsurance protection from the FCIC on the business they have written. For
insured farms allocated to the "Commercial Pool", the Company, at its election,
generally retains 50% to 100% of the risk and the FCIC assumes 0% - 50% of the
risk; for those allocated to the "Developmental Pool", the Company generally
retains 35% of the risk and the FCIC assumes 65%; and for those allocated to
the "Assigned Risk Pool", the Company retains 20% of the risk and the FCIC
assumes 80%. The MPCI Retention is protected by private third party stop loss
treaties.
Although the Company in general must agree to insure any eligible farm, it is
not restricted in its decision to allocate a risk to any of the three pools,
subject to a minimum aggregate retention of 35% of its MPCI Premiums and MPCI
Imputed Premiums written. The Company uses a sophisticated methodology derived
from a comprehensive historical data base to allocate MPCI risks to the federal
reinsurance pools in an effort to enhance the underwriting profits realized
from this business. The Company has crop yield history information with
respect to over 100,000 farms in the United States. Generally, farms or crops
which, based on historical experience, location and other factors, appear to
have a favorable net loss ratio and to be less likely to suffer an insured
loss, are placed in the Commercial Pool. Farms or crops which appear to be
more likely to suffer a loss are placed in the Developmental Pool or Assigned
Risk Pool. The Company has historically allocated the bulk of its insured
risks to the Commercial Pool.
The Company's share of profit or loss depends on the aggregate amount of MPCI
Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention"). As previously
described, the Company purchases reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds
Under the MPCI program the Company pays losses to farmers through a federally
funded escrow account as they are incurred during the growing season. The
Company requests funding of the escrow account when a claim is settled, and the
escrow account is funded by the federal government within three business days.
After a growing season ends, the aggregate loss experience of the Company's
insureds in each state for risks allocated to each of the three reinsurance
pools is determined. If, for all risks allocated to a particular pool in a
particular state, the Company's share of losses incurred is less than its
aggregate MPCI Retention, the Company shares in the gross amount of such profit
according to a schedule set by the FCIC for each year. The profit and loss
sharing percentages are different for risks allocated to each of the three
reinsurance pools, and private insurers will receive or pay the greatest
percentage of profit or loss for risks allocated to the Commercial Pool.
The percentage split between private insurers and the federal government of any
profit or loss which emerges from an MPCI Retention is set by the FCIC and
generally is adjusted from year to year. For 1995, 1996 and 1997 crop years,
the FCIC increased the maximum potential profit share of private insurers for
risks allocated to the Commercial Pool above the maximum potential profit share
set for 1994, without increasing the maximum potential share of loss for risks
allocated to that pool for 1995. This change increased the potential profit-
ability of risks allocated to the Commercial Pool by private insurers.
The following table presents MPCI Premiums, MPCI Imputed Premiums, and
underwriting gains or losses of IGF for the periods indicated:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
MPCI Premiums $44,325 $53,408 $82,102
MPCI Imputed Premiums 2,171 19,552 29,744
Gross Underwriting Gain 4,344 10,870 15,801
Net Private Third-Party
Reinsurance Expense
And Other (1,087) (1,217) (3,524)
Net Underwriting Gain 3,257 9,653 12,277
MPCI Fees and Reimbursement Payments
The Company receives Buy-up Expense Reimbursement Payments from the FCIC for
writing and administering Buy-up Coverage policies. These payments provide
funds to compensate the Company for its expenses, including agents' commissions
and the costs of administering policies and adjusting claims. In 1994, the
Buy-up Expense Reimbursement Payments were set at 31% of the MPCI Premium. In
1995 and 1996, this payment has also been set at 31% of the MPCI Premium, but
it is scheduled to be reduced to 29% in 1997, 28% in 1998, and 27.5% in 1999.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced
in an amount that corresponds to the reduction in the expense reimbursement
rate, there can be no assurance that the Company's actual costs will not exceed
the expense reimbursement rate.
Farmers are required to pay a fixed administrative fee of $50 per policy in
order to obtain CAT Coverage. This fee is retained by the Company to defray
the cost of administration and policy acquisition. The Company also receives,
from the FCIC, a separate CAT LAE Reimbursement Payment equal to approximately
13.0% of MPCI Imputed Premiums in respect of each CAT Coverage policy it
writes and a small MPCI Excess LAE Reimbursement Payment. In general, fees and
payments received by the Company in respect of CAT Coverage are significantly
lower than those received for Buy-up Coverage.
In addition to premium revenues, the Company received the following fees and
commissions from its crop insurance segment for the periods indicated:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
CAT Coverage Fees $ 74 $ 1,298 $ 1,181
Buy-up Expense Reimbursement
Payments 13,845 16,366 24,971
CAT LAE Reimbursement Payments
and MPCI Excess LAE
Reimbursement Payments 107 3,427 5,753
Total $14,026 $21,091 $31,905
Crop Revenue Coverage
The Company has recently introduced a new product in its crop insurance
business called Crop Revenue Coverage ("CRC"). In contrast to standard MPCI
coverage, which features a yield guarantee or coverage for the loss of pro-
duction, CRC provides the insured with a guaranteed revenue stream by combining
both yield and price variability protection. CRC protects against a grower's
loss of revenue resulting from fluctuating crop prices and/or low yields by
providing coverage when any combination of crop yield and price results in
revenue that is less than the revenue guarantee provided by the policy. CRC
was approved by the FCIC as a pilot program for revenue insurance coverage
plans for the 1996 crop year, and has been available for corn and soybeans in
all counties in Iowa and Nebraska beginning with such crop year. CRC policies
represent approximately 30% of the combined corn policies written by IGF in
Iowa and Nebraska for the 1996 crop year. In July, 1996, the FCIC announced
that CRC will be made available in the fall of 1996 for winter wheat in the
entire states of Kansas, Michigan, Nebraska, South Dakota, Texas and Washington
and in parts of Montana.
Revenue insurance coverage plans such as CRC are the result of the 1994 Reform
Act, which directed the FCIC to develop a pilot crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company other than the
Company under the auspices of this pilot program, which authorizes private
companies to design alternative revenue coverage plans and to submit them for
review, approval and endorsement by the FCIC. As a result, although CRC is
administered and reinsured by the FCIC and risks are allocated to the federal
reinsurance pools, CRC remains partially influenced by the private sector,
particularly with respect to changes in its rating structure.
CRC plans to use the policy terms and conditions of the Actual Production
History ("APH") plan of MPCI as the basic provisions for coverage. The APH
provides the yield component by utilizing the insured's historic yield records.
The CRC revenue guarantee is the producer's approved APH times the coverage
level, times the higher of the spring futures price or harvest futures price
(in each case, for post-harvest delivery) of the insured crop for each unit of
farmland. The coverage levels and exclusions in a CRC policy are similar to
those in a standard MPCI policy. As with MPCI policies, the Company receives
from the FCIC an expense reimbursement payment equal to 31% of gross premiums
written in respect of each CRC policy it writes. See " - MPCI Fees and
Reimbursement Payments". This expense reimbursement payment is scheduled to
be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999.
CRC protects revenues by extending crop insurance protection based on APH to
include price as well as yield variability. Unlike MPCI, in which the crop
price component of the coverage is set by the FCIC prior to the growing season
and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice in
the CRC plan. The spring futures price is used to establish the initial policy
revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to
recompute the revenue guarantee (and resulting indemnity payments) when the
harvest price is higher than the spring price.
The industry (including the Company) and the FCIC are reviewing the current
rating structure supporting the CRC product. The Company is studying this
issue and other factors as part of its MPCI underwriting and risk allocation
plan, although the Company currently expects to offer CRC in the regions where
it can be sold for winter wheat in 1996 because of high interest in the product
among farmers. Based on crop performance to date in the regions where it has
written CRC for spring planted crops, the Company does not believe that any
potential underpricing of CRC policies it has written for such crops will
adversely affect its results of operations.
Crop Hail
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary HAILPLUS product
which combines the application and underwriting process for MPCI and hail
coverages. The HAILPLUS product tends to produce less volatile loss ratios
than the stand alone produce since the combined product generally insures a
greater number of acres, thereby spreading the risk of damage over a larger
insured area. Approximately 50% of IGF's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide insurance
against hail damage, under crop hail coverages farmers can receive payments for
hail damage which would not be severe enough to require a payment under an MPCI
policy. The Company believes that offering crop hail insurance enables it to
sell more MPCI policies than it otherwise would.
Named Peril
In addition to crop hail insurance, the Company also sells a small volume of
insurance against crop damage from other specific named perils. These products
cover specific crops, including hybrid seed corn, cranberries, cotton, tomatoes
and onions, and are generally written on terms that are specific to the kind of
crop and farming practice involved and the amount of actuarial data available.
The Company plans to seek potential growth opportunities in this niche market
by developing basic policies on a diverse number of named crops grown in a
variety of geographic areas, and to offer these polices primarily to large
producers through certain select agents. The Company's experienced product
development team will develop the underwriting criteria and actuarial rates for
the named peril coverages. As with the Company's other crop insurance
products, loss adjustment procedures for named peril policies are handled by
full-time professional claims adjusters who have specific agronomy training
with respect to the crop and farming practice involved in the coverage.
Third Party Reinsurance In Effect For 1996
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss reinsurance from other private
insurers in addition to reinsurance obtained from the FCIC. In addition, since
the FCIC and state regulatory authorities require IGF to limit its aggregate
writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of
capital, and retain a net loss exposure of not in excess of 50% of capital, IGF
may also obtain reinsurance from private insurers in order to permit it to
increase its premium writings. Such private reinsurance would not eliminate
the Company's potential liability in the event a reinsurer was unable to pay or
losses exceeded the limits of the stop loss coverage. For crop hail insurance,
the Company has in effect quota share reinsurance of 10% of premiums, although
the reinsurer is only liable to participate in losses of the Company up to a
150% pure loss ratio. The Company also has stop loss treaties for its crop
hail business which reinsure approximately 45% of losses in excess of an 80%
pure loss ratio up to a 100% pure loss ratio and 95% of losses in excess of a
100% pure loss ratio up to a 140% pure loss ratio. With respect to its MPCI
business, the Company has stop loss treaties which reinsure 93.75% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 100% of the Company's
MPCI Retention up to 125% of MPCI Retention. The Company also has an
additional layer of MPCI stop loss reinsurance which covers 95% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 125% of MPCI Retention up
to 150% of MPCI Retention.
Based on a review of the reinsurers' financial health and reputation in the
insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they therefore can meet their
obligations to the Company under the terms of the reinsurance treaties.
Reserves for uncollectible reinsurance are provided as deemed necessary. The
following table provides information with respect to all reinsurers on the
aforementioned IGF reinsurance agreements:
Goran Capital Inc.
For The Year Ended December 31, 1996<F1>
(In Thousands of U.S. Dollars)
Reinsurers A.M. Best Rating Ceded Premiums
Folksam International
Insurance Co. Ltd. A-<F2> $ 587
Frankona
Ruckversicherungs AG A<F3> $ 400
Granite Re NR<F4> $1,609
Insurance Corporation
Of Hannover A- $1,159
Liberty Mutual Insurance
Co. (UK) Ltd A $ 364
Partner Reinsurance
Company Ltd. A $1,587
R & V Versicherung AG NR<F5> $ 852
Scandinavian Reinsurance
Company Ltd. A+<F6> $1,393
[FN]
<F1>
For the year ended December 31, 1996, total ceded premiums were $86,393.
<F2>
An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
<F3>
An A.M. Best rating of "A" is the third highest of 15 ratings.
<F4>
Granite Re, a subsidiary of the Company, is an insurer domiciled in
Barbados which has never applied for or requested such a rating.
<F5>
R + V Versicherung AG is an insurer domiciled outside of the United States
and, as such, does not have a rating from A.M. Best.
<F6>
An A.M. Best rating of "A+" is the second highest of 15 ratings.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 31 states
through approximately 2,500 agents associated with approximately 1,200
independent insurance agencies, with its primary geographic concentration in
the states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has,
however, begun to diversify outside of the Midwest and Texas in order to reduce
the risk associated with geographic concentration. IGF is licensed in 20
states and markets its products in additional states through a fronting
agreement with a third party insurance company. IGF has a stable agency base
and it experienced negligible turnover in its agencies in 1996. Through its
agencies, IGF targets farmers with an acreage base of at least 1,000 acres.
Such larger farms typically have a lower risk exposure since they tend to
utilize better farming practices and to have noncontiguous acreage, thereby
making it less likely that the entire farm will be affected by a particular
occurrence. Many farmers with large farms tend to buy or rent acreage which is
increasingly distant from the central farm location. Accordingly, the like-
lihood of a major storm (wind, rain or hail) or a freeze affecting all of a
particular farmer's acreage decreases.
The following table presents MPCI Premiums written by IGF by state for the
years ended December 31, 1994, 1995 and 1996.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
State
Texas $ 6,751 $11,075 $12,361
Iowa 8,506 9,296 15,205
Illinois 7,302 7,305 11,228
Kansas 2,003 3,476 5,249
Minnesota 1,965 2,026 2,244
Nebraska 1,536 1,992 3,206
Indiana 1,486 1,875 3,870
Colorado 1,526 1,771 3,334
Missouri 1,785 1,718 2,427
North Dakota 1,153 1,638 2,796
All Other 10,312 11,236 20,182
Total $44,325 $53,408 $82,102
The following table presents gross premiums written by IGF by state for crop
hail coverages for the years ended December 31, 1994, 1995 and 1996.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
State
Iowa $ 3,954 $ 4,667 $6,590
Minnesota 318 2,162 2,300
Colorado 964 1,775 1,651
Nebraska 1,022 1,477 1,567
Montana 239 1,355 5,632
North Dakota 1,087 1,283 2,294
Kansas 765 846 661
South Dakota 124 756 1,457
Wisconsin 315 458 370
Mississippi 277 400 482
All Other 1,065 1,787 4,953
Total $10,130 $16,966 $27,957
The Company seeks to maintain and develop its agency relationships by providing
agencies with faster, more efficient service as well as marketing support. IGF
owns an IBM AS400 along with all peripheral and networking equipment and has
developed its own proprietary software package, Aplus, which allows agencies to
quote and examine various levels of coverage on their own personal computers.
The Company has seven regional managers who are responsible for the Company's
field operations within an assigned geographic territory, including maintaining
and enhancing relationships with agencies in those territories. IGF also uses
application documentation which is designed for simplicity and convenience.
The Company believes that IGF is the only crop insurer which has created a
single application for MPCI and hail coverage.
IGF generally compensates its agents based on a percentage of premiums produced
and, in the case of CAT Coverage and crop hail insurance, a percentage of
underwriting gain realized with respect to business produced. This
compensation structure is designed to encourage agents to place profitable
business with IGF (which tends to be insurance coverages for larger farms with
respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact that
rates are established by the FCIC, the primary underwriting functions performed
by the Company's personnel with respect to MPCI coverage are (i) selecting of
marketing territories for MPCI based on the type of crops being grown in the
area, typical weather patterns and loss experience of both agencies and
farmers within a particular area, (ii) recruiting agencies within those
marketing territories which service larger farms and other more desirable
risks, and (iii) ensuring that policies are underwritten in accordance with the
FCIC rules.
With respect to its hail coverage, IGF seeks to minimize its underwriting
losses by maintaining an adequate geographic spread of risk by rate group.
In addition, IGF establishes sales closing dates after which hail policies
will not be sold. These dates are dependent on planting schedules, vary by
geographic location and range from May 15 in Texas to July 15 in North Dakota.
Prior to these dates, crops are either seeds in the ground or young growth
newly emerged from the ground and hail damage to crops in either of these
stages of growth is minimal. The cut-off dates prevent farmers from adversely
selecting against IGF by waiting to purchase hail coverage until a storm is
forecast or damage has occurred. For its hail coverage, IGF also sets limits
by policy ($400,000 each) and by township ($2.0 million per township). The
Company also uses a daily report entitled "Severe Weather Digest" which
shows the time and geographic location of all extraordinary weather events to
check incoming policy applications against possible previous damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters on a
part-time basis for loss adjusting services, IGF employs full-time professional
claims adjusters who are agronomy trained as well as part-time adjusters.
Management believes that the professionalism of the IGF full-time claims staff
coupled with their exclusive commitment to IGF helps to ensure that claims are
handled in a manner so as to reduce overpayment of losses experienced by IGF.
The adjusters are located throughout IGF's marketing territories. In order to
promote a rapid claims response, the Company has deployed several small four
wheel drive vehicles for use by its adjusters. The adjusters report to a field
service representative in their territory who manages adjusters' assignments,
assures that all preliminary estimates for loss reserves are accurately
reported and assists in loss adjustment. Within 72 hours of reported
damage, a loss notice is reviewed by an IGF service office claims manager and
a preliminary loss reserve is determined which is based on the representative's
and/or adjuster's knowledge of the area or the particular storm which caused
the loss. Generally, within approximately two weeks, hail and MPCI claims are
examined and reviewed on site by an adjuster and the insured signs a proof of
loss form containing a final release. As part of the adjustment process,
IGF's adjusters use Global Positioning System Units, which are hand held
devices using navigation satellites to determine the precise location where a
claimed loss has occurred. IGF has a team of catastrophic claims specialists
who are available on 48 hours notice to travel to any of IGF's six regional
service offices to assist in heavy claim work load situations.
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies and, with respect to CAT Coverage, USDA field
service offices in certain areas. However, under the 1996 Reform Act,
effective for the 1997 crop year, USDA field service offices may offer CAT
Coverage in a state only if the Secretary of Agriculture determines that there
is an insufficient number of approved insurance providers operating in the
state to provide CAT Coverage to producers adequately.
Many of the Company's competitors have substantially greater financial and
other resources than the Company, and there can be no assurance that the
Company will be able to compete effectively against such competitors in the
future. The Company competes on the basis of the commissions paid to agents,
the speed with which claims are paid, the quality and extent of services
offered, the reputation and experience of its agency network and, in the case
of private insurance, policy rates. Because the FCIC establishes the rates
that may be offered for MPCI policies, the Company believes that quality of
service and level of commissions offered to agents are the principal factors on
which it competes in the area of MPCI. The Company believes that the crop hail
and other named peril crop insurance industry is extremely rate-sensitive
and the ability to offer competitive rate structures to agents is a critical
factor in the agent's ability to write crop hail and other named peril
premiums. Because of the varying state laws regarding the ability of agents to
write crop hail and other named peril premiums prior to completion of rate and
form filings (and, in some cases, state approval of such filings), a company
may not be able to write its expected premium volume if its rates are not
competitive.
The crop insurance industry has become increasingly consolidated. From the
1985 crop year to the 1996 crop year, the number of insurance companies having
agreements with the FCIC to sell and service MPCI policies has declined from 50
to 16. The Company believes that IGF is the fifth largest MPCI crop insurer in
the U.S. based on premium information compiled in 1995 by the FCIC and NCIS.
The Company's primary competitors are Rain & Hail Insurance Service, Inc.
(affiliated with Cigna Insurance Company), Rural Community Insurance Services,
Inc. (which is owned by Norwest Corporation), American Growers Insurance
Company (Redland), Crop Growers Insurance, Inc., Great American Insurance
Company, Blakely Crop Hail (an affiliate of Farmers Alliance Mutual Insurance
Company) and North Central Crop Insurance, Inc. The Company believes that in
order to compete successfully in the crop insurance business it will have to
market and service a volume of premiums sufficiently large to enable the
Company to continue to realize operating efficiencies in conducting its
business. No assurance can be given that the Company will be able to compete
successfully if this market further consolidates.
Reserves for Losses and Loss Adjustment Expenses
Loss reserves are estimates, established at a given point in time based on
facts then known, of what an insurer predicts its exposure to be in connection
with incurred losses. LAE reserves are estimates of the ultimate liability
associated with the expense of settling all claims, including investigation and
litigation costs resulting from such claims. The actual liability of an
insurer for its losses and LAE reserves at any point in time will be greater
or less than these estimates.
The Company maintains reserves for the eventual payment of losses and LAE with
respect to both reported and unreported claims. Nonstandard automobile
reserves for reported claims are established on a case-by-case basis. The
reserving process takes into account the type of claim, policy provisions
relating to the type of loss and historical paid loss and LAE for similar
claims. Reported crop insurance claims are reserved based upon preliminary
notice to the Company and investigation of the loss in the field. The ultimate
settlement of a crop loss is based upon either the value or the yield of the
crop.
Under the second method, loss and LAE reserves for claims that have been
incurred but not reported are estimated based on many variables including
historical and statistical information, inflation, legal developments, economic
conditions, trends in claim severity and frequency and other factors that could
affect the adequacy of loss reserves.
The following loss reserve development tables illustrate the change over time
of reserves established for claims and claims expense at the end of various
calendar years for the nonstandard automobile segment of the Company (not
including Superior), and for Superior separately. The first three line items
show the reserves as originally reported at the end of the stated year. The
table also includes the cumulative amounts paid as of the end of successive
years with respect to that reserve liability. The "liabilities reestimated"
section indicates reestimates of the original recorded reserve as of the end of
each successive year based on additional information pertaining to such
liabilities. The last portion of the table compares the latest reestimated
reserve to the reserve amount as originally established and indicates whether
or not the original recorded amount was adequate or inadequate to cover the
estimated costs of unsettled claims.
The reserve for claims and claims expense is an accumulation of the estimated
amounts necessary to settle all outstanding claims as of the date for which the
reserve is stated. The reserve and payment data shown below have been reduced
for estimated subrogation and salvage recoveries. The reserve estimates are
based upon the factors in each case and experience with similar cases. No
attempt is made to isolate explicitly the impact of inflation from the multi-
tude of factors influencing the reserve estimates though inflation is
implicitly included in the estimates. Pafco and Superior regularly
update their reserve forecasts by type of claim as new facts become known and
events occur which affect unsettled claims. Pafco and Superior do not
discount their reserves for unpaid claims and claims expense.
The following loss reserve development tables are cumulative and, therefore,
ending balances should not be added since the amount at the end of each calen-
dar year includes activity for both the current and prior years. Conditions
and trends that have affected the development of liability in the past may not
necessarily reoccur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies from the table.
Goran Capital Inc.
Nonstandard Automobile Insurance Only
(Not Including Superior)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Gross Reserves For
Unpaid Losses And
LAE $29,125 $26,819 $30,844 $27,145
Deduct: Reinsurance
Recoverable 12,581 10,927 9,921 8.124
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $4,748 $10,775 $14,346 $17,083 $17,449 $18,706 $16,544 $16,522 $20,923 $19,021
Paid Cumulative
As Of:
One Year Later 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059 8.082
Two Years Later 4,318 7,510 10,388 10,930 12,723 14,934 12,966 8,806
Three Years Later 4,433 7,875 12,107 12,497 14,461 16,845 13,142
Four Years Later 4,146 8,225 12,863 13,271 15,071 16,641
Five Years Later 4,154 8,513 13,147 13,503 14,903
Six Years Later 4,297 8,546 13,237 13,500
Seven Years Later 4,297 8,561 13,238
Eight Years Later 4,295 8,561
Nine Years Later 4,295
Liabilities
Reestimated As Of:
One Year Later 3,434 11,208 15,060 15,103 16,797 18,872 16,747 17,000 21,748
Two Years Later 4,588 11,413 14,178 14,745 16,943 19,599 17,023 17,443
Three Years Later 4,702 10,923 14,236 14,993 16,914 19,662 17,009
Four Years Later 4,311 10,791 14,479 14,809 16,750 19,651
Five Years Later 4,234 10,877 14,436 14,659 16,746
Six Years Later 4,320 10,825 14,468 14,659
Seven Years Later 4,278 10,922 14,468
Eight Years Later 4,309 10,921
Nine Years Later 4,309
Net Cumulative
(Deficiency) Or
Redundancy 439 (146) (22) 2,424 695 (945) (465) (921) (825)
Expressed As A
Percentage Of
Unpaid Losses And
LAE 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.8%) (5.6%) (3.9%)
Net reserves for the nonstandard automobile business of Pafco increased
substantially in 1988, 1989, 1990 and 1995. Such changes were due entirely to
changes in the premium volume of the nonstandard automobile business for those
years. In general, Pafco's nonstandard automobile segment has not
developed significant redundancies or deficiencies as compared to original
reserves. A deficiency of $956,000, or 5.1%, of original reserves developed
with respect to loss reserves at December 31, 1992 due to an unexpected
increase in loss severity and average claim cost.
Superior Insurance Company
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Gross Reserves For
Unpaid Losses And
LAE $54,577 $47,112 $52,413
Deduct: Reinsurance
Recoverable 68 1,099 987
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125 $52,413
Paid Cumulative
As Of:
One Year Later 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227 25,454
Two Years Later 25,526 34,122 43,547 44,128 40,513 41,231 38,908 35,141
Three Years Later 29,670 39,524 48,037 47,442 44,183 43,198 41,107
Four Years Later 32,545 41,257 49,064 49,256 44,708 44,010
Five Years Later 33,242 41,492 49,522 49,365 45,196
Six Years Later 33,395 41,716 49,327 49,476
Seven Years Later 33,535 41,576 49,425
Eight Years Later 33,469 41,621
Nine Years Later 33,408
Liabilities
Reestimated As Of:
One Year Later 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564 37,933
Two Years Later 37,118 49,327 53,715 56,626 50,520 50,474 50,006 42,989
Three Years Later 37,932 49,051 53,022 55,147 51,854 46,624 46,710
Four Years Later 38,424 49,436 52,644 57,720 49,739 44,823
Five Years Later 38,580 49,297 54,030 56,824 48,592
Six Years Later 38,584 50,701 53,697 55,770
Seven Years Later 39,965 50,515 53,683
Eight Years Later 39,861 50,521
Nine Years Later 39,998
Net Cumulative
(Deficiency) Or
Redundancy (13,553)(12,670) 2,741 4,348 11,980 5,832 10,489 8,193 8,192
Expressed As A
Percentage Of
Unpaid Losses And
LAE (51.6%) (33.5%) 4.9% 7.2% 19.9% 10.3% 20.0% 15.3% 17.8%
Net reserves for Superior increased substantially through 1990 before de-
creasing in 1992. Such changes were due to changes in premium volume and
reduction of reserve redundancies. The decrease in 1995 reflects Superior's
curtailment of marketing efforts and writings in Illinois, Mississippi,
Tennessee, Texas and Washington resulting from more restrictive underwriting
criteria, inadequately priced business in these states and other unfavorable
marketing conditions. Significant deficiencies developed in reserves estab-
lished as of December 31 of each of 1986 through 1988 which were substantially
offset by reserve additions in 1989 due to changes in reserve methodology.
With respect to reserves established as of December 31, 1991 and 1992, Superior
developed significant redundancies due to conservative levels of case basis and
IBNR reserves. Beginning in 1993, Superior began to adjust its reserving
methodology to reduce its redundancies and to take steps to close older claim
files which still carried redundant reserves.
Pafco and Superior employ an independent actuary to annually evaluate and
certify the adequacy of their loss and LAE reserves.
Investments
Insurance company investments must comply with applicable laws and regulations
which prescribe the kind, quality and concentration of investments. In
general, these laws and regulations permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate.
The Company's investment policies are determined by the Company's Board of
Directors and are reviewed on a regular basis. The Company's investment
strategy is to maximize the after-tax yield of the portfolio while emphasizing
the stability and preservation of the Company's capital base. Further, 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.
The investment portfolios of the Company are managed by third party
professional administrators, including Goldman Sachs & Co., in accordance with
pre-established investment policy guidelines established by the Company. The
investment portfolios of the Company at December 31, 1996 consisted of the
following:
Goran Capital Inc.
For The Year Ended December 31, 1996
(In Thousands of U.S. Dollars)
Amortized Estimated
Type of Investment Cost Market Value
Fixed Maturities:
U.S. and Canadian Treasury
Securities and Obligations of
U.S. and Canadian Government
Corporation and Agencies $ 57,804 $ 57,826
Obligations of States, Provinces
and Political Subdivisions 3,587 3,651
Corporate Securities 76,421 76,906
Total Fixed Maturities $137,812 $138,383
Equity Securities:
Preferred stocks
Common Stocks 28,075 28,729
Short Term Investments 29,052<F1> 29,052
Real Estate 4,548 4,548
Mortgage Loans 2,430 2,430
Other Loans 75 75
Total Investments $201,992 $203,217
[FN]
<F1>
Due to the nature of crop insurance, the Company must maintain short-term
investments to fund amounts due under the MPCI program.
The following table sets forth, as of December 31, 1995 and 1996 the compo-
sition of the fixed maturity securities portfolio of the Company by time to
maturity.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1995 1996
Market Percent Total Market Percent Total
Time to Maturity Value Market Value Value Market Value
1 Year or Less $ 8,797 31.3% $ 9,169 6.6%
More Than 1 Year
Through 5 Years 15,546 55.4% 79,042 57.1%
More Than 5 Years
Through 10 Years 3,737 13.3% 43,404 31.4%
More Than 10 Years - - - - - - 6,768 4.9%
Total $28,080 100.0% $138,383 100.0%
The investment results of the Company for the periods indicated are set forth
below:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. dollars)
1994 1995 1996
Net Investment Income<F1> $ 3,372 $ 3,530 $ 7,877
Average Investment Portfolio<F2> $48,712 $50,347 $130,519
Pre-tax Return On Average
Investment Portfolio 6.9% 7.0% 6.0%
Net Realized Gains (Losses) $ (358) $ (198) $ (637)
[FN]
<F1>
Includes dividend income received in respect of holdings of common stock.
<F2>
Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio.
Ratings
A.M. Best has currently assigned a B+ rating to Superior and a B- rating to
Pafco. Pafco's rating has been confirmed by A.M. Best at a B- rating sub-
sequent to the Acquisition. Superior's rating was reduced from A- to B+ as
a result of the leverage of GGS Holdings resulting from indebtedness assumed
in connection with the Acquisition. IGF recently received an "NA-2" rating (a
"rating not assigned" category for companies that do not meet A.M. Best's
minimum size requirement) from A.M. Best but intends to seek a revised rating
after the infusion of capital from the proceeds of the Offering, although
there can be no assurance that a revised rating will be obtained or as to the
level of any such rating.
A.M. Best's ratings are based upon a comprehensive review of a company's
financial performance, which is supplemented by certain data, including
responses to A.M. Best's questionnaires, phone calls and other correspondence
between A.M. Best analysts and company management, quarterly NAIC filings,
state insurance department examination reports, loss reserve reports, annual
reports, company business plans and other reports filed with state insurance
departments.
A.M. Best undertakes a quantitative evaluation, based upon profitability,
leverage and liquidity, and a qualitative evaluation, based upon the compo-
sition of a company's book of business or spread of risk, the amount, appropri-
ateness and soundness of reinsurance, the quality, diversification and
estimated market value of its assets, the adequacy of its loss reserves and
policyholders' surplus, the soundness of a company's capital structure, the
extent of a company's market presence, and the experience and competence of its
management. A.M. Best's ratings represent an independent opinion of a
company's financial strength and ability to meet its obligations to policy-
holders. A.M. Best's ratings are not a measure of protection afforded
investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest
rating classifications, respectively, out of 15 ratings. A "B+" rating is
awarded to insurers which, in A.M. Best's opinion, "have demonstrated very
good overall performance when compared to the standards established by the
A.M. Best Company" and "have a good ability to meet their obligations to
policyholders over a long period of time." A "B-" rating is awarded to
insurers which, in A.M. Best's opinion, "have demonstrated adequate overall
performance when compared to the standards established by the A.M. Best
Company" and "generally have an adequate ability to meet their obligations
to policyholders, but their financial strength is vulnerable to unfavorable
changes in underwriting or economic conditions". There can be no assurance
that such ratings or changes therein will not in the future adversely affect
the Company's competitive position.
Regulation
General
As a general rule, an insurance company must be licensed to transact insurance
business in each jurisdiction in which it operates, and almost all significant
operations of a licensed insurer are subject to regulatory scrutiny. Licensed
insurance companies are generally known as "admitted" insurers. Most states
provide a limited exemption from licensing for insurers issuing insurance
coverages that generally are not available from admitted insurers. These
coverages are referred to as "surplus lines" insurance and these insurers as
"surplus lines" or "non-admitted" companies.
The Company's admitted insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the
state and whether it is an admitted or non-admitted insurer, such authority
may extend to such things as (i) periodic reporting of the insurer's financial
condition; (ii) periodic financial examination; (iii) approval of rates and
policy forms; (iv) loss reserve adequacy; (v) insurer solvency; (vi) the
licensing of insurers and their agents; (vii) restrictions on the payment of
dividends and other distributions; (viii) approval of changes in control;
and (ix) the type and amount of permitted investments.
Pafco, IGF and Superior are subject to triennial examinations by state
insurance regulators. Such examinations were last conducted for Pafco as of
June 30, 1992 (covering the period to that date from September 30, 1990), for
IGF as of March 31, 1992 (covering the period to that date from December 31,
1987), and Superior as of December 31, 1993 (covering the period to that
date from January 1, 1991). The two subsidiaries of Superior, Superior
American Insurance Company and Superior Guaranty Insurance Company, had
examinations conducted as of October 31, 1996 (covering the period to that
date from the subsidiaries' inception on December 9, 1994). Pafco will have
a triennial examination in 1997. Superior and IGF have not been notified of
the dates of their next examination.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding companies in
Florida and Indiana, where they are domiciled. These laws, among other
things, (i) require the Company to file periodic information with state
regulatory authorities including information concerning its capital structure,
ownership, financial condition and general business operations; (ii) regulate
certain transactions between the Company, its affiliates and IGF, Pafco and
Superior (the "Insurers"), including the amount of dividends and other
distributions and the terms of surplus notes; and (iii) restrict the ability of
any one person to acquire certain levels of the Company's voting securities
without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of Common Stock of SIG
would be presumed to have acquired control of IGF unless the Indiana
Commissioner, upon application, has determined otherwise. In addition, any
purchaser of approximately 10% or more of the outstanding shares of Common
Stock of the Company will be presumed to have acquired control of Pafco and
Superior unless the Commissioner of Insurance of the State of Indiana
(the "Indiana Commissioner") and the Commissioner of Insurance of the State of
Florida (the "Florida Commissioner"), upon application, have determined
otherwise.
Indiana law defines as "extraordinary" any dividend or distribution which,
together with all other dividends and distributions to shareholders within the
preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus
as regards policyholders as of the end of the preceding year, or (ii) the prior
year's net income. Dividends which are not "extraordinary" may be paid ten
days after the Indiana Department of Insurance receives notice of their
declaration. "Extraordinary" dividends and distributions may not be paid
without prior approval of the Indiana Commissioner or until the Indiana
Commissioner has been given thirty days prior notice and has not disapproved
within that period. The Indiana Department of Insurance must receive notice
of all dividends, whether "extraordinary" or not, within five business days
after they are declared. Notwithstanding the foregoing limit, a domestic
insurer may not declare or pay a dividend of funds other than earned surplus
without the prior approval of the Indiana Department of Insurance. "Earned
surplus" is defined as the amount of unassigned funds set forth in the
insurer's most recent annual statement, less surplus attributable to
unrealized capital gains or reevaluation of assets. As of December 31 1996,
IGF and Pafco had earned surplus of $29,412,000 and $18,112,000, respectively.
Further, no Indiana domiciled insurer may make payments in the form of
dividends or otherwise to shareholders as such unless it possesses assets in
the amount of such payment in excess of the sum of its liabilities and the
aggregate amount of the par value of all shares of its capital stock;
provided, that in no instance shall such dividend reduce the total of (i)
gross paid-in and contributed surplus, plus (ii) special surplus funds, plus
(iii) unassigned funds, minus (iv) treasury stock at cost, below an amount
equal to 50% of the aggregate amount of the par value of all shares of the
insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to stock-
holders without prior approval of the Florida Department of Insurance if the
dividend or distribution does not exceed the larger of (i) the lesser of (a)
10% of surplus, or (b) net income, not including realized capital gains, plus
a 2-year carryforward, (ii) 10% of surplus with dividends payable constrained
to unassigned funds minus 25% of unrealized capital gains, or (iii) the lesser
of (a) 10% of surplus or (b) net investment income plus a 3-year carryforward
with dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains. Alternatively, a Florida domestic insurer may pay a dividend
or distribution without the prior written approval of the Florida Department of
Insurance if (1) the dividend is equal to or less than the greater of (i) 10%
of the insurer's surplus as regards policyholders derived from realized net
operating profits on its business and net realized capital gains, or (ii) the
insurer's entire net operating profits (including unrealized gains or losses)
and realized net capital gains derived during the immediately preceding
calendar year; (2) the insurer will have policyholder surplus equal to or
exceeding 115% of the minimum required statutory surplus after the dividend
or distribution; (3) the insurer files a notice of the dividend or distri-
bution with the department at least ten business days prior to the dividend
payment or distribution; and (4) the notice includes a certification by an
officer of the insurer attesting that, after the payment of the dividend or
distribution, the insurer will have at least 115% of required statutory
surplus as to policyholders. Except as provided above, a Florida domiciled
insurer may only pay a dividend or make a distribution (i) subject to prior
approval by the Florida Department of Insurance, or (ii) 30 days after the
Florida Department of Insurance has received notice of such dividend or
distribution and has not disapproved it within such time. In the Consent
Order approving the Acquisition, the Florida Department of Insurance has
prohibited Superior from paying any dividends (whether extraordinary or not)
for four years without the prior written approval of the Florida Department of
Insurance.
Under these laws, the maximum aggregate amounts of dividends to SIG in
1997 by IGF and Pafco without prior regulatory approval is $12,122,000 and
$561,000, respectively, none of which has been paid. Although SIG
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company - Liquidity and Capital Resources". Further,
there can be no assurance that, if requested, the Indiana Department of
Insurance will approve any request for extraordinary dividends from Pafco or
IGF or that the Florida Department of Insurance will allow any dividends to
be paid by Superior during the four year period described above.
The maximum dividends permitted by state law are not necessarily indicative of
an insurer's actual ability to pay dividends or other distributions to a parent
company, which also may be constrained by business and regulatory consider-
ations, such as the impact of dividends on surplus, which could affect an
insurer's competitive position, the amount of premiums that can be written and
the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in
relation to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly to the
dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to GGS Holdings. See "The Company -
Formation of GGS Holdings; Acquisition of Superior". The management agreement
formerly in place between SIG and Pafco which provides for an annual
management fee equal to 15% of gross premiums has been assigned to GGS
Management, Inc. ("GGS Management"), a wholly-owned subsidiary of GGS Holdings.
A similar management agreement with a management fee of 17% of gross premiums
has been entered into between GGS Management and Superior. Employees of the
Company relating to the nonstandard automobile insurance business and all
Superior employees became employees of GGS Management effective April 30, 1996.
As part of the approval of the Formation Transaction, the Indiana Department
of Insurance has required Pafco to resubmit its management agreement for
review by the Indiana Department of Insurance no later than May 1, 1997 (the
first anniversary of the Formation Transaction), together with supporting
evidence that management fees charged to Pafco are fair and reasonable in
comparison to fees charged between unrelated parties for similar services.
In the Consent Order approving the Acquisition, the Florida Department of
Insurance has reserved, for three years, the right to reevaluate the
reasonableness of fees provided for in the Superior management agreement at
the end of each calendar year and to require Superior to make adjustments in
the management fees based on the Florida Department of Insurance's consid-
eration of the performance and operating percentages of Superior and other
pertinent data. There can be no assurance that either the Indiana Department
of Insurance or the Florida Department of Insurance will not in the future
require a reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the federal
government by means of premium subsidies to farmers, expense reimbursement and
federal reinsurance pools for private insurers. Consequently, the MPCI program
is subject to oversight by the legislative and executive branches of the
federal government, including the FCIC. The MPCI program regulations generally
require compliance with federal guidelines with respect to underwriting, rating
and claims administration. The Company is required to perform continuous
internal audit procedures and is subject to audit by several federal government
agencies.
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. The most recent significant changes to the MPCI
program came as a result of the passage by Congress of the 1994 Reform Act and
the 1996 Reform Act.
Certain provisions of the 1994 Reform Act, when implemented by the FCIC, may
increase competition among private insurers in the pricing of Buy-up Coverage.
The 1994 Reform Act authorizes the FCIC to implement regulations permitting
insurance companies to pass on to farmers in the form of reduced premiums
certain cost efficiencies related to any excess expense reimbursement over the
insurer's actual cost to administer the program, which could result in
increased price competition. To date, the FCIC has not enacted regulations
implementing these provisions but is currently collecting information from the
private sector regarding how to implement these provisions.
The 1994 Reform Act required farmers for the first time to purchase at least
CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including but not limited to low interest loans and crop price
supports. The 1994 Reform Act also authorized for the first time the marketing
and selling of CAT Coverage by the local USDA offices. Partly as a result of
the increase in the size of the MPCI market resulting from the 1994 Reform Act,
the Company's MPCI Premium increased to $53.4 million in 1995 from $44.3
million in 1994. However, the 1996 Reform Act, signed into law by President
Clinton in April, 1996, eliminates the linkage between CAT Coverage and quali-
fication for certain federal farm program benefits and also limits the role of
the USDA offices in the delivery of MPCI coverage. In accordance with the 1996
Reform Act, the USDA announced in July, 1996, 14 states where CAT Coverage will
no longer be available through USDA offices but rather would solely be
available through private agencies: Arizona, Colorado, Illinois, Indiana,
Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South
Dakota, Washington and Wyoming. The limitation of the USDA's role in the
delivery system for MPCI should provide the Company with the opportunity to
realize increased revenues from the distribution and servicing of its MPCI
product. The Company has not experienced any material negative impact in 1996
from the delinkage mandated by the 1996 Reform Act. In addition, the FCIC has
transferred to the Company approximately 8,900 insureds for CAT Coverage who
previously purchased such coverage from USDA field offices. The Company
believes that any future potential negative impact of the delinkage mandated by
the 1996 Reform Act will be mitigated by, among other factors, the likelihood
that farmers will continue to purchase MPCI to provide basic protection against
natural disasters since ad hoc federal disaster relief programs have been
reduced or eliminated. In addition, the Company believes that (i) lending
institutions will likely continue to require this coverage as a condition to
crop lending, and (ii) many of the farmers who entered the MPCI program as a
result of the 1994 Reform Act have come to appreciate the reasonable price of
the protection afforded by CAT Coverage and will remain with the program
regardless of delinkage. There can, however, be no assurance as to the
ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies have
adopted or proposed new laws or regulations to deal with the cyclical nature of
the insurance industry, catastrophic events and insurance capacity and pricing.
These regulations include (i) the creation of "market assistance plans" under
which insurers are induced to provide certain coverages, (ii) restrictions on
the ability of insurers to rescind or otherwise cancel certain policies in mid-
term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals, and (iv) limitations upon or decreases in rates permitted
to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of 12 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 several priority
designations is assigned, and the insurance department of the state of domicile
is then responsible for follow-up action.
During 1996 Pafco had a net premiums to surplus ratio of 3.03 to 1 which was in
excess of the high end range of 3.0 to 1. The excess was not material and
Pafco has the ability to cede business to Superior to maintain compliance with
this ratio. Pafco's change in net writings was 61% compared to 33% at the high
end of the range. This result was expected given growth in gross premiums and
elimination of quota share reinsurance. Pafco also had positive surplus growth
of 64% outside the high end of the range at 50%. Pafco planned for higher
premium volume given the more profitable results than in prior years. During
1996, Pafco's investment yield as calculated under the IRIS tests was 3.8%
which was below the low end of the range at 4.5%. However, this IRIS test is a
simple average of beginning and end of year investments. Pafco's value fell
below the range due to the following: (i) inclusion of investment in IGF prior
to the Transfer during the first four months of the year when no investment
income was received; (ii) growth in the portfolio in the latter part of the
year not taken into account by the IRIS test; (iii) change during the course
of the year to reduce ratio of equities to total investments in favor of fixed
income securities; (iv) contribution to surplus of $3.7 million at the end of
1996 included in the IRIS test; and (v) inclusion of the home office building
in the investment base. If a weighted average was calculated using monthly
balances and excluding the IGF investment and real estate from the calcu-
lation, Pafco's return would have been 5.7%. Based on current investment
levels and mix it is expected that this test will be met in 1997. During 1996,
Pafco's ratio of reserve deficiency to surplus was 62% which exceeds the upper
range of 25%. This IRIS test calculates the average of claims liability to
premiums for the preceding two years and compares the resultant percentage to
the current year's percentage with a corresponding analysis to surplus. During
1994 and 1995, Pafco's claims liability to premiums ratio was approximately 55%
and decreased to approximately 35% in 1996, resulting in the unusual IRIS
result. This situation was a result of commercial claims liabilities in
1994 and 1996 that have now been ceded to an affiliate. Thus, claims
liability at December 31, 1996 is entirely for nonstandard automobile.
The reserves for the commercial liability business were at a much higher
ratio of premiums and are paid at a much slower rate than nonstandard auto-
mobile claims. Thus, although premiums grew in 1996, the increase in non-
standard automobile claims liability was offset by ceded commercial claims.
As this IRIS test uses a two year average of claims liabilities to premiums,
it is likely that Pafco may exceed the normal ratio in 1997. It should be
noted that Pafco did not have unusual IRIS values for the one and two year
reserve development to surplus tests.
During 1996 IGF had unusual values for three IRIS tests. IGF's surplus
increased by 237% which exceeded the high end of the range of 50%.
However, this is a very positive development due to growth in profits and
the capital infusion from the proceeds of the Offering. IGF continued to
have unusual values in the liabilities to liquid assets and agents balances to
surplus tests. IGF generally has an unusual value in these tests due to the
reinsurance program mandated by the FCIC for the distribution of the MPCI
program and the fact that agents' balances at December 31 are usually not
settled until late February.
During 1996 Superior had a ratio of net premiums written to surplus of 3.07 to
1 compared to the IRIS test upper limit of 3.0 to 1. During 1996, Superior's
net premium writings increased by 116% which exceeded the upper limit of the
IRIS range of 33%. Superior had a reserve deficiency to surplus ratio of 29%
which was in excess of the upper IRIS limit of 25%. All these matters were a
function of the strong growth of Superior. Such results may continue in the
future if growth continues. See Management's Discussion and Analysis for
further discussion on impact of premium writings to surplus ratio.
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 has directly, and Florida has
indirectly, adopted the NAIC model formula. The RBC formula for property and
casualty insurance companies measures four major areas of risk facing property
and casualty insurers: (i) underwriting, which encompasses the risk of adverse
loss developments and inadequate pricing; (ii) declines in asset values arising
from credit risk; (iii) declines in asset values arising from investment risks;
and (iv) off-balance sheet risk arising from adverse experience from non-
controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and requires the relevant insurance commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below
70% of the RBC amount. Based on the foregoing formulae, as of December 31,
1996, the RBC ratios of the Insurers were in excess of the Company Action
Level, the first trigger level that would require regulatory action.
Guaranty Funds
The Insurers also may be required under the solvency or guaranty laws of most
states in which they do business to pay assessments (up to certain prescribed
limits) to fund policyholder losses or liabilities of insolvent or rehabil-
itated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would
not ordinarily accept. The Company recognizes its obligations for guaranty
fund assessments when it receives notice that an amount is payable to the fund.
The ultimate amount of these assessments may differ from that which has already
been assessed.
It is not possible to predict the future impact of changing state and federal
regulation on the Company's operations, and there can be no assurance that laws
and regulations enacted in the future will not be more restrictive than
existing laws.
Stockholder Agreement with GS Funds
The Stockholder Agreement among the Company, GS Funds, SIG and GGS
Holdings provides that the Board of Directors of GGS Holdings consists of five
members, of whom three shall be designated by the Company and two shall be
designated by GS Funds. However, in the event that (x) at any time the
Company and its affiliates shall own less than 25% of the issued and
outstanding common stock of GGS Holdings by reason of the issuance of shares of
common stock to GS Funds in satisfaction of the indemnification obligations
of the Company or SIG pursuant to the GGS Agreement (the "Indemnity Date") or
(y) at any time (i) SIG, Goran or GGS Holdings is in violation of any
term of the Stockholder Agreement, or (ii) GGS Holdings or GGS Management shall
remain in violation of any covenant with respect to indebtedness incurred by
GGSH to partially fund the Acquisition (the "GGS Senior Credit Facility")
(whether or not such violation is waived) after the expiration of any
applicable cure period or there shall occur an event of default under the GGS
Senior Credit Facility (whether or not waived), the size of the Board shall be
reduced to four members (a "Board Reduction"). At December 31, 1996, GS
Funds waived their right to this Board Reduction for the covenants violations
of the GGSH Senior Credit Facility. The covenants contained in the GGS Senior
Credit Facility are customary commercial loan covenants relating to the
maintenance of financial ratios and restrictions on dividends, significant
corporate transactions and other matters. In such event, so long as the
Indemnity Date has not occurred, SIG shall be entitled to designate
only two directors and GS Funds shall be entitled to designate two directors.
After the occurrence of the Indemnity Date, SIG shall be entitled to
designate one director and GS Funds shall be entitled to designate three
directors.
Prior to a Board Reduction, action may be taken by the Board only with the
approval of a majority of the members of the Board. After a Board Reduction,
prior to the Indemnity Date, action may only be taken with the approval of at
least one GS Funds designee and one SIG designee. After the Indemnity Date
following a Board Reduction, action may only be taken by the Board with the
approval of a majority of the entire Board. Prior to a Board Reduction, GGS
Holdings may not take the following actions, among others, without first
obtaining approval by the Board and at least one GS Funds designee: (i)
consolidate or merge with any person, (ii) purchase the capital stock or
substantially all of the assets of any person, (iii) enter into any joint
venture or partnership or establish any non-wholly owned subsidiaries in which
the consideration paid by or invested by GGS Holdings is in excess of $1
million, (iv) voluntarily liquidate or dissolve, (v) offer any type of
insurance other than nonstandard automobile insurance (other than certain
policies issued on behalf of IGF or SIGF), (vi) sell, lease or transfer assets
for an aggregate consideration in excess of $1 million, (vii) subject to
certain exceptions, enter into any contract with a director or officer of Goran
(or any relative or affiliate of such person) or with any affiliate of Goran,
(viii) create or suffer to exist any indebtedness for borrowed money in an
aggregate amount in excess of $1 million excluding certain existing indebted-
ness, (ix) mortgage or encumber its assets in an amount in excess of $1
million, (x) make or commit to make any capital expenditure in an amount in
excess of $1 million, (xi) redeem or repurchase its outstanding capital stock,
(xii) issue or sell any shares of capital stock of GGS Holdings or its subsid-
iaries, (xiii) enter into, adopt or amend any employment agreement or benefit
plan, (xiv) amend its Certificate of Incorporation or Bylaws, (xv) amend or
waive any provision of the Stockholder Agreement or the GGS Agreement, (xvi)
change its independent certified accountants or actuaries, (xvii) register any
securities under the Securities Act, (xviii) enter into one or more agreements
to reinsure a substantial portion of the liability of GGS Holdings or any of
its subsidiaries, or (xix) adopt or change the reserve policy or the investment
policy of GGS Holdings or any of its subsidiaries.
The Company's representatives on the Board of Directors of GGS Holdings are G.
Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief
Executive Officer of the Company and Douglas H. Symons, President and Chief
Operating Officer of the Company. Pursuant to their power under the Stock-
holder Agreement to designate the Chairman of the Board of GGS Holdings, GS
Funds has named G. Gordon Symons as Chairman of the Board of GGS Holdings.
The Stockholder Agreement designates Alan G. Symons as the Chief Executive
Officer of GGS Holdings and gives him the right to designate and determine the
compensation for all management personnel, provided that the designation of,
removal of, and determination of compensation for, any person earning $100,000
or more per annum is subject to the prior approval of the board. GS Funds
has the right at any time to designate a chief operating officer for GGS
Holdings but have currently not elected to exercise this right. Upon request,
GS Funds has the right to appoint one designee to each of the committees
of the Board of Directors of GGS Holdings. The Stockholder Agreement does not
give GS Funds the right to appoint any designees to the board of directors
of any of the subsidiaries of GGS Holdings.
Certain Rights Of The GS Funds To Cause A Sale of GGS Holdings
Events Which Trigger the Rights of the GS Funds to Cause A Sale of GGS
Holdings.
The Stockholder Agreement establishes certain rights of GS Funds to cause a
sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering of
GGS Holdings stock representing, on a fully diluted basis, at least 20% of all
such stock issued and outstanding, and generating at least $25 million in net
proceeds to the sellers of such securities, by April 30, 2001, (ii) the third
separate occasion, during the term of the Stockholder Agreement, on which an
equity financing or acquisition transaction proposed by GS Funds is rejected
by the GGS Holdings Board of Directors, (iii) the loss of voting control of
Goran or SIG (defined, with respect to Goran, as being direct or indirect
ownership of more than 40% of the outstanding voting stock of Goran if any
other holder or group holds in excess of 10% of the outstanding voting stock
of Goran, and otherwise 25% thereof; and defined, with respect to SIG, as
requiring both (a) direct ownership by Goran in excess of 50% of SIG's
voting stock and (b) retention by Alan G. Symons and his family members of
voting control of Goran) by Alan G. Symons or his family members or
affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of
GGS Holdings for any reason.
Upon the occurrence of any of such events, and at any time or from time to time
thereafter, GS Funds may, by notifying SIG in writing, initiate the
process of seeking to effect a sale of GGS Holdings on terms and conditions
which are acceptable to GS Funds. However, within thirty days after SIG
receives notice of GS Funds' intention to initiate the sale of GGS
Holdings, SIG may provide written notice to GS Funds that it wishes
to acquire or combine with GGS Holdings. SIG's notice to GS Funds
must include the proposed purchase price and other material terms and
conditions with such specificity as is necessary to permit GS Funds to
evaluate SIG's offer. If, within 90 days of delivery of the notice by
SIG, GS Funds accepts SIG's offer, SIG will be obligated to acquire or
combine with GGS Holdings. In the event GS Funds rejects SIG's proposal,
(i) any sale to a third party effected within 180 days after receipt of such
proposal must not contain terms that are in the aggregate less favorable to
the GGS Holdings stockholders than those set forth in SIG's proposal, (ii)
any sale must provide for the same consideration to be paid to each stock-
holder, and (iii) no sale may constitute an acquisition by or a combination
with an affiliate of GS Funds. Accordingly, under certain circumstances,
GS Funds may have the ability to force SIG to divest itself of its nonstandard
automobile operations. Further, a forced sale of GGS Holdings may also cause
SIG to be characterized as an investment company within the meaning of the
Investment Company Act of 1940 (the "1940 Act") unless the proceeds are
redeployed into other business operations or another exemption from
registration under the 1940 Act is available.
Canadian Federal Income Tax Considerations
This summary is based upon the current provisions of the Income Tax Act
(Canada) (the "Canadian Tax Act"), the regulations thereunder, proposed
amendments thereto publicly announced by the Department of Finance, Canada
prior to the date hereof and the provisions of the Canada-U.S. Income Tax
Convention (1980) (the "Convention") as amended by the Third Protocol (1995).
A purchase of common shares by the Company (other than a purchase of common
shares by the Company on the open market) will give rise to a deemed dividend
under the Canadian Tax Act equal to the amount paid by the Company on the
purchase in excess of the paid-up capital of such shares determined in
accordance with the Canadian Tax Act. Any such dividend deemed to have been
received by a person not resident in Canada will be subject to nonresident
withholding tax as described above. The amount of any such deemed dividend
will reduce the proceeds of disposition to a holder of common shares for
purposes of computing the amount of his capital gain or loss under the Canadian
Tax Act.
A holder of common shares who is not a resident of Canada within the meaning of
the Canadian Tax Act will not be subject to tax under the Canadian Tax Act in
respect of any capital gain on a disposition of common shares (including on a
purchase by the Company) unless such shares constitute taxable Canadian
property of the shareholder for purposes of the Canadian Tax Act and such
shareholder is not entitled to relief under an applicable tax treaty.
Common shares will generally not constitute taxable Canadian property of a
shareholder who is not a resident of Canada for purposes of the Canadian Tax
Act in any taxation year in which such shareholder owned common shares unless
such shareholder uses or holds or is deemed to use or hold such shares in or in
the course of carrying on business in Canada or, a share of the capital stock
of a corporation resident in Canada, that is not listed on a prescribed stock
exchange or a share that is listed on prescribed stock exchange, if at any
time during the five year period immediately preceding the disposition of
the common shares owned, either alone or together with persons with whom he
does not deal at arm's length, not less than 25% of the issued shares of any
class of the capital stock of the Company. In any event, under the
Convention, gains derived by a resident of the United States from the
disposition of common shares will generally not be taxable in Canada unless
50% or more of the value of the common shares is derived principally from
real property situated in Canada.
Currently, under the Convention, the rate of Canadian non-resident withholding
tax on the gross amount of dividends beneficially owned by a person who is a
resident of the United States for the purpose of the Convention and who does
not have a "permanent establishment" or "fixed base" in Canada is 15%.
However, where such beneficial owner is a company which owns at least 10% of
the voting stock of the company, the rate of such withholding is 5%. Amounts
in respect of common shares paid or credited or deemed to be paid or credited
as, on account or in lieu of payment of, or in satisfaction of, dividends to a
shareholder who is not a resident in Canada within the meaning of the Canadian
Tax Act will generally be subject to Canadian non-resident withholding tax.
Such withholding tax is levied at a basic rate of 25% which may be reduced
pursuant to the terms of an applicable tax treaty between Canada and the
country of resident of the non-resident.
U.S. Federal Income Tax Considerations
The following is a general summary of certain U.S. federal income tax
consequence to U.S. Holders of the purchase, ownership and disposition of
common shares. This summary is based on the U.S. Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof and all of which are subject to change. This summary does not
address all aspects of U.S. federal income taxation that may be relevant to a
particular U.S. Holder based on such U.S. Holder's particular circumstances.
In particular, the following summary does not address the tax treatment of U.S.
Holders who are broker dealers or who own, actually or constructively, 10% or
more of the Company's oustanding voting stock, and certain U.S. Holders
(including, but not limited to, insurance companies, tax-exempt organizations,
financial institutions and persons subject to the alternative minimum tax) may
be subject to special rules not discussed below.
For U.S. federal income tax purposes, a U.S. Holder of common shares generally
will realize, to the extent of the Company's current and accumulated earnings
and profits, ordinary income on the receipt of cash dividends on the common
shares equal to the U.S. dollar value of such dividends on the date of receipt
(based on the exchange rate on such date) without reduction for any Canadian
withholding tax. Dividends paid on the common shares will not be eligible for
the dividends received deduction available in certain cases to U.S. corp-
orations. In the case of foreign currency received as a divdend that is not
converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollars
value on the date of receipt. Any gain or loss recognized upon a subsequent
sale or other disposition of the foregin currency, including an exchange for
U.S. dollars, will be ordinary income or loss. Subject to certain requirements
and limitations imposed by the Code, a U.S. Holder may elect to claim the
Canadian tax withheld or paid with respect to dividends on the common shares
either as a deduction or as a foreign tax credit against the U.S. federal
income tax liability of such U.S. Holder. The requirements and limitations
imposed by the Code with respect to the foreign tax credit are complex and
beyond the scope of this summary, and consequently, prospective purchasers of
common shares should consult with their own tax advisors to determine whether
and to what extent they would be entitled to such credit.
For U.S. federal income tax purposes, upon a sale or exchange of a common
share, a U.S. Holder will recognize gain or loss equal to the difference
between the amount realized on such sale or exchange and the tax basis of such
common share. If a common share is held as a capital asset, any such gain or
loss will be capital gain or loss, and will be long-term capital gain or
loss if the U.S. Holder has held such common share for more than one year.
Under current Treasury regulations, dividends paid on the common share to U.S.
Holders will not be subject to the 31% U.S. backup withholding tax. Proposed
Treasury regulations which are not yet in effect and which will only apply
prospectively, however, would subject dividends paid on the common shares
through a U.S. or U.S. related broker to the 31% U.S. backup withholding tax
unless certain information reporting requirements are satisfied. Whether and
when such proposed Treasury regulations will become effective cannot be
determined at this time. The payment of proceeds of a sale or other dispo-
sition of common shares in the U.S. through a U.S. or U.S. related broker
generally will be subject to U.S. information reporting requirements and may
also be subject to the 31% U.S. backup withholding tax, unless the U.S. Holder
furnishes the broker with a duly completed and signed Form W-9. Any amounts
withheld under the U.S. backup withholding tax rules may be refunded or
credited against the U.S. Holder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the U.S. Internal
Revenue Service.
Employees
At December 31, 1996 the Company and its subsidiaries employed approximately
600 persons. The Company believes that relations with its employees are
excellent.
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations, including but not limited to, the 1994 Reform
Act and 1996 Reform Act, on the Company's business and results of operations,
(ii) the competitive advantage afforded to IGF by approaches adopted by
management in the areas of information, technology, claims handling and under-
writing, (iii) the sufficiency of the Company's cash flow to meet the operating
expenses, debt service obligations and capital needs of the Company and its
subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense Reim-
bursements on the Company's results of operations, are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
From time to time the Company may also issue other statements either orally or
in writing, which are forward looking within the meaning of these statutory
provisions. Forward looking statements are typically identified by the words
"believe", "expect", "anticipate", "intend", "estimate", "plan" and similar
expressions. These statements involve a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from the forward looking statements in this Form 10-K or from other
forward looking statements made by the Company. In addition to the risks and
uncertainties of ordinary business operations, some of the facts that could
cause actual results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements are the
risks and uncertainties (i) discussed herein, (ii) contained in the Company's
other filings with the Securities and Exchange Commission and public statements
from time to time, and (iii) set forth below:
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty industry is
that its products generally are priced, before its costs are known, because
premium rates usually are determined before losses are reported. Premium rate
levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in surplus
have generally been accompanied by increased price competition among property
and casualty insurers. The nonstandard automobile insurance business in recent
years has experienced very competitive pricing conditions and there can be no
assurance as to the Company's ability to achieve adequate pricing. Changes in
case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. New products also present special issues in
establishing appropriate premium levels in the absence of a base of experience
with such products' performance.
The number of competitors and the similarity of products offered, as well as
regulatory constraints, limit the ability of property and casualty insurers to
increase prices in response to declines in profitability. In states which
require prior approval of rates, it may be more difficult for the Company to
achieve premium rates which are commensurate with the Company's underwriting
experience with respect to risks located in those states. In addition, the
Company does not control rates on its MPCI business, which are instead set by
the FCIC. Accordingly, there can be no assurance that these rates will be
sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance company
are also determined, in part, by the establishment of, and adjustments to,
reserves reflecting estimates made by management as to the amount of losses and
loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses and
LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material
adverse effect on the insurer's financial position or results of operations in
future periods.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many factors which
can cause fluctuation in the results of operations of this business. Many of
these factors are not subject to the control of the Company. The size of the
nonstandard market can be significantly affected by, among other factors, the
underwriting capacity and underwriting criteria of standard automobile
insurance carriers. In addition, an economic downturn in the states in which
the Company writes business could result in fewer new car sales and less demand
for automobile insurance. Severe weather conditions could also adversely
affect the Company's business through higher losses and LAE. These factors,
together with competitive pricing and other considerations, could result in
fluctuations in the Company's underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can vary
substantially from period to period as a result of various factors, including
timing and severity of losses from storms, drought, floods, freezes and other
natural perils and crop production cycles. Therefore, the results for any
quarter or year are not necessarily indicative of results for any future period.
The underwriting results of the crop insurance business are recognized through-
out the year with a reconciliation for the current crop year in the fourth
quarter.
The Company expects that for the foreseeable future a majority of its crop
insurance will continue to be derived from MPCI business. The MPCI program is
federally regulated and supported by the federal government by means of premium
subsidies to farmers, expense reimbursement and federal reinsurance pools for
private insurers. As such, legislative or other changes affecting the MPCI
program could impact the Company's business prospects. The MPCI program has
historically been subject to modification at least annually since its
establishment in 1980, and some of these modifications have been
significant. No assurance can be given that future changes will not
significantly affect the MPCI program and the Company's crop insurance
business.
The 1994 Reform Act also reduced the expense reimbursement rate payable to the
Company for its costs of servicing MPCI policies that exceed the basic CAT
Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and 1999
crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium serviced, a
decrease from the 31% level established for the 1994, 1995 and 1996 crop years.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced
in an amount that corresponds to the reduction in the expense reimbursement
rate, there can be no assurance that the Company's actual costs will not exceed
the expense reimbursement rate. The FCIC has appointed several committees
comprised of members of the insurance industry to make recommendations
concerning this matter.
The 1994 Reform Act also directs the FCIC to establish adequate premiums for
all MPCI coverages at such rates as the FCIC determines are actuarially
sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss
ratio has exceeded this target ratio. There can be no assurance that the FCIC
will not increase rates to farmers in order to achieve the targeted loss ratio
in a manner that could adversely affect participation by farmers in the MPCI
program above the CAT Coverage level.
The 1996 Reform Act, signed into law by President Clinton in April, 1996,
provides that, MPCI coverage is not required for federal farm program benefits
if producers sign a written waiver that waives eligibility for emergency crop
loss assistance. The 1996 Reform Act also provides that, effective for the
1997 crop year, the Secretary of Agriculture may continue to offer CAT Coverage
through USDA offices if the Secretary of Agriculture determines that the number
of approved insurance providers operating in a state is insufficient to
adequately provide catastrophic risk protection coverage to producers. There
can be no assurance as to the ultimate effect which the 1996 Reform Act may
have on the business or operations of the Company.
Total MPCI Premium for each farmer depends upon the kinds of crops grown,
acreage planted and other factors determined by the FCIC. Each year, the FCIC
sets, by crop, the maximum per unit commodity price ("Price Election") to be
used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The Company's crop insurance business is also affected by market conditions in
the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating to
agricultural products and producers, demand for agricultural products, weather,
natural disasters, technologic advances in agricultural practices, inter-
national agricultural markets and general economic conditions both in the
United States and abroad. For example, the number of MPCI Buy-up Coverage
policies written has historically tended to increase after a year in which a
major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
Highly Competitive Businesses
Both the nonstandard automobile insurance and crop insurance businesses are
highly competitive. Many of the Company's competitors in both the nonstandard
automobile insurance and crop insurance business segments have substantially
greater financial and other resources than the Company, and there can be no
assurance that the Company will be able to compete effectively against such
competitors in the future.
In its nonstandard automobile business, the Company competes with both large
national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers.
Direct writers may have certain competitive advantages over agency writers,
including increased name recognition, loyalty of the customer base to the
insurer rather than an independent agency and, potentially, reduced acquisition
costs. In addition, certain competitors of the Company have from time to time
decreased their prices in an apparent attempt to gain market share. Also, in
certain states, state assigned risk plans may provide nonstandard automobile
insurance products at a lower price than private insurers.
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1996 crop year, the
number of insurance companies that have entered into agreements with the FCIC
to sell and service MPCI policies has declined from 50 to 16. The Company
believes that to compete successfully in the crop insurance business it will
have to market and service a volume of premiums sufficiently large to enable
the Company to continue to realize operating efficiencies in conducting its
business. No assurance can be given that the Company will be able to compete
successfully if this market consolidates further.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many factors
which can cause fluctuations in the results of operations of this business.
Many of these facts are not subject to the control of the Company. The size
of the nonstandard market can be significantly affected by, among other
factors, the underwriting capacity and underwriting criteria of standard
automobile insurance carriers. In addition, an economic downturn in the states
in which the Company writes business could result in fewer new car sales and
less demand for automobile insurance. Severe weather conditions could also
adversely affect the Company's business through higher losses and LAE. These
factors, together with competitive pricing and other considerations, could
result in fluctuations in the Company's underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can vary sub-
stantially from period to period as a result of various factors, including
timing and severity of losses from storms, droughts, floods, freezes and other
natural periods and crop production cycles. Therefore, the results for any
quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insruance business are
recognized throughout the year with a reconciliation for the current crop year
in the fourth quarter.
The Company expects that for the foreseeable future a majority of its crop
insurance business will continue to be derived from MPCI business. The MPCI
program is federally regulated and supported by the federal government by
means of premium subsidies to farmers, expense reimbursement and federal
reinsurance pools for private insurers. As such, legislative or other changes
affecting the MPCI program could impact the Company's business prospects. The
MPCI program has historically been subject to modification at least annually
since its establishment in 1980, and some of these modifications have been
significant. No assurance can be given that future changes will not
significantly affect the MPCI program and the Company's crop insurance
business.
The Company's crop insruance business is also affected by market conditions
in the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating
to agricultural products and producers, demand for agricultural products,
weather, natural disasters, technological advances in agricultural practices,
international agricultural markets and general economic conditions both in
the United States and abroad. For example, the number of MPCI Buy-up
Coverage policies written has historically tended to increase after a year in
which a major natural disaster adversely affecting crops occurs, and to
decrease following a year in which favorable weather conditions prevail.
For further information about the Company's MPCI business, see "Business-
Crop Insurance-Products".
Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco a
B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior
was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting
from indebtedness in connection with the Acquisition. A "B+" and a "B-" rating
are A.M. Best's sixth and eighth highest rating classifications, respectively,
out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's
opinion, "have demonstrated very good overall performance when compared to the
standards established by the A.M. Best Company" and "have a good ability to
meet their obligations to policyholders over long period of time". A "B-"
rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated
adequate overall performance when compared to the standards established by the
A.M. Best Company" and "generally have an adequate ability to meet their obli-
gations to policyholders, but their financial strength is vulnerable to
unfavorable changes in underwriting or economic conditions." IGF recently
received an "NA-2" rating (a "rating not assigned" category for companies that
do not meet A.M. Best's minimum size requirement) from A.M. Best. IGF intends
to seek a revised rating after the infusion of capital from the proceeds of the
Offering, although there can be no assurance that a revised rating will be
obtained or as to the level of any such rating. A.M. Best bases its ratings
on factors that concern policyholders and agents and not upon factors
concerning investor protection. Such ratings are subject to change and are
not recommendations to buy, sell or hold securities. One factor in an
insurer's ability to compete effectively is its A.M. Best rating. The A.M.
Best ratings for the Company's rated Insurers are lower than for many of the
Company's competitors. There can be no assurance that such ratings or
future changes therein will not affect the Company's competitive position.
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated in the
states of Florida, California, Indiana, Missouri and Virginia; consequently the
Company will be significantly affected by changes in the regulatory and
business climate in those states. The Company's crop insurance business is
concentrated in the states of Iowa, Texas, Illinois, Kansas and Minnesota
and the Company will be significantly affected by weather conditions, natural
perils and other factors affecting the crop insurance business in those states.
Future Growth and Continued Operations Dependent on Access to Capital
Property and casualty insurance is a capital intensive business. The Company
must maintain minimum levels of surplus in the Insurers in order to continue to
write business, meet the other related standards established by insurance
regulatory authorities and insurance rating bureaus and satisfy financial ratio
covenants in loan agreements.
Historically, the Company has achieved premium growth as a result of both
acquisitions and internal growth. It intends to continue to pursue acquisition
and new internal growth opportunities. Among the factors which may restrict
the Company's future growth is the availability of capital. Such capital will
likely have to be obtained through debt or equity financing or retained
earnings. There can be no assurance that the Company's insurance subsidiaries
will have access to sufficient capital to support future growth and also
satisfy the capital requirements of rating agencies, regulators and creditors.
In addition, the Company will require additional capital to finance future
acquisitions. If the Company's representatives on the Board of Directors of
GGS Holdings cause GGS Holdings to decline acquisition opportunities because
the Company is unable to raise sufficient capital to fund its pro-rata share
of the purchase price, the GS Funds may be able to force a sale of GGS
Holdings. The ability of each of the Company and GGS Holdings to raise
capital through an issuance of voting securities may be affected by conflicts
of interest between each of them and their respective control persons and
other affiliates.
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves for unpaid losses and LAE established by the Company are estimates
of amounts needed to pay reported and unreported claims and related LAE based
on facts and circumstances then known. These reserves are based on estimates
of trends in claims severing judicial theories of liability and other factors.
Although the nature of the Company's insurance business is primarily short-
tail, the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating these amounts, it has been
necessary, and may over time continue to be necessary, to revise estimates of
the Company's reserves for losses and LAE. The historic development of
reserves for losses and LAE may not necessarily reflect future trends in the
development of these amounts. Accordingly, it may not be appropriate to
extrapolate redundancies or deficiencies based on historical information.
Reliance Upon Reinsurance
In order to reduce risk and to increase its underwriting capacity, the Company
purchases reinsurance. Reinsurance does not relieve the Company of liability
to its insureds for the risks ceded to reinsurers. As such, the Company is
subject to credit risk with respect to the risks ceded to reinsurers. Although
the Company places its reinsurance with reinsurers, including the FCIC, which
the Company generally believes to be financially stable, a significant
reinsurer's insolvency or inability to make payments under the terms of a
reinsurance treaty could have a material adverse effect on the Company's
financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing in
property and casualty insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability
to provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity, no
assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may
need to reduce the levels of its underwriting commitments.
Risks Associated with Investments
The Company's results of operations depend in part on the performance of its
invested assets. Certain risks are inherent in connection with fixed maturity
securities including loss upon default and price volatility in reaction to
changes in interest rates and general market factors. Equity securities
involve risks arising from the financial performance of, or other developments
affecting, particular issuers as well as price volatility arising from general
stock market conditions.
Comprehensive State Regulation
The Company's insurance subsidiaries are subject to comprehensive regulation
by government agencies in the states in which they operate. The nature and
extent of that regulation vary from jurisdiction to jurisdiction but
typically involve prior approval of the acquisition of control of an
insurance company or of any company controlling an insurance company,
regulation of certain transactions entered into by an insurance company with
any of its affiliates, limitations on dividends, approval or filing of
premium rates and policy forms for many lines of insurance, solvency
standards, minimum amounts of capital and surplus which must be maintained,
limitations on types and amounts of investments, restrictions on the size of
risks which may be insured by a single company, limitation of the right to
cancel or non-renew policies in some lines, regulation of the right to
withdraw from markets or agencies, requirements to participate in residual
markets, licensing of insurers and agents, deposits of securities for the
benefit of policyholders, reporting with respect to financial condition, and
other matters. In addition, state insurance department examiners perform
periodic financial and market conduct examinations of insurance companies.
Such regulation is generally intended for the protection of policyholders
rather than security holders. No assurance can be given that future legis-
lative or regulatory changes will not adversely affect the Company.
Holding Company Structure; Dividend And Other Restrictions; Management Fees
Holding Company Structure. The Company is a holding company whose principal
asset is the capital stock of the subsidiaries. The Company relies primarily
on dividends and other payments from its subsidiaries, including its insurance
subsidiaries to meet its obligations to creditors and to pay corporate
expenses. The Insurers are domiciled in the states of Indiana and Florida and
each of these states limits the payment of dividends and other distributions
by insurance companies. In addition, a significant portion of the invested
assets of the reinsurance company domiciled in Barbados are held in trust
accounts to secure its obligations to the cedents.
Dividend and Other Restrictions. Indiana law defines as "extraordinary" any
dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the end
of the preceding year, or (ii) the prior year's net income. Dividends which
are not "extraordinary" may be paid ten days after the Indiana Department of
Insurance ("Indiana Department") receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without the prior
approval of the Indiana Commissioner or until the Indiana Commissioner has
been given thirty days' prior notice and has not disapproved within that
period. The Indiana Department must receive notice of all dividends,
whether "extraordinary" or not, within five business days after they are
declared. Notwithstanding the foregoing limit, a domestic insurer may not
declare or pay a dividend from any source of funds other than "Earned
Surplus" without the prior approval of the Indiana Department. "Earned
Surplus" is defined as the amount of unassigned funds set forth in the
insurer's most recent annual statement, less surplus attributable to unrealized
capital gain or re-evaluation of assets. Further, no Indiana domiciled insurer
may make payments in the form of dividends or otherwise to its shareholders
unless it possesses assets in the amount of such payments in excess of the sum
of its liabilities and the aggregate amount of the par value of all shares of
capital stock; provided, that in no instance shall such dividend reduce the
total of (i) gross paid-in and contributed surplus, plus (ii) special surplus
funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an
amount equal to 50% of the aggregate amount of the par value of all shares of
the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department of Insurance ("Florida
Department") if the dividend or distribution does not exceed the larger of: (i)
the lesser of (a) 10% of surplus or (b) net investment income, not including
realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with
dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net investment
income plus a 3-year carryforward with dividends payable constrained to
unassigned funds minus 25% of unrealized capital gains. Alternatively, a
Florida domestic insurer may pay a dividend or distribution without the prior
written approval of the Florida Department if (1) the dividend is equal to or
less than the greater of (i) 10% of the insurer's surplus as regards policy-
holders derived from net operating profits on its business and net realized
capital gains, or (ii) the insurer's entire net operating profits (including
unrealized gains or losses) and realized net capital gains derived during the
immediately preceding calendar year; (2) the insurer will have policyholder
surplus equal to or exceeding 115% of the minimum required statutory surplus
after the dividend or distribution; (3) the insurer files a notice of the
dividend or distribution with the Florida Department at least ten business
days prior to the dividend payment or distribution; and (4) the notice
includes a certification by an officer of the insurer attesting that, after the
payment of the dividend or distribution, the insurer will have at least 115% of
required statutory surplus as to policyholders. Except as provided above, a
Florida domiciled insurer may only pay a dividend or make a distribution (i)
subject to prior approval by the Florida Department, or (ii) thirty days after
the Florida Department has received notice of such dividend or distribution and
has not disapproved it within such time. In the consent order approving the
Acquisition (the "Consent Order"), the Florida Department has prohibited
Superior from paying any dividends (whether extraordinary or not) for four
years without the prior written approval of the Florida Department.
Although the Company believes that funds required for it to meet its financial
and operating obligations will be available, there can be no assurance in this
regard. Further, there can be no assurance that, if requested, the Indiana
Department will approve any request for extraordinary dividends from Pafco or
IGF or that the Florida Department will allow any dividends to be paid by
Superior during the four year period described above.
Payment of dividends by IGF requires prior approval by the lender under the
credit agreement to which IGF is a party. There can be no assurance that IGF
will be able to obtain this consent. The Company is in the process of seeking
regulatory approval for a new arrangement whereby underwriting, marketing and
administrative functions of IGF will be assumed by, and employees will be
transferred to, IGF Holdings. As a result of this restructuring, management
fees would be paid by IGF to IGF Holdings, thereby providing an additional
source of liquidity for the Company to the extent these payments exceed the
operating and other expenses of IGF Holdings. There can be no assurance that
this regulatory approval will be obtained.
The maximum dividends permitted by state law are not necessarily indicative of
an insurer's actual ability to pay dividends or other distributions to a parent
company, which also may be constrained by business and regulatory consid-
erations, such as the impact of dividends on surplus, which could affect an
insurer's competitive position, the amount of premiums that can be written and
the ability to pay future dividends. Further, state insurance laws and regu-
lations require that the statutory surplus of an insurance company following
any dividend or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
Management Fees. The management agreement originally entered into between the
Company and Pafco was assigned as of April 30, 1996 by the Company to GGS
Management, a wholly-owned subsidiary of GGS Holdings. This agreement provides
for an annual management fee equal to 15% of gross premiums written. A similar
management agreement with a management fee of 17% of gross premiums written has
been entered into between GGS Management and Superior. Employees of the
Company relating to the nonstandard automobile insurance business and all
Superior employees became employees of GGS Management effective April 30, 1996.
As part of the approval of the transaction relating to the formation of GGS
Holdings, the Indiana Department has required Pafco to resubmit its management
agreement for review by the Indiana Department no later than May 1, 1997 (the
first anniversary of the Formation Transaction), together with supporting
evidence that management fees charged to Pafco are fair and reasonable in
comparison to fees charged between unrelated parties for similar services.
In the Consent Order approving the Acquisition, the Florida Department has
reserved, for a period of three years, the right to re-evaluate the reason-
ableness of fees provided for in the Superior management agreement at the end
of each calendar year and to require Superior to make adjustments in the
management fees based on the Florida Department's consideration of the
performance and operating percentages of Superior and other pertinent data.
There can be no assurance that either the Indiana Department or the Florida
Department will not in the future require a reduction in these management
fees.
Furthermore, as a result of certain restrictive covenants with respect to
dividends and other payments contained in the GGS Senior Credit Facility, GGS
Holdings and its subsidiaries, Pafco and Superior, are not expected to
constitute a significant source of funds for the Company. In addition, since
the GS Funds own 48% of the outstanding capital stock of GGS Holdings, the
Company would only be entitled to receive 52% of any dividend or distribution
paid by GGS Holdings to its stockholders.
Certain Rights of the GS Funds to Cause A Sale of GGS Holdings
The Stockholder Agreement establishes certain rights of the GS Funds to cause a
sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering of
GGS Holdings stock representing, on a fully diluted basis, at least 20% of all
such stock issued and outstanding, and generating at least $25 million in net
proceeds to the sellers of such securities, by April 30, 2001, (ii) the third
separate occasion, during the term of the Stockholder Agreement on which an
equity financing or acquisition transaction proposed by the GS Funds is
rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or SIG (defined, with respect to Goran as being direct
or indirect ownership of more than 40% of the outstanding voting stock of Goran
if any other holder or group holds in excess of 10% of the outstanding voting
stock of Goran and otherwise 25% thereof, and defined, with respect to SIG,
as requiring both (a) direct ownership by Goran in excess of 50% of SIG's
voting stock, and (b) retention by Alan G. Symons and his family members of
voting control of Goran by Alan G. Symons or his family members or affiliates,
or (iv) the cessation of Alan G. Symons' employment as CEO of GGS Holdings
for any reason. As a result of the considerations arising under the
Investment Company Act of 1940 (the "1940 Act"), with respect to GGS
Holdings, any public offering by GGS Holdings would probably be required to
consist solely of a secondary offering of shares held by stockholders.
Upon the occurrence of any of such events, and at any time or from time to time
thereafter, GS Funds may, by notifying SIG in writing, initiate the
process of seeking to effect a sale of GGS Holdings on terms and conditions
which are acceptable to GS Funds. However, within thirty days after SIG
receives notice of GS Funds' intention to initiate the sale of GGS Holdings,
SIG may provide written notice to the GS Funds that it wishes to acquire or
combine with GGS Holdings. SIG's notice to GS Funds must include the proposed
purchase price and other material terms and conditions with such specificity
as is necessary to permit GS Funds to evaluate SIG's offer. If, within ninety
days of delivery of the notice by SIG, GS Funds accept SIG's offer, SIG will
be obligated to acquire or combine with GGS Holdings. In the event GS Funds
rejects SIG's proposal, (i) any sale to a third party effected within 180 days
after receipt of such proposal must not contain terms that are in the aggregate
less favorable to the GGS Holdings stockholders than those set forth in SIG's
proposal, (ii) any sale must provide for the same consideration to be
paid to each stockholder, and (iii) no sale may constitute an acquisition by or
a combination with an affiliate of GS Funds. Accordingly, under certain
circumstances, GS Funds may have the ability to force SIG to divest itself
of its nonstandard automobile operations. Further, a forced sale of GGS
Holdings may also cause SIG to be characterized as an investment company
within the meaning of the 1940 Act unless the proceeds are redeployed into
other business operations or another exemption from registration under the
1940 Act is available.
ITEM 2 - PROPERTIES
The headquarters for the Company, SIG, GGS Holdings and Pafco are located at
4720 Kingsway Drive, Indianapolis, Indiana. The building is an 80,000 square
foot multilevel structure approximately 50% of which is utilized by Pafco. The
remaining space is leased to third parties at a price of approximately $10 per
square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel
building leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in Atlanta,
Georgia, Tampa, Florida and Orange, California. Under a lease term which
extends through February, 1998, Superior leases office space at 280 Interstate
North Circle, N.W., Suite 500 Atlanta, Georgia. Superior occupies 43,448
square feet at this location and subleases an additional 3,303 square feet
to third party tenants. Superior also has an office located at 3030 W. Rocky
Point Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of
space leased for a term extending through February 2000. In addition, Superior
occupies an office at 1745 West Orangewood, Orange, California consisting of
3,264 square fee under a lease extending through May 1997.
IGF owns a 17,500 square foot office building located at 2882 106th Street,
des Moines, Iowa which serves as its corporate headquarters. The building is
fully occupied by IGF. IGF also owns certain improved commercial property
which is adjacent to its corporate headquarters.
IGF has entered into a purchase agreement to acquire an office building in Des
Moines, Iowa, to be used as its crop insurance division home office. The
purchase price was $2.6 million, of which $2.4 million was escrowed on February
1, 1997. The terms include a floating closing date whereby the transaction
will close on the earlier of February 1, 1998 or thirty days after the closing
of the sale of the Company's currently occupied home office building, also
located in Des Moines. The purchase of the new building is not contingent on
the sale of the current building.
ITEM 3 - LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising in the
ordinary course of business. The Company believes that the ultimate resolution
of these lawsuits will not have a material adverse effect on its financial
condition or results of operations. The Company, through its claims reserves,
reserves for both the amount of estimated damages attributable to these
lawsuits and the estimated costs of litigation.
IGF is the administrator of a run-off book of business. The FCIC has requested
that IGF take responsibility for the claims liabilities of these policies under
its administration. IGF has requested reimbursement of certain expenses from
the FCIC with respect to this run-off activity. IGF instituted litigation
against the FCIC on March 23, 1995 in the United States District Court for the
Southern District of Iowa seeking $4.3 million as reimbursement for these
expenses. The FCIC has counterclaimed for approximately $1.2 million in claims
payments for which FCIC contends IGF is responsible as successor to the run-off
book of business. While the outcome of this lawsuit cannot be predicted with
certainty, the Company believes that the final resolution of this lawsuit will
not have a material adverse effect on the financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during 1996 to a vote of security holders of the
Registrant, through the solicitation of proxies or otherwise.
SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officers of the
Company who are not also directors. Their respective ages and their respective
positions with the Company are listed as follows:
Name Age Position
David L. Bates 37 Vice President, General Counsel
and Secretary of the Company
Gary P. Hutchcraft 35 Vice President, Chief Financial
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and
Secretary of SIG since November, 1995 after having been named Vice President
and General Counsel of the Company in April, 1995. Mr. Bates served as a
member of the Fort Howard Corporation Legal Department from September, 1988
through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager
with Deloitte & Touche.
Mr. Hutchcraft, C.P.A., has served as Vice President,Chief Financial Officer
and Treasurer of SIG and the Company since July, 1996. Prior to that time, Mr.
Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP from
July, 1988 to July, 1996.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's Common Shares, the
range of selling prices for each quarterly period for the years ended December
31, 1996 and 1995 with respect to the Common Shares and the approximate number
of holders of Common Shares as of December 31, 1996 the Common Shares and other
matters is included under the caption Market Information on Page 35 of the
1996 Annual Report, included as Exhibit 13, which information is incorporated
herein by reference.
The Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon earnings, capital requirements, any financing
agreement covenants and the financial condition of the Company. In addition,
regulatory restrictions and provisions of the GGS Senior Credit Facility limit
distributions to shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
Selected Financial Data of the Company follows:
GORAN CAPITAL INC.
Selected Financial Data
As of the Year Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994 1993 1992
Gross Premium Revenue $307,634 $151,717 $126,978 $114,135 $128,440
Reported Net Earnings 31,296 7,171 3,940 1,397 4,413
US/Canada GAAP
Differences:
Discounting on
Outstanding Claims 62 (161) 88 49 143
Deferred Income Taxes (64) (344) 1,180 562 0
Revised Net Earnings 31,294 6,666 5,208 2,008 4,556
Earnings Per Share $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94
EPS-Before
Extraordinary Item $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94
EPS-Fully Diluted $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94
Dividends Per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Reported Total Assets 381,342 160,816 115,240 128,690 96,573
US/Canada GAAP
Differences:
Loans to Purchase
Shares (595) (563) (593) (741) (774)
Deferred Income
Taxes 1,357 1,466 1,742 548 0
Outstanding Claims
Ceded 0 0 0 0 0
Unearned Premiums
Ceded 0 0 0 0 0
Unrealized gain (loss)
on Investments 1,225 (221) (1,383) 0 0
Revised Total Assets 383,329 161,498 115,006 128,497 95,799
Long Term Bonds and
Debentures 0 9,237 10,787 12,936 14,633
Reported Shareholders'
Equity 47,258 12,622 5,067 1,088 (739)
US/Canada GAAP
Differences:
Deferred Income
Taxes 1,357 1,466 1,742 548 0
Discounting on
claims (1,261) (1,327) (1,134) (1,292) (1,396)
Loans to Purchase
Shares (595) (563) (593) (741) (774)
Unrealized Gain (Loss)
on Investments 1,225 (221) (1,383) 0 0
Revised Shareholders'
Equity 47,984 11,977 3,699 (397) (2,909)
Shares Outstanding 5,724,476 5,567,644 5,399,463 5,242,101 4,834,160
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
The discussion entitled "Management Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report on
pages 5 through 13, included as Exhibit 13 is incorporated herein
by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included in the 1996 Annual Report,
included as Exhibit 13, and listed in Item 14 of this Report are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement
for its 1996 annual meeting of common stockholders filed with the Commission
pursuant to Regulation 14A (the "1996 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report except as
otherwise indicated:
1. Financial Statements. The following described consolidated financial
statements found on the pages of the 1996 Annual Report indicated below are
incorporated into Item 8 of this Report by reference.
Description of Financial Statement Item
Report of Indpendent Accountants
Consolidated Balance Sheets, December 31,
1996 and 1995
Consolidated Statements of Earnings, Years
Ended December 31, 1996 and 1995
Consolidated Statements of Retained Earnings
(Deficit), Years Ended December 31,
1996 and 1995
Consolidated Statements of Cash Resources,
Years Ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements,
Years Ended December 31, 1996 and 1995
2. Financial Statement Schedules.
The following financial statement schedules are included herein.
Description of Financial Statement Item
Report of Independent Account On Differences
Between Canadian and United States Generally
Accepted Accounting Principles and
Supplementary Schedules
Differences Between Canadian And United States
Generally Accepted Accounting Principles
Exhibit 1 - Consolidated Statement of Changes
In Cash Resources
Exhibit 2 - Summary of Investments That Exceed
10% Of Shareholders' Equity
Exhibit 3 - Summary of Non Income Producing
Investments
Exhibit 4 - Amounts Due From Insurance Companies
In Excess of 10% of Shareholders' Equity
Exhibit 5 - Analysis Of Changes In Shareholders'
Equity
Schedule I - Summary Of Investments Other Than
Investments In Related Parties
Schedule II - Condensed Financial Information
Of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation And Qualifying Accounts
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations
Schedules other than those listed above have been omitted because the required
information is contained in the financial statements and notes thereto or
because such schedules are not required or applicable.
3. Exhibits. The Exhibits set forth on the Index to Exhibits are
incorporated herein by reference.
4. Reports on Form 8-K. Registrant filed no reports on Form 8-K during the
quarter ended December 31, 1996.
GORAN CAPITAL INC.
Differences Between Canadian And United States General Accepted Accounting
Principles
For The Years Ended December 31, 1996, 1995 and 1994
A reconciliation of financial statement amounts from Canadian Generally
Accepted Accounting Principles to U.S. Generally Accepted Accounting
Principles is as follows:
1996 1995 1994
Net Earnings In Accordance
With Canadian Generally
Accepted Accounting Principles $31,296 $7,171 $3,940
Add Effect Of Difference In
Accounting For:
Deferred Income Taxes
(See Note (e)) (64) (344) 1,180
Outstanding Claims
(See Note (f)) 62 (161) 88
Net Earnings In Accordance
With United States Generally
Accepted Accounting Principles $31,294 $6,666 $5,208
Applying United States Generally Accepted Accounting Principles, deferred
income tax assets would be increased by $1,357, $1,466 and $1,742, outstanding
claims would be increased by $1,261, $1,327 and $1,134 and cumulative trans-
lation adjustment would be increased by $41, $36, and $14, as at December 31,
1996, 1995 and 1994, respectively. As a result of these adjustments, retained
earnings would be increased by $96, $139 and $608 as at December 31, 1996, 1995
and 1994, respectively. The effect of the above noted differences on other
individual balance sheet items and on working capital is not significant.
B. Earnings Per Share
Earnings per share, as determined in accordance with United States Generally
Accepted Accounting Principles, are set out below. Primary earnings per share
are computed based on the weighted average number of common shares outstanding
during the year plus common share equivalents consisting of stock options and
warrants. Primary and fully diluted earnings per share are calculated using
the Treasury Stock method and assume conversion of securities when the result
is dilutive.
The following average number of shares were used for the compilation of primary
and fully diluted earnings per share:
1996 1995 1994
Primary $5,724,476 $5,567,644 $5,399,463
Fully Diluted 5,724,476 5,567,644 5,399,463
Earnings per share, as determined in accordance with U.S. Generally
Accepted Accounting Principles, are as follows:
1996 1995 1994
Primary Earnings Per Share $5.47 $1.20 $0.96
Fully Diluted Earnings Per Share 5.47 1.20 0.96
C. Statement Of Changes In Cash Resources
U.S. Generally Accepted Accounting Principles require that the
components of the changes in cash resources, in most cases, be reported on a
gross basis.
Exhibit 1 is a Statement of Cash Resources that incorporates the necessary
added disclosure detail.
D. Supplemental Cash Flow Information
Cash paid for interest and income taxes is summarized as follows:
1996 1995 1994
Cash Paid For Interest $4,005 $1,548 $1,773
Cash Paid For Income Taxes,
Net of Refunds 9,825 1,953 166
E. Income Taxes
The difference in accounting for deferred income taxes reflects the adoption
for U.S. Generally Accepted Accounting Principles, effective January
1, 1993, of Statement of Financial Accounting Standards No. 109 ("SFAS" No.
109"), "Accounting for Income Taxes". This standard requires an asset and
liability approach that takes into account changes in tax rates when valuing
the deferred tax amounts to be reported in the balance sheet.
Deferred tax assets recognized under Canadian Generally Accepted Accounting
Principles and Accounting Principles Board Opinion No. 11, which require
realization beyond a reasonable doubt in order to record the assets, amounted
to $NIL, $73 and $214 at December 31, 1996, 1995 and 1994, respectively, and
pertained to Canadian operations only.
The adoption of SFAS No. 109 results in additional deferred tax assets
recognized for deductible temporary differences and loss carry-forwards in the
amount of $3,531, $2,581 and $2,375 net of valuation allowances of NIL, $69
and $260 and deferred tax liabilities recognized for taxable temporary
differences in the amount of $2,174, $1,114 and $633 at December 31, 1996,
1995 and 1994, respectively.
F. Outstanding Claims
The difference in accounting for outstanding claims reflects the application
for U.S. Generally Accepted Accounting Principles of SEC Staff
Accounting Bulletin No. 62, "Discounting By Property/Casualty Insurance
Companies". This standard does not allow discounting of unpaid claim lia-
bilities by public companies, except in specific circumstances that are not
applicable to the Company.
G. Receivables From Sale Of Capital Stock
The SEC Staff Accounting Bulletins require that accounts or notes receivable
arising from transactions involving capital stock should be presented as
deductions from shareholders' equity and not as assets. According, in order to
comply with U.S. Generally Accepted Accounting Principles, shareholders'
equity would be reduced by $595, $563 and $593 at December 31, 1996, 1995 and
1994, respectively, to reflect the loans due from certain shareholders which
relate to the purchase of common shares of the Company.
H. Concentration Of Investments
U.S. Generally Accepted Accounting Principles require that disclosure
be made of significant concentrations of investments and of investments that
are non-income producing. The Company considers investments whose value
exceeds 10% of shareholders' equity to be significant. The relevant dis-
closures are provides in Exhibits 2 and 3, respectively.
I. Concentrations of Credit Risk
U.S. Generally Accepted Accounting Principles require disclosure of
significant concentrations of credit risk. The Company's credit risk is with
respect to amounts receivable from other insurance companies. The Company
considers credit risks in excess of 10% of shareholders' equity to be
significant. The relevant disclosure is provided in Exhibit 4.
J. Unrealized Loss On Investments
U.S. Generally Accepted Accounting Principles require that unrealized
losses on investment portfolios be included as a component in determining
shareholders' equity. In addition, SFAS No. 115 permits prospective
recognition of unrealized gains on investment portfolios for year-ends
commencing after December 15, 1993. As a result, shareholders' equity would
be increased by $1,225 as at December 31, 1996 and reduced by $221 and $1,383
as at December 31, 1995 and 1994, respectively.
K. Changes In Shareholders' Equity
An analysis of the components of the change in shareholders' equity, determined
in accordance with Canadian Generally Accepted Accounting Principles, is
provided in Exhibit 5.
A reconciliation of shareholders' equity from Canadian Generally Accepted
Accounting Principles to U.S. Generally Accepted Accounting Principles
is as follows:
1996 1995 1994
Shareholders' Equity In Accordance
With Canadian Generally
Accepted Accounting Principles $47,258 $12,622 $ 5,067
Add (deduct) Effect Of Difference
In Accounting For:
Deferred Income Taxes (See
Note (a)) 1,357 1,466 1,742
Outstanding Claims (See
Note (a)) (1,261) (1,327) (1,134)
Receivables From Sale Of
Capital Stock (See Note (g)) (595) (563) (593)
Unrealized Gain (Loss) On
Investments (See Note (j)) 1,225 (221) (1,383)
Shareholders' Equity (Deficiency)
In Accordance With U.S.
Generally Accepted
Accounting Principles $47,984 $11,977 $ 3,699
GORAN CAPITAL INC.
Consolidated Statement of Changes
In Cash Resources
For the Year Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Cash Provided By Operating
Activities:
Net income for the period $ 31,296 $7,171 $3,941
Items Not Affecting Cash
Resources:
Amortization 2,438 693 566
Minority Interest In Net
Income Of Consolidated
Subsidiary 2,801 (16) 16
Loss (gain) On Sale Of
Investments 637 198 (358)
Loss (gain) On Sale Of Capital
Assets (4) (7) (1)
Increase in Unearned Premiums 13,178 9,247 (7,037)
Increase (Decrease) In
Outstanding Losses (4,545) 29,289 (18,341)
Decrease (Increase) In Deferred
Policy Acquisition Costs 1,649 (3,058) (864)
Decrease In Deferred Income
Taxes 73 147 214
Decrease In Goodwill 0 0 0
Decrease (Increase) in
Reinsurance Recoverable on
outstanding claims 8,464 (25,930) 22,259
Decrease (Increase) in prepaid
reinsurance premiums (8,785) 916 (3,548)
Decrease (Increase) In Other
Assets (2,433) (470) 78
Items Not Involving Cash 13,473 11,009 7,058
Increase (Decrease) In Accounts
Payable 5,576 (2,291) 1,352
Decrease (Increase) In Accounts
Receivable (19,448) (6,252) (13,775)
Changes In Operating Working
Capital (13,872) (8,543) (12,423)
30,897 9,637 (1,424)
Financing Activities:
Issue Of Share Capital 599 303 34
Reduction Of Subordinated
Debenture (11,085) (1,462) (1,047)
Increase (Decrease) Of
Borrowed Funds 42,189 220 722
Increase (Decrease) in
Contributed Surplus 2,775 0 0
Increase (Decrease) in
Minority Interest 38,225 0 0
Investing Activities:
Net (Purchase) Sale Of
Marketable Securities (11,996) (4,147) 2,118
Acquisition of subsidiary (66,590) 0 0
Proceeds On Sale Of Capital
Assets 14 11 5
Net Purchase Of Capital Assets (2,473) (1,692) (634)
Other 563 155 (401)
Change In Cash Resources
During The Year 23,118 3,025 (627)
Cash Resources, Beginning Of Year 10,613 7,588 8,215
Cash Resources, End Of Year 33,731 10,613 7,588
Cash Resources Are Comprised Of:
Cash 4,679 4,171 (116)
Short-Term Investments 29,052 6,442 7,704
33,731 10,613 7,588
GORAN CAPITAL INC.
CONSOLIDATED SUMMARY OF INVESTMENTS
THAT EXCEED 10% OF SHAREHOLDERS' EQUITY
For The Year Ended December 31, 1996
(In Thousands of U.S. Dollars)
Fixed Short-Term Total
Maturities Investments Investment
Federal Home
Loan Bank $ 9,770 $ $ 9,770
Federal
National
Mortgage
Association $14,885 $ $14,885
U.S.
Treasury
Notes $26,318 $ $26,318
U.S.
Treasury
Bills $ $10,292 $61,265
GORAN CAPITAL INC.
Consoldiated Shareholders' Equity In Accordance
With United States GAAP
As At December 31, 1996
(In Thousands of U.S. Dollars)
Consolidated Shareholders' Equity
in Accordance with U.S. GAAP $47,983,000
Threshold (Rounded) 4,798,300
GORAN CAPITAL INC.
Concentration of Credit Risk
Amounts Due From Other Insurance
Companies Paid and Unpaid Claims
As At December 31, 1996
(In Thousands of U.S. Dollars)
Company Name Amount
Centre Reinsurance (Bermuda) Limited $16,764
Federal Crop Insurance Corporation $21,800
Total $38,564
Notes: Accounts listed above are amounts greater than $4,798,000 (U.S.)
which is approximately 10% of Shareholders' Equity at December 31, 1996.
Amounts are net of trust accounts posted as collateral with original cedents,
with respect to certain retrocession agreements in which the Company is a
retrocessionnaire.
GORAN CAPITAL INC.
ANALYSIS OF CHANGES IN SHAREHOLDERS' EQUITY
As at December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Capital Stock $16,875 $ 16,126 $ 16,091
Contributed Surplus 0 0 0
Deficit (3,895) (11,066) (15,007)
Cumulative Translation Adjustment (358) 7 (173)
Shareholders' Equity -
Opening Balance $12,622 $ 5,067 $ 911
Activity For The Year
Issue Of Share Capital 541 749 35
Contributed Surplus 2,775 0 0
Net Income For The Year 31,296 7,171 3,941
Translation Adjustment for The Year 24 (365) 180
Shareholders' Equity -
Ending Balance 47,258 12,622 5,067
Comprised Of:
Capital Stock 17,416 16,875 16,126
Contributed Surplus 2,775 0 0
Retained Earnings (Deficit) 27,401 (3,895) (11,066)
Cumulative Translation Adjustment (334) (358) 7
Shareholders' Equity -
Ending Balance 47,258 12,622 5,067
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE 1 - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
As at December 31, 1996
(In Thousands of U.S. Dollars)
Estimated Amount On
Type of Investment Cost Market Value Balance Sheet
Fixed Maturities:
Bonds:
Government and Government
Agencies $ 57,804 $ 57,826 $ 57,804
States and Municipalities 3,587 3,651 3,587
Public Utilities 350 379 350
All Other Corporate Bonds 76,071 76,527 76,071
Total Fixed Maturities $137,812 $138,383 $137,812
Equity Securities:
Common Stocks $ 28,075 $ 28,729 $ 28,075
Preferred Stocks 0 0 0
Total Equity Securities $ 28,075 $ 28,729 $ 28,075
Mortgage Loans on Real Estate 2,430 2,430 2,430
Real Estate 4,548 4,548 4,548
Other Long-Term Investments 75 75 75
Short Term Investments 29,052 29,052 29,052
Total Investments $201,992 $203,217 $201,992
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (Parent Company)
Balance Sheet
As At December 31,
(In Thousands U.S. Dollars)
1995 1996
Assets
Cash $ 319 $ 812
Accounts Receivable 419 379
Capital and Other Assets 543 750
Investment In Subsidiaries 10,772 10,807
Total Assets $ 12,054 $ 12,748
Liabilities and Shareholders' Equity
Accounts Payable $ 9,758 $ 1,225
Other Payables 973 757
Subordinated Debenture 0 11,084
Total Liabilities 10,731 13,066
Shareholders' Equity
Common Shares 18,473 18,002
Deficit (17,150) (18,320)
Total Shareholders' Equity 1,323 (318)
Total Liabilities and Shareholders' Equity $12,054 $12,748
GORAN CAPITAL INC.
Statement of Earnings (Loss)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Revenues
Management Fees $ 352 $ 796 $ 901
Royalty Income 0 0 69
Dividend Income 3,500 0 0
Other Income 0 0 1,449
Net Investment Income 264 448 399
Total Revenues 4,116 1,244 2,818
Expenses
Debenture Interest Expense 868 998 1,089
Amortization 200 114 160
General, Administrative And
Acquisition Expenses 1,879 1,338 1,170
Total Expenses 2,946 2,450 2,419
Net Income (Loss) $ 1,170 $ (1,206) 399
Deficit, beginning of year (18,320) (17,114) (17,513)
Deficit, end of year (17,150) (18,320) (17,114)
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
(In Thousands of U.S. Dollars)
1994 1995 1996
Cash Flows From Operations:
Net Income (Loss) $ 1,170 $ (1,206) $ 399
Items Not Involving Cash:
Amortization 199 114 160
Gain on Sale of Capital Assets (4) (7) 0
Decrease (Increase) in Accounts
Receivable (40) 1,822 40
Decrease (Increase) in Other
Assets (3) (29) (2)
Increase (Decrease) in Accounts
Payable 8,533 1,227 (164)
Increase (Decrease) in Other
Payables 0 (141) (214)
Net Cash Provided (Used) by Operations 10,071 1,780 219
Cash Flows From Financing Activities:
Redemption of Share Capital by
Subsidiary 0 0 623
Proceeds on Sale of Capital
Assets 14 11 0
Issue of Common Shares 599 305 35
Net Cash Provided By Financing
Activities 613 316 658
Cash Flows From Investing Activities:
Purchase of Fixed Assets 0 (3) 0
Other, net (93) 3 0
Reduction of Debentures (11,084) (1,454) (1,076)
Net Cash Used by Investing Activities: (11,177) (1,454) (1,076)
Net Increase (Decrease) in Cash (493) 642 (199)
Cash at Beginning of Year 812 170 369
Cash At End of Year 319 812 170
Cash Resources are Comprised of:
Cash 187 109 (29)
Short-Term Investments 132 703 199
319 812 170
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Goran Capital Inc. The condensed
financial information includes the accounts and activities of the Parent
Company which acts as the holding company for the insurance subsidiaries.
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Direct Amount $102,178 $122,088 $298,596
Assumed From Other
Companies $ 24,800 $ 29,629 $ 9,038
Ceded To Other
Companies $ 68,505 65,356 87,202
Net Amount $ 58,473 $ 86,361 $220,432
Percentage Of Amount
Assumed To Net 42.4% 34.3% 4.1%
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994-Allowance 1995-Allowance 1996-Allowance
for Doubtful for Doubtful for Doubtful
Accounts Accounts Accounts
Additions:
Balance At Beginning
Of Period $1,179 $1,209 $ 927
Charged To Costs
And Expenses<F1> (86) 2,523 5,034
Charged to Other
Accounts - - - - - - 0
Deductions From
Reserves (116)<F2> 2,805<F2> 4,981<F2>
Balance At End
Of Period $1,209 $ 927 $1,480
[FN]
<F1> In 1993, the Company began to direct bill policyholders rather than
agents for premiums. Therefore, bad debt expenses in 1993 increased
accordingly. During late 1994 and into 1995, the Company experienced an
increase in premiums written. During 1995, the Company further evaluated the
collectibility of this business and incurred a bad debt expense of approxi-
mately $2.5 million. The Company continually monitors the adequacy of its
allowance for doubtful accounts and believes the balance of such allowance
at December 31, 1993, 1994 and 1995 was adequate.
<F2>
Uncollectible accounts written off, net of recoveries.
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Deferred Policy
Acquisition Costs $ 12,800 $ 2,379 $ 1,479
Reserves for Losses and
Loss Adjustment Expenses 101,719 59,421 29,269
Unearned Premiums 87,825 17,497 14,416
Earned Premiums 191,759 49,641 32,126
Net Investment Income 6,738 1,173 1,241
Losses And Loss Adjustment
Expenses Incurred Related To:
Current Years 137,895 35,184 26,268
Prior Years (570) 787 202
Paid Losses And Loss
Adjustment Expenses 130,895 31,075 26,995
Amortization Of Deferred
Policy Acquisition Costs 27,657 7,150 4,852
Premiums Written 305,499 $124,634 $103,134
Note: All amounts in the above table are net of the effects of reinsurance and
related commission income, except for net investment income regarding which
reinsurance is not applicable, premiums written liabilities for losses and loss
adjustment expenses, and unearned premiums which are stated on a gross basis.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
GORAN CAPITAL INC.
March 15, 1997 By: /s/ Alan G. Symons,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 29, 1996, on
behalf of the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial/Accounting Officer:
/s/Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/G. Gordon Symons /s/David B. Shapira
Chairman of the Board Director
/s/John K. McKeating /s/James G. Torrance
Director Director
/s/J. Ross Schofield /s/Douglas H. Symons
Director Director
/s/Alan G. Symons
Director
EXHIBIT INDEX
Reference to
Regulation S-K
Exhibit No. Document
1 Final Draft of the Underwriting Agreement dated November 4
1996 among Registrant, Symons International Group, Inc.,
Advest, Inc. and Mesirow Financial, Inc.
3.1 The Registrant's Articles of Incorporation are incorporated
by reference to Exhibit 1 of the Registrant's Form 20-F,
filed October 31, 1994.
3.2 Registrant's Restated Bylaw 1
4.1 Sample Share Certificate and Articles of Amalgamation
defining rights attaching to common shares are incorporated
by reference to Exhibit 2 of Registrant's Form 20-F filed
October 31, 1994.
10.1 The Stock Purchase Agreement among Registrant, Symons
International Group, Inc., Fortis, Inc. and Interfinancial,
Inc. dated January 31, 1996 is incorporated by reference to
Exhibit 10.1 of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.2(1) The Stock Purchase Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Registrant and Symons
International Group, Inc. dated January 31, 1996 is
incorporated by reference to Exhibit 10.2(1) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.2(2) The First Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Registrant and Symons International Group, Inc. dated
March 28, 1996 is incorporated by reference to Exhibit
10.2(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.2(3) The Second Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Registrant and Symons International Group, Inc. dated
April 30, 1996 is incorporated by reference to Exhibit
10.2(3) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.2(4) The Third Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Registrant, Symons International Group, Inc. and Pafco
General Insurance Company dated September 24, 1996 is
incorporated by reference to Exhibit 10.2(4) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.3(1) The Stockholders Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Symons International
Group, Inc. and Registrant dated April 30, 1996 is
incorporated by reference to Exhibit 10.3(1) of the Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.3(2) The Amended and Restated Stockholder Agreement among GGS
Management Holdings, Inc., GS Capital Partners II, L.P.,
Symons International Group, Inc. and Registrant dated
September 24, 1996 is incorporated by reference to Exhibit
10.3(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.4 The Registration Rights Agreement among GGS Management
Holdings, Inc., GS Capital Partners II, L.P., Registrant and
Symons International Group, Inc. dated April 30, 1996 is
incorporated by reference to Exhibit 10.4 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.5 The Management Agreement among Superior Insurance Company,
Superior American Insurance Company, Superior Guaranty
Insurance Company and GGS Management, Inc. dated April 30,
1996 is incorporated by reference to Exhibit 10.5 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.6 The Management Agreement between Pafco General Insurance
Company and Symons International Group, Inc. dated May 1,
1987, as assigned to GGS Management, Inc. effective April 30,
1996, is incorporated by reference to Exhibit 10.6 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.7 The Administration Agreement between IGF Insurance Company
and Symons International Group, Inc. dated February 26, 1990,
as amended, is incorporated by reference to Exhibit 10.7 of
the Symons International Group, Inc.'s Registration Statement
on Form S-1, Reg. No. 333-9129.
10.8 The Agreement between IGF Insurance Company and Symons
International Group, Inc. dated November 1, 1990 is
incorporated by reference to Exhibit 10.8 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.9(1) The Credit Agreement between GGS Management, Inc., various
Lenders and The Chase Manhattan Bank (National Association),
as Administrative Agent, dated April 30, 1996 is incorporated
by reference to Exhibit 10.11(1) of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No.
333-9129.
10.9(2) The Pledge Agreement between GGS Management Holdings, Inc.
and Chase Manhattan Bank, N.A. dated April 30, 1996 is
incorporated by reference to Exhibit 10.11(2) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.9(3) The Pledge Agreement between GGS Management, Inc. and Chase
Manhattan Bank, N.A. dated April 30, 1996 is incorporated by
reference to Exhibit 10.11(3) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.9(4) The First Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated September 26,
1996
10.9(5) The Second Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated December 31,
1996
10.9(6) The Third Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated March 26,
1997
10.10 The Registration Rights Agreement between Registrant and
Symons International Group, Inc. dated May 29, 1996 is
incorporated by reference to Exhibit 10.13 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.11(1) The License, Improvement and Support Agreement between
Tritech Financial Systems, Inc. and Symons International
Group, Inc. dated August 30, 1995 is incorporated by
reference to Exhibit 10.14(1) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.11(2) The License of Computer Software between Tritech Financial
Systems, Inc. and Symons International Group, Inc. dated
August 30, 1995 is incorporated by reference to Exhibit
10.14(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.12(1) The Agreement among Cliffstan Investments, Inc., Pafco
General Insurance Company and Gage North Holdings, Inc. dated
September 1, 1989 is incorporated by reference to Exhibit
10.15(1) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.12(2) The Purchase of Promissory Note and Assignment of Security
Agreement between Pafco General Insurance Company and Granite
Reinsurance Company, Ltd., dated September 30, 1992 is
incorporated by reference to Exhibit 10.15(2) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.12(3) The Guarantee of Alan G. Symons dated April 22, 1994 is
incorporated by reference to Exhibit 10.15(3) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.12(4) The Share Pledge Agreement between Symons International
Group, Ltd. and Pafco General Insurance Company dated April
22, 1994 is incorporated by reference to Exhibit 10.15(4) of
Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.13(1) The Employment Agreement between GGS Management Holdings,
Inc. and Alan G. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(1) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.13(2) The Employment Agreement between GGS Management Holdings,
Inc. and Douglas H. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(2) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.14(1) The Employment Agreement between IGF Insurance Company and
Dennis G. Daggett effective February 1, 1996 is incorporated
by reference to Exhibit 10.17(1) of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No.
333-9129.
10.14(2) The Employment Agreement between IGF Insurance Company and
Thomas F. Gowdy effective February 1, 1996 is incorporated by
reference to Exhibit 10.17(2) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.15 The Employment Agreement between Superior Insurance Company
and Roger C. Sullivan, Jr. dated May 9, 1996 is incorporated
by reference to Exhibit 10.18 of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.16 The Employment Agreement between Registrant and Gary P.
Hutchcraft effective June 30, 1996 is incorporated by
reference to Exhibit 10.19 of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.17 The Goran Capital Inc. Stock Option Plan is incorporated by
reference to Exhibit 10.20 of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.18 The GGS Management Holdings, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.21 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.19 The Symons International Group, Inc. 1996 Stock Option Plan
is incorporated by reference to Exhibit 10.22 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.20 The Symons International Group, Inc. Retirement Savings Plan
is incorporated by reference to Exhibit 10.24 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.21 The Insurance Service Agreement between Mutual Service
Casualty Company and IGF Insurance Company dated May 20, 1996
is incorporated by reference to Exhibit 10.25 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.22(1) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance. Contract between Pafco General
Insurance Company and Superior Insurance Company is
incorporated by reference to Exhibit 10.27(1) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.22(2) The Crop Hail Quota Share Reinsurance Contract and Crop
Insurance Service Agreement between Pafco General Insurance
Company and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(2) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.22(3) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance Contract between IGF Insurance
Company and Pafco General Insurance Company is incorporated
by reference to Exhibit 10.27(3) of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(4) The Multiple Line Quota Share Reinsurance Contract between
IGF Insurance Company and Pafco General Insurance Company is
incorporated by reference to Exhibit 10.27(4) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.22(5) The Standard Revenue Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(5) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.23 The Commitment Letter, effective October 24, 1996, between
Fifth Third Bank of Central Indiana and Symons International
Group, Inc. is incorporated by reference to Exhibit 10.28 of
Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.24 The Reinsurance Agreement No. 1000-91 (Quota Share Agreement)
and Reinsurance agreement No. 1000-90 (Stop Loss Reinsurance
and Reserves Administration Agreement) are incorporated by
reference to Exhibit 3(c) of Registrant's Form 20-F filed
October 31, 1994.
10.25 The Form of Share Option Agreement is incorporated by
reference to Exhibit 10.05 of Registrant's Form 10-K for the
year ended December 31, 1994.
10.26 The Share Pledge Agreement between Symons International
Group, Ltd and Registrant is incorporated by reference to
Exhibit 10.06 of Registrant's Form 10-K for the year ended
December 31, 1994.
10.27 The MPCI Mulit-Year Stop Loss Reinsurance Agreement is
incorporated by reference to Exhibit 10.07 of Registrant's
Form 10-K for the year ended December 31, 1994.
10.28 The Automobile Liability and Physical Damage Quota Share
Reinsurance Agreement, as amended, is incorporated by
reference to Exhibit 10.08 of Registrant's Form 10-K for the
year ended December 31, 1994.
11 Statement re Computation of Per Share Earnings
13 Annual Report to Security Holders, 1996 and 1995
21 The Subsidiaries of the Registrant are incorporated by
reference to Footnote 1 of the Registrant's consolidated
financial statements contained in its Annual Report to
Security Holders filed hereunder as Exhibit 13.
99 Management Proxy Circular with respect to 1997 Annual
Meeting of Shareholders of Registrant