As filed with the Securities and Exchange Commission on September 16,1997
Registration No. 333-___________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SYMONS INTERNATIONAL GROUP, INC. SIG CAPITAL TRUST I
(Exact name of Registrant as (Exact name of Registrant as specified
specified in its charter) in its trust agreement)
INDIANA DELAWARE
(State or other jurisdiction of ) (State or other jurisdiction of
incorporation or organization) incorporation or organization)
6331 6331
(Primary Standard Industrial (Primary Standard Industrial Classifi-
Classification Code Number) cation Code Number)
35-1707115 35-6650328
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
4720 KINGSWAY DRIVE
INDIANAPOLIS, INDIANA 46205
(317) 259-6300
(Address, including zip code, and telephone number, including area code, of
Registrants' principal executive offices)
DAVID L. BATES, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
SYMONS INTERNATIONAL GROUP, INC.
4720 KINGSWAY DRIVE
INDIANAPOLIS, INDIANA 46205
(317) 259-6300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
ROBERT A. ROSE, ESQ.
DANN PECAR NEWMAN & KLEIMAN, P.C.
2300 One American Square, Box 82008
Indianapolis, Indiana 46282
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
CALCULATION OF REGISTRATION FEE
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE (2) (3)
Trust Preferred Securities of SIG Capital
Trust I . . . . . . . . . . . . . . . . . . . . . . .$135,000,000 100% $135,000,000 $40,909
Senior Subordinated Notes of Symons
International Group, Inc.(2)
Symons International Group, Inc. Guarantee
with respect to Trust Preferred Securities(3)
Total . . . . . . . . . . . . . . . . . . . . . . . $135,000,000(4) 100% $135,000,000(5) $40,909
(1) Estimated solely for the purpose of computing the registration fee.
(2) No separate consideration will be received for the Senior Subordinated Notes
of Symons International Group, Inc. distributed upon any liquidation of SIG
Capital Trust I.
(3) No separate consideration will be received for the Symons International
Group, Inc. Guarantee.
(4) This Registration Statement is deemed to cover rights of holders of Senior
Subordinated Notes under an Indenture, the rights of holders of Trust
Preferred Securities of the SIG Capital Trust I under the Amended and
Restated Declaration of Trust, the rights of holders of such Trust Preferred
Securities under a Guarantee and certain backup undertakings as described
herein.
(5) Such amount represents the Liquidation Amount of the SIG Capital Trust I
Preferred Securities to be exchanged hereunder and the principal amount of
Senior Subordinated Notes that may be distributed to holders of such Trust
Preferred Securities upon any liquidation of the SIG Capital Trust I.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to Completion, Dated September 16, 1997
SIG CAPITAL TRUST I
OFFER TO EXCHANGE ITS
9 1/2% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER PREFERRED SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
9 1/2% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
SYMONS INTERNATIONAL GROUP, INC.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED
------------------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 23 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER PREFERRED SECURITIES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------------
SIG Capital Trust I, a statutory business trust formed under the laws
of the State of Delaware (the "Trust"), hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus (as the same may be
amended or supplemented from time to time, the "Prospectus") and in the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange up to $135,000,000 aggregate Liquidation Amount of its 9
1/2% Trust Preferred Securities (the "Exchange Preferred Securities") which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for a like Liquidation Amount of its outstanding
9 1/2% Trust Preferred Securities (the "Preferred Securities"), of which
$135,000,000 aggregate Liquidation Amount is outstanding. Pursuant to the
Exchange Offer, Symons International Group, Inc., an Indiana corporation (the
"Company"), is also offering to exchange (i) its guarantee of payments of cash
distributions and payments on liquidation of the Trust or redemption of the
Preferred Securities (the "Company Guarantee") for a like guarantee in respect
of the Exchange Preferred Securities (the "Exchange Guarantee") and (ii) all of
its 9 1/2% Senior Subordinated Notes due August 15, 2027 (the "Old Senior
Subordinated Notes") for a like aggregate principal amount of its 9 1/2% Senior
Subordinated Notes due August 15, 2027 (the "Exchange Notes"), which Exchange
Guarantee and Exchange Notes also have been registered under the Securities Act.
The Preferred Securities, the Company Guarantee and the Old Senior Subordinated
Notes are collectively referred to herein as the "Old Securities" and the
Exchange Preferred Securities, the Exchange Guarantee and the Exchange Notes are
collectively referred to herein as the "Exchange Securities."
The terms of the Exchange Securities are identical in all material
respects to the respective terms of the Old Securities, except that (i) the
Exchange Securities have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the Old
Securities, (ii) the Exchange Preferred Securities will not contain the $100,000
minimum Liquidation Amount transfer restriction, (iii) the Exchange Preferred
Securities will not provide for any increase in the Distribution rate thereon,
(iv) the Exchange Notes will not contain the $100,000 minimum principal amount
transfer restriction and (v) the Exchange Notes will not provide for any
increase in the interest rate thereon. See "Description of Exchange Preferred
Securities" and "Description of Old Securities." The Exchange Securities are
being offered for exchange in order to satisfy certain obligations of the
Company and the Trust under the Registration Rights Agreement dated as of August
12, 1997 (the "Registration Rights Agreement") among the Company, the Trust and
the Initial Purchasers (as defined herein). In the event that the Exchange Offer
is consummated, any Preferred Securities which remain outstanding after
consummation of the Exchange Offer and the Exchange Preferred Securities issued
in the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding
Liquidation Amount thereof have taken certain actions or exercised certain
rights under the Declaration (as defined herein).
This Prospectus and the Letter of Transmittal are first being mailed to
all holders of Preferred Securities on September , 1997.
The date of this Prospectus is September , 1997.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such
information may also be accessed electronically by means of the Commission's
home page on the Internet (http://www.sec.gov).
No separate financial statements of the Trust have been included
herein. The Company and the Trust do not consider that such financial statements
would be material to holders of the Preferred Securities or Exchange Preferred
Securities because the Trust is a newly formed special purpose entity, has no
operating history or independent operations and is not engaged in and does not
propose to engage in any activity other than holding as trust assets the
Exchange Notes and issuing the Trust Securities. See "SIG Capital Trust I" and
"Description of Exchange Preferred Securities." In addition, the Company does
not expect that the Trust will file reports under the Exchange Act with the
Commission.
This Prospectus constitutes a part of a registration statement on Form
S-4 (the "Registration Statement") filed by the Company and the Trust with the
Commission under the Securities Act. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission, and
reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company, the Trust
and the Exchange Preferred Securities. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
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The Exchange Preferred Securities and the Preferred Securities
(collectively, the "Securities") represent beneficial interests in the assets of
the Trust. The Company is the owner of all of the beneficial interests
represented by common securities of the Trust (the "Common Securities," and
together with the Securities, the "Trust Securities"). Wilmington Trust Company
is the Preferred Trustee of the Trust. The Trust exists for the sole purpose of
issuing the Trust Securities and investing the proceeds thereof in the Exchange
Notes (as defined herein). The Exchange Notes will mature on August 15, 2027
(the "Stated Maturity Date"). The Securities will have a preference over the
Common Securities under certain circumstances with respect to cash distributions
and amounts payable on liquidation, redemption or otherwise. See "Description of
Exchange Preferred Securities."
As more fully described herein, the Company has entered into several
contractual undertakings which, the Company believes, taken together, guarantee
to the holders of the Exchange Preferred Securities a full and unconditional
right to enforce the payment of the distributions with respect to the Exchange
Preferred Securities, the payment of the redemption price upon redemption of the
Exchange Preferred Securities and the payment of the Liquidation Amount with
respect to the Exchange Preferred Securities upon liquidation of the Trust. See
"Risk Factors -- Rights Under the Exchange Guarantee." Those contractual
arrangements include the Company's obligations under (i) the Exchange Guarantee,
(ii) the Declaration, (iii) the Exchange Notes and (iv) the Indenture. As used
herein, (i) the "Indenture" means the Senior Subordinated Indenture, dated as of
August 12, 1997, as amended and supplemented from time to time, between the
Company and Wilmington Trust Company, as Indenture Trustee (the "Indenture
Trustee"), (ii) the "Declaration" means the Amended and Restated Declaration of
Trust relating to the Trust, dated as of August 12, 1997, among the Company, as
Sponsor, Wilmington Trust Company as Preferred Trustee (the "Preferred
Trustee"), Wilmington Trust Company, as Delaware Trustee (the "Delaware
Trustee"), and the Company Trustees named therein (collectively, with the
Preferred Trustee and the Delaware Trustee, the "Issuer Trustees"). In addition,
as the context may require, unless otherwise expressly stated, (i) the term
"Securities" includes the Preferred Securities and the Exchange Preferred
Securities, (ii) the term "Trust Securities" includes the Securities and the
Common Securities, (iii) the term "Senior Subordinated Notes" includes the Old
Senior Subordinated Notes and the Exchange Notes and (iv) the term "Guarantee"
includes the Company Guarantee and the Exchange Guarantee.
Holders of the Exchange Preferred Securities will be entitled to
receive preferential cumulative cash distributions arising from the payment of
interest on the Exchange Notes, accruing from August 12, 1997, and payable
semi-annually in arrears on February 15 and August 15 of each year, commencing
February 15, 1998, at the annual rate of 9 1/2% of the Liquidation Amount of
$1,000 per Exchange Preferred Securities ("Distributions").
Unless an Event of Default has occurred and is continuing, the Company
will have the right under the Indenture at any time during the term of the
Exchange Notes to defer the payment of interest at any time or from time to time
for a period not exceeding ten consecutive semi-annual periods with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity Date. As a consequence of any such deferral, semi-annual
Distributions on the Securities by the Trust will be deferred during any such
Extension Period. At the end of an Extension Period, the Company must pay all
interest then accrued and unpaid (together with interest then accrued at the
annual rate of 9 1/2%, compounded semi-annually, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and holders of Exchange Notes (and holders of the Trust Securities while Trust
Securities are outstanding) will be required to accrue interest income (in the
form of OID) for United States federal income tax purposes prior to the receipt
of cash attributable to such income. See "Certain United States Federal Income
Tax Considerations -- Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's Capital Stock (which
includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu in all respects with or junior in
interest to the Exchange Notes or (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any Subsidiary of the
Company if such guarantee ranks pari passu with or junior in right of payment to
the Exchange Notes (other than (a) dividends or distributions in shares of or
options, warrants or rights to subscribe for or purchase shares of, Common Stock
of the Company, (b) any declaration of a dividend in connection with the
3
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Company's Capital Stock or the exchange or conversion of
one class or series of the Company's Capital Stock for another class or series
of the Company's Capital Stock, (e) the purchase of fractional interests in
shares of the Company's Capital Stock pursuant to the conversion or exchange
provisions of such Capital Stock or the security being converted or exchanged
and (f) purchases or issuances of Common Stock under any of the Company's stock
option, stock purchase, stock loan or other benefit plans for its directors,
officers or employees or any of the company's dividend reinvestment plans, in
each case as now existing or hereafter established or amended).
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed ten consecutive semi-annual periods or to
extend beyond the Stated Maturity Date. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest Payment
Date, the Company may elect to begin a new Extension Period, subject to the
above requirements. No interest shall be due and payable during an Extension
Period, except at the end thereof. The Company must give the Preferred Trustee
and Indenture Trustee notice of its election of any Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Securities would have been payable except for the
election to begin or extend such Extension Period or (ii) the date the Trustees
are required to give notice to any securities exchange or to holders of Trust
Securities of the record date or the date such Distributions are payable, but in
any event not less than five Business Days prior to such record Date. The
Indenture Trustee shall give notice of the Company's election to begin or extend
a new Extension Period to the holders of the Securities. There is no limitation
on the number of times that the Company may elect to begin an Extension Period.
Through the Guarantee, the guarantee agreement of the Company relating
to the Common Securities (the "Common Guarantee"), the Declaration, the Senior
Subordinated Notes and the Indenture, taken together, the Company has guaranteed
or will guarantee, as the case may be, fully, irrevocably and unconditionally,
all of the Trust's obligations under the Trust Securities. See "Relationship
Among the Exchange Preferred Securities, the Declaration, the Exchange Notes and
the Exchange Guarantee -- Full And Unconditional Guarantee." The Company
Guarantee and the Common Guarantee guarantees, and the Exchange Guarantee will
guarantee, payments of Distributions and payments on liquidation or redemption
of the Trust Securities, but in each case only to the extent that the Trust
holds funds on hand legally available therefor and has failed to make such
payments, as described herein. See "Description of Exchange Preferred Securities
- -- Description of Exchange Guarantee." If the Company fails to make a required
payment on the Senior Subordinated Notes, the Trust will not have sufficient
funds to make the related payments, including Distributions, on the Trust
Securities. The Guarantee and the Common Guarantee will not cover any such
payment when the Trust does not have sufficient funds on hand legally available
therefor. In such event, a holder of Securities may institute a legal proceeding
directly against the Company to enforce its rights in respect of such payment.
See "Description of Exchange Preferred Securities -- Description of Exchange
Notes -- Enforcement Rights of Holders of Exchange Preferred Securities." The
obligations of the Company under the Guarantee, the Common Guarantee and the
Senior Subordinated Notes will be subordinate and junior in right of payment to
all Senior Indebtedness (as defined in "Description of Exchange Preferred
Securities -- Description of Exchange Notes").
The Trust Securities will be subject to mandatory redemption in a Like
Amount (as defined herein), (i) in whole but not in part, on the Stated Maturity
Date upon repayment of the Senior Subordinated Notes at a redemption price equal
to the principal amount of, plus accrued interest on, the Senior Subordinated
Notes (the "Maturity Redemption Price"), (ii) in whole or in part, on or after
August 15, 2007, contemporaneously with the optional prepayment by the Company
of the Senior Subordinated Notes, at a redemption price equal to the Optional
Prepayment Price (as defined below) (the "Optional Redemption Price"), (iii)
upon the occurrence of a Change of Control Triggering Event (as defined herein)
at a redemption price equal to 101% of the principal amount, of any Senior
Subordinated Notes received in exchange for Trust Securities plus any accrued
and unpaid interest thereon (the "Change of Control Redemption Price") or (iv)
in whole upon acceleration of the Senior Subordinated Notes upon the occurrence
of an Event of Default at a redemption price equal to the principal amount of,
plus accrued interest on, the Senior Subordinated Notes (the "Default Redemption
Price").
4
Further, the Trust Securities are subject to redemption at the option
of the Company in a Like Amount upon the occurrence of a Tax Event (as defined
herein) in certain circumstances at a redemption price equal to the principal
amount of, plus accrued interest on, the Senior Subordinated Notes (the "Event
Redemption Price"). Any of the Maturity Redemption Price, the Change of Control
Redemption Price, the Default Redemption Price, the Event Redemption Price or
the Optional Redemption Price may be referred to herein as the "Redemption
Price." See "Description of Exchange Preferred Securities."
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Senior Subordinated Notes to be paid in accordance with their terms
and (ii) with respect to a distribution of Senior Subordinated Notes upon the
liquidation of the Trust, Senior Subordinated Notes having a principal amount
equal to the Liquidation Amount of the Trust Securities of the holder to whom
such Senior Subordinated Notes are distributed.
The Exchange Notes will be prepayable prior to the Stated Maturity Date
at the option of the Company (i) on or after August 15, 2007, in whole or in
part, at a prepayment price (the "Optional Prepayment Price") equal to the
principal amount thereof outstanding, plus accrued interest thereon to the date
of prepayment or (ii) at any time, in whole but not in part, upon not less than
thirty or more than sixty days' notice, at the Redemption Prices (as defined in
the Indenture) (expressed as a percentage of principal amount) set forth below
plus accrued and unpaid interest to the Redemption Date (as defined in the
Indenture) (subject to the right of holders of record on the relevant Regular
Record Date (as defined in the Indenture) to receive interest due on an Interest
Payment Date that is on or prior to the Redemption Date) if redeemed during the
twelve-month period beginning on August 15 of the years indicated below:
Percentage of
Year Principal Amount
2007...............................................................104.750%
2008...............................................................103.167%
2009...............................................................101.583%
2010 and thereafter................................................100.000%
Either of the Optional Prepayment Price or the Change of Control Redemption
Price may be referred to herein as the "Prepayment Price." See "Description of
Exchange Preferred Securities."
The Company will have the right at any time to terminate the Trust and
cause a Like Amount of the Senior Subordinated Notes to be distributed to the
holders of the Trust Securities in liquidation of the Trust, subject to the
Company having received an opinion of counsel to the effect that such
distribution will not be a taxable event to holders of Trust Securities. Unless
the Senior Subordinated Notes are distributed to the holders of the Trust
Securities, in the event of a liquidation of the Trust as described herein,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, the holders of Trust Securities generally will be entitled to
receive a Liquidation Amount of $1,000 per Trust Security plus accumulated
Distributions thereon to the date of payment. See "Description of Exchange
Preferred Securities."
Based on existing interpretations of the Securities Act by the staff of
the Division of Corporate Finance of the Commission ("Staff") set forth in
several no-action letters to third parties, and subject to the immediately
following sentence, the Company and the Trust believe that the Exchange
Preferred Securities, Exchange Guarantee and Exchange Notes issued pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by the holders thereof (other than holders who are broker-dealers) without
further compliance with the registration and prospectus delivery provisions of
the Securities Act. However, any purchaser of Preferred Securities who is an
affiliate of the Trust or the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the Exchange Preferred
Securities, or any broker-dealer who purchased the Preferred Securities from the
Trust to resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (i) will not be able to rely on the interpretation of the Staff
set forth in the above-mentioned no-action letters, (ii) will not be entitled to
tender its Preferred Securities
5
in the Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Preferred Securities unless such sale or transfer is made
pursuant to an exemption from such requirements. Neither the Company nor the
Trust intends to seek its own no-action letter and there can be no assurance
that the Staff would make a similar determination with respect to the Exchange
Preferred Securities, Exchange Guarantee and Exchange Notes as it has in such
no-action letters to third parties.
Each holder of the Preferred Securities (other than certain specified
holders) who wishes to exchange the Preferred Securities for Exchange Preferred
Securities in the Exchange Offer will be required to represent that (i) it is
not an affiliate of the Trust or the Company, (ii) the Exchange Preferred
Securities to be received by it were acquired in the ordinary course of its
business and (iii) at the time of the Exchange Offer, it has no arrangement with
any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Preferred Securities. In addition, in connection
with any resales of Exchange Preferred Securities, any broker-dealer (a
"Participating Broker- Dealer") who acquired the Exchange Preferred Securities
for its own account as a result of market-making or other trading activities
must deliver a prospectus meeting the requirements of the Securities Act. The
Commission has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the Exchange Preferred
Securities (other than a resale of an unsold allotment from the original sale of
the Preferred Securities) with the prospectus contained in the Exchange Offer
Registration Statement. Under the Registration Rights Agreement, the Trust is
required to allow Participating Broker-Dealers and other persons, if any,
subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of such Exchange Preferred Securities.
In that regard, each Participating Broker-Dealer who surrenders
Preferred Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal, that, upon receipt of notice
from the Company or the Trust of the occurrence of any event or the discovery of
any fact which makes any statement contained or incorporated by reference in
this Prospectus untrue in any material respect or which causes this Prospectus
to omit to state a material fact necessary in order to make the statements
contained or incorporated by reference herein, in light of the circumstances
under which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of Exchange Preferred Securities (or the
Exchange Guarantee or the Exchange Notes, as applicable) pursuant to this
Prospectus until the Company or the Trust has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented Prospectus to such Participating Broker-Dealer or
the Company or the Trust has given notice that the sale of the Exchange
Preferred Securities (or the Exchange Guarantee or the Exchange Notes, as
applicable) may be resumed, as the case may be. If the Company or the Trust
gives such notice to suspend the sale of the Exchange Preferred Securities (or
the Exchange Guarantee or the Exchange Notes, as applicable) it shall extend the
90-day period referred to above during which Participating Broker-Dealers are
entitled to use this Prospectus in connection with the resale of Exchange
Preferred Securities by the number of days during the period from and including
the date of the giving of such notice to and including the date when
Participating Broker- Dealers shall have received copies of the amended or
supplemented Prospectus necessary to permit resales of the Exchange Preferred
Securities or to and including the date on which the Company or the Trust has
given notice that the sale of the Exchange Preferred Securities (or the Exchange
Guarantee or the Exchange Notes, as applicable) may be resumed, as the case may
be.
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Preferred Securities. The Exchange Preferred
Securities will be a new issue of securities for which there currently is no
market. Although the Initial Purchasers have informed the Company and the Trust
that they each currently intend to make a market in the Exchange Preferred
Securities, they are not obligated to do so, and any such market-making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Preferred
Securities. The Company and the Trust currently do not intend to apply for
listing of the Exchange Preferred Securities on any securities exchange or for
quotation through the NASDAQ Stock Market.
6
Any Preferred Securities not tendered and accepted in the Exchange
Offer will remain outstanding and will be entitled to all the same rights and
will be subject to the same limitations applicable thereto under the Declaration
(except for those rights which terminate upon consummation of the Exchange
Offer). Following consummation of the Exchange Offer, the holders of Preferred
Securities will continue to be subject to all of the existing restrictions upon
transfer thereof and neither the Company nor the Trust will have any further
obligation to such holders (other than under certain limited circumstances) to
provide for registration under the Securities Act of the Preferred Securities
held by them. To the extent that Preferred Securities are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Preferred
Securities could be adversely affected. See "Risk Factors -- Consequences of a
Failure to Exchange Preferred Securities."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF PREFERRED SECURITIES ARE URGED TO READ THIS PROSPECTUS
AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO
TENDER THEIR PREFERRED SECURITIES PURSUANT TO THE EXCHANGE OFFER.
Preferred Securities may be tendered for exchange on or prior to 5:00 p.m.,
New York City time, on , 1997 (such time on such date being hereinafter called
the "Expiration Date"), unless the Exchange Offer is extended by the Company or
the Trust (in which case the term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended). Tenders of Preferred
Securities may be withdrawn at any time on or prior to the Expiration Date. The
Exchange Offer is not conditioned upon any minimum Liquidation Amount of
Preferred Securities being tendered for exchange. However, the Exchange Offer is
subject to certain events and conditions which may be waived by the Company or
the Trust and to the terms and provisions of the Registration Rights Agreement.
Preferred Securities may be tendered in whole or in part having an aggregate
Liquidation Amount of not less than $100,000 (100 Preferred Securities) or any
integral multiple of $1,000 Liquidation Amount (one Preferred Security) in
excess thereof. The Company will pay all fees, expenses, debts and obligations
(other than the Trust Securities) related to the Trust and the offering and
exchange of the Preferred Securities and will pay, directly or indirectly, all
ongoing costs, expenses and liabilities of the Trust. See "The Exchange Offer --
Fees and Expenses." Holders of the Preferred Securities whose Preferred
Securities are accepted for exchange will not receive Distributions on such
Preferred Securities and will be deemed to have waived the right to receive any
Distributions on such Preferred Securities accumulated from and after August 12,
1997. See "The Exchange Offer -- Distributions of Exchange Preferred
Securities."
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the Exchange Preferred Securities offered hereby. No dealer-manager
is being used in connection with this Exchange Offer. See "Use of Proceeds" and
"Plan of Distribution."
------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE
OFFER AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE TRUST. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THE TRUST SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR ANYONE TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------------------
7
TABLE OF CONTENTS
Page
Available Information..................................................... 2
Prospectus Summary........................................................ 9
Risk Factors.............................................................. 23
Use of Proceeds........................................................... 37
Accounting Treatments..................................................... 37
Capitalization............................................................ 38
Unaudited Pro Forma Consolidated Financial Statements..................... 39
Selected Consolidated Financial Data of the Company....................... 45
Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company...................... 50
Selected Consolidated Historical Financial Data of
Superior Insurance Company.............................................. 60
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Superior Insurance Company.................. 61
Business.................................................................. 67
The Exchange Offer........................................................ 99
Description of Exchange Preferred Securities.............................. 109
Description of the Exchange Notes......................................... 122
Description of Exchange Guarantee......................................... 142
Relationship Among the Exchange Preferred Securities,
the Declaration, the Exchange Notes and the Exchange Guarantee.......... 146
Description of Old Securities............................................. 148
Certain United States Federal Income Tax Considerations................... 149
ERISA Considerations...................................................... 154
Plan of Distribution...................................................... 155
Legal Matters............................................................. 156
Experts................................................................... 156
Glossary of Terms......................................................... 157
Index to Financial Statements............................................. F-1
8
PROSPECTUS SUMMARY
See "Glossary of Terms" ("Glossary") for the definitions of certain of the
capitalized and defined terms used herein.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and consolidated financial statements, and
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
indicates otherwise, (i) the "Company" or "SIG" refers to Symons International
Group, Inc., an Indiana corporation, and its Subsidiaries, (ii) the
"Subsidiaries" refer to the direct and indirect subsidiaries of the Company,
(iii) the "Insurers" refer to IGF Insurance Company, an Indiana property and
casualty insurance company and a wholly owned subsidiary of the Company ("IGF"),
and through the Company's ownership of GGS Management Holdings, Inc. ("GGS
Holdings"), Pafco General Insurance Company, an Indiana property and casualty
insurance company ("Pafco"), and Superior Insurance Company, a Florida property
and casualty insurance company, together with its subsidiaries ("Superior") and
(iv) "Goran" refers to Goran Capital Inc. and its subsidiaries, other than the
Company and the Subsidiaries.
Unless otherwise indicated, (i) all data in this Prospectus takes into
effect the 7,000-for-1 stock split of the Company's Common Stock prior to its
Initial Public Offering in November 1996 and (ii) all financial information and
operating statistics applicable to the Company, set forth in this Prospectus are
based on generally accepted accounting principles ("GAAP") and not statutory
accounting practices ("SAP"). In conformity with industry practice, data derived
from A.M. Best Company, Inc. ("A.M. Best") and the National Association of
Insurance Commissioners ("NAIC"), generally used herein for industry
comparisons, are based on SAP.
SIG Capital Trust I
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) the Declaration executed by the Company, as Sponsor, Wilmington Trust
Company, as Preferred Trustee and Wilmington Trust Company, as Delaware Trustee,
and the three individual Company Trustees named therein and (ii) the filing of a
certificate of trust with the Delaware Secretary of State on August 4, 1997. The
Trust's business and affairs are conducted by the Issuer Trustees: the Preferred
Trustee, the Delaware Trustee and the three Company Trustees who are employees
or officers of or affiliated with the Company. The Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of the Trust Securities to acquire the Senior
Subordinated Notes issued by the Company and (iii) engaging in only those other
activities necessary, advisable or incidental thereto (such as registering the
transfer of the Trust Securities). Accordingly, the Senior Subordinated Notes
will be the sole assets of the Trust, and payments under the Senior Subordinated
Notes will be the sole revenues of the Trust. All of the Common Securities are
owned by the Company.
The Company
Overview
Symons International Group, Inc., a specialty property and casualty
insurer, underwrites and markets nonstandard private passenger automobile
insurance and crop insurance. Through its Subsidiaries, the Company writes
business in the United States exclusively through independent agencies and seeks
to distinguish itself by offering high quality, technology-based services for
its agents and policyholders. The Company had consolidated Gross Premiums
Written of approximately $305.5 million and $279.1 million for the twelve months
ended December 31, 1996 and the six months ended June 30, 1997, respectively.
The Company believes that, based on the Company's Gross Premiums Written in
1996, it is the twelfth largest underwriter of nonstandard automobile insurance
in the United States. Based on premium information compiled in 1996 by the
National Crop Insurance
9
Services, Inc. ("NCIS"), the Company believes that IGF is the fifth largest
underwriter of Multi-Peril Crop Insurance ("MPCI") in the United States.
The Company generated EBITDA of $29.8 million and $21.2 million for the
twelve months ended December 31, 1996 and the six months ended June 30, 1997,
respectively. The Company's nonstandard automobile business and crop businesses
are operated autonomously and, as a result, are not dependent on one another nor
are they impacted by similar events. In the first half of 1997, the nonstandard
automobile business and crop business accounted for approximately 36.9% and
63.1% of the Company's EBITDA, respectively. Through a disciplined underwriting
philosophy, the Company has generated Combined Ratios of 93.4% and 98.3% for the
twelve months ended December 31, 1996 and six months ended June 30, 1997,
respectively.
The Company markets its nonstandard automobile business through
approximately 6,000 independent agents in eighteen states. Nonstandard insureds
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 higher
than for standard risks. Nonstandard policies have relatively short coverage
periods and low limits of liability. According to A.M. Best, the nonstandard
automobile market accounted for $17.4 billion in premiums in 1995. The
nonstandard automobile market is the fastest growing sector of the personal
lines market resulting primarily from (i) the increased regulatory pressure on
previously uninsured motorists to purchase insurance and (ii) the increasing
number of young adults reaching driving age. The Company's nonstandard
automobile insurance business generated $187.2 million and $165.5 million of
Gross Premiums Written and had Combined Ratios of 98.8% and 99.3% for the twelve
months ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
The Company also underwrites MPCI, crop hail insurance and other named
peril crop insurance policies through approximately 1,200 independent agencies
in 39 states. MPCI, a federally subsidized program, is designed to provide
farmers who suffer an insured crop loss due to the weather or other natural
perils with the funds needed to continue operations and plant crops for the next
growing season. For the year ended December 31, 1996, the Company wrote
approximately $82.1 million in MPCI premiums and $28.0 million in crop hail
gross premiums. For the first six months of 1997, the Company wrote
approximately $79.0 million in MPCI premiums and $29.3 million in crop hail
gross premiums. In addition to premium revenues, for 1996, the Company received
from the Federal Crop Insurance Corporation ("FCIC"): (i) CAT Coverage Fees in
the amount of $1.2 million, (ii) Buy-up Expense Reimbursement Payments in the
amount of $25.0 million and (iii) CAT LAE Reimbursement Payments and MPCI Excess
LAE Reimbursement Payments in the aggregate amount of $5.8 million. See
"Management's Discussion and Analysis -- Certain Accounting Policies for Crop
Insurance Operations."
As of June 30, 1997, 75.5% of the Company's investment portfolio was
invested in fixed maturities, of which 87.3% had ratings of "A" or equivalent or
better and 97.6% had ratings of "BBB" or equivalent or better.
Company Strategy
The Company employs separate operating strategies for its nonstandard
automobile and crop insurance businesses.
Nonstandard Automobile Insurance Business
o 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.
10
o The Company seeks to expand the multi-tiered marketing approach currently
employed in certain states in order to offer to its independent agency
network a broader range of products with different premium and commission
structures.
o 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.
o 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.
o The Company encourages agencies to place a large share of their
profitable business with its Subsidiaries by offering, in addition to fixed
commissions, a contingent commission based on a combination of volume and
profitability.
o The Company responds to claims in a manner designed 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.
Crop Insurance Business
o The Company seeks 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.
o The Company also limits the risks associated with crop insurance through
selective underwriting of crop risks based on its historical loss
experience data base.
o The Company continues to develop and maintain a proprietary
knowledge-based underwriting system which utilizes a database of
Company-specific underwriting rules.
o 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.
o Unlike many of its competitors, the Company employs approximately 85
full-time claims adjusters, most of whom are agronomy trained, to reduce
the Losses experienced by IGF.
o The Company stops selling its crop hail policies after certain selected
dates to prevent farmers from adversely selecting against IGF by purchasing
crop insurance when a storm is forecast or hail damage has already
occurred.
o The Company continues to explore growth opportunities and product
diversification through new specialty coverages, including Crop Revenue
Coverage and named peril insurance.
o The Company continues to explore new opportunities in administrative
efficiencies and product underwriting made possible 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.
11
Company Structure
In April 1996, the Company acquired Superior from Fortis, Inc., through GGS
Management Holdings, Inc. ("GGS Holdings"), which is 100% owned by the Company.
The following chart shows the current organizational structure of the Company
with all Subsidiaries being 100% directly or indirectly owned by the Company.
SYMONS INTERNATIONAL
GROUP, INC.
("SIG" or the "Company")
-----------
|
|-----100%-------------------|---------------100%---------|
| |
IGF HOLDINGS, INC. GGS MANAGEMENT
("IGF Holdings") HOLDINGS, INC.
- ----------------- ("GGS Holdings")
| ----------------
| |
| |
IGF INSURANCE GGS MANAGEMENT, INC.
COMPANY ("GGS Management")
("IGF") ------------------
------- |
|
|---------------------------------------|
| |
PAFCO GENERAL SUPERIOR INSURANCE
INSURANCE COMPANY COMPANY
("Pafco") ("Superior")
--------- ------------
The address and telephone number of the Company's principal executive
offices are 4720 Kingsway Drive, Indianapolis, Indiana 46205, (317) 259-6300.
12
The Exchange Offer
The Exchange Offer Up to $135,000,000 aggregate Liquidation Amount of Exchange
Preferred Securities are being offered in exchange for a
like aggregate Liquidation Amount of Preferred Securities.
Preferred Securities may be tendered for exchange in whole
or in part in a Liquidation Amount of $100,000 (100
Preferred Securities) or any integral multiple of $1,000
(one Preferred Security) in excess thereof. The Company and
the Trust are making the Exchange Offer in order to satisfy
their obligations under the Registration Rights Agreement
relating to the Preferred Securities. For a description of
the procedures for tendering Preferred Securities, see "The
Exchange Offer-- Procedures for Tendering Preferred
Securities."
Expiration Date 5:00 p.m., New York City time, on __________________, 1997,
unless the Exchange Offer is extended by the Company or the
Trust (in which case the Expiration Date will be the latest
date and time to which the Exchange Offer is extended). See
"The Exchange Offer-- Terms of the Exchange Offer."
Conditions to the The Exchange Offer is subject to certain onditions, which
Exchange Offer may be waived by the Company and the Trust in their sole
discretion. The Exchange Offer is not conditioned upon any
minimum Liquidation Amount of Preferred Securities being
tendered. See "The Exchange Offer -- Conditions to the
Exchange Offer."
Offer The Company and the Trust reserve the right in their sole
and absolute discretion, subject to applicable law, at any
time and from time to time, (i) to delay the acceptance of
the Preferred Securities for exchange, (ii) to terminate the
Exchange Offer if certain specified conditions have not been
satisfied and (iii) to extend the Expiration Date of the
Exchange Offer and retain all Preferred Securities tendered
pursuant to the Exchange Offer, subject, however, to the
right of holders of Preferred Securities to withdraw their
tendered Preferred Securities. See "The Exchange Offer--
Terms of the Exchange Offer."
Withdrawal Rights Tenders of Preferred Securities may be withdrawn at any time
on or prior to the Expiration Date by delivering a written
notice of such withdrawal to the Exchange Agent in
conformity with certain procedures set forth below under
"The Exchange Offer-- Withdrawal Rights."
Procedures for Tendering holders of Preferred Securities must complete and
Tendering sign a Letter of Transmittal in accordance with the
Preferred instructions contained therein and forward the same by mail,
Securities facsimile or hand delivery, together with any other required
documents, to the Exchange Agent, either with the Preferred
Securities to be tendered or in compliance with the
specified procedures for guaranteed delivery of Preferred
Securities. Certain brokers, dealers, commercial banks,
trust companies and other nominees may also effect tenders
by an Agent's Message (defined herein) in case of book-entry
delivery to the Exchange Agent prior to the Expiration Date.
Holders of Preferred Securities registered in the name of a
broker, dealer, commercial bank, trust company or other
nominee are urged to contact such person promptly if they
wish to tender Preferred Securities pursuant to the Exchange
Offer. See "The Exchange Offer -- Procedures for Tendering
Preferred Securities."
13
Letters of Transmittal and certificates representing
Preferred Securities should not be sent to the Company or
the Trust. Such documents should only be sent to the
Exchange Agent.
Resales of Exchange The Company and the Trust are making the Exchange Offer in
Preferred reliance on the position of the Staff as set forth in
Securities certain interpretive letters addressed to third parties in
other transactions. However, neither the Company nor the
Trust has sought its own interpretive letter and there can
be no assurance that the Staff would make a similar
determination with respect to the Exchange Offer as it has
in such interpretive letters to third parties. Based on
these interpretations by the Staff, and subject to the two
immediately following sentences, the Company and the Trust
believe that Exchange Preferred Securities issued pursuant
to this Exchange Offer in exchange for Preferred Securities
may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a
broker-dealer) without further compliance with the
registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Preferred
Securities are acquired in the ordinary course of such
holder's business and that such holder is not participating,
and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the
Securities Act) of such Exchange Preferred Securities.
However, any holders of Preferred Securities who is an
"affiliate" of the Company or the Trust or who intends to
participate in the Exchange Offer for the purpose of
distributing the Exchange Preferred Securities, or any
broker-dealer who purchased the Preferred Securities from
the Trust to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (a) will not
be able to rely on the interpretations of the Staff set
forth in the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Preferred
Securities in the Exchange Offer and (c) must comply with
the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer
of such Preferred Securities unless such sale is made
pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds
Preferred Securities acquired for its own account as a
result of market-making or other trading activities and
exchanges such Preferred Securities for Exchange Preferred
Securities, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in
connection with any resales of such Exchange Preferred
Securities.
Each holder of Preferred Securities who wishes to exchange
Preferred Securities for Exchange Preferred Securities in
the Exchange Offer will be required to represent that (i) it
is not an "affiliate" of the Company or the Trust, (ii) any
Exchange Preferred Securities to be received by it are being
acquired in the ordinary course of its business, (iii) it
has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the
Securities Act) of such Exchange Preferred Securities and
(iv) if such holder is not a broker-dealer, such holder is
not engaged in, and does not intend to engage in, a
distribution (within the meaning of the Securities Act) of
such Exchange Preferred Securities. Each broker-dealer that
receives Exchange Preferred Securities for its own account
pursuant to the Exchange Offer must acknowledge that it
acquired the Exchange Preferred Securities for its own
account as the result of market-making activities or other
trading activities and it will deliver a prospectus meeting
the requirements of the
14
Securities Act in connection with any resale of such
Exchange Preferred Securities. The Letter of Transmittal
states that, by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities
Act. Based on the position taken by the Staff in the
interpretive letters referred to above, the Company and the
Trust believe that Participating Broker-Dealers who acquired
Preferred Securities for their own accounts as a result of
market-making activities or other trading activities may
fulfill their prospectus delivery requirements with respect
to the Exchange Preferred Securities received upon exchange
of such Preferred Securities (other than Preferred
Securities which represent an unsold allotment from the
original sale of the Preferred Securities) with a prospectus
meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with
respect to the resale of such Exchange Preferred Securities.
Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of
Exchange Preferred Securities received in exchange for
Preferred Securities where such Preferred Securities were
acquired by such Participating Broker-Dealer for its own
account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the
Registration Rights Agreement and to the limitations
described below under "The Exchange Offer -- Resales of
Exchange Preferred Securities," the Company and the Trust
have agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of
such Exchange Preferred Securities for a period ending
90-days after the Expiration Date (subject to extension
under certain limited circumstances) or, if earlier, when
all such Exchange Preferred Securities have been disposed of
by such Participating Broker-Dealer. See "Plan of
Distribution." Any Participating Broker-Dealer who is an
"affiliate" of the Company or the Trust may not rely on such
interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. See "The Exchange
Offer -- Resales of Exchange Preferred Securities."
Exchange Agent The exchange agent with respect to the Exchange Offer is
Wilmington Trust Company (the "Exchange Agent"). The
addresses, and telephone and facsimile numbers, of the
Exchange Agent are set forth in "The Exchange Offer-
Exchange Agent" and in the Letter of Transmittal.
Use of Proceeds Neither the Company nor the Trust will receive any cash pro-
ceeds from the issuance of the Exchange Preferred Securities
offered hereby. See "Use of Proceeds."
Certain United Holders of Preferred Securities should review the
States Federal information set forth under "Certain United States Federal
Income Tax Income Tax Considerations" and "ERISA Considerations"
Considerations; prior to tendering Preferred Securities in the Exchange
ERISA Offer
Considerations"
15
The Exchange Preferred Securities
Securities Offered Up to $135,000,000 aggregate Liquidation Amount of the
Trust's Exchange Preferred Securities which have been
registered under the Securities Act (Liquidation Amount
$1,000 per Exchange Preferred Security). The Exchange
Preferred Securities will be issued and the Preferred
Securities were issued under the Declaration. The Exchange
Preferred Securities and any Preferred Securities which
remain outstanding after consummation of the Exchange Offer
will vote together as a single class for purposes of
determining whether holders of the requisite percentage in
outstanding Liquidation Amount thereof have taken certain
actions or exercised certain rights under the Declaration.
See "Description of Exchange Preferred Securities-- Voting
Rights; Modification of the Declaration." The terms of the
Exchange Preferred Securities are identical in all material
respects to the terms of the Preferred Securities, except
that the Exchange Preferred Securities have been registered
under the Securities Act and will not be subject to the
$100,000 minimum Liquidation Amount transfer restriction and
certain other restrictions on transfer applicable to the
Preferred Securities and will not provide for any increase
in the Distribution rate thereon. See "The Exchange Offer--
Purpose of the Exchange Offer," "Description of Exchange
Securities" and "Description of Old Securities."
Distribution Dates February 15 and August 15 of each year, commencing February
15, 1998.
Extension Periods Distributions on the Exchange Preferred Securities will be
deferred for the duration of any Extension Period elected by
the Company with respect to the payment of interest on the
Exchange Notes. No Extension Period will exceed ten
consecutive semi-annual periods or extend beyond the Stated
Maturity Date. See "Description of Exchange Notes-- Option
to Extend Interest Payment Date" and "Certain United States
Federal Income Tax Considerations-- Interest Income and
Original Issue Discount."
Ranking The Exchange Preferred Securities will rank pari passu, and
payments thereon will be made pro rata, with the Preferred
Securities and the Common Securities except as described
under "Description of Exchange Preferred Securities--
Subordination of Common Securities." The Exchange Notes will
rank pari passu with the Old Senior Subordinated Notes and
all other junior subordinated debentures to be issued by the
Company (collectively, with the Old Senior Subordinated
Notes, the "Other Notes") and sold (if at all) to other
trusts to be established by the Company (if any), in each
case similar to the Trust (the "Other Trusts"), and will be
unsecured and subordinate and junior in right of payment to
all Senior Indebtedness to the extent and in the manner set
forth in the Indenture. At June 30, 1997, the aggregate
principal amount of outstanding Senior Indebtedness was
approximately $44.8 million. See "Description of Exchange
Preferred Securities" and "Description of Exchange Notes."
The Exchange Guarantee will rank pari passu with the Company
Guarantee and will constitute an unsecured obligation of the
Company and will rank subordinate and junior in right of
payment to all Senior Indebtedness to the extent and in the
manner set forth in the Exchange Guarantee. See "Description
of Exchange Preferred Securities" and "Description of
Exchange Guarantee."
16
Optional The Company is permitted to redeem the Senior Subordinated
Redemption Notes at the redemption prices set forth herein in whole or
in part, from time to time, after August 15, 2007. Upon any
such redemption, the proceeds from such redemption shall
simultaneously be applied by the Trust to redeem Securities
and Common Securities at the Redemption Price (as defined
herein). In the event that fewer than all the outstanding
Senior Subordinated Notes are to be so redeemed, then the
proceeds from such redemption shall be allocated to the
redemption pro rata of the Securities and the Common
Securities. See "Description of the Exchange Preferred
Securities-- Optional Redemption."
Mandatory The Preferred Securities will be subject to mandatory
Redemption redemption upon the repayment of the Senior Subordinated
Notes at their stated maturity, upon acceleration, earlier
redemption or otherwise. See "Description of the Exchange
Preferred Securities -- Mandatory Redemption."
Change of Control Upon the occurrence of a Change of Control Triggering Event
Redemption (as defined herein), a Holder of Trust Securities has the
right to require the Trust to exchange all or any part of
the Holder's Trust Securities for Senior Subordinated Notes
having an aggregate principal amount equal to the aggregate
Liquidation Amount of the Trust Securities so offered. Upon
the occurrence of such an event, the Company will be
required to immediately redeem any Senior Subordinated Notes
so exchanged at a redemption price equal to 101% of the
principal amount thereof plus any accrued and unpaid
interest. See "Description of the Exchange Preferred
Securities-- Change of Control Redemption" and "Description
of the Exchange Notes-- Change of Control."
Tax Event or Upon the occurrence of a Tax Event or an Investment Company
Investment Event (each as defined herein), except in certain limited
Company Event circumstances, the Company will cause the Trustees (as
Redemption or defined herein) to dissolve and liquidate the Trust and,
Distribution after satisfaction of liabilities to creditors of the
Trust, cause Senior Subordinated Notes to be distributed to
the holders of the Securities. Upon the occurrence of a Tax
Event, in certain circumstances, the Company will have the
right to redeem the Senior Subordinated Notes in whole (but
not in part) at 100% of the principal amount plus accrued
and unpaid interest, in lieu of a distribution of the Senior
Subordinated Notes, in which event all the Trust Securities
will be redeemed by the Trust at the Liquidation Amount of
$1,000 per each of the Securities plus accrued and unpaid
Distributions. See "Description of the Exchange Preferred
Securities-- Tax Event or Investment Company Event
Redemption or Distribution."
Rating The Preferred Securities were rated BB+ by Standard & Poor's
Ratings Services and Ba3 by Moody's Investors Service, Inc.
17
Absence of Market The Exchange Preferred Securities will be a new issue of
for the securities for which there currently is no market.
Exchange Preferred Although Donaldson, Lufkin & Jenrette Securities
Securities Corporation, Goldman, Sachs & Co., CIBC Wood Gundy
Securities Corp. and Mesirow Financial, Inc., the initial
purchasers of the Preferred Securities (the "Initial
Purchasers"), have informed the Company and the Trust that
they each currently intend to make a market in the Exchange
Preferred Securities, they are not obligated to do so, and
any such market-making may be discontinued at any time
without notice. Accordingly, there can be no assurance as to
the development or liquidity of any market for the Exchange
Preferred Securities. The Trust and the Company do not
intend to apply for listing of the Exchange Preferred
Securities on any securities exchange or for quotation
through the NASDAQ Stock Market. See "Plan of Distribution."
18
Summary Company Consolidated Financial Data
The following tables set forth summary consolidated financial information
with respect to the Company for the periods indicated. The historical financial
information was prepared in accordance with Generally Accepted Accounting
Principles.
The financial information for the Company as of June 30, 1997 is unaudited;
however, in management's opinion, it includes all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of results
for such interim periods. Interim results are not necessarily indicative of
results for the full year.
The pro forma consolidated statement of operations data for the year ended
December 31, 1996 and for the six months ended June 30, 1997 present results for
the Company as if the Formation Transaction, the Acquisition and the other
Transactions (as defined herein), the Initial Public Offering and the Buyout
Transaction had occurred as of January 1, 1996. The pro forma consolidated
financial information and the Offering presents pro forma consolidated balance
sheet data of the Company as if the Buyout Transaction described above had
occurred as of June 30, 1997.
19
For the Year Ended December 31, For The Six Months Ended June 30,
------------------------------------------------- ------------------------------------
(dollars in thousands)
Pro Pro
Forma Forma
1994 1995 1996 1996 (1) 1996 1997 1997 (1)
---- ---- ---- -------- ---- ---- --------
Consolidated Statement of
Operations Data: (2) (3)
Gross Premiums Written $103,134 $124,634 $305,499 $349,492 $146,950 $279,065 $279,065
Net Premiums Written 35,139 53,447 209,592 253,210 77,042 150,524 150,524
Net Premiums Earned 32,126 49,641 191,759 231,146 59,066 136,012 136,012
Net Investment Income 1,241 1,173 6,733 9,185 1,533 5,276 5,276
Other Income 1,632 2,170 9,286 11,503 4,062 10,791 10,791
Net Realized Capital Gain (Loss) (159) (344) (1,015) (986) 228 1,684 1,684
----- ----- ------- ----- --- ----- -----
Total Revenues 34,840 52,640 206,763 250,848 64,889 153,763 153,763
------ ------ ------- ------- ------ ------- -------
Net Earnings (4) $2,117 $4,821 $13,256 $12,162 $4,304 $9,586 $8,089
===== ===== ====== ====== ===== ===== =====
Other Data:
EBITDA (5) $3,259 $9,430 $29,835 $35,721 $7,552 $21,242 $21,242
Adjusted EBITDA (6) $3,418 $9,774 $30,850 $36,707 $7,324 $19,558 $19,558
Ratio of EBITDA to interest
expense and Distributions on
Preferred Securities 2.78x 3.29x
Ratio of Adjusted EBITDA to
interest expense and Distri-
butions on Preferred Securities
(6) 2.86x 3.03x
Total Preferred Securities to
Adjusted EBITDA (6) 3.68x (8)
GAAP Ratios: (2) (7)
Loss and LAE Ratio 82.4% 72.5% 71.5% 70.9% 76.7% 75.9% 75.9%
Expense Ratio 18.1% 16.1% 21.9% 23.9% 20.8% 22.4% 22.9%
----- ----- ----- ----- ----- ----- -----
Combined Ratio 100.5% 88.6% 93.4% 94.8% 97.5% 98.3% 98.8%
====== ===== ===== ===== ===== ===== =====
At December 31, At June 30, 1997
--------------- -----------------------------------
(dollars in thousands)
As Adjusted for
1996 Actual the Offering
Consolidated Balance Sheet Data: (2)
Cash and cash equivalents $13,095 $18,329 $18,329
Investments 168,137 190,500 214,728
Total Assets 344,679 567,641 632,081
Losses and Loss Adjustment Expenses 101,719 137,924 137,924
Total Debt 48,000 44,872 ---
Minority Interest:
Preferred Securities --- --- 135,000
Equity in net assets of subsidiary 21,610 26,724 ---
Total Shareholders' Equity 60,900 71,900 73,327
Statutory Capital and Surplus: (9)
Crop (IGF) $29,412 $36,760 $36,760
Nonstandard automobile (Pafco and Superior) $75,233 $82,291 $82,291
20
- ---------------
(1) Results of operations of Superior for the years ended December 31, 1994 and
1995 and for the six months ended June 30, 1996 are presented herein in
"Selected Consolidated Historical Financial Data of Superior Insurance Company."
The pro forma consolidated statement of operations data for the year ended
December 31, 1996 and for the six months ended June 30, 1997 present results of
the Company as if the Formation Transaction, the Acquisition and the other
Transactions, the Initial Public Offering and the Buyout Transaction had
occurred as of January 1, 1996. The as adjusted consolidated balance sheet data
as of June 30, 1997 gives effect to the Buyout Transaction and Offering as if
they had occurred as of June 30, 1997. See "Unaudited Pro Forma Consolidated
Financial Statements" for a discussion.
(2) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company" for a discussion of the accounting treatment
accorded to the crop insurance business.
(3) Consolidated results of operations reflect the results of Superior
subsequent to its acquisition by the Company on April 30, 1996.
(4) Pro forma net earnings for the six month period ended June 30, 1997 and the
year ended December 31, 1996 exclude ($725,000) and ($901,000), respectively,
for the effects of the assumed write-off of debt issuance costs incurred on the
GGS Senior Credit Facility upon repayment of that debt from the proceeds of the
Offering. Such amounts will be presented as extraordinary items in accordance
with Generally Accepted Accounting Principles.
(5) EBITDA consists of earnings before interest, taxes, minority interest,
depreciation and amortization. EBITDA is presented here not as a measure of
operating results, but rather as a measure of the Company's cash flow and debt
service ability, and should not be considered as an alternative to net earnings
and cash flows determined in accordance with GAAP. Because the Company's ability
to obtain dividends from its insurance subsidiaries may be subject to certain
restrictions, EBITDA is not necessarily indicative of the Company's ability to
service its indebtedness.
(6) Adjusted EBITDA is comprised of EBITDA excluding realized gains or losses on
sales of investments.
(7) The Loss and LAE Ratio is calculated by dividing Losses and Loss Adjustment
Expenses by Net Premiums Earned. The Expense Ratio is calculated by dividing
policy acquisition and general and administrative expenses by Net Premiums
Earned. The Combined Ratio is the sum of the Loss and LAE and Expense Ratios. As
a result of the accounting treatment accorded to the MPCI business, the
Company's GAAP Loss and LAE, Expense and Combined Ratios are not comparable to
the ratios for other property and casualty insurers.
(8) This ratio is not meaningful for interim periods.
(9) Statutory capital and surplus is calculated under SAP and is relevant for
insurance regulatory purposes in determining the amount of business an insurance
company may write.
Statutory capital and surplus for Pafco and Superior individually is as follows:
(dollars in thousands)
-------------------------------------------------------------------------------
June 30, As Adjusted,
December 31, 1996 1997 June 30, 1997
----------------------- ---------------------- -------------------
Pafco $18,112 $17,273 $17,273
Superior $57,121 $65,018 $65,018
21
The Trust
The Trust is a statutory business trust created under the laws of the State
of Delaware pursuant to (i) a declaration of trust executed by the Company, as
sponsor of the Trust, and certain of the trustees of the Trust and (ii) the
filing of a certificate of trust with the Secretary of the State of Delaware on
August 4, 1997. The original declaration of trust of the Trust was amended and
restated in its entirety in the form of the Amended and Restated Declaration of
Trust of the Trust (the "Declaration"). The Company acquired Common Securities
in an aggregate Liquidation Amount equal to not less than 3% of the total
capital of the Trust representing all of the Common Securities of the Trust. The
Common Securities rank pari passu, and payment will be made thereon pro rata,
with the Preferred Securities, except that, upon the occurrence and during the
continuance of a Declaration Event of Default (as defined herein), the rights of
the Company as holder of the Common Securities to payment in respect of
Distributions and payments upon liquidation, redemption and otherwise will be
subordinated to the rights of the holders of the Preferred Securities. See
"Description of the Exchange Preferred Securities -- Subordination of Common
Securities." The assets of the Trust consist of the Senior Subordinated Notes.
The Trust exists for the exclusive purpose of (i) issuing and selling the Trust
Securities representing undivided beneficial ownership interests in the assets
of the Trust, (ii) investing the proceeds of the Trust Securities in the Senior
Subordinated Notes and (iii) engaging in only those other activities necessary
or incidental thereto. Accordingly, the Senior Subordinated Notes will be the
sole assets of the Trust, and payments under the Senior Subordinated Notes will
be the sole revenue of the Trust.
The Trust has a term of approximately fifty years but may dissolve earlier
as provided in the Declaration. The Trust business and affairs are conducted by
its trustees (the "Trustees"), each appointed by the Company as sole holder of
the Common Securities. Pursuant to the Declaration, the number of Trustees is
five. Three of the Trustees (the "Company Trustees") will be individuals who are
employees or officers of, or who are affiliated with the Company. The fourth
trustee is a financial institution that is unaffiliated with the Company (the
"Preferred Trustee"). The fifth trustee is an entity that maintains its
principal place of business in the State of Delaware (the "Delaware Trustee").
Wilmington Trust Company acts as Preferred Trustee and as Delaware Trustee
until, in each case, removed or replaced by the Holder of the Common Securities.
Wilmington Trust Company also acts as trustee under the Guarantee (the
"Guarantee Trustee") and under the Indenture (the "Indenture Trustee"). See
"Description of the Exchange Guarantee" and "Description of the Exchange
Preferred Securities."
The Preferred Trustee will hold title to the Senior Subordinated Notes for
the benefit of the holders of the Trust Securities and will have the power to
exercise all rights, powers and privileges under the Indenture as the holder of
the Senior Subordinated Notes. In addition, the Preferred Trustee maintains
exclusive control of a segregated non-interest bearing bank account (the
"Property Account") to hold all payments made in respect of the Senior
Subordinated Notes for the benefit of the holders of Securities. The Company, as
the direct or indirect holder of all the Common Securities, will have the right
to appoint, remove or replace any of the Trustees and to increase or decrease
the number of Trustees, provided that the number of Trustees shall be at least
three, a majority of which shall be Company Trustees. The holder of the Common
Securities of the Trust, or the holders of a majority in Liquidation Amount of
the Securities if a Declaration Event of Default has occurred and is continuing,
will be entitled to appoint, remove or replace the Preferred Trustee and/or the
Delaware Trustee for such Trust. In no event will the holders of the Securities
have the right to vote to appoint, remove or replace the Company Trustees; such
voting rights are vested exclusively in the holder of the Common Securities. The
duties and obligations of each of the Trustees are governed by the Declaration.
In the Indenture, the Company, as borrower, has agreed to pay for all fees and
expenses related to the Trust, including fees and expenses of the Trustees and
any income taxes, duties and other governmental charges, and all costs and
expenses with respect thereto to which the Trust may become subject and all fees
and expenses related to this Offering and will pay, directly or indirectly, all
ongoing costs, expenses and liabilities of the Trust. See "Description of the
Exchange Notes."
The rights of the holders of the Securities, including economic rights,
rights to information and voting rights, if any, are as set forth in the
Declaration and the Delaware Business Trust Act, as amended (the "Trust Act").
See "Description of the Preferred Securities." The Declaration, the Indenture
and the Guarantee also incorporate by reference the terms of the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The Declaration, the
Indenture and the Company Guarantee will be qualified under the Trust Indenture
Act.
The place of business and the telephone number of the Trust is: 1100 North
Market Street, Rodney Square North, Wilmington, Delaware 19890-0001, (307)
651-8516.
23
RISK FACTORS
Prospective investors should consider carefully, in addition to the
other information contained in this Prospectus, the following factors in
connection with the Exchange Offer and the Exchange Preferred Securities offered
hereby and should particularly consider the following matters. Certain
statements in the Prospectus and documents incorporated herein by reference are
forward-looking and are identified by the use of forward-looking words or
phrases such as "intended," "will be positioned," "expects," is or are
"expected," "anticipates," and "anticipated." These forward-looking statements
are based on the Company's current expectations. To the extent any of the
information contained in this Prospectus constitutes a "forward-looking
statement" as defined in section 27a(i)(1) of the Securities Act, the risk
factors set forth below are cautionary statements identifying important factors
that could cause results to differ materially from those in the forward-looking
statement.
Factors Relating to the Exchange Preferred Securities
Subordination of the Guarantee and Senior Subordinated Notes
The Company's obligations under the Guarantee and the Senior
Subordinated Notes are subordinate and junior in right of payment to all present
and future Senior Indebtedness (as defined herein) of the Company. No payment of
principal (including redemption payments, if any), premium, if any, or interest
on the Senior Subordinated Notes may be made if (i) any Senior Indebtedness of
the Company having an outstanding principal amount at the time of determination
in excess of $10 million (the "Specified Senior Indebtedness"), is not paid when
due or (ii) any other default on Specified Senior Indebtedness occurs and the
maturity of such Specified Senior Indebtedness is accelerated in accordance with
its terms, unless, in either case, the default has been cured or waived and any
such acceleration has been rescinded or such Specified Senior Indebtedness has
been paid in full. Although the ability of the Company and its Subsidiaries to
incur Indebtedness (as defined herein) is restricted under the Senior
Subordinated Notes, the Company and its Subsidiaries will have the ability to
incur substantial additional Indebtedness, which may be senior to the Senior
Subordinated Notes. See "Description of the Exchange Notes -- Certain
Covenants." Because the Company's assets consist of stock of its Subsidiaries,
and because the Company relies on dividends, management fees and billing fees
from its Subsidiaries to meet its obligations for payment of principal and
interest on its outstanding debt obligations and corporate expenses, the Senior
Subordinated Notes are also effectively subordinate to all existing and future
liabilities of the Company's Subsidiaries. See "Risk Factors -- Holding Company
Structure; Dividend and Other Restrictions; Management Fees."
Option to Extend Interest Payment Period; Tax Considerations
So long as no Event of Default (as defined in the Indenture) has
occurred and is continuing, the Company has the right under the Indenture to
defer the payment of interest on the Senior Subordinated Notes at any time or
from time to time for a period not exceeding ten consecutive semi-annual periods
with respect to each Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Senior Subordinated Notes. See
"Description of Exchange Notes -- Option to Extend Interest Payment Date." As a
consequence of any such deferral, semi-annual Distributions on the Securities by
the Trust will be deferred during any such Extension Period. Distributions to
which holders of the Securities are entitled will accumulate additional
Distributions thereon during any Extension Period at the rate of 9 1/2% per
annum, compounded semi-annually from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve thirty-day
months and the actual days elapsed in a partial month in such period. The term
"Distribution" as used herein will include any such additional Distributions.
During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment or principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Senior Subordinated Notes or
(iii) make any guarantee payments with respect to any guarantee of the Company
of the debt securities of any Subsidiary of the Company if such guarantee ranks
pari passu with or junior in right of payment to the Senior Subordinated Notes
(other than (a) dividends or distributions in share of, or options, warrants or
rights to subscribe for or purchase shares of, Common Stock of the
23
Company, (b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class or series of
the Company's capital stock for another class or series of the Company's capital
stock, (e) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged and (f) purchases or
issuances of Common Stock in connection with any of the Company's stock option,
stock purchase, stock loan or other benefit plans for its directors, officers or
employees or any of the Company's dividend reinvestment plans, in each case as
now existing or hereafter established or amended). Prior to the termination of
any such Extension Period, the Company may further defer the payment of
interest, provided that no Extension Period may exceed ten consecutive
semi-annual periods or extend beyond the Stated Maturity of the Senior
Subordinated Notes. Upon the termination of any Extension Period and the payment
of all interest then accrued and unpaid (together with interest thereon at the
annual rate of 9 1/2%, compounded semi-annually, to the extent permitted by
applicable law), the Company may elect to begin a new Extension Period subject
to the above conditions. No interest shall be due and payable during an
Extension Period, except at the end thereof. The Company must give the Preferred
Trustee and the Indenture Trustee notice of its election to begin an Extension
Period at least five Business Days (as defined herein) prior to the earlier of
(i) date the Distributions on the Securities would have been payable but for the
election to begin such Extension Period or (ii) the date the Trustees are
required to give notice to any securities exchange or to holders of Trust
Securities of the record date or the date such Distributions are payable, but in
any event, not less than five Business Days prior to such record date. The
Trustees will give notice of the Company's election to begin a new Extension
Period to the holders of the Securities. Subject to the foregoing, there is no
limitation on the number of times that the Company may elect to begin an
Extension Period. See "Description of the Preferred Securities -- Distributions"
and "Description of the Exchange Notes -- Option to Extend Interest Payment
Date."
Should an Extension Period occur, a holder of Securities will be
required to accrue income (in the form of original issue discount ("OID")) for
United States federal income tax purposes in respect of its pro rata share of
the Senior Subordinated Notes held by the Trust. As a result, a holder of
Securities will be required to include such amount in gross income for United
States federal income tax purposes in advance of the receipt of cash
attributable to such income, and will not receive the cash related to such
income from the Trust if the holder disposes of the Securities prior to the
record date for the payment of Distributions with respect to such Extension
Period. See "Certain United States Federal Income Tax Considerations."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Senior
Subordinated Notes. However, should the Company elect to exercise such right in
the future, the market price of the Securities is likely to be affected. A
holder that disposes of his, her or its Securities during an Extension Period,
therefore, might not receive the same return on his, her or its investment as a
holder that continues to hold its Securities. In addition, as a result of the
existence of the Company's right to defer interest payments, the market price of
the Securities (which represent undivided beneficial ownership interests in the
assets of the Trust) may be more volatile than the market prices of other
securities with respect to which the issuer does not have such right to defer
interest payments.
Exchange of Securities for Senior Subordinated Notes
The holders of all the outstanding Common Securities have the right at
any time to dissolve the Trust and, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, cause the Senior
Subordinated Notes to be distributed to the holders of the Securities in
liquidation of the Trust. See "Description of the Exchange Preferred Securities
- -- Liquidation Distribution Upon Dissolution."
Under current United States federal income tax law interpretations and
assuming, as expected, that the Trust would not be taxable as a corporation, a
distribution of the Senior Subordinated Notes upon a liquidation of the Trust
would not be a taxable event to holders of the Securities. However, if a Tax
Event were to occur that would cause the Trust to be subject to United States
federal income tax with respect to income received or accrued on the Senior
24
Subordinated Notes, a distribution of the Senior Subordinated Notes by the Trust
could be a taxable event to the Trust and the holders of the Securities. See
"Certain United States Federal Income Tax Considerations."
Trust's Dependence on the Company
The Trust exists for the exclusive purpose of (i) issuing and selling
the Trust Securities representing undivided beneficial ownership interests in
the assets of the Trust, (ii) investing the proceeds of the Trust Securities in
the Senior Subordinated Notes and (iii) engaging in only those other activities
necessary or incidental thereto. Accordingly, the Senior Subordinated Notes will
be the sole assets of the Trust, and payments under the Senior Subordinated
Notes will be the sole revenue of the Trust.
The ability of the Trust to make distributions or other payments on the
Securities is wholly dependent upon the Company making interest and other
payments on the Senior Subordinated Notes as and when required. The Company is
highly leveraged. See " -- Risks Relating to the Business of the Company --
Leverage" and " -- Holding Company Structure; Dividend and Other Restrictions;
Management Fees." The Company's level of debt presents the risk that the Company
might not generate sufficient cash to service the Company's indebtedness,
including the Senior Subordinated Notes. If the Company were not to make
payments on the Senior Subordinated Notes, the Trust would be unable to make
payments on the Securities as and when required. In such an event, holders of
the Securities would not be able to rely on the Guarantee since distributions or
other payments on the Securities are subject to such Guarantee only if and to
the extent that the Company has made a payment to the Trust of interest or
principal on the Senior Subordinated Notes.
The Indenture provides that the Company, as borrower, shall pay for all
debts and obligations (other than with respect to the Trust Securities) and all
costs and expenses of the Trust, including any taxes and all costs and expenses
with respect thereto to which the Trust may become subject, except for United
States withholding taxes. No assurance can be given that the Company will have
sufficient resources to enable it to pay any such debts, obligations, costs and
expenses on behalf of the Trust. See "Description of the Exchange Guarantee."
Rights Under the Exchange Guarantee
The Guarantee Trustee will hold the Guarantee for the benefit of the
holders of the Securities. The Guarantee guarantees to the holders of the
Securities the payment of (i) any accrued and unpaid distributions that are
required to be paid on the Securities to the extent the Trust has funds legally
available therefor, (ii) the amount payable upon redemption, including all
accrued and unpaid distributions, of the Securities called for redemption by the
Trust, to the extent the Trust has funds legally available therefor and (iii)
upon a voluntary or involuntary dissolution, winding up or termination of the
Trust (other than in connection with the distribution of Senior Subordinated
Notes to the holders of Securities or redemption of all of the Securities), the
lesser of (a) the aggregate of the Liquidation Amount and all accrued and unpaid
distributions on the Securities to the date of payment to the extent the Trust
has funds legally available therefor and (b) the amount of cash assets of the
Trust remaining available for distribution to holders of the Securities upon the
liquidation of the Trust. The holders of a majority in Liquidation Amount of the
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee. In addition, in the event of a payment default on the Securities, any
holder of Securities may institute a legal proceeding directly against the
Company to enforce such holder's rights in respect thereof under the Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee, or any other person or entity. If the Company were to default on its
obligations under the Senior Subordinated Notes, the Trust would lack available
funds for the payment of Distributions or amounts payable on redemption of the
Securities or otherwise, and in such event, the holders of the Securities would
not be able to rely upon the Guarantee for payment of such amounts. Instead,
holders of the Securities could rely on the enforcement (i) by the Preferred
Trustee of its rights as registered holder of the Senior Subordinated Notes,
against the Company pursuant to the terms of the Senior Subordinated Notes or
(ii) by a Special Trustee elected by 25% in Liquidation Amount of the Securities
of the Trust's rights under the Senior Subordinated Notes or (iii) if the
Preferred Trustee or the Special Trustee do not enforce the Trust's rights
against the Company, by
25
such holder of its right of direct action against the Company on behalf of the
Trust to enforce payments on the Senior Subordinated Notes. See "Description of
the Exchange Guarantee" and "Description of the Exchange Notes -- Subordination"
herein. The Declaration provides that each holder of Securities, by acceptance
thereof, agrees to the provisions of the Guarantee (including the subordination
provisions thereof) and the Indenture.
Change of Control Redemption
Upon the occurrence of a Change of Control Triggering Event (as defined
herein), a holder of Trust Securities has the right to require the Trust to
exchange all or any part of the holder's Trust Securities for Senior
Subordinated Notes having an aggregate principal amount equal to the aggregate
Liquidation Amount of the Trust Securities so offered. Upon the occurrence of
such an event, the Company will be required to immediately redeem any Senior
Subordinated Notes so exchanged at a redemption price equal to 101% of the
principal amount thereof plus any accrued and unpaid interest. See "Description
of the Exchange Preferred Securities" and "Description of the Exchange Notes --
Change of Control."
Tax Event or Investment Company Event Redemption or Distribution
Upon the occurrence of a Tax Event or Investment Company Event, the
Company will, except in certain limited circumstances, cause the Trustees to
dissolve and liquidate the Trust and, after satisfaction of liabilities to
creditors of the Trust, cause Senior Subordinated Notes to be distributed pro
rata to the holders of Trust Securities. Upon the occurrence of a Tax Event, in
certain circumstances, the Company will have the right to redeem the Senior
Subordinated Notes, in whole (but not in part), at 100% of principal amount plus
accrued and unpaid interest, in lieu of a distribution of the Senior
Subordinated Notes, in which event the Securities will be redeemed in whole at
the Liquidation Amount of $1,000 per each of the Securities plus accrued and
unpaid Distributions. In the case of a Tax Event, the Company may also elect to
cause the Securities to remain outstanding. See "Description of the Exchange
Preferred Securities -- Tax Event or Investment Company Event Redemption or
Distribution."
Under current United States federal income tax law and assuming, as
expected, that the Trust is not taxable as a corporation, a distribution of the
Senior Subordinated Notes would not be a taxable event to holders of the
Preferred Securities. However, in the event of a Tax Event which results in the
Trust being treated as an association taxable as a corporation, the distribution
would likely constitute a taxable event to holders of the Securities. See
"Certain United States Federal Income Tax Considerations -- Distribution of
Notes or Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for the Securities or
the Senior Subordinated Notes that may be distributed in exchange for Securities
if a dissolution or liquidation of the Trust were to occur. Accordingly, the
Securities that an investor may purchase, whether pursuant to the offer made
hereby or in the secondary market, or the Senior Subordinated Notes that a
holder of Securities may receive on dissolution and liquidation of the Trust,
may trade at a discount to the price that the investor paid to purchase the
Preferred Securities. Because holders of Securities may receive Senior
Subordinated Notes upon the occurrence of a Tax Event or Investment Company
Event, Holders of Securities are also making an investment decision with regard
to the Exchange Notes and should carefully review all the information regarding
the Exchange Notes contained herein. See "Description of the Exchange Preferred
Securities" and "Description of the Exchange Notes."
Limited Voting Rights
Except in the limited circumstances described herein, holders of
Securities will have no voting rights, including the right to vote to appoint,
remove or replace the Trustees, or increase or decrease their number, the right
to which is vested in the holder(s) of the Common Securities. See "Description
of the Exchange Preferred Securities -- Voting Rights."
26
Proposed Tax Law Changes
The United States Congress has recently passed and the President has
approved certain changes to United States federal income tax law. While
President Clinton proposed as part of the legislation a denial to an issuer of
an interest deduction, for United States federal income tax purposes, on
instruments such as the Senior Subordinated Notes, the law does not include any
such provision. There can be no assurance, however, that future legislation will
not adversely affect the ability of the Company to deduct interest on the Senior
Subordinated Notes or otherwise affect the tax treatment of the transactions
described herein. Moreover, such legislation could give rise to a Tax Event
which would permit the Company to distribute the Senior Subordinated Notes to
the holders of the Securities or cause a redemption of the Exchange Securities
as described more fully under "Description of the Exchange Notes" and
"Description of the Exchange Preferred Securities." See also "Certain United
States Federal Income Tax Considerations -- Possible Tax Law Changes."
Modification of the Declaration
The Declaration may be modified and amended by the Trustees and the
Company, provided, that if any proposed amendment provides for, or the Trustees
or the Company otherwise propose to effect, (i) any action that would adversely
affect the powers, preferences or special rights of the Trust Securities,
whether by way of amendment to the Declaration or otherwise or (ii) the
dissolution, winding-up or termination of the Trust other than pursuant to the
terms of the Declaration, then the holders of the Trust Securities voting
together as a single class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of at least a majority in Liquidation Amount of the Trust Securities
affected thereby; provided that if any amendment or proposal referred to in
clause (i) above would adversely affect only the Securities or the Common
Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least a majority in Liquidation Amount of such
class of Trust Securities.
Notwithstanding the foregoing, no amendment or modification maybe made
to the Declaration if such amendment or modification would (i) cause the Trust
to be classified for purposes of United States federal income taxation as other
than a grantor trust or another entity which is not subject to United States
federal income tax at the entity level and the assets and income of which are
treated for United States federal income tax purposes as held and derived
directly by holders of interests in the entity, (ii) reduce or otherwise
adversely affect the powers of the Trustees or (iii) cause the Trust to be
deemed an "investment company" which is required to be registered under the 1940
Act.
Consequences of a Failure to Exchange Preferred Securities
The Preferred Securities have not been registered under the Securities
Act or any state securities laws and therefore may not be offered, sold or
otherwise transferred except in compliance with the registration requirements of
the Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Preferred Securities
which remain outstanding after consummation of the Exchange Offer will continue
to bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Preferred Securities which remain
outstanding will not be entitled to any rights to have such Preferred Securities
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions). The
Company and the Trust do not intend to register under the Securities Act any
Preferred Securities which remain outstanding after consummation of the Exchange
Offer (subject to such limited exceptions, if applicable). To the extent that
Preferred Securities are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered Preferred Securities could be adversely affected.
The Exchange Preferred Securities and any Preferred Securities which
remain outstanding after consummation of the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding Liquidation Amount thereof have taken certain actions
or exercised certain rights under the Declaration. See "Description of Exchange
Preferred Securities -- Voting Rights; Modification of the Declaration."
27
If a registration statement relating to the Exchange Offer has not been
filed by September 30, 1997 and declared effective by February 9, 1998, the
Distribution rate borne by the Preferred Securities commencing on September 16,
1997 will increase by 0.25% per annum until the Exchange Offer is consummated.
Upon consummation of the Exchange Offer, holders of Preferred Securities will
not be entitled to any increase in the Distribution rate thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Description of Exchange Preferred Securities."
Absence of Public Market
The Preferred Securities were issued to, and the Company believes such
securities are currently owned by, a relatively small number of beneficial
owners. The Preferred Securities have not been registered under the Securities
Act and will be subject to restrictions on transferability if they are not
exchanged for the Exchange Preferred Securities. Although the Exchange Preferred
Securities may be resold or otherwise transferred by the holders (who are not
affiliates of the Company or the Trust) without compliance with the registration
requirements under the Securities Act, they will constitute a new issue of
securities with no established trading market. Preferred Securities may be
transferred by the holders thereof only in blocks having a Liquidation Amount of
not less than $100,000 (100 Preferred Securities). Exchange Preferred Securities
may be transferred by the holders thereof in blocks having a Liquidation Amount
of $1,000 (one Exchange Preferred Security) or integral multiples thereof. The
Company and the Trust have been advised by the Initial Purchasers that the
Initial Purchasers presently intend to make a market in the Exchange Preferred
Securities. However, the Initial Purchasers are not obligated to do so and any
market-making activity with respect to the Exchange Preferred Securities may be
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer. Accordingly, no
assurance can be given that an active public or other market will develop for
the Preferred Exchange Securities or the Preferred Securities or as to the
liquidity of or the trading market for the Exchange Preferred Securities or the
Preferred Securities. If an active public market does not develop, the market
price and liquidity of the Exchange Preferred Securities may be adversely
affected.
If a public trading market develops for the Exchange Preferred
Securities, future trading prices will depend on many factors, including, among
other things, prevailing interest rates, the Company's results and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the Exchange Preferred Securities may trade at a discount.
Notwithstanding the registration of the Exchange Preferred Securities
in the Exchange Offer, holders who are "affiliates" (as defined under Rule 405
of the Securities Act) of the Company or the Trust may publicly offer for sale
or resell the Exchange Preferred Securities only in compliance with the
provisions of Rule 144 under the Securities Act.
Each broker-dealer who receives Exchange Preferred Securities for its
own account in exchange for Preferred Securities, where such Preferred
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Securities.
See "Plan of Distribution."
Exchange Offer Procedures
Issuance of the Exchange Preferred Securities in exchange for Preferred
Securities pursuant to the Exchange Offer will be made only after a timely
receipt by the Trust of such Preferred Securities, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of the Preferred Securities desiring to tender such Preferred Securities
in exchange for Exchange Preferred Securities should allow sufficient time to
ensure timely delivery. Neither the Company nor the Trust is under any duty to
give notification of defects or irregularities with respect to the tenders of
Preferred Securities for exchange.
28
Risks Relating to the Business of the Company
Leverage
As of June 30, 1997, after giving pro forma effect to the Offering, the
Company would have had aggregate outstanding indebtedness of approximately $135
million. For the fiscal year ended December 31, 1996, on a pro forma basis,
after giving effect to the Offering as if it had occurred on January 1, 1996,
the Company's ratio of earnings to fixed charges would have been 2.47 to 1. See
"Capitalization" and "Unaudited Pro Forma Consolidated Financial Statements."
The Indenture pursuant to which the Senior Subordinated Notes are or
will be issued permits the Company to incur additional indebtedness, subject to
certain limitations. Management believes that cash flow from the operations of
the Insurers will be adequate to permit the Company to make required payments of
principal and interest on its indebtedness, although there can be no assurance
that this will be the case. To the extent that cash flow from operations is
insufficient to satisfy the Company's cash requirements, the Company may seek to
obtain funds from additional borrowings, restructure or refinance additional
equity capital or acquire other businesses that would provide cash flow (in all
such cases to the extent permitted by the Indenture). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." There can be no assurance that such actions
could be effected on satisfactory terms, in a timely manner or at all, that they
would enable the Company to make any payments due on the Senior Subordinated
Notes or that any such actions would be permitted under the Indenture.
The degree to which the Company is leveraged could have adverse
consequences to holders of the Securities, including the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
the funds available to the Company for other purposes, (ii) the Company's
ability to obtain additional financing in the future for working capital,
acquisitions or other purposes may be impaired, (iii) certain of the Company's
borrowings will be at variable rates of interest, which will expose the Company
to the risk of higher interest rates, (iv) the Company's flexibility in planning
for or reacting to changes in market conditions may be limited, (v) the Company
may be substantially more leveraged than certain of its competitors, which may
place the Company at a competitive disadvantage and (vi) the Company may be more
vulnerable in the event of a downturn in its business. The Company's ability to
satisfy its obligations will be dependent upon its future performance, which
will be subject to prevailing economic conditions and to financial, business and
other factors, including factors beyond the control of the Company.
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 sufficient 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 or market
demand. 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.
29
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, results of operations or cash flows
in future periods.
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 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, droughts, floods, freezes
and other natural perils and crop production cycles. Therefore, the results for
any quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insurance business are recognized
throughout the year with a reconciliation for the current crop year in the
fourth quarter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company" for examples of recent events that
could adversely affect the Company's operating results.
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 1994 Reform Act also reduced the maximum 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 29.0%, 28.0% and 27.5%, respectively, of the MPCI Premium
serviced, a decrease from the 31% level established for the 1994, 1995 and 1996
crop years. Historically, the FCIC has paid the maximum MPCI Buy-up Expense
Reimbursement Payment rate allowable under law, although no assurance can be
given that this practice will continue. 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 Buy-up Expense Reimbursement Payment.
The FCIC has appointed several committees comprised of members of the insurance
industry to make recommendations concerning this matter.
The crop insurance industry has recently completed negotiation of the
1998 Standard Reinsurance Agreement ("1998 SRA") with the FCIC, with the 1998
SRA providing for a 27% MPCI Expense Reimbursement and no change to the CAT
Coverage program from prior years.
30
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 limits the role of USDA offices in the delivery of
MPCI coverage for the 1997 Crop Year and eliminated the linkage between CAT
Coverage and qualifications for certain federal farm program benefits.
Currently, 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. Effective June 9,
1997, the Secretary of Agriculture announced that the USDA would no longer
provide CAT Coverage through USDA offices in any state. This is to be
implemented by transferring the collection of premium and administration of CAT
policies to the various members of the crop insurance industry. At this time,
the Company has been preliminarily informed that it will receive approximately
17,000 policies that were formerly written by USDA offices, although there can
be no assurance that the Company will receive this number of policies. Based on
historical, per-policy averages, the Company has preliminarily estimated that it
will receive approximately an additional $6 to $7 million in premiums from such
transferred policies, however, there can be no assurance that this number will
be realized. This estimate assumes that IGF will retain 100% of such premiums.
Total MPCI Premium for each farmer depends upon the kind 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, 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."
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. See "Business -- Nonstandard
Automobile Insurance -- Competition."
31
In the crop insurance business, the Company competes against other crop
insurance companies. In addition, the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1995 crop year, the
number of insurance companies that have entered into agreements with the FCIC to
sell and service MPCI policies has declined from fifty to seventeen. 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. See "Business -- Crop
Insurance."
Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and
Pafco a B- (Adequate) rating. 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 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 "have
an adequate ability to meet their obligations to policyholders, but their
financial strength is vulnerable to unfavorable changes in underwriting or
economic conditions." IGF is currently not assigned a rating by A.M. Best. 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. See
"Business -- Ratings."
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Texas, Indiana, Missouri and Virginia;
consequently the Company will be significantly affected by changes in the
regulatory and business climate in those states. See "Business -- Nonstandard
Automobile Insurance -- Marketing." The Company's crop insurance business is
concentrated in the states of Iowa, Texas, Illinois, Kansas, Montana and
Minnesota. The Company will be significantly affected by weather conditions,
natural perils and other factors affecting the crop insurance business in those
states. See "Business -- Crop Insurance."
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 Insurers will have access
to sufficient capital to support future growth and also satisfy the capital
requirements of rating agencies and regulators. In addition, the Company will
require additional capital to finance future acquisitions. See " -- Control by
Goran," " -- Potential Limitations on Ability to Raise Additional Capital," and
" -- Conflicts of Interest" below. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Liquidity and Capital Resources."
32
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves for unpaid Losses and LAE established by the Company are
estimates of amounts needed to pay reported and unreported claims and related
LAE based on facts and circumstances then known. These reserves are based on
estimates of trends in claims severity, judicial theories of liability and other
factors.
Although the nature of the Company's insurance business is primarily
Short-Tail, the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for Losses and LAE and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating these amounts, it has been
necessary, and may over time continue to be necessary, to revise estimates of
the Company's reserves for Losses and LAE. The historic development of reserves
for Losses and LAE may not necessarily reflect future trends in the development
of these amounts. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on historical information. See "Business --
Reserves for Losses and Loss Adjustment Expenses."
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 amounts not recoverable from
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, the Company
may need to reduce the levels of its underwriting commitments. See "Business --
Nonstandard Automobile Insurance -- Reinsurance" and "Business -- Crop Insurance
- -- Reinsurance Pools and Third-Party Reinsurance in Effect for 1997."
Risks Associated with Investments
The Company's results of operations depend in part on the performance
of its invested assets. As of June 30, 1997, 75.5% of the Company's investment
portfolio was invested in fixed maturity securities, 16.8% in equity securities,
6.2% in short-term investments and 1.5% in real estate and mortgage loans.
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. See "Business -- Investments."
33
Comprehensive State Regulation
The Insurers 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 legislative or regulatory changes will not adversely affect the Company.
See "Business -- Regulation."
Holding Company Structure; Dividend and Other Restrictions; Management Fees
Dividends
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 management fees), including the
Insurers, to meet its obligations to creditors and to pay corporate expenses,
including the principal and interest on the Senior Subordinated Notes. 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. Under these laws, the maximum aggregate amounts of dividends
permitted to be paid in 1997 by IGF and Pafco without prior regulatory approval
is $12,122,000 and $561,000, respectively, none of which has been paid. 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 from the date of Acquisition without the
prior written approval of the Florida Department. 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. See
"Business -- Regulation" and "Management Discussion and Analysis of Financial
Condition and Results of Operations of the Company."
Payment of dividends by IGF requires prior approval by the lender under
the IGF Revolver. There can be no assurance that IGF will be able to obtain this
consent.
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,
Inc., a wholly owned subsidiary of GGS Holdings ("GGS Management"). 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. In the consent order approving the Acquisition, the Florida
Department has reserved, for a period of 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'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.
34
Control by Goran
The Company is a 67%-owned subsidiary of Goran. Goran has the power to
control the Company, to elect its Board of Directors and to approve any action
requiring shareholder approval, including adopting amendments to the Company's
articles of incorporation and approving or disapproving mergers or sales of all
or substantially all of the assets of the Company. Because Goran has the ability
to elect the Board of Directors of the Company, it will be able to effectively
control all of the Company's policy decisions. As long as Goran is the majority
shareholder of the Company, third parties will not be able to obtain control of
the Company through purchases of Common Stock not owned by Goran.
G. Gordon Symons, Chairman of the Board of Goran, the Company and GGS
Holdings and the father of Alan G. Symons, Chief Executive Officer of the
Company, and Douglas H. Symons, President and Chief Operating Officer of the
Company, and members of the Symons family beneficially own in the aggregate 61%
of the outstanding common stock of Goran. Accordingly, since G. Gordon Symons
and members of his family have the ability to elect the Board of Directors of
Goran, they will have the ability to elect the Board of Directors of the Company
and otherwise to significantly influence the Company's business and operations.
Of the eight directors of the Company, five are current directors of
Goran (three of whom are members of the Symons family and two of whom are
independent directors of Goran) and three are outside directors. Directors and
officers of the Company and Goran may have conflicts of interest with respect to
certain matters affecting the Company, such as potential business opportunities
and business dealings between the Company and Goran and its affiliated companies
and interpretations of agreements.
Potential Limitations on Ability to Raise Additional Capital
Goran's failure to maintain ownership of at least 50% of the Company's
voting securities will expose Goran to a risk that it will be characterized as
an investment company within the meaning of the Investment Company Act of 1940,
as amended (the "1940 Act"), unless Goran's remaining voting securities of the
Company, together with any other investment securities, represent not more than
40% of the total assets of Goran on an unconsolidated basis. In such event,
Goran would be required to comply with the registration and other requirements
of the 1940 Act, which would be significantly burdensome for Goran. This
constraint makes it unlikely that Goran would approve a stock issuance by the
Company that reduces Goran's ownership below 50% and therefor would likely limit
the amount of additional capital which can be raised by the Company through the
issuance of voting securities. Among other consequences, such a limit could
affect the Company's ability to raise funds for acquisition opportunities which
may become available to the Company. In addition, if Goran or the Company ever
sold additional significant amounts of shares of common stock in the public
market, those sales might have an adverse effect on the market price of the
common stock of the Company.
Conflicts of Interest
Currently, Goran does not market property and casualty insurance
products which compete with products sold by the Company. Although there are no
restrictions on the activities in which Goran may engage, management of the
Company does not expect that Goran and the Company will compete with each other
to any significant degree in the sale of property and casualty insurance
products. There can be no assurance, however, that the Company will not
encounter competition from Goran in the future or that actions by Goran or its
affiliates will not inhibit the Company's growth strategy. See "Risk Factors --
Control by Goran."
Conflicts of interest between the Company and Goran could arise with
respect to business dealings between them, including potential acquisitions of
businesses or properties, the issuance of additional securities, the election of
new or additional directors, the payment of dividends by the Company and
interpretations of agreements. The Company has not instituted any formal plan or
arrangement to address potential conflicts of interest that may arise between
the Company and Goran. See "Risk Factors -- Control by Goran."
35
Dependence on Key Personnel in Connection with Future Success
The future success of the Company depends significantly upon the
efforts of certain key management personnel including G. Gordon Symons, Chairman
of the Board of the Company, Alan G. Symons, Chief Executive Officer of the
Company, Douglas H. Symons, President and Chief Operating Officer of the Company
and Pafco, Dennis G. Daggett, President of IGF and Roger C. Sullivan, Jr.,
Executive Vice President of Superior. A loss of any of these officers could
adversely affect the Company's business.
Possible Liabilities Relating to Transactions
Prior to the Offering, the Company entered into a number of
transactions, including the Formation Transaction, the Acquisition, the
Transfer, the Distribution, the Dividend and other transactions. The application
of the tax laws to the factual circumstances relating to certain aspects of the
Transactions is uncertain. In particular, while the Company believes that there
is substantial authority for treating Pafco's contribution of IGF to IGF
Holdings in exchange for all of the capital stock of IGF Holdings (the
"Contribution") as a tax-free transaction under Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code"), and therefore that no tax
penalties would in any event be payable, there can be no assurance that the
Internal Revenue Service (the "IRS") would agree with the foregoing tax
treatment. Among other things, the IRS could attempt to recharacterize the
Contribution and the Dividend which could result in a material liability to the
Company. The Company cannot predict with certainty whether or when any such
liabilities might arise.
Accordingly, the Company's results of operations in one or more future
periods could be materially adversely affected by liabilities related to the
Transactions. Goran has agreed to indemnify the Company against any of the
foregoing liabilities; however, in the event that Goran was unable to pay any
such amount, the Company would remain liable.
36
USE OF PROCEEDS
Neither the Company nor the Trust will receive any cash proceeds from
the issuance of the Exchange Preferred Securities offered hereby. In
consideration for issuing the Exchange Preferred Securities in exchange for the
Preferred Securities as described in this Prospectus, the Trust will receive
Preferred Securities in like Liquidation Amount. The Preferred Securities
surrendered in exchange for the Exchange Preferred Securities will be retired
and canceled.
All the proceeds to the Trust from the sale of the Preferred Securities
were invested by the Trust in the Old Senior Subordinated Notes. The Company
used the net proceeds received from the sale of the Old Senior Subordinated
Notes primarily to (i) retire bank debt of approximately $44.9 million in
principal amount, (ii) purchase the shares of GGS Holdings not owned by the
Company and (iii) used the remainder for general corporate purposes. The Company
invested the net proceeds in short-term, income-generating, investment-grade
securities.
ACCOUNTING TREATMENTS
The Trust will be treated, for financial reporting purposes, as a
Subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of the Company. The Securities
will be presented as a separate line item in the consolidated balance sheet of
the Company under the caption "Minority Interest -- Preferred Securities," and
appropriate disclosures about the Securities, the Guarantee and the Senior
Subordinated Notes will be included in the notes to consolidated financial
statements.
All future reports of the Company filed under the Exchange Act will (a)
present the Trust Securities issued by the Trust on the balance sheet as a
separate line item entitled "Minority Interest -- Preferred Securities," (b)
include in a footnote to the financial statements disclosure that the sole
assets of the Trust are the Senior Subordinated Notes (including the outstanding
principal amount, interest rate and maturity date of such Senior Subordinated
Notes) and (c) include in a footnote to the financial statements disclosure that
the Company owns all of the Common Securities of the Trust, the sole assets of
the Trust are the Senior Subordinated Notes, and the back-up obligations, in the
aggregate constitute a full and unconditional guarantee by the Company of the
obligations of the Trust under the Securities.
37
CAPITALIZATION
Set forth below is the actual capitalization of the Company at June 30,
1997 and the capitalization of the Company at June 30, 1997, as adjusted to give
effect to the Offering and the application of the net proceeds from the Offering
as described in "Use of Proceeds."
Six Months Ended
June 30, 1997
----------------------------------------
As Adjusted for
(in thousands) Actual The Offering (1)
---------------- ------------------
Long-term bank debt $44,872 $ ---
---------------- ------------------
Minority interest:
Preferred Securities --- 135,000
Equity in net assets of subsidiaries 26,724 ---
Shareholders' Equity:
Preferred Stock; 50,000,000 shares
authorized; no shares outstanding --- ---
outstanding
Common Stock, no par value, and
additional paid-in capital;
100,000,000 shares authorized;
10,450,000 shares issued and
outstanding 39,019 39,019
Additional paid-in capital 5,905 5,905
Unrealized loss on investments 2,184 4,218
Retained earnings $24,792 $24,185
---------------- -----------------
Total Shareholders' Equity $71,900 $73,327
---------------- -----------------
Total Capitalization $143,496 $208,327
======== ========
- ---------------
(1) The information as adjusted excludes shares reserved for issuance
pursuant to certain employment agreements with officers of IGF and the
Company's stock option plan.
38
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Balance Sheet of the
Company as of June 30, 1997 and the Statements of Earnings of the Company for
the year ended December 31, 1996 and for the six months ended June 30, 1997
present the financial position and results of operations for the Company as if
the Transactions, including the Formation Transaction, the Acquisition and the
Buyout Transaction, the Initial Public Offering and the Offering had occurred as
of January 1, 1996. The pro forma adjustments are based on available information
and certain assumptions the Company currently believes are reasonable in the
circumstances. The Unaudited Pro Forma Consolidated Balance Sheet and Statements
of Earnings have been derived from and should be read in conjunction with the
historical Consolidated Financial Statements and Notes of the Company for the
year ended December 31, 1996 and the unaudited six months ended June 30, 1997,
contained elsewhere herein, and should be read in conjunction with the
accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet and
Statements of Earnings. The pro forma adjustments and pro forma consolidated
amounts are provided for informational purposes only.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the results of operations or financial
position that would have occurred had the Transaction, including the Formation
Transaction and the Acquisition, and the Buyout Transaction, the Initial Public
Offering and the Offering been consummated on the dates assumed; nor is the pro
forma information intended to be indicative of the Company's future results of
operations.
40
Unaudited Pro Forma Consolidated Balance Sheet
As of June 30, 1997
(in thousands)
Pro Forma
SIG Pro Forma for the
Historical Adjustments Offering
-------------- -------------- --------------
Assets:
Investments $190,500 $24,228 (1) $214,728
Cash and cash equivalents 18,329 --- 18,329
Receivables, net 176,045 --- 176,045
Reinsurance recoverable on paid and unpaid losses, net 70,694 --- 70,694
Prepaid reinsurance premiums 73,927 --- 73,927
Deferred policy acquisition costs 13,121 --- 13,121
Deferred income taxes 2,899 118 (2) 3,017
Property and equipment 9,555 --- 9,555
Investments in and advances to related parties 2,418 --- 2,418
--- 4,900 (3) ---
--- (1,116) (4) ---
--- 2,034 (5) ---
Other 10,153 34,276 (6) 50,247
-------------- -------------- --------------
$567,641 $64,440 $632,081
======== ======= ========
Liabilities:
Losses and Loss Adjustment Expenses $137,924 $--- $137,924
Unearned premiums 160,741 --- 160,741
Reinsurance payable 100,475 --- 100,475
Federal income tax payable 1,594 (391) (7) 1,203
Term debt 44,872 (44,872) (8) ---
Other 23,411 --- 23,411
-------------- ------------- --------------
469,017 (45,263) 423,754
-------------- ------------- --------------
Minority interest:
Preferred securities --- 135,000 (9) 135,000
Equity in net assets of subsidiary 26,724 (26,724) (10) ---
-------------- ------------- --------------
Stockholders' Equity:
Common Stock 39,019 --- 39,019
Additional paid-in capital 5,905 --- 5,905
Unrealized gain/(loss) on investments, net 2,184 2,034 (5) 4,218
--- (725) (11) ---
Retained Earnings 24,792 118 (2) 24,185
-------------- ------------- --------------
71,900 1,427 73,327
-------------- ------------- --------------
$567,641 $64,440 $632,081
======== ======= ========
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
40
Unaudited Pro Forma Consolidated Statement of Earnings
Six Months Ended June 30, 1997
(in thousands, except per share data and ratios)
Pro Forma Pro Forma for
SIG Historical Adjustments the Offering
-------------- -------------- --------------
Gross Premiums Written $279,065 $ --- $279,065
======== ========
Net Premiums Written $150,524 --- $150,524
======== ========
Net Premiums Earned $136,012 --- $136,012
Net investment income 5,276 --- 5,276
Other income 10,791 --- 10,791
Net realized capital gains 1,684 --- 1,684
-------------- --------------
Total Revenues 153,763 --- 153,763
-------------- --------------
Losses and loss adjustment expenses 103,293 --- 103,293
Policy acquisition and general and administration expenses --- 82 (12) ---
--- (116) (13) ---
30,397 788 (14) 31,151
Interest Expense 2,744 (2,706) (15) 38
-------------- -------------- --------------
Total Expenses 136,434 (1,952) 134,482
-------------- -------------- --------------
Earnings before income taxes, minority interest
and extraordinary item 17,329 1,952 19,281
Provision for income taxes --- 959 (16) ---
6,183 (118) (17) 7,024
Minority interest:
Distributions on Preferred Securities --- 4,168 (18) 4,168
Equity in earnings of subsidiary 1,560 (1,560) (19) ---
-------------- -------------- --------------
Net earnings from continuing operations (20) $9,586 $(1,497) $8,089
====== ======= ======
Pro Forma for
SIG Historical the Offering
-------------- --------------
Net earnings per common share from continuing
operations - primary (20) $0.90 $0.76
-------------- --------------
Weighted average shares outstanding 10,617 10,617
-------------- --------------
Other Data:
EBITDA (21) --- $21,242
Adjusted EBITDA (22) --- $19,558
Ratio of EBITDA to interest expense and Distributions on Preferred --- 3.29x
Securities
Ratio of Adjusted EBITDA to interest expense and Distributions on
Preferred Securities (22) --- 3.03x
Ratio of earnings to fixed charges (23) --- 2.97x
GAAP Ratios:
Loss Ratio 75.9% 75.9%
Expense Ratio 22.4% 22.9%
-------------- --------------
Combined Ratio 98.3% 98.8%
==== ====
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
41
Unaudited Pro Forma Consolidated Statement of Earnings
Year Ended December 31, 1996
(in thousands, except per share data and ratios)
Four Months
Ended April Pro Forma Pro Forma for
30, 1996 Adjustments for the Trans-
SIG Superior the Transactions actions and Pro Forma Pro Forma for
Historical Historical and the IPO the IPO Adjustments the Offering
----------- ----------- ------------- ------------ ----------- -------------
Gross premiums written $305,499 $43,993 $ --- $349,492 $ --- $349,492
======== ======= ======== ========
Net premiums written $209,592 $43,618 $ --- $253,210 $ --- $253,210
=========== =========== ============ =============
Net premiums earned $191,759 $39,387 --- $231,146 --- $231,146
Net investment income 6,733 2,452 --- 9,185 --- 9,185
Other income 9,286 2,217 --- 11,503 --- 11,503
Net realized capital
gains/(losses) (1,015) 29 --- (986) --- (986)
----------- ----------- ------------ -------------
Total Revenues 206,763 44,085 --- 250,848 --- 250,848
----------- ----------- ------------ -------------
Losses and loss
adjustment expenses 137,109 26,715 163,824 163,824
--- --- 77 (24) --- --- ---
--- --- 30 (25) --- 163 (12) ---
Policy acquisition and --- --- (174) (26) --- (231) (13) ---
general and administrative
expenses 42,013 11,445 106 (27) 53,497 1,703 (14) 55,132
--- --- 1,330 (28) --- --- ---
--- --- (719) (29) --- --- ---
Interest expense 3,938 --- (434) (30) 4,115 (4,104) (15) 11
----------- ----------- ------------- ------------ ----------- -------------
Total Expenses 183,060 38,160 216 221,436 (2,469) 218,967
----------- ----------- ------------- ------------ ----------- -------------
Earnings before income
taxes, minority interest
and extraordinary item 23,703 5,925 (216) 29,412 2,469 31,881
Provision for income taxes 8,046 1,952 (75) (16) 9,923 1,460 (16) 11,383
Minority interest:
Distributions on Preferred
Securities --- --- --- --- 8,336 (18) 8,336
Equity in earnings of (19) ---
subsidiary 2,401 --- 1,421 (31) 3,822 (3,822)
----------- ----------- ------------- ------------ ----------- -------------
Net earnings from
continuing
operations (20) $13,256 $3,973 $1,562 $15,667 $(3,505) $12,162
======= ====== ====== ======= ======= =======
Net earnings per
common share
from continuing
operations (20) $1.76 $1.13
===== =====
Weighted average
shares outstanding 7,537 3,193 (32) 10,730
===== ===== ======
Other Data:
EBITDA (21) --- --- 35,721
Adjusted EBITDA (22) --- --- 36,707
Ratio of EBITDA to interest
expense and Distribution on
Preferred Securities --- --- 2.78x
Total Preferred Securities to
EBITDA --- --- 3.78x
Ratio of Adjusted EBITDA to
interest expense and
Distributions on Preferred
Securities (22) --- --- 2.86x
Total Preferred Securities to
Adjusted EBITDA (23) --- --- 3.68x
Ratio of earnings to fixed
charges (31) --- --- 2.47x
GAAP ratios:
Loss Ratio 71.5% 70.9%
Expense Ratio 21.9% 23.9%
----------- -------------
Combined Ratio 93.4% 94.8%
==== ====
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
42
Notes To Unaudited Pro Forma Consolidated Financial Statements
(1) Application of the net proceeds from the Offering are invested as of June
30, 1997 as follows:
(in thousands)
Offering Proceeds $135,000
Estimated fees and expenses (4,900)
Repayment of GGS Senior Credit Facility (44,872)
Purchase of Minority Interest in GGS Holdings (61,000)
-------------------
General corporate purposes $24,228
-------------------
The pro forma statement of earnings for the six months ended June 30,
1997 and the year ended December 31, 1996 assumes no interest earnings
on funds remaining. However, the Company fully expects to invest such
funds.
(2) Deferred tax assets and retained earnings at June 30, 1997 increase by
$118,000 related to the elimination of the deferred tax liability on
the unremitted earnings of GGS Holdings due to the purchase of the
remaining minority interest share of 48%.
(3) Other assets at June 30, 1997 increase by $4,900,000 representing
deferred Preferred Securities issuance costs to be amortized over their
term (30 years).
(4) Other assets at June 30, 1997 are reduced by $1,116,000 representing
the write-off of unamortized debt issuance costs in connection with the
GGS Senior Credit Facility that was repaid with the proceeds of the
Offering.
(5) Goodwill and equity at June 30, 1997 increase by $2,034,000 for the
after tax effects of the elimination of the minority interest portion
of the unrealized loss on investments held for sale.
(6) Goodwill at June 30, 1997 is increased by $34,276,000 for the excess of
the purchase price of the minority interest share, over the minority
interest liability of $26,724,000 as the entire excess purchase price
is applied to goodwill as all identifiable assets approximate fair
value. Total goodwill at June 30, 1997, including that existing prior
to the Offering aggregates $36,390,000.
(7) Income taxes payable at June 30, 1997 are reduced by $391,000 for the
tax effect of the write-off of the debt issuance costs associated with
the term debt repaid from the proceeds of the Offering.
(8) The GGS Senior Credit Facility is completely repaid with the proceeds
of the Offering.
(9) Issuance of Preferred Securities from the Offering.
(10) Minority interest liability at June 30, 1997 is eliminated with the
purchase of the minority interest share from the proceeds of the
Offering.
(11) Retained earnings at June 30, 1997 is reduced by $725,000 for the after
tax effects of the write-off of the debt issuance costs associated with
the GGS Senior Credit Facility repaid from the proceeds of the
Offering.
(12) Policy acquisition and general and administrative expenses for the six
months ended June 30, 1997 and the year ended December 31, 1996 are
increased by $82,000 and $163,000, respectively, for the amortization
of the Preferred Securities issuance costs. Such costs are amortized
over the life of the Preferred Securities of thirty years.
(13) Policy acquisition and general and administrative expenses for the six
months ended June 30, 1997 and the year ended December 31, 1996 are
decreased by $116,000 and $231,000, respectively, for the amortization
of the debt issuance costs associated with the GGS Senior Credit
Facility. The adjustment for the year ended December 31, 1996 includes
the pro forma adjustment described in Note 21.
(14) Policy acquisition and general and administrative expenses for the six
months ended June 30, 1997 and the year ended December 31, 1996 are
increased by $788,000 and $1,703,000, respectively, for the
amortization of goodwill created by the excess of the purchase price of
the minority interest share in excess of the minority interest
liability. Goodwill is amortized over a 25-year period on a straight
line basis based upon management's estimate of the expected benefit
period.
(15) Interest expense for the six months ended June 30, 1997 and the year
ended December 31, 1996 is decreased by $2,706,000 and $4,104,000,
respectively, for the interest incurred on the GGS Senior Credit
Facility which was repaid from the proceeds of the Offering. The
adjustment for the year ended December 31, 1996 includes the pro forma
adjustment described in Note 25.
43
Notes To Unaudited Pro Forma Consolidated Financial Statements
(16) All applicable pro forma adjustments to operations are tax affected
at a rate of 35%.
(17) Income tax expense for the six months ended June 30, 1997 is reduced by
$118,000 for the elimination of the deferred tax effects of the
unremitted earnings to SIG of GGS Holdings due to the purchase of the
remaining minority interest.
(18) Distributions on Preferred Securities for the six months ended June 30,
1997 and the year ended December 31, 1996, net of income taxes at 35%,
of $4,168,000 and $8,336,000, respectively, were based on an interest
rate of 9.50%.
(19) Minority interest earnings are eliminated with the purchase of
the remaining minority interest share.
(20) Net earnings and net earnings per common share from continuing
operations for the six month period ended June 30, 1997 and the year
ended December 31, 1996 exclude ($725,000) (($0.07) per share) and
($901,000) (($0.08) per share), respectively, for the effects of the
write-off of debt issuance costs incurred on the GGS Senior Credit
Facility upon repayment of that debt from the proceeds of the Offering.
Such amounts will be presented as extraordinary items in accordance
with GAAP.
(21) EBITDA consists of earnings before interest, taxes, minority interest,
depreciation and amortization. EBITDA is presented here not as a
measure of operating results, but rather as a measure of the Company's
cash flow and debt service ability, and should not be considered as an
alternative to net earnings and cash flows determined in accordance
with GAAP. Because the Company's ability to obtain dividends from its
insurance subsidiaries may be subject to certain restrictions, EBITDA
is not necessarily indicative of the Company's ability to service its
indebtedness.
(22) Adjusted EBITDA is comprised of EBITDA excluding realized gains or
losses on investment sales.
(23) In determining the pro forma ratio of earnings to fixed charges,
earnings are defined as earnings from continuing operations before
income taxes and fixed charges. Fixed charges consist of the total of
interest on all indebtedness and amortization of deferred debt issuance
costs.
(24) Policy, acquisition and general and administrative expenses for the
period prior to the Acquisition are increased by $77,000 for the year
ended December 31, 1996 to reflect amortization of the deferred loan
origination costs of $1,386,000 incurred related to the GGS Senior
Credit Facility. The debt issuance costs are amortized over six years,
the term of the GGS Senior Credit Facility.
(25) Policy, acquisition and general and administrative expenses for the
period prior to the Acquisition are increased by $30,000 for the year
ended December 31, 1996 to reflect amortization of the goodwill of
$2,217,000. Goodwill is amortized over a 25-year period on a
straight-line basis based upon management's estimate of the expected
benefit period.
(26) Policy, acquisition and general and administrative expenses for the
period prior to the Acquisition are decreased by $174,000 for the year
ended December 31, 1996 to reflect the elimination of management fees
charged by Superior's former parent, Fortis, for corporate expenses.
(27) Policy, acquisition and general and administrative expenses for the
period prior to the Formation Transaction are increased by $106,000 for
the year ended December 31, 1996 to reflect amortization of
organization costs of $1,597,000. Organizational costs are amortized
over a five-year period on a straight-line basis.
(28) Interest expense for the period prior to the Acquisition is increased
by $1,330,000 for the year ended December 31, 1996 to reflect the GGS
Senior Credit Facility financing of $48,000,000 related to the
Acquisition. The interest rate utilized was 8.31% based upon the actual
rate in 1996 after consideration of the interest rate swap.
(29) Interest expense for the period prior to the Initial Public Offering is
decreased by $719,000 for the year ended December 31, 1996 to reflect
the retirement of the certain indebtedness of the Company to Goran and
Granite Re aggregating $7,500,000 with a stated interest rate of 10%
which was repaid with the proceeds from the Initial Public Offering.
(30) Interest expense for the year ended December 31, 1996 is decreased by
$434,000 reflecting the interest incurred on a $7,500,000 note payable
to Bank at 9.25% (prime plus 1%) for the period from April 30, 1996 to
the closing of the Initial Public Offering when such debt was repaid.
(31) Minority interest for the period prior to the Formation Transaction has
been increased by $1,421,000 for the year ended December 31, 1996 to
reflect the 48% minority interest of the GS Funds in GGS Holdings.
(32) The weighted average shares outstanding have been adjusted to reflect
the 3,450,000 shares issued in the initial public offering, and have
been further increased by 280,000 shares for the $3.5 million dividend
paid to Goran from the proceeds of the Initial Public Offering, in
accordance with accounting rules which require such presentation for
purposes of pro forma earnings per share calculation.
44
SELECTED CONSOLIDATED FINANCIAL DATA
OF SYMONS INTERNATIONAL GROUP, INC.
The selected consolidated financial data presented below are derived
from the consolidated financial statements of the Company and its Subsidiaries.
Such financial statements for, and as of the end of, each of the years in the
three-year period ended December 31, 1996, have been audited by Coopers &
Lybrand L.L.P., independent accountants, and are included elsewhere in this
Prospectus. The selected consolidated financial data presented below for, and as
of the end of, each of the six month periods ended June 30, 1996 and 1997 are
derived from the unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus. The results of the operations of the
Company for the six months ended June 30, 1997 are not necessarily indicative of
the results of operations that may be expected for the full year. In the opinion
of management, the unaudited information includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for such periods. The information
set forth below should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto, included elsewhere in this
Prospectus.
The pro forma consolidated statement of operations data for the year
ended December 31, 1996 and for the six months ended June 30, 1997 present
results for the Company as if the Formation Transaction, the Acquisition, the
other Transactions, the Initial Public Offering, the Buyout Transaction and the
Offering had occurred as of January 1, 1996. The pro forma Consolidated Balance
Sheet of the Company gives effect to the Buyout Transaction and the Offering as
if they had occurred as of June 30, 1997.
45
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------------------------ -----------------------------------
Historical Historical
----------------------------------------------------------- -----------------------
(in thousands, except per share data)
Pro Pro
Forma Forma
1992 1993 1994 1995 1996 1996 (1) 1996 1997 1997 (1)
---- ---- ---- ---- ---- -------- ---- ---- --------
Consolidated
Statement of
Operations Data:
(2) (9)
Gross Premiums
Written $109,219 $88,936 $103,134 $124,634 $305,499 $349,492 $146,950 $279,065 $279,065
Net Premiums
Written 35,425 31,760 35,139 53,447 209,592 253,210 77,042 150,524 150,524
Net Premiums
Earned 35,985 31,428 32,126 49,641 191,759 231,146 59,066 136,012 136,012
Net Investment
Income 1,319 1,489 1,241 1,173 6,733 9,185 1,533 5,276 5,276
Other Income 0 886 1,632 2,170 9,286 11,503 4,062 10,791 10,791
Net Realized
Capital Gains/
(Losses) 486 (119) (159) (344) (1,015) (986) 228 1,684 1,684
--- ----- ----- ----- ------- ----- --- ----- -----
Total Revenues 37,790 33,684 34,840 52,640 206,763 250,848 64,889 153,763 153,763
------ ------ ------ ------ ------- ------- ------ ------- -------
Losses and loss
adjustment
expenses 27,572 25,080 26,470 35,971 137,109 163,824 45,275 103,293 103,293
Policy acquisition
and general and
administrative
expenses 7,955 8,914 5,801 7,981 42,013 55,132 12,283 30,397 31,151
Interest expense 459 996 1,184 1,248 3,938 11 1,261 2,744 38
--- --- ----- ----- ----- ---------- ----- ----- ---------
Total expenses 35,986 34,990 33,455 45,200 183,060 218,967 58,819 136,434 134,482
------ ------ ------ ------ ------- ------- ------ ------- -------
Earnings (loss)
before taxes,
discontinued
operations,
cumulative effect
of an accounting
change and
minority interest 1,804 (1,306) 1,385 7,440 23,703 31,881 6,070 17,329 19,281
Income taxes 996 83 (718) 2,619 8,046 11,383 1,854 6,183 7,024
--- -- ----- ----- ----- ------ ----- ----- -----
Earnings (loss)
before
discontinued
operations,
cumulative effect
of an accounting
change and
minority interest $808 $(1,389) $2,103 $4,821 $15,657 $20,498 $4,216 $11,146 $12,257
=== ======= ===== ===== ====== ====== ===== ====== ======
Net Earnings
(loss) (3) $817 $(323) $2,117 $4,821 $13,256 $12,162 $4,304 $9,586 $8,089
=== ===== ===== ===== ====== ====== ===== ===== =====
46
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------------------------ ----------------------------------
Historical Historical
----------------------------------------------------------- -----------------------
(in thousands, except per share data)
Pro Pro
Forma Forma
1992 1993 1994 1995 1996 1996 (1) 1996 1997 1997 (1)
---- ---- ---- ---- ---- -------- ---- ---- --------
Per common
share data:
Earnings (loss)
before
discontinued
operations,
extraordinary
item, cumulative
effect of an
accounting
change and
minority interest $0.12 ($0.20) $0.30 $0.69 $2.08 $1.91 $0.60 $1.05 $1.15
Net Earnings
(loss) $0.12 ($0.05) $0.30 $0.69 $1.76 $1.13 $0.61 $0.90 $0.76
Weighted average
shares outstanding 7,000 7,000 7,000 7,000 7,537 10,730 7,000 10,617 10,617
Other Data:
EBITDA (4) $3,259 $9,430 $29,835 $35,721 $7,552 $21,242 $21,242
Adjusted EBITDA
(5) $3,418 $9,774 $30,850 $36,707 $7,324 $19,558 $19,558
Ratio of earnings
to fixed changes
(6) 4.93x (0.31x) 2.17x 6.96x 6.79x 2.47x 5.67x 7.06x 2.97x
Ratio of EBITDA
to interest expense
and Distributions
on Preferred
Securities 2.78x 3.29x
Ratio of Adjusted
EBITDA to
interest expense
and Distributions
on Preferred
Securities (5) 2.86x 3.03x
Total Preferred
Securities to
EBITDA (5) 3.78x
Total Preferred
Securities to
Adjusted EBITDA
(5) 3.68x
GAAP Ratios:
(2) (7)
Loss and LAE
Ratio 76.6% 79.8% 82.4% 72.5% 71.5% 70.9% 76.7% 75.9% 75.9%
Expense Ratio 22.1% 28.4% 18.1% 16.1% 21.9% 23.9% 20.8% 22.4% 22.9%
----- ----- ----- ----- ----- ----- ----- ----- -----
Combined Ratio 98.7% 108.2% 100.5% 88.6% 93.4% 94.8% 97.5% 98.3% 98.8%
===== ====== ====== ===== ===== ===== ===== ===== =====
47
Six Months Ended
Year Ended December 31, June 30, 1997
--------------------------------------------------------------- ---------------------------
Historical
---------------------------------------------------------------
(in thousands, except per share data)
Pro
1992 1993 1994 1995 1996 Actual Forma
---- ---- ---- ---- ---- ------ -----
Consolidated Balance
Sheet Data: (2) (9)
Investments $27,941 $21,497 $18,572 $25,902 $168,137 $190,500 $214,728
Total assets 75,001 81,540 66,628 110,516 344,679 567,641 632,081
Losses and Loss
Adjustment Expenses 38,616 54,143 29,269 59,421 101,719 137,924 137,924
Total debt 11,528 9,341 10,683 11,776 48,000 44,872 ---
Minority interest:
Preferred Securities --- --- --- --- --- --- 135,000
Equity in net assets of
subsidiary 55 --- 16 --- 21,610 26,724 ---
Total shareholders' equity 1,193 2,219 4,255 9,535 60,900 71,900 73,327
Book value per share $0.17 $0.32 $0.61 $1.36 $5.83 $6.88 $7.02
Statutory Capital and
Surplus: (8)
Crop (IGF) $29,412 $36,760 $36,760
Nonstandard automobile
(Pafco and Superior) $75,233 $82,291 $82,291
- ---------------
(1) Results of operations of Superior for the years ended December 31, 1994 and
1995 and for the six months ended June 30, 1996 are presented herein in
"Selected Consolidated Historical Financial Data of Superior Insurance Company."
The pro forma consolidated statement of operations data for the year ended
December 31, 1996 and for the six months ended June 30, 1997 present results of
the Company as if the Formation Transaction, the Acquisition and the other
Transactions, the Initial Public Offering and the Buyout Transaction had
occurred as of January 1, 1996. The as adjusted consolidated balance sheet data
as of June 30, 1997 gives effect to the Buyout Transaction and Offering as if
they had occurred as of June 30, 1997. See "Unaudited Pro Forma Consolidated
Financial Statements" for a discussion of pro forma statement adjustments.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company" for a discussion of the
accounting treatment accorded to the crop insurance business.
48
(3) Pro forma net earnings (loss) and net earnings per common share for the
six month period ended June 30, 1997 and the year ended December 31,
1996 exclude ($725,000) (($0.07) per share) and ($901,000) (($0.08) per
share), respectively, for the assumed effects of the write-off of debt
issuance costs incurred on the GGS Senior Credit Facility upon
repayment of that debt from the proceeds of the offering. Such amounts
will be presented as extraordinary items in accordance with Generally
Accepted Accounting Principles.
(4) EBITDA consists of earnings before interest, taxes, minority interest,
depreciation and amortization. EBITDA is presented here not as a
measure of operating results, but rather as a measure of the Company's
cash flow and debt service ability, and should not be considered as an
alternative to net earnings and cash flows determined in accordance
with GAAP. Because the Company's ability to obtain dividends from its
insurance subsidiaries may be subject to certain restrictions, EBITDA
is not necessarily indicative of the Company's ability to service its
indebtedness.
(5) Adjusted EBITDA is comprised of EBITDA excluding realized gains or
losses on sales of investments.
(6) In determining the pro forma ratio of earnings to fixed charges,
earnings are defined as earnings from continuing operations before
income taxes and fixed charges. Fixed charges consist of the total of
interest and distributions on all indebtedness and Preferred Securities
and amortization of deferred debt issuance costs.
(7) The Loss and LAE Ratio is calculated by dividing losses and loss
adjustment expenses by Net Premiums Earned. The Expense Ratio is
calculated by dividing policy acquisition and general and
administrative expenses by Net Premiums Earned. The Combined Ratio is
the sum of the Loss and LAE and Expense Ratios. As a result of the
accounting treatment accorded to the MPCI business, the Company's GAAP
Loss and LAE, Expense and Combined Ratios are not comparable to the
ratios for other property and casualty insurers.
(8) Statutory capital and surplus is calculated under SAP and is relevant
for insurance regulatory purposes in determining the amount of business
an insurance company may write.
Statutory capital and surplus for Pafco and Superior individually is as
follows:
(in thousands)
-------------------------------------------------------------
December 31, June 30, As Adjusted,
1996 1997 June 30, 1997
------------------ --------------- -----------------
Pafco $18,112 $17,273 $17,273
Superior $57,121 $65,018 $65,018
(9) The results of operation and financial condition of the Company do not
include any amounts related to Superior prior to the Acquisition.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY
Certain Accounting Policies for Crop Insurance Operations
The majority of the Company's crop insurance business consists of MPCI.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from more traditional property and casualty insurance lines.
Farmers may purchase "CAT Coverage" (the minimum available level of MPCI
coverage) upon payment of a fixed administrative fee of $50 per policy (the "CAT
Coverage Fee") instead of a premium. This fee is included in other income.
Commissions paid to agents to write CAT policies are partially offset by the CAT
Coverage Fee. For purposes of the profit-sharing formula under the MPCI program
referred to below, the Company is credited with an imputed premium (its "MPCI
Imputed Premium") for all CAT Coverage policies it sells, determined in
accordance with the profit-sharing formula established by the Federal Crop
Insurance Corporation ("FCIC"). For income statement purposes under GAAP, Gross
Premiums Written consist of the aggregate amount of premiums paid by farmers for
"Buy-up Coverage" (MPCI coverage in excess of CAT Coverage), and any related
federal premium subsidies, but do not include any MPCI Imputed Premium credited
on CAT Coverage. By contrast, Net Premiums Written and Net Premiums Earned do
not include any MPCI Premiums or premium subsidies, all of which are deemed to
be ceded to the United States Government as reinsurer. The Company's profit or
loss from its MPCI business is determined after the crop season ends on the
basis of a complex profit-sharing formula established by federal regulation and
the FCIC. For GAAP income statement purposes, any such profit or loss sharing
earned or payable by the Company is treated as an adjustment to commission
expense and is included in policy acquisition and general and administrative
expenses. Amounts receivable from the FCIC are reflected on the Company's
consolidated balance sheet as reinsurance recoverables.
The Company also receives from the FCIC (i) an expense reimbursement
payment equal to a percentage of Gross Premiums Written for each Buy-up Coverage
policy it writes (the "Buy-up Expense Reimbursement Payment"), (ii) an LAE
reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT
Coverage policy it writes (the "CAT LAE Reimbursement Payment") and (iii) a
small excess LAE Reimbursement Payment of two hundredths of one percent (0.02%)
of MPCI Retention to the extent the Company's MPCI Loss Ratios on a per state
basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For
GAAP income statement purposes, the Buy-up Expense Reimbursement Payment is
treated as a contribution to income and reflected as an offset against policy
acquisition and general and administrative expenses. The CAT LAE Reimbursement
Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement
purposes, recorded as an offset against LAE, up to the actual amount of LAE
incurred by the Company in respect of such policies, and the remainder of the
payment, if any, is recorded as other income.
In 1996, the Company instituted a policy of recognizing (i) 35% of its
estimated MPCI Gross Premiums Written for each of the first and second quarters,
(ii) commission expense at a rate of 16% of MPCI Gross Premiums Written and
(iii) Buy-up Expense Reimbursement at a rate of 31% of MPCI Gross Premiums
Written along with normal operating expenses incurred in connection with premium
writings. In the third quarter, if a sufficient volume of policyholder acreage
reports have been received and processed by the Company, the Company's policy is
to recognize MPCI Gross Premiums Written for the first nine months based on a
re-estimate. If an insufficient volume of policies have been processed, the
Company's policy is to recognize 20% of its full year estimate of MPCI Gross
Premiums Written in the third quarter. The remaining amount of MPCI Gross
Premiums Written is recognized in the fourth quarter, when all amounts are
reconciled. In prior years, recognition of MPCI Gross Premiums Written was 30%,
30%, 30% and 10%, for the first, second, third and fourth quarters,
respectively. Commencing with its June 30, 1995 financial statements, the
Company also began recognizing MPCI underwriting gain or loss during the first
and second quarters, as well as the third quarter, reflecting the Company's best
estimate of the amount of such gain or loss to be recognized for the full year,
based on, among other things, historical results, plus a provision for adverse
developments. In the fourth quarter, a reconciliation amount is recognized for
the underwriting gain or loss based on final premium and loss information.
51
Selected Segment Data of the Company
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate overhead, or commercial
insurance operations, nor does it include the results of operations of Superior
prior to May 1, 1996.
Year Ended December 31, Six Months Ended June 30,
------------------------------------------ ---------------------------
(in thousands)
1994 1995 1996 (1) 1996 1997 (1)
---- ---- ---- ---- ----
Nonstandard Automobile Insurance Operations:
Gross Premiums Written (2 ) $45,593 $49,005 $187,176 $62,290 $165,547
Net Premiums Written (2) 28,114 37,302 186,579 62,089 133,843
Net Premiums Earned (2 ) 25,390 34,460 168,746 52,844 128,244
Net investment income 904 624 6,489 1,435 5,094
Other income 1,545 1,787 7,578 2,333 7,204
Net realized capital gains (losses) (55) (508) (1,014) 212 1,684
---- ----- ------- --- -----
Total revenues 27,784 36,363 181,799 56,824 142,226
------ ------ ------- ------ -------
Losses and Loss Adjustment Expenses 18,303 25,423 124,385 38,831 99,024
Policy acquisition and general and
administrative expenses 8,709 12,929 46,796 15,774 35,492
Interest and amortization of intangibles 0 0 3,184 696 2,711
- - ----- --- -----
Total expenses 27,012 38,352 174,365 55,301 137,227
------ ------ ------- ------ -------
Earnings (loss) before income taxes $772 $(1,989) $7,434 $1,523 $4,999
=== ======= ===== ===== =====
GAAP Ratios (Nonstandard Automobile Only)
Loss and LAE Ratio 72.1% 73.8% 73.7% 73.5% 77.2%
Expense Ratio, net of billing fees 28.2% 32.3% 25.1% 25.4% 22.1%
----- ----- ----- ----- -----
Combined Ratio 100.3% 106.1% 98.8% 98.9% 99.3%
====== ====== ===== ===== =====
Crop Insurance Operations: 1(3)
Gross Premiums Written (4) $54,455 $70,374 $110,059 $80,537 $108,356
Net Premiums Written (4) 4,565 11,608 23,013 14,953 16,680
Net Premiums Earned (4) 4,565 11,608 23,013 6,222 7,768
Net Investment Income 339 674 181 96 92
Other income 73 384 1,672 1,148 3,587
Net realized capital gain (loss) (104) 164 (1) 16 ---
----- --- --- -- ---
Total revenues 4,873 12,830 24,865 7,482 11,447
----- ------ ------ ----- ------
Losses and Loss Adjustment Expenses 7,031 8,629 12,724 6,444 4,269
Policy acquisition and general and
administrative expenses (4,802) (7,466) (6,095) (4,266) (6,026)
Interest expense 492 627 551 120 24
--- --- --- --- --
Total expenses 2,721 1,790 7,180 2,298 (1,733)
----- ----- ----- ----- -------
Earnings (loss) before income taxes $2,152 $11,040 $17,685 $5,184 $13,180
===== ====== ====== ===== ======
Statutory Capital and Surplus:
Pafco (5) $7,848 $11,875 $18,112 $14,872 $17,273
IGF $4,512 $9,219 $29,412 $11,559 $36,760
Superior $43,577 $49,277 $57,121 $48,036 $65,018
- ---------------
(1) The nonstandard automobile insurance operations include the results of
operations of Superior subsequent to the Acquisition.
(2) 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.
(3) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company."
(4) Crop hail insurance premiums are primarily written in the second and
third calendar quarters.
(5) The statutory surplus of Pafco includes Pafco's share of IGF's
statutory surplus prior to April 30, 1996. Pafco owned the following
percentages of IGF at December 31 of each of the following years:
1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF to
SIG. Prior to the Transfer, IGF also paid a dividend to Pafco in the
form of cash of $7,500,000 and a promissory note of $3,500,000.
51
Six Months Ended June 30, 1997 and 1996
Overview
For the three and six months ended June 30, 1997, the Company recorded
net earnings of $3,677,000 and $9,586,000 or $0.35 and $0.90 per share. This is
approximately a 35.3% and 123% increase from 1996 comparable amounts of
$2,718,000 and $4,304,000 or $0.39 and $0.61 per share. The improved earnings
for the six months ended were attributable to continued premium growth and
improved expense ratios of the nonstandard automobile segment and continued
growth and profit in the crop segment. The improvement for the three months
ended relates to the growth and profitability of the crop segment. The crop
segment demonstrated enhanced profitability due to higher volume as well as
normal crop underwriting expectations.
Gross Premiums Written
Consolidated Gross Premiums Written increased 41.4% in the second
quarter and 89.9% year-to-date due to growth in both the nonstandard auto and
crop segments. Gross Premiums Written for the nonstandard auto segment increased
104% in the second quarter and 166% year-to-date. Such increase was due
primarily to Gross Premiums Written from Superior of $71,921,000 and
$128,846,000 for the three and six months ended June 30, 1997, as compared to
$25,202,000 in 1996 subsequent to its acquisition on April 30, 1996. While a
portion of this increase relates to four additional months of premium in 1997 of
Superior, additional premium growth relates to internal growth due to improved
service, certain product improvements and tougher uninsured motorist laws in
states such as California and Florida. Such increase was primarily due to volume
rather than rate increases, although the Company adjusts rates on an ongoing
basis. Gross Premiums Written for the crop segment decreased 4.2% in the second
quarter and increase 34.5% year-to-date. The year-to-date increase was due to
continued industry privatization and aggressive marketing efforts, while the
decrease in the second quarter is a reflection of timing of processing of
acreage reports. Remaining Gross Written Premiums represent commercial business
which was ceded 100% effective January 1, 1996 to an affiliate, Granite
Reinsurance Company Ltd.
Net Premiums Written
Net Premiums Written increased in the second quarter and year-to-date
for 1997 as compared to 1996 due to the growth in Gross Premiums Written offset
by quota share Reinsurance.
In 1997, the Company ceded $15,876,000 and $31,353,000 of nonstandard
automobile premiums during the second quarter and year-to-date as part of a 20%
quota share treaty instituted January 1, 1997. No such treaty was in effect
during 1996. In 1997, the Company ceded $6,903,000 and $11,805,000 of crop hail
premiums during the second quarter and year-to-date as part of a 40% quota share
treaty instituted January 1, 1997. In 1996, crop hail premiums were ceded at a
rate of 10%. The nonstandard automobile quota share Reinsurance treaty is not
expected to continue in effect subsequent to the Offering of the Preferred
Securities.
Net Premiums Earned
Net Premiums Earned increased for the three and six months ended June
30, 1997 as compared to the corresponding periods of the prior year, reflecting
the strong growth in Gross Written Premiums offset by the effects of the
nonstandard automobile and crop hail quota share treaties.
Net Investment Income
Net investment income increased $1,863,000 and $3,743,000 for the three
and six months ended June 30, 1997 as compared to the corresponding periods of
the prior year. Such increases were due primarily to investment income from
Superior and greater invested assets.
52
Other Income
Other income increased $2,668,000 and $6,729,000 for the three and six
months ended June 30, 1997 as compared to the corresponding periods of the prior
year. Such increases were due to billing fee income on nonstandard automobile
business at Superior and due to an increase in the in-force policy count. There
was also an increase in the receipt of CAT Coverage Fees and CAT LAE
Reimbursement Payments due to higher premium volume.
Net Realized Capital Gains
Realized gains of $1,684,000 in 1997 were due primarily to a change in
equity managers and a repositioning of the portfolio.
Loss and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 82.5%
and 77.2% for the three- and six- months ended June 30, 1997 as compared to
77.2% and 73.5% for the corresponding periods in 1996. The Company, as part of
management's actions to reduce costs and combine operations of the nonstandard
automobile division, combined the claims management as well as the reserving
philosophies of Superior Insurance Company with Pafco General Insurance Company,
the two nonstandard automobile insurance companies in the Group. In order to
align the different reserving philosophies of its two subsidiaries, the Company
adopted the more conservative methodology for the combined business which
required an increase of reserves of $5.3 million. This adjustment increased the
second quarter and year-to-date 1997 loss ratio by 8.1% and 4.1%. While the
Company believes those actions were necessary, the establishment and monitoring
of reserve levels are a highly subjective process involving numerous estimates
and assumptions. Therefore, actual results may differ from current estimates.
The Crop Hail Loss Ratio in 1997 is 54.2% compared to 62.0% in 1996.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses have
increased as a result of the increased volume of business produced by the
Company combined with a higher percentage of net premiums retained and offset by
increases in reinsurance commission income. Policy acquisition and general and
administrative expenses rose to $17,514,000 and $30,397,000 or 24.0% and 22.4%
of Net Premium Earned for the three and six months ended June 30, 1997 compared
to $8,614,000 and $12,283,000 or 19.0% and 20.8% of Net Premium Earned in the
corresponding periods of 1996. Such increase was due to a higher mix of
nonstandard automobile premiums in 1997 as compared to 1996. The Expense Ratio,
net of billing fees, for the nonstandard automobile segment improved to 21.6%
and 22.1% for the three and six months ended June 30, 1997 as compared to 22.6%
and 25.4% for the corresponding periods in 1996, due to technological and
operational efficiencies, economies of scale and tighter expense controls.
Due to the accounting for the crop insurance segment, operating
expenses for the three and six months ended June 30, 1997 includes a
contribution to earnings of $1,260,000 and $6,026,000, as compared to comparable
amounts of $2,433,000 and $4,266,000 for the corresponding periods in 1996. Such
increase was due to greater Buy-up Expense Reimbursement Payments and MPCI
underwriting gain due to increased premium volumes.
The nonstandard automobile quota share treaty reduced premiums earned,
losses and LAE incurred and policy acquisition and general administrative
expenses by $12,442,000, $8,631,000 and $3,501,000, and $15,812,000,
$10,912,000, and $4,505,000, respectively, for the three and six months ending
June 30, 1997, for a net pre-tax earnings reduction of $310,000 and $395,000 in
the three and six months ending June 30, 1997. Reduction in expenses reflects
ceding commission income net of a deferred acquisition cost adjustment.
Interest Expense
Interest expense increased $232,000 and $1,483,000 for the three and
six months ended June 30, 1997 as compared to the corresponding periods in the
prior year due primarily to interest incurred since April 30, 1996 on the
53
GGS Senior Credit Facility. The GGS Senior Credit Facility will be repaid with
the proceeds from the Offering of the Preferred Securities.
Income Tax Expense
Income tax expense was 34.8% and 35.7% of pre-tax income for the three
and six months ended June 30, 1997 as compared to 28.3% and 30.5% in 1996. The
increase was due to the Company's selling of its tax exempt investments in the
second half of 1996 as part of its restructuring of the investment portfolios.
Year Ended December 31, 1995 Compared with 1994
Gross Premiums Written
Gross Premiums Written in 1995 increased 20.8%, to $124,634,000 from
$103,134,000 in 1994 reflecting an increase in Gross Premiums Written of 29.2%
in crop insurance and 7.5% in nonstandard automobile insurance. The increase in
Gross Premiums Written for the nonstandard automobile insurance segment was
primarily attributable to an increase in policies in-force of 13.4%. The Company
experienced a greater percentage increase in certain states due to the
introduction of product improvements. In Colorado, Policies In-Force increased
by 46% in 1995. In that state, the Company increased the number of its
deductible options and implemented more favorable pricing for certain personal
injury protection coverages. The crop insurance segment experienced growth in
both the crop hail and MPCI business. The increase in crop hail Gross Premiums
Written to $16,966,000 in 1995 from $10,130,000 in 1994 was due primarily to
increased opportunities to market crop hail coverages to farmers as a result of
the increases in sales of MPCI products (both Buy-up Coverage and CAT Coverage)
due to the 1994 Reform Act. The net increase in MPCI Gross Premiums Written to
$53,408,000 in 1995 from $44,325,000 in 1994 resulted from an increase in the
number of acres insured in 1995 following the 1994 Reform Act.
Net Premiums Written
The Company's Net Premiums Written in 1995 increased 52.1%, to
$53,447,000 from $35,139,000 in 1994 due to an increase in Gross Premiums
Written and a reduction in premiums ceded to reinsurers under quota share
reinsurance for both nonstandard automobile and crop hail insurance. The
percentage of the Company's nonstandard automobile premiums ceded under its
quota share reinsurance treaty was reduced to 25% from an effective percentage
ceded of 38% in 1994 as a result of a reduction in the Company's need for the
additional capacity provided by this reinsurance.
Net Premiums Earned
The Company's Net Premiums Earned in 1995 increased 54.5% reflecting an
increase in Net Premiums Written and a reduction in quota share reinsurance on
the nonstandard automobile insurance business. The ratio of Net Premiums Earned
to Net Premiums Written for nonstandard automobile insurance in 1995 remained
relatively unchanged at 92.4% as compared to 90.3% in 1994.
Net Investment Income
Net investment income in 1995 decreased 5.5% principally due to a
decrease in the average yield earned on invested assets to 5.2% in 1995 from
6.0% in 1994. Although market interest rates increased in 1995, the average
yield on investments declined primarily as a result of the repositioning of the
Company's investment portfolio, begun in the latter part of 1995, into a higher
concentration in fixed income securities, particularly including shorter term
securities. The decrease in the average yield was partially offset by an
increase in average invested assets to $22,653,000 in 1995 from $20,628,000 in
1994.
54
Other Income
The Company's other income in 1995 increased 34.0% as a result of
increased billing fee income of $351,000 on nonstandard automobile business due
primarily to the increase in the in-force policy count as described above, with
the remainder due primarily to the receipt of CAT Coverage Fees and CAT LAE
Reimbursement Payments following the 1995 introduction of CAT Coverages.
Net Realized Capital Gain (Loss)
The Company recorded a net realized capital loss of $344,000 from the
sale of investments in 1995 as compared to a net realized capital loss of
$159,000 in 1994. The net realized capital loss in 1995 was the result of
appointing a new investment manager in October 1995 and the resulting
repositioning of the Company's investment portfolio described above, as well as
certain write-downs taken on investments with an other than temporary decline in
estimated fair value.
Losses and LAE
The nonstandard automobile segment Loss and LAE Ratio increased to
73.8% in 1995 from 72.1% in 1994 primarily due to increased repair costs for
automobile parts resulting from the implementation of laws prohibiting use of
reconditioned parts as well as general inflationary pressures on costs of
settling claims. The crop hail Loss and LAE Ratio decreased to 74.3% in 1995
from 154.0% in 1994 due to more favorable weather conditions than in the prior
year. Crop insurance Losses and LAE were also impacted by net MPCI Excess LAE
Reimbursement Payment of $0 in 1995 and $936,000 in 1994, after reduction for
LAE reimbursements of $3,324,000 in 1995 compared to $107,000 in 1994. These
reimbursements are reflected in Losses and LAE up to the actual amount of LAE
incurred with any excess reflected in other income.
Policy Acquisition and General and Administrative Expenses
The Company's policy acquisition and general and administrative
expenses in 1995 increased 37.6%, to $7,981,000 from $5,801,000 in 1994. The
nonstandard automobile segment Expense Ratio increased to 37.5% in 1995 from
34.3% in 1994 primarily due to a $2,390,000, or 44%, reduction in ceding
commission income in 1995 arising from reduced reliance on quota share
reinsurance. As a result of the accounting for the crop insurance segment, such
segment experienced a contribution to income reflected in the policy acquisition
and general and administrative expense line item of $7,466,000 in 1995 compared
to a contribution to income of $4,802,000 in 1994. This increase in contribution
resulted from an increase in Buy-Up Expense Reimbursement Payments of $2,521,000
due to higher Gross Premiums Written in 1995, together with an increase in the
MPCI underwriting gain of $6,396,000.
Interest Expense
The Company's interest expense in 1995 increased 5.4% as a result of
increased line of credit borrowings by IGF due to an increase in cash flow
requirements and an increase in applicable interest rates. This was partially
offset by interest savings in 1995 over 1994 resulting from debt principal
repayments and the retirement of a Company term loan in June 1995.
Income Tax Expense
The effective tax rate in 1995 was 35.2% as compared to an effective
tax rate of (52.2%) in 1994. The tax benefit in 1994 was due to a $1,492,000
reduction in the valuation allowance the Company had previously established for
its deferred tax assets.
55
Liquidity and Capital Resources
The primary source of funds available to the Company as a holding
company are dividends from its primary subsidiaries, IGF, IGF Holdings and GGS
Management. Subsequent to this Offering and the repayment of the GGS Senior
Credit Facility and purchase of the remaining 48% minority interest, GGS
Management will have no dividend restrictions. The Company also receives
$150,000 quarterly pursuant to an administration agreement with IGF to cover the
costs of executive management, accounting, investing, marketing, data processing
and reinsurance.
GGS Management collects billing fees charged to policyholders of Pafco
and Superior who elect to make their premium payments in installments. GGS
Management also receives management fees under its management agreement with
Pafco and Superior. When the Florida Department approved the acquisition of
Superior by GGS Holdings, it prohibited Superior from paying any dividends
(whether extraordinary or not) for four years from the date of Acquisition
without the prior written approval of the Florida Department, and extraordinary
dividends, within the meaning of the Indiana Insurance Code, cannot be paid by
Pafco without the prior approval of the Indiana Commissioner. The management
fees charged to Pafco and Superior by GGS Management are subject to review by
the Indiana and Florida Departments. See "Business -- Regulation."
The nonstandard automobile insurance Subsidiaries' primary source of
funds are premiums, investment income and proceeds from the maturity or sale of
invested assets. Such funds are used principally for the payment of claims,
operating expenses (primarily management fees), commissions, dividends and the
purchase of investments. There is variability to cash outflows because of
uncertainties regarding settlement dates for liabilities for unpaid losses.
Accordingly, the Company maintains investment programs intended to provide
adequate funds to pay claims without forced sales of investments. As claim
payments tend to lag premium receipts and due to the growth in premium volume
the Company has experienced an increase in its investment portfolio and has not
experienced any problems with meeting its obligations for claims payments or
management fees.
The Company is also in the process of preparing a management agreement
between IGF and IGF Holdings similar to that for the nonstandard automobile
operations where IGF will pay IGF Holdings certain management fees for services
rendered by IGF Holdings for IGF. IGF Holdings has no limitations on dividends
to the Company thus providing a cash flow stream other than dividends from IGF
for amounts in excess of IGF Holdings's expenses. As of December 31, 1997, IGF
has the ability to pay $12,122,000 in dividends without prior regulatory
approval.
Cash flows in the Company's MPCI business differ from cash flows from
certain more traditional lines. The Company pays insured losses to farmers as
they are incurred during the growing season, with the full amount of such
payments being reimbursed to the Company by the federal government within three
business days. MPCI premiums are not received from farmers until covered crops
are harvested. Such premiums are required to be paid over in full to the FCIC by
the Company, with interest, if not paid by a specified date in each crop year.
During 1996, IGF continued the practice of borrowing funds under a
revolving line of credit to finance premium payables to the FCIC on amounts not
yet received from farmers (the "IGF Revolver"). The maximum borrowing amount
under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the
maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a
weighted average interest rate of 6.0%, 8.1%, 9.7% and 8.6%, in 1993, 1994, 1995
and 1996, respectively. IGF did not borrow on this line in the first quarter of
1997. These payables to the FCIC accrue interest at a rate of 15%, as do the
receivables from farmers. By utilizing the IGF Revolver, which bears interest at
a floating rate equal to the prime rate plus .25%, IGF avoids incurring interest
expense at the rate of 15% on interest payable to the FCIC while continuing to
earn 15% interest on the receivables due from the farmer. The IGF Revolver
contains certain covenants which restrict IGF's ability to (i) incur
indebtedness, (ii) declare dividends or make any capital distribution upon its
stock whether through redemption or otherwise and (iii) make loans to others,
including affiliates. The IGF Revolver also contains other customary covenants
which, among other things, restricts IGF's ability to participate in mergers,
acquire another enterprise or participate in the organization or creation of any
other business entity. At December 31, 1996, $7,000,000 remains available under
the IGF Revolver.
56
Net cash provided by operating activities in 1997 aggregated
$26,510,000 compared to $7,982,000 in 1996. This increase in funds provided was
caused by additional cash of $4,690,000 from net earnings adjusted for non-cash
expenses and realized gains or losses, continued premium growth and the normal
receipt of funds from the FCIC in the first quarter on the crop insurance
operations.
Net cash used in investing activities decreased from $82,579,000 in
1996 to $18,870,00 in 1997 reflecting the acquisition of Superior in 1996 offset
in part by the application of funds received from operating activities. The
proceeds from sales of equity securities of $16,531,000 in 1997 reflects a
change in investment managers and a restructuring of the portfolio rather than a
liquidation for operating cash needs.
In 1997, financing activities used cash of $2,406,000 compared to cash
provided of $72,286,000 in 1996. The Company paid principal of $3,128,000 on its
Term Debt as scheduled. The contribution from the GS Funds of $2,304,000
represents a contribution to GGS Holdings that was ultimately contributed to the
insurance subsidiaries for surplus. The Company also contributed cash to
maintain its 52% share. The crop insurance segment had no need to borrow funds
on its revolver in 1997 due to the proceeds it received from the initial public
offering and continued growth and profitable operations.
Net cash provided by operating activities in 1996 was $10,003,000
compared to $9,654,000 in 1995 for an increase of $349,000. This increase was
due to improved profitability and growth in written premiums. Loss payments in
the nonstandard automobile insurance business tend to lag behind receipt of
premiums thus providing cash for operations. Net cash provided by operating
activities in 1995 was $9,654,000 compared to net cash used by operating
activities of $3,302,000 in 1994. Operations in 1995 provided an additional
$12,956,000 in cash compared to 1994 due to additional net earnings of
$2,704,000 and cash flow provided of $5,109,000 relating to premium receipts and
loss payments, including effects of reinsurance, due primarily to growth in
operations with the remainder due to timing of tax and other liability payments.
Net cash used in investing activities increased from $8,835,000 in 1995
to $92,769,000 in 1996. Included in 1996 was a $66,590,000 use of cash for the
Acquisition. The remaining increase in cash used in investing activities in 1996
related to the growth in investments due to increased cash provided by operating
activities. Net cash of $8,835,000 was used in investing activities in 1995
compared to net cash provided by investing activities in 1994 of $1,473,000. The
increase in the use of cash in 1995 over 1994 primarily relates to investing of
excess funds generated by additional operating earnings in fixed income
securities. Due to the nature of insurance operations, the Company does not have
a significant amount of expenditures on property and equipment.
The primary items comprising the $93,550,000 of cash provided by
financing activities in 1996 were the $48,000,000 of proceeds from the GGS
Senior Credit Facility, $21,200,000 minority interest investment received as
part of the formation of GGS Holdings and the funding of the Acquisition and
$37,969,000 of proceeds from the Initial Public Offering.
Cash provided or used by financing activities in 1995 and 1994
primarily related to activity in the Company's line of credit for its crop
segment.
At December 31, 1996 the Company was either in compliance with or
obtained waivers for violations of debt covenants. See "Consolidated Financial
Statements of the Company" for further information.
The Company believes cash flows in the nonstandard automobile segment
from premiums, investment income and billing fees are sufficient to meet that
segment's obligations to policyholders, operating expenses and debt service for
the foreseeable future. This is due primarily to the lag time between receipt of
premiums and claims payments. Therefore, the Company does not anticipate
additional borrowings for this segment other than in the event of an
acquisition. The Company also believes cash flows in the crop segment from
premiums and expense reimbursements are sufficient to meet the segment's
obligations for the foreseeable future. Due to the more seasonal nature of the
crop segment's operations, it may be necessary to obtain short term funding at
times during a calendar year by drawing on
57
an existing line of credit. Except for this short term funding and normal
increases therein resulting from an increase in the business in force, the
Company does not anticipate any significant short or long term additional
borrowing needs for this segment. Accordingly, while there can be no assurance
as to the sufficiency of the Company's cash flow in future periods, the Company
believes that its cash flow will be sufficient to meet all of the Company's
operating expenses and debt service for the foreseeable future and, therefore,
does not anticipate additional borrowings except as may be necessary to finance
acquisitions.
While GAAP shareholders' equity was $60,900,000 at December 31, 1996,
it does not reflect the statutory equity upon which the Company conducts its
various insurance operations. Pafco, Superior and IGF individually had statutory
surplus at December 31, 1996 of $18,112,000, $57,121,000 and $29,412,000,
respectively.
Effects of Inflation
Due to the short term that claims are outstanding in the two product
lines the Company underwrites, inflation does not pose a significant risk to the
Company.
Primary Differences Between GAAP and SAP
The financial statements contained herein have been prepared in
conformity with Generally Accepted Accounting Principles ("GAAP") which differ
from statutory accounting practices ("SAP") prescribed or permitted for
insurance companies by regulatory authorities in the following respects: (i)
certain assets are excluded as "Nonadmitted Assets" under statutory accounting;
(ii) costs incurred by the Company relating to the acquisition of new business
are expensed for statutory purposes, (iii) the investment in wholly owned
subsidiaries is consolidated for GAAP rather than valued on the statutory equity
method. The net income or loss and changes in unassigned surplus of the
subsidiaries is reflected in net income for the period rather than recorded
directly to unassigned surplus, (iv) fixed maturity investments are reported at
amortized cost or market value based on their National Association of Insurance
Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment
expenses and unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes, (vi) deferred income taxes are not
recognized on a statutory basis and (vii) credits for reinsurance are recorded
only to the extent considered realizable. Under SAP, credit for reinsurance
ceded is allowed to the extent the reinsurers meet the statutory requirements of
the Insurance Departments of the States of Indiana and Florida, principally
statutory solvency.
New Accounting Standards
The Company has adopted the provisions of SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and SFAS No. 123, "Accounting for Stock-Based Compensation." The Company is
to adopt SFAS No. 128, "Earnings Per Share" by December 31, 1997. There was no
material impact on the consolidated financial statements from adoption of these
statements. Refer to Note 1 to the Company's "Consolidated Financial
Statements."
The National Association of Insurance Commissioners ("NAIC") is
considering the adoption of a recommended statutory accounting standard for crop
insurers, the impact of which is uncertain since several methodologies are
currently being examined. Although the Indiana Department has permitted the
Company to continue, for its statutory financial statements through June 30,
1997, its practice of recording its MPCI business as 100% ceded to the FCIC with
net underwriting results recognized in ceding commissions, the Indiana
Department has indicated that in the future it will require the Company to adopt
the MPCI accounting practices recommended by the NAIC or any similar practice
adopted by the Indiana Department. Since such a standard would be adopted
industrywide for crop insurers, the Company would also be required to conform
its future GAAP financial statements to reflect the new MPCI statutory
accounting methodology and to restate all historical GAAP financial statements
consistent with this methodology for comparability. The Company cannot predict
what accounting methodology will eventually be implemented or when the Company
will be required to adopt such methodology. The Company anticipates that any
such new crop accounting methodology will not affect GAAP net income.
58
The NAIC currently has a project under way to codify SAP, as existing
SAP does not address all accounting issues and may differ from state to state.
Upon completion, the codification is expected to replace prescribed or permitted
SAP in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the codification is uncertain at this
time, yet implementation could be required as early as January 1, 1999. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting may, however, materially impact
statutory capital and surplus.
59
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
SUPERIOR INSURANCE COMPANY
The following table presents historical data of Superior and its
subsidiaries prior to its acquisition by the Company.
Six Months Ended
(in thousands) Year Ended December 31, June 30,
------------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Consolidated Statement of
Operations Data:
Gross Premiums Written $115,660 $112,906 $94,756 $42,915 $69,119
Net Premiums Written 115,294 112,515 94,070 42,515 68,707
Net Premiums Earned 118,136 112,837 97,614 50,053 62,739
Net investment income 8,170 7,024 7,093 4,161 3,476
Other income 5,879 3,344 4,171 1,692 3,092
Net realized capital gains (losses) 3,559 (200) 1,954 711 2,104
----- ----- ----- --- -----
Total revenues 135,744 123,005 110,832 56,617 71,411
Losses and Loss Adjustment
Expenses 85,902 92,378 72,343 38,129 45,963
Policy acquisition and general and
administrative expenses 36,292 38,902 32,705 17,212 17,106
------ ------ ------ ------ ------
Total expenses 122,194 131,280 105,048 55,341 63,067
------- ------- ------- ------ ------
Income (loss) before income taxes,
and a cumulative effect of a change
in accounting principle $13,550 $(8,275) $5,784 $1,276 $8,344
Income taxes 3,981 (3,800) 1,649 161 2,313
----- ------- ----- --- -----
Income (loss) before cumulative
effect of a change in accounting
principle 9,569 (4,475) 4,135 1,115 6,031
Cumulative effective of a change in
accounting principle 1,389 --- --- --- ---
----- --- --- --- ---
Net income (loss) $10,958 $(4,475) $4,135 $1,115 $6,031
GAAP Ratios: (1)
Loss and LAE Ratio 72.7% 81.9% 74.1% 76.2% 73.3%
Expense Ratio 30.7% 34.5% 33.5% 34.4% 27.3%
----- ----- ----- ----- -----
Combined Ratio 103.4% 116.4% 107.6% 110.6% 110.6%
====== ====== ====== ====== ======
- ---------------
(1) The Loss and LAE Ratio is calculated by dividing Losses and Loss
Adjustment Expenses by Net Premiums Earned. The Expense Ratio is
calculated by dividing the sum of policy acquisition and general and
administrative expenses and Interest Expense by Net Premiums Earned.
The Combined Ratio is the sum of the Loss and LAE and Expense Ratios.
60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SUPERIOR
On April 30, 1996, Superior was acquired by GGS Holdings. As a result
of the Acquisition, certain financial information relating to Superior's
nonstandard business in respect of periods prior to consummation of the
Acquisition will not be comparable to corresponding financial information for
subsequent periods. The acquisition of Superior was accounted for under the
purchase method of accounting and was recorded as follows (in thousands):
Assets Acquired:
Invested assets $118,665
Receivables 34,933
Deferred acquisition costs 7,925
Other assets 2,082
-----------------
Total 163,605
-----------------
Liabilities Assumed:
Unpaid Losses and LAE 44,423
Unearned premiums 45,280
Other liabilities 10,863
-----------------
Total 100,566
-----------------
Net assets acquired 63,039
Purchase price 66,590
Excess purchase price 3,161
Less amounts allocated to deferred income taxes
on unrealized gains on investments 1,334
-----------------
Goodwill $2,217
=================
Goodwill is amortized over a 25-year period on a straight-line basis
based upon management's estimate of the expected benefit period.
61
The Company's results from operations for the six months ended June 30,
1996 include the results of Superior subsequent to April 30, 1996 as follows (in
thousands):
Gross Premiums $25,202
============
Net Premiums Earned $23,429
Net investment and other income 2,060
------------
Total Revenue 25,489
------------
Losses and LAE 18,804
Policy acquisition and general and
administrative expenses 6,149
------------
Total Expenses 24,953
------------
Income before taxes and minority interest 536
Income taxes 182
------------
Income before minority interest 354
Minority interest 169
------------
Net Income $185
============
Amortization includes goodwill, as previously discussed, and deferred
debt and organizational costs of approximately $1,900,000 which are being
amortized over 5 to 6 years on the straight-line basis. The impact on Net Income
of the aforementioned items was a reduction of $265,000.
Six Months Ended June 30, 1996 and 1995
Gross Premiums Written
Superior's Gross Premiums Written for the six month period ended June
30, 1996 increased $26,204,000 or 61.1% to $69,119,000 from $42,915,000 for the
same period in 1995 due to the modification of the multi-tiered product offered
in Florida and the introduction of a multi-tiered product in the states of
Virginia and California, the introduction of variable commission levels and
improved service to policyholders. The new variable commission structure
attracted sales from independent agents who perceived one of Superior's major
competitors as pursuing a direct marketing approach.
Net Premiums Written
Superior's Net Premiums Written for the six month period ended June 30,
1996 increased $26,192,000 or 61.6%, to $68,707,000 from $42,515,000 for the
same period in 1995 due to an increase in Gross Premiums Written.
Net Premiums Earned
Superior's Net Premiums Earned for the six month period ended June 30,
1996 increased $12,686,000 or 25.3%, to $62,739,000 from $50,053,000 for the
same period in 1995 reflecting an increased in Net Premiums Written. This
increase in Net Premiums Earned does not fully reflect the 61.6% increase in Net
Premiums Written since Net Premiums Earned lagged behind Net Premiums Written.
62
Net Investment Income
Superior's net investment income for the six month period ended June
30, 1996 decreased $685,000, or 16.5%, to $3,476,000 from $4,161,000 for the
same period in 1995 due to the net effects of a decline in the average yield on
invested assets which was partially offset by an increase in average invested
assets.
Other Income
Superior's other income for the six month period ended June 30, 1996
increased $1,400,000, or 82.7%, to $3,092,000 from $1,692,000 for the same
period in 1995 due to a growth in premiums and an increase in billing fees
relating to payment programs associated with an increased number of policies
written.
Net Realized Capital Gain (Loss)
Superior recorded a net realized capital gain from the same of
investments of $2,104,000 for the six month period ended June 30, 1996 compared
to a net realized capital gain from the sale of investment of $711,000 for the
same period in 1995.
Losses and LAE
Superior's Losses and LAE for the six month period ended June 30, 1996
increased $7,834,000, or 20.5%, to $45,963,000 from $38,129,000 for the same
period in 1995 due to an increase in Net Premiums Earned. However, the 20.5%
increase in Losses and LAE was less than the 25.3% increase in Net Premiums
Earned due to improved results in claims administration which resulted in a
change of estimate that resulted in a decrease in reserves of $1,300,000 in the
first quarter of 1996. As a result, the Loss and LAE Ratio for the six month
period ended June 30, 1996 was 73.3% as compared to 76.2% for same period in
1995. The improved results also reflect an improved work flow, productivity, and
a reduction in middle management positions as a result of the claims department
restructuring. Superior has negotiated flat rate fee agreements with all counsel
representing it and has obtained discounts for vendor service for independent
appraisals, total loss evaluations, medical bill review and the sale of salvage.
Policy Acquisition and General and Administrative Expenses
Superior's policy acquisition and general and administrative expenses
for the six month period ended June 30, 1996 decreased $108,000 or 0.6%, to
$17,104,000 from $17,212,000 for the same period in 1995. Policy acquisition and
general and administrative expenses decreased 0.6% although Net Premiums Earned
increased 25.3% due to reduced agents' commissions in Florida and a general
reduction in the cost of overhead. As a result, the Expense Ratio for the six
month period ended June 30, 1996 and was 27.3% as compared to 34.4% for the same
period in 1995.
Income Tax Expense
Superior's income tax expense for the six month period ended June 30,
1996 increased $2,152,000 to $2,313,000 from $161,000 for the same period in
1995. The effective tax rate in 1996 was 27.7% compared to 12.6% in 1995. The
increase in income tax expense and the effective tax rate was due to the
utilization of net operating loss carry-forwards in 1995.
Years Ended December 31, 1995 Compared with 1994
Gross Premiums Written
Superior's Gross Premiums Written in 1995 decreased $18,150,000, or
16.1%, to $94,756,000 from $112,906,000 in 1994 due to the Company's curtailment
of marketing efforts and writings in Illinois, Mississippi,
63
Tennessee, Texas and Washington resulting from more restrictive underwriting
criteria, inadequately priced business in those states and other unfavorable
market conditions.
Net Premiums Written
Superior's Net Premiums Written in 1995 decreased $18,445,000, or
16.4%, to $94,070,000 from $112,515,000 in 1994 due to a decrease in Gross
Premiums Written.
Net Premiums Earned
Superior's Net Premiums Earned in 1995 decreased $15,223,000, or 13.5%,
to $97,614,000 from $112,837,000 in 1994 reflecting a decrease in Net Premiums
Written.
Net Investment Income
Superior's net investment income in 1995 increased $69,000, or 1.0%, to
$7,093,000 from $7,024,000 in 1994 due to a slight increase in the average yield
earned on invested assets resulting from improved market conditions and an
increase in invested assets due to improved operating cash flows.
Other Income
Superior's other income in 1995 increased $827,000, or 24.7%, to
$4,171,000 from $3,344,000 in 1994 due to higher billing fees in Florida
resulting from the ability to collect billing fees during the entire year in
1995 compared to only part of the year in 1994.
Net Realized Capital Gain (Loss)
Superior recorded a net realized capital gain from the sale of
investments of $1,954,000 in 1995 compared to a net realized capital loss from
the sale of investments of $200,000 in 1994. The net realized capital gain in
1995 was the result of disposing of invested assets with increased market
values.
Losses and LAE
Superior's Losses and LAE in 1995 decreased $20,035,000, or 21.7%, to
$72,343,000 from $92,378,000 in 1994 due to a decrease in Net Premiums Earned.
However, the 21.7% decrease in Losses and LAE was greater than the 13.5%
decrease in Net Premiums Earned due to Superior assuming a more aggressive
stance with regard to the evaluation and settlement of bodily injury claims, the
specialization of the handling of physical damage claims with a resulting
reduction in average paid severities and an improvement in productivity and a
reduction in cost as a result of the consolidation of nine claims offices to
three. As a result, the Loss and LAE Ratio for 1995 was 74.1% as compared to
81.9% in 1994.
Policy Acquisition and General and Administrative Expenses
Superior's policy acquisition and general and administrative expenses
in 1995 decreased $6,197,000, or 15.9%, to $32,705,000 from $38,902,000 in 1994
due to reengineering of internal operations aimed at reducing cost and the
introduction of reduced agent commission programs.
Income Tax Expense
Supeerior's income tax expense and effective tax rate for 1995
were $1,649,000 and 28.5%, respectively. This compares to an income tax benefit
of $3,800,000 in 1994, which resulted in an effective tax rate of (45.9)%. The
64
increase in income tax expense is primarily a function of the improvement in net
income before taxes in 1995 as compared to 1994 and a decreased portion of net
investment income being derived from tax-free sources.
Years Ended December 31, 1994 and 1993
Gross Premiums Written
Superior's Gross Premiums Written in 1994 decreased $2,754,000, or
2.4%, to $112,906,000 from $115,660,000 in 1993 due to the implementation of
certain underwriting restrictions in Texas and the termination of certain agency
relationships in Texas.
Net Premiums Written
Superior's Net Premiums Written in 1994 decreased $2,779,000, or 2.4%,
to $112,515,000 from $115,294,000 in 1993 due to a decrease in Gross Premiums
Written.
Net Premiums Earned
Superior's Net Premiums Earned in 1994 decreased $5,299,000, or 4.5%,
to $112,837,000 from $118,136,000 in 1993 reflecting a decrease in Net Premiums
Written.
Net Investment Income
Superior's net investment income in 1994 decreased $1,146,000, or
14.0%, to $7,024,000 from $8,170,000 in 1993 due primarily to a decline in
average invested assets which resulted from a decrease in operating cash flow
and dividends paid in early 1994.
Other Income
Superior's other income in 1994 decreased $2,535,000, or 43.1%, to
$3,344,000 from $5,879,000 in income in 1993 due to an interruption in the state
of Florida in the charging of billing fees caused by a regulatory change which
increased the minimum down payments.
Net Realized Capital Gain (Loss)
Superior recorded a net realized capital loss from the sale of
investments of $200,000 in 1994 compared to a net realized capital gain from the
sale of investments of $3,559,000 in 1993 due to market conditions which drove
market interest rates higher in 1994 causing Superior's fixed maturity portfolio
to decline in market value.
Losses and LAE
Superior's Losses and LAE in 1994 increased $6,476,000, or 7.5%, to
$92,378,000 from $85,902,000 in 1993 due to claims management inefficiencies
arising from inadequate managerial supervision and a conversion to a new claims
management system. These claims management inefficiencies were substantially
corrected in 1995 as a result of the completion of the implementation of the new
claims management system. The Loss and LAE Ratio for 1994 was 81.9% as compared
to 72.7% for 1993.
Policy Acquisition and General and Administrative Expenses
Superior's policy acquisition and general and administrative expenses
in 1994 increased $2,610,000, or 7.2%, to $38,902,000 from $36,292,000 in 1993
due to a significant increase in employee compensation caused by the hiring of
new officers and managers.
65
Income Tax Expense
Superior recorded an income tax benefit of $3,800,000 and an effective
tax rate of (45.9)% in 1994 as compared to an income tax expense of $3,981,000
and an effective tax rate of 29.4% in 1993. The income tax benefit in 1994 was a
function of the Company's generation of a net loss before income taxes. The low
effective tax rate in 1993 was due to a greater portion of net investment income
being derived from tax-free sources.
66
BUSINESS
Overview
Symons International Group, Inc., a specialty property and casualty
insurer, underwrites and markets nonstandard private passenger automobile
insurance and crop insurance. Through its Subsidiaries, the Company writes
business in the United States exclusively through independent agencies and seeks
to distinguish itself by offering high quality, technology based services for
its agents and policyholders. The Company had consolidated Gross Premiums
Written of approximately $305 million and $279 million for the twelve months
ended December 31, 1996 and the six months ended June 30, 1997, respectively.
Based on the Company's Gross Premiums Written in 1996, the Company believes that
it is the twelfth largest underwriter of nonstandard automobile insurance in the
United States. Based on premium information compiled in 1996 by the NCIS, the
Company believes that IGF is the fifth largest underwriter of MPCI in the United
States.
The following table sets forth the premiums written by line of business
for the periods indicated:
Six Months
(in thousands) Years Ended December 31, Ended June 30,
------------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Nonstandard Automobile: (1)
Gross Premiums Written $45,593 $49,005 $187,176 $62,290 $165,547
Net Premiums Written 28,114 37,302 186,579 62,089 133,843
Crop Hail: (2)
Gross Premiums Written $10,130 $16,966 $27,957 $17,620 $29,339
Net Premiums Written 4,565 11,608 23,013 14,953 16,681
MPCI: (3)
Gross Premiums Written $44,325 $53,408 $82,102 $62,951 $79,017
Net Premiums Written --- --- --- --- ---
Commercial: (4)
Gross Premiums Written $3,086 $5,255 $8,264 $4,089 $5,162
Net Premiums Written 2,460 4,537 --- --- ---
Total: (5)
Gross Premiums Written $103,134 $124,634 $305,499 $146,950 $279,065
======= ======= ======= ======= =======
Net Premiums Written $35,139 $53,447 $209,592 $77,042 $150,524
====== ====== ======= ====== =======
67
- ---------------
(1) 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.
(2) Most crop hail insurance policies are sold in the second and third
quarters of the calendar year.
(3) 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."
(4) All commercial premiums written were written by Pafco and 100% ceded to
Granite Re.
(5) 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 Subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile physical damage and liability
policies for "nonstandard risks." 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 up from $9 billion in 1995.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
o 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.
o The Company will seek to expand the multi-tiered marketing
approach currently employed in certain states in order to
offer to its independent agency network a broader range of
products with different premium and commission structures.
o 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.
o 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.
68
o The Company encourages agencies to place a large share of
their profitable business with its subsidiaries by offering,
in addition to fixed commissions, a contingent commission
based on a combination of volume and profitability.
o The Company responds to claims in a manner designed 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.
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, Texas and Virginia and
the Company writes nonstandard automobile insurance in thirteen additional
states. Management plans to continue to expand selectively into additional
states. The Company 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
table sets forth the geographic distribution of Gross Premiums Written for the
Company and Superior on a combined basis for the periods indicated. The
following amounts include Gross Premiums Written for Superior prior to its
acquisition by the Company on April 30, 1996.
69
Symons International Group, Inc. and Superior Insurance Company (Combined)
Year Ended December 31,
(in thousands)
Six Months
Ended
State 1994 1995 1996 June 30, 1997
- ----- ---- ---- ---- -------------
Arkansas $1,619 $1,796 $2,004 $850
California 13,422 15,350 25,131 31,890
Colorado 5,629 9,257 10,262 4,818
Florida 55,282 54,535 97,659 74,320
Georgia 7,342 5,927 7,398 4,101
Illinois 3,894 2,483 2,994 1,931
Indiana 14,062 13,842 16,599 9,171
Iowa 3,769 3,832 5,818 3,723
Kentucky 9,573 7,840 11,065 5,068
Mississippi 4,411 2,721 2,250 1,410
Missouri 8,163 8,513 13,423 5,214
Nebraska 3,192 3,660 5,390 3,313
Nevada 0 0 0 1,021
Ohio 4,325 3,164 3,643 2,298
Oklahoma 0 317 2,559 1,753
Oregon 0 0 0 554
Tennessee 1,829 332 (2) 0
Texas 10,660 3,464 10,122 3,864
Virginia 7,500 5,035 14,733 10,225
Washington 3,827 1,693 106 23
----- ----- --- ---
Total $158,499 $143,761 $231,154 $165,547
======== ======== ======== ========
The Company markets its nonstandard products exclusively through
approximately 6,000 independent agencies and focuses its 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 provider 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 26
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 completing its development of
computer software that will provide on-line communication with its agency force.
In addition, to deliver 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 nonstandard automobile insurance
business. The Company reviews all coverages bound by the agents promptly and
70
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."
The Company compensates its agents by paying a commission based on a
percentage of premiums produced. The Company 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.
The Company believes that the combination of Pafco with Superior and
its two Florida-domiciled insurance subsidiaries allows the Company the
flexibility to engage in multi-tiered marketing efforts in which specialized
automobile insurance products are directed toward specific segments of the
market. Since certain state insurance laws prohibit a single insurer from
offering similar products with different commission structures or, in some
cases, premium rates, it is necessary to have multiple licenses in certain
states in order to obtain the benefits of market segmentation. The Company 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
underwriting system provides a significant competitive advantage because it (i)
improves efficiencies for the agent and the Company, thereby reenforcing the
agents' commitment 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, Expense Ratios and Combined Ratios for the
periods indicated for the nonstandard automobile insurance business of the
Company. The ratios exclude the effects of Superior prior to the acquisition by
the Company on April 30, 1996. The Ratios shown in the table below are computed
based upon GAAP. See "Recent Developments" for a discussion of adjustments to
operating results subsequent to June 30, 1997.
71
Six Months Ended
Years Ended December 31, June 30,
------------------------ ------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Loss and LAE Ratio 72.1% 73.8% 73.7% 73.5% 77.2%
Underwriting Expense Ratio,
net of billing fees 28.2% 32.3% 25.1% 25.4% 22.9%
----- ----- ----- ----- ------
Combined Ratio 100.3% 106.1% 98.8% 98.9% 99.3%
====== ====== ===== ===== =====
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 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 claim-related litigation is monitored by a home
office supervisor or litigation manager. The claims policy of the Company
emphasizes prompt and fair settlement of meritorious claims, appropriate
reserving for claims and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a
portion of its risks and paying for that protection based upon premiums received
on all policies subject to such Reinsurance. Insurance is ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large losses, including catastrophic losses. Although
Reinsurance does not legally discharge the ceding insurer from its primary
obligation to pay the full amount of losses incurred under policies reinsured,
it does render the reinsurer liable to the insurer to the extent provided by the
terms of the Reinsurance treaty. As part of its internal procedures, the Company
evaluates the financial condition of each prospective reinsurer before it cedes
business to that carrier. Based on the Company's review of its reinsurers'
financial health and reputation in the insurance marketplace, the Company
believes its reinsurers are financially sound and that they therefore can meet
their obligations to the Company under the terms of the Reinsurance treaties.
Reserves for uncollectible Reinsurance are provided as deemed necessary.
Effective January 1, 1997, Pafco and Superior entered into a 20% quota
share Reinsurance treaty on its written and assumed nonstandard automobile
business by placing 90% of such Reinsurance with Vesta Fire Insurance Company
(rated "A" by A.M. Best) and 10% with an affiliate, Granite Re. In 1997, Pafco
and Superior continues to maintain excess of loss treaties on their nonstandard
automobile insurance business covering 100% of losses on an individual
72
occurrence basis in excess of $200,000 up to a maximum of $5,000,000. As of June
30, 1997 neither Pafco nor Superior had any material Reinsurance recoverables.
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. No gain
or loss was recognized from this portfolio transfer. On this date, Pafco also
entered into a 100% quota 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 of $9,230,000, of which $770,000 was uncollateralized.
Granite Re subsequently provided appropriate and sufficient collateral in 1997
and maintained sufficient collateral at June 30, 1997.
Neither Pafco nor Superior has any facultative Reinsurance with respect
to its nonstandard automobile insurance business.
Competition
The Company competes with both large national and smaller regional
companies in each state in which it operates. The Company's competitors include
other companies which, like the Company, serve the agency market, as well as
companies which sell insurance directly to customers. Direct writers may have
certain competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and, potentially, reduced
acquisition costs. The Company's primary competitors are Progressive Casualty
Insurance Company, Guaranty National Insurance Company, Integon Corporation
Group, Deerbrook Insurance Company (a member of the Allstate Insurance Group)
and the companies of the American Financial Group. Generally, these competitors
are larger and have greater financial resources than the Company. The
nonstandard automobile insurance business is price sensitive and certain
competitors of the Company have, from time to time, decreased their prices in an
apparent attempt to gain market share. 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, occasionally been supported by
the federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available only
on major crops in major producing areas. In 1980, 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 participating
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
73
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 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 USDA offices which has been eliminated for the 1998 crop
year.
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 14 states in which CAT Coverage will no longer be available
through USDA offices but rather will be solely available through private
companies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota,
Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and
Wyoming. Through June 1996, the FCIC 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.
On June 9, 1997, the Secretary of Agriculture announced that the USDA
would no longer provide CAT Coverage through USDA offices in any state effective
for the 1998 crop year. This is to be implemented by a transferring of CAT
policies to the various members of the crop insurance industry. At this time,
the Company has been preliminarily informed that it will receive approximately
17,000 policies that were formerly written by USDA offices, although there can
be no assurance that the Company will receive this number of policies. Based on
historical, per- policy averages, the Company has preliminarily estimated that
it will receive an additional approximate $6 to $7 million in premium from such
transferred policies, however, there can be no assurance that this number will
be realized. This estimate assumes that IGF will retain 100% of such premiums.
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.
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
o The Company seeks 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.
74
o The Company also limits the risks associated with crop
insurance through selective underwriting of crop risks based
on its historical loss experience data base.
o The Company continues to develop and maintain a proprietary
knowledge-based underwriting system which utilizes a database
of Company-specific underwriting rules.
o 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.
o Unlike many of its competitors, the Company employs
approximately 85 full-time claims adjusters, most of whom are
agronomy-trained, to reduce the cost of losses experienced by
IGF.
o The Company stops selling its crop hail policies after certain
selected dates to prevent farmers from adversely selecting
against IGF when a storm is forecast or hail damage has
already occurred.
o The Company continues to explore growth opportunities and
product diversification through new specialty coverages,
including Crop Revenue Coverage (CRC) and specific named peril
crop insurance. Further, IGF is in the initial stages of
opening new markets and attracting new customers by developing
timber, crop completion and agricultural production
interruption coverages.
o The Company continues to explore new opportunities in
administrative efficiencies and product underwriting made
possible 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
MPCI is a federally subsidized program which is designed to provide
participating farmers who suffer insured crop damage with funds needed to
continue operating and plant crops for the next growing season. All of the
material terms of the MPCI program and 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.
In addition to CAT Coverage, MPCI policies that 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
75
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 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
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
76
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 that 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 profitability of risks allocated to the Commercial Pool by private
insurers.
77
The following table presents MPCI Premiums, MPCI Imputed Premiums and
underwriting gains or losses of IGF for the periods indicated:
Six Months Ended
(in thousands) Year Ended December 31, June 30,
--------------------------- ---------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
MPCI premiums $44,325 $53,408 $82,102 $62,951 $79,017
MPCI imputed premiums $2,171 $19,552 $38,944 $14,104 $26,063
Gross underwriting gain $4,344 $10,870 $15,801 $3,105 $6,930
Net private third party
reinsurance expense and
other (1,087) (1,217) (3,524) (1,495) (1,690)
------- ------- ------- ------- -------
Net underwriting gain $3,257 $9,653 $12,277 $1,610 $5,240
===== ===== ====== ===== =====
MPCI Fees and Reimbursement Payments
The Company receives Buy-up Expense Reimbursement Payments from the
FCIC for writing and administering Buy-up Coverage policies. These payments
provide funds to compensate the Company for its expenses, including agents'
commissions and the costs of administering policies and adjusting claims. For
1994, 1995 and 1996, the maximum Buy-up Expense Reimbursement Payment had been
set at 31% of the MPCI Premium, was 28% for the 1997 Crop Year and is currently
under review and subject to change for the 1998 Crop Year. Historically, the
FCIC has paid the maximum MPCI Buy-up Expense Reimbursement Payment rate
allowable under law, although no assurance can be given that this practice will
continue. 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 crop insurance industry has recently completed negotiation of the
1998 Standard Reinsurance Agreement ("1998 SRA") with the FCIC, with the 1998
SRA providing for a 27% MPCI Expense Reimbursement and no change to the CAT
Coverage program from prior years.
Farmers are required to pay a fixed administrative fee of $50 per
policy (maximum of $100 per county) 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:
78
Six Months Ended
(in thousands) Years Ended December 31, June 30,
---------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
CAT Coverage Fees (1) $74 $1,298 $1,181 $941 $1,074
Buy-up Expense Reimbursement
Payments 13,845 16,366 24,971 19,402 23,206
CAT LAE Reimbursement Payments
and MPCI Excess LAE
Reimbursement Payments 107 3,427 5,753 1,646 3,553
--- ----- ----- ----- -----
Total $14,026 $21,091 $31,905 $21,989 $27,833
====== ====== ====== ====== ======
- ---------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company" for a discussion of the
accounting treatment accorded to the crop insurance business.
Crop Revenue Coverage
The Company recently began offering 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
production, 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 since 1996. CRC policies
represented approximately 30% of the combined corn policies written by IGF in
Iowa and Nebraska since 1996. Since July 1996, CRC was made available for winter
wheat in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas
and Washington and in parts of Montana. In May 1997, the FCIC announced that CRC
will be expanded to include wheat in twenty-five additional states. Currently,
CRC represents approximately 10% of all of the Company's wheat policies.
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. For the 1997 Crop Year, the Company received
from the FCIC an expense reimbursement payment equal to 25% of Gross Premiums
Written in respect of each CRC policy it writes. The MPCI Buy-up Expense
Reimbursement Payment is currently administratively established by FCIC in the
absence of a applicable legislation. This expense reimbursement payment was
reduced from 27% in 1996.
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
79
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.
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(R) product which combines the application and underwriting process for
MPCI and hail coverages. The HAILPLUS(R) product tends to produce less volatile
loss ratios than the stand alone product since the combined product generally
insures a greater number of acres, thereby spreading the risk of damage over a
larger insured area. Approximately 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,
sugar cane, sugar beets, citrus, tomatoes and onions and are generally written
on terms that are specific to the kind of crops and farming practices involved
and the amount of actuarial data available. The Company plans to seek potential
growth opportunities in this niche market by developing basic policies on a
diverse number of named crops grown in a variety of geographic areas 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. IGF is currently in the initial stages of opening new
markets and attracting new customers by developing timber, crop completion and
agricultural production interruption coverages.
Third-Party Reinsurance In Effect for 1997
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss Reinsurance from other private
reinsurers in addition to Reinsurance obtained from the FCIC. In addition, since
the FCIC and state regulatory authorities require IGF to limit its aggregate
writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of
capital, and retain a net loss exposure of not in excess of 50% of capital, IGF
may also obtain Reinsurance from private reinsurers in order to permit it to
increase its premium writings. Such private Reinsurance would not eliminate the
Company's potential liability in the event a reinsurer was unable to pay or
losses exceeded the limits of the stop loss coverage. For crop hail insurance,
the Company has in effect quota share Reinsurance of 40% of business, although
the reinsurer is only liable to participate in losses of the Company up to a
150% pure loss ratio. The Company also has stop loss treaties for its crop hail
business which reinsure net losses in excess of an 80% pure Loss Ratio to 130%
at 95% coverage with IGF retaining the remaining 5%. With respect to its MPCI
business, the Company has stop loss treaties which reinsure 93.75% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 100% of the Company's MPCI
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 160% 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 therefor can meet their
80
obligations to the Company under the terms of the Reinsurance treaties. Reserves
for uncollectible Reinsurance are provided as deemed necessary. The following
table provides information with respect to ceded premiums in excess of $250,000
on crop hail and named perils and for any affiliates.
Six Months Ended June 30, 1997 (1)
(in thousands, except footnotes)
A.M. Best Ceded
Reinsurers Rating Premiums
- ---------- ------ --------
Folksam International Insurance Co. Ltd. (2) A- $578
Frankona Ruckversicherungs AG (3) A $298
Granite Re (4) Not Rated $758
Liberty Mutual Insurance Co. (UK) Ltd. A $308
Monde Re (5) Not Rated $3,226
Munich Re (6) A+ $2,309
National Grange A- $574
Partner Reinsurance Company Ltd. A $430
R & V Versicherung AG (5) Not Rated $958
Reinsurance Australia Corporation, Ltd. (REAC) (5) Not Rated $3,740
Scandinavian Reinsurance Company Ltd. A+ $719
- ---------------
(1) For the six months ended June 30, 1997, total ceded premiums were
$91,676,000.
(2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
(3) An A.M. Best rating of "A" is the third highest of 15 ratings.
(4) Granite Re is an affiliate of the Company.
(5) Monde Re is owned by REAC.
(6) An A.M. Best rating of "A+" is the second highest of 15 ratings.
As of June 30, 1997, IGF's Reinsurance recoverables aggregated
approximately $63,000 excluding recoverables from the FCIC.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 39
states through approximately 2,500 agents associated with approximately 1,500
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 twenty 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 1997. 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
81
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
likelihood of a major storm (wind, rain or hail) or a freeze affecting all of a
particular farmer's acreage decreases.
82
The following table presents MPCI and crop hail premiums written by IGF
by state for the periods indicated.
(in thousands)
-------------------------------------------------------------------------------------------------------------------
Year Ended Six Months Ended Six Months Ended
December 31, 1996 June 30, 1996 June 30, 1997
------------------------------------- ------------------------------------ -------------------------------
State Crop MPCI Total Crop MPCI Total Crop MPCI Total
- ----- ---- ---- ----- ---- ---- ----- ---- ---- -----
Hail Hail Hail
---- ---- ----
Alabama $97 $2,951 $3,048 $38 $2,332 $2,370 $64 $1,298 $1,362
Arkansas 314 1,784 2,098 298 2,025 2,323 526 2,191 2,717
California 1,164 1,992 3,156 45 --- 45 671 4,284 4,955
Colorado 1,651 3,334 4,985 760 2,524 3,284 837 1,655 2,492
Florida --- 1,738 1,738 --- 186 186 --- 1,711 1,711
Illinois 526 11,228 11,754 207 8,491 8,698 328 8,965 9,293
Indiana 115 3,870 3,985 9 2,161 2,170 7 2,258 2,265
Iowa 6,590 15,205 21,795 3,481 10,922 14,403 4,465 11,716 16,181
Kansas 662 5,249 5,911 477 2,905 3,382 807 2,242 3,049
Louisiana 28 1,674 1,702 35 2,166 2,201 20 1,775 1,795
Minnesota 2,300 2,244 4,544 1,993 2,527 4,520 3,399 3,698 7,097
Mississippi 482 2,222 2,704 480 1,758 2,238 515 1,689 2,204
Missouri 556 2,427 2,983 313 1,878 2,191 222 2,322 2,544
Montana 5,632 1,554 7,186 3,655 711 4,366 2,451 1,609 4,060
Nebraska 1,567 3,206 4,773 1,086 2,282 3,368 1,225 3,365 4,590
North
Dakota 2,294 2,796 5,090 1,231 2,457 3,688 605 2,800 3,405
Oklahoma 403 1,436 1,839 360 1,214 1,574 350 748 1,098
South
Dakota 1,457 1,106 2,563 1,291 969 2,260 859 2,594 3,453
Texas 1,262 12,361 13,623 1,084 12,206 13,290 2,348 17,015 19,363
Wisconsin 370 2,187 2,557 351 1,972 2,323 308 1,573 1,881
All Other 487 1,538 2,025 426 1,265 1,691 9,332 3,509 12,841
--- ----- ----- --- ----- ----- ----- ----- ------
Total $27,957 $82,102 $110,059 $17,620 $62,951 $80,571 $29,339 $79,017 $108,356
====== ====== ======= ====== ====== ====== ====== ====== =======
83
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's regional managers are responsible for the
Company's field operations within an assigned geographic territory, including
maintaining and enhancing relationships with agencies in those territories. IGF
also uses application documentation which is designed for simplicity and
convenience. The Company believes that IGF is the only crop insurer which has
created a single application for MPCI, crop hail and named peril 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, most of whom 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 designed 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
available 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
84
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 for MPCI, crop hail and named peril coverage.
Many of the Company's competitors have substantially greater financial and other
resources than the Company and there can be no assurance that the Company will
be able to compete effectively against such competitors in the future. The
Company competes on the basis of the commissions paid to agents, the speed with
which claims are paid, the quality and extent of services offered, the
reputation and experience of its agency network and, in the case of private
insurance, 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 fifty to seventeen. The Company believes that IGF is the fifth largest MPCI
crop insurer in the United States 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.
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 Company's reserves are reviewed by independent actuaries on a
semi-annual basis. The Company's carried claims reserves are certified by the
independent actuaries for each calendar year.
87
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
the original recorded amount was adequate or inadequate to cover the estimated
costs of unsettled claims.
During the first half of 1997, and most noticeably in the second
quarter of 1997, the Company, as part of its efforts to reduce costs and combine
the operations of the two nonstandard automobile insurance companies, has
combined the claims settlement practices as well as the reserving philosophies
of Superior and Pafco. Superior had historically provided higher case reserves
and lower IBNR levels than Pafco while paying claims in a manner where such
payments were generally less than applicable reserves. Pafco had historically
carried adequate reserves while paying claims in a manner where such payments
were generally greater than applicable reserves. In connection with this change
in claims management philosophy, the Company recorded additional Loss and LAE
Reserves, relating primarily to operations at Pafco, resulting in an after tax
charge to earnings of approximately $1.8 million or $0.17 per share in the
second quarter of 1997. While the Company believes these actions are necessary,
the establishment and monitoring of reserve levels is a highly subjective
process involving numerous assumptions and estimates. Therefore, actual results
may ultimately differ from current estimates.
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 multitude
of factors influencing the reserve estimates though inflation is implicitly
included in the estimates. The Company and Superior regularly update their
reserve forecasts by type of claim as new facts become known and events occur
which affect unsettled claims. The Company and Superior do not discount their
reserves for unpaid claims and claims expense.
The following loss reserve development tables are cumulative and,
therefor, ending balances should not be added since the amount at the end of
each calendar year includes activity for both the current and prior years.
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.
86
Symons International Group, Inc.
Nonstandard Automobile Insurance Only (Not Including Superior)
For The Years Ended December 31,
(in thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross Reserves for Unpaid
Losses and LAE 26,819 30,844 27,145
Deduct: Reinsurance
recoverable 10,297 9,921 8,124
Reserve for unpaid losses and
LAE, net of reinsurance 4,748 10,775 14,346 17,083 17,499 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
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
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 14,368 14,659
Seven Years Later 4,278 10,922 14,368
Eight Years Later 4,309 10,921
Nine Years Later 4,309
Net cumulative (deficiency)
or redundancy 439 (146) (22) 2,424 753 (945) (465) (921) (825)
Expressed as a percentage of
unpaid losses and LAE 9.2% (1.4%) (0.2%) 14.2% 4.3% (5.1%) (2.8%) (5.6%) (3.9%)
Net reserves for the nonstandard automobile business of the Company
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, the Company's nonstandard automobile segment has
not developed significant redundancies or deficiencies as compared to original
reserves. A deficiency of $921,000, or 5.6%, of original reserves developed with
respect to loss reserves at December 31, 1994 due to an unexpected increase in
loss severity and average claim cost.
87
Superior Insurance Company
For The Years Ended December 31,
(in thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross Reserves for Unpaid
Losses and LAE 52,610 54,577 47,112 52,413
Deduct: Reinsurance 68 1,090 987 0
Recoverabel 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
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Liabilities reestimated as
of:
One Year Later 31,911 48,376 54,858 58,158 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 (13,753) (12,670) 2,741 4,348 11,632 11,980 5,832 10,498 8,192
Expressed as a percentage of
unpaid losses and LAE (52.4%) (33.5%) 4.9% 7.2% 19.3% 21.1% 11.1% 19.6% 17.8%
Net reserves for Superior increased substantially through 1990 before
decreasing in 1992. Such changes were due to changes in premium volume and
reduction of reserve redundancies. The decrease in 1995 reflects the Company'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 established
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.
The Company employs an independent actuary to annually evaluate and
certify the adequacy of its Loss and LAE reserves.
88
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, and the Company's fixed maturity and common equity
investments are substantially all in public companies. The Company's investments
in real estate and mortgage loans represent 1.4% of the Company's aggregate
investments. The investment portfolios of the Company are managed by third-party
professional administrators, in accordance with pre-established investment
policy guidelines established by the Company. The investment portfolios of the
Company at June 30, 1997 consisted of the following:
(in thousands)
Estimated
Type of Investment Amortized Cost Market Value
- ------------------ -------------- ------------
Fixed maturities:
United States Treasury securities
and obligations of United States
government corporations and agencies $51,447 $51,382
Obligations of states and political
subdivisions 6,308 6,343
Corporate securities 85,773 86,180
------ ------
Total Fixed Maturities 143,528 143,905
Equity Securities:
Preferred stocks --- ---
Common stocks 25,792 32,031
Short-term investments (1) 11,742 11,742
Real estate 457 457
Mortgage loans (2) 2,290 2,290
Other loans 75 75
-- --
Total Investments $183,884 $190,500
======= =======
- ---------------
(1) Due to the nature of crop insurance, the Company must maintain
short-term investments to fund amounts due under the MPCI program.
(2) Mortgage loans represent one commercial real estate loan for $3 million
due in 2001 with monthly principal and interest (8.0%) payments. All
payments on the loan were current as of June 30, 1997.
89
The following table sets forth, as of December 31, 1995 and 1996 and
June 30, 1997 the composition of the fixed maturity securities portfolio of the
Company by time to maturity.
(in thousands) 1995 1996 June 30, 1997
----------------- ------------------ -------------------
Percent Percent Percent
Total Total Total
Market Market Market Market Market Market
Time To Maturity Value Value Value Value Value Value
- ---------------- ----- ----- ----- ----- ----- -----
1 year or less $4,610 35.6% $ 6,423 5.0% $15,250 10.6%
More than 1 year
through 5 years 5,051 39.1% 71,086 55.7% 77,867 54.1%
More than 5 years
through 10 years 3,270 25.3% 43,404 34.0% 43,013 29.9%
More than 10 years --- --- 6,768 5.3% 7,775 5.4%
------ ----- ----- ---- ----- ----
Total $12,931 100.0% $127,681 100.0% $143,905 100.0%
====== ====== ======= ====== ======= =====
The following table sets forth, as of December 31, 1995 and 1996 and
June 30, 1997 the ratings assigned to the fixed maturity securities of the
Company.
(in thousands) 1995 1996 June 30, 1997
------------------- -------------------- ---------------
Percent Percent Percent
Total Total Total
Market Market Market Market Market Market
Rating (1) Value Value Value Value Value Value
- ---------- ----- ----- ----- ----- ----- -----
Aaa or AAA $7,753 60.0% $50,444 39.5% $53,491 37.2%
Aa or AA 680 5.2% 2,976 2.3% 3,918 2.7%
A 257 2.0% 50,365 39.4% 68,216 47.4%
Baa or BBB 100 0.8% 11,671 9.1% 14,829 10.3%
Ba or BB --- --- 2,840 2.3% 2,947 2.0%
Other below
investment grade --- --- 2,091 1.6% --- ---
Not rated (2) 4,141 32.0% 7,294 5.8% 504 0.4%
----- ----- ----- ---- --- ----
Total $12,931 100.0% $127,681 100.0% $143,905 100.0%
====== ====== ======= ====== ======= ======
- ---------------
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available, are based on ratings assigned by Standard & Poor's
Corporation.
(2) These securities were not rated by the rating agencies. However, these
securities are designated as Category 1 securities by the NAIC, which
is the equivalent rating of "A" or better.
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The investment results of the Company for the periods indicated are set
forth below:
Six Months Ended
(in thousands) Years Ended December 31, June 30,
----------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Net investment income (1) $1,241 $1,173 $6,733 $1,533 $5,276
Average investment portfolio (2) $20,628 $22,653 $153,565 $146,757 $174,596
Pre-tax return on average investment
portfolio 6.0% 5.2% 5.9% 4.4% 6.0%
Net realized gains (losses) $(159) $(344) $(1,015) $228 $1,684
- ---------------
(1) Includes dividend income received in respect of holdings of common
stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio. For 1996, the
average investment portfolio was adjusted for the effect of the
Acquisition.
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
subsequent 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 "NR-2" rating (a
"rating not assigned" category for companies that do not meet A.M. Best's
minimum size requirement) from A.M. Best.
A.M. Best's ratings are based upon a comprehensive review of a
company's financial performance, which is supplemented by certain data,
including responses to A.M. Best's questionnaires, phone calls and other
correspondence between A.M. Best analysts and company management, quarterly NAIC
filings, state insurance department examination reports, loss reserve reports,
annual reports, company business plans and other reports filed with state
insurance departments. A.M. Best undertakes a quantitative evaluation, based
upon profitability, leverage and liquidity, and a qualitative evaluation, based
upon the composition of a company's book of business or spread of risk, the
amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus, the soundness of a company's capital
structure, the extent of a company's market presence and the experience and
competence of its management. A.M. Best's ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations to
policyholders. A.M. Best's ratings are not a measure of protection afforded
investors. "B+" and "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 "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.
91
Recent Acquisitions
On January 31, 1996, Goran, the Company, 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 the Company agreed to purchase Superior from Interfinancial,
Inc. for a purchase price of approximately $66.6 million. Simultaneously with
the execution of the Superior Purchase Agreement, Goran, the Company, GGS
Holdings and the GS Funds, a Delaware limited partnership, entered into an
agreement (the "GGS Agreement") to capitalize GGS Holdings and to cause GGS
Holdings to issue its capital stock to the Company and to the GS Funds, so as to
give the Company a 52% ownership interest and the GS Funds a 48% ownership
interest (the "Formation Transaction"). Pursuant to the GGS Agreement (a) the
Company contributed to GGS Holdings (i) all the outstanding common stock of
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 a value of approximately
$350,000 and (b) the GS Funds contributed to GGS Holdings $21.2 million in cash.
The Formation Transaction and the Acquisition were completed on April 30, 1996.
On August 12, 1997, the Company acquired the remaining 48% interest in GGS
Holdings that had been owned by the GS funds for $61 million with a portion of
the proceeds from the sale of the Preferred Securities.
Regulation
General
The Company's insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition,
(ii) periodic financial examination, (iii) approval of rates and policy
forms,(iv) loss reserve adequacy, (v) insurer solvency, (vi) the licensing of
insurers and their agents, (vii) restrictions on the payment of dividends and
other distributions, (viii) approval of changes in control and (ix) the type and
amount of permitted investments.
Pafco, IGF and Superior are subject to triennial examinations by state
insurance regulators. Such examinations were last conducted for Pafco as of
December 31, 1996, (covering the period to that date from June 30, 1992), for
IGF as of December 31, 1996, (covering the period to that date from June 30,
1992)and for 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). Superior has not been notified of
the date of its next examination. The Company does not expect any material
findings from the examinations of Pafco, IGF or Superior and the Superior
subsidiaries.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding
companies in Florida and Indiana, where the insurers 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 note and (iii) restrict the ability of
any one person to acquire certain levels of the Company's voting securities
without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of Common Stock
of the Company would be presumed to have acquired control of Pafco and IGF
unless the Indiana Commissioner, upon application, has determined
92
otherwise. In addition, any purchaser of 5% or more of the outstanding shares of
Common Stock of the Company will be presumed to have acquired control of
Superior unless the Florida Commissioner, upon application, has 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 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 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.
"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 stockholders
without prior approval of the Florida Department if the dividend or distribution
would exceed the larger of (i) the lesser of (a) 10% of surplus or (b) net
income, not including realized capital gains, plus a two-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 three-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 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
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
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 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.
Under these laws, the maximum aggregate amounts of dividends permitted
to be paid to the Company in 1997 by IGF and Pafco without prior regulatory
approval are $12,122,000 and $561,000, respectively, none of which have been
paid. Although the Company 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
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.
93
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 considerations, 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 Management. The management agreement
between the Company and Pafco has been assigned to GGS Management, Inc. ("GGS
Management") and provides for an annual management fee equal to 15% of gross
premiums. A similar management agreement with a management fee of 17% of gross
premiums 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.
In the consent order approving the Acquisition, the Florida Department 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'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.
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. No material compliance issues were noted during
IGF's most recent FCIC compliance review.
The MPCI program has historically been subject to change by the 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 qualification 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 the following 14 states where CAT Coverage
will no longer be available through USDA offices but rather would solely be
available through
94
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, through June 30, 1996, the FCIC 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.
The crop insurance industry has recently completed negotiation of the
1998 Standard Reinsurance Agreement ("1998 SRA") with the FCIC, with the 1998
SRA providing for a 27% MPCI Expense Reimbursement and no change to the CAT
Coverage program from prior years.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to deal with the
cyclical nature of the insurance industry, catastrophic events and insurance
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to rescind or otherwise cancel
certain policies in mid-term, (iii) advance notice requirements or limitations
imposed for certain policy non-renewals and (iv) limitations upon or decreases
in rates permitted to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of twelve ratios with defined acceptable ranges. They are used as an
initial screening process for identifying companies that may be in need of
special attention. Companies that have several ratios that fall outside of the
acceptable range are selected for closer review by the NAIC. If the NAIC
determines that more attention may be warranted, one of five priority
designations is assigned and the insurance department of the state of domicile
is then responsible for follow-up action.
During 1996 Pafco had a net premiums to surplus ratio of 3.03 to 1
which was slightly 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 under its current quota
share arrangement to maintain compliance with this ratio test. 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
95
balances and excluding the IGF investment and real estate was excluded from the
calculation, 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; however, Pafco
is currently a Priority 3 company based on its 1996 IRIS tests. 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
1995 that have now been Ceded to an affiliate. Thus, net claims liability at
December 31, 1996 is entirely for nonstandard automobile insurance. 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 automobile claims. Thus,
although premiums grew in 1996, the increase in nonstandard 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. Pafco is expected to fail its reserve development IRIS test ratio for
1997 and 1998 due to Pafco's additions to its reserves which is discussed more
fully in "Recent Developments."
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 Initial Public 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 of
Financial Condition and Results of Operations" 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 directly, and Florida
indirectly, have adopted the NAIC model formula. The RBC formula for property
and casualty insurance companies measures four major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses the risk of
adverse loss developments and inadequate pricing, (ii) declines in asset values
arising from credit risk, (iii) declines in asset values arising from investment
risks and (iv) off-balance sheet risk arising from adverse experience from
non-controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The
extent of regulatory intervention and action increases as the level of surplus
to RBC falls. The first level, the Company Action Level (as defined by the
NAIC), requires an insurer to submit a plan of corrective actions to the
regulator if surplus falls below 200% of the RBC amount. The Regulatory Action
Level (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
96
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; Residual Markets
The Insurers also may be required under the solvency or guaranty laws
of most states in which they do business to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would not
ordinarily accept. The Company recognizes its obligations for guaranty fund
assessments when it receives notice that an amount is payable to the fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.
Properties
The headquarters for the Company, 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 the Company.
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 Pointe 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 feet 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 but is currently for sale. 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 30 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.
Employees
At December 31, 1996 the Company and its subsidiaries employed
approximately 1,000 full and part-time employees. The Company believes that
relations with its employees are excellent.
97
Legal Proceedings
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.
98
THE EXCHANGE OFFER
Purpose of the Exchange Offer
In connection with the sale of the Preferred Securities, the Company
and the Trust entered into the Registration Rights Agreement with the Initial
Purchasers, pursuant to which the Company and the Trust agreed to file and to
use their reasonable efforts to cause to become effective with the Commission a
registration statement with respect to the exchange of the Preferred Securities
for capital securities with terms identical in all material respects to the
terms of the Preferred Securities. A copy of the Registration Rights Agreement
has been filed as an Exhibit to the Registration Statement of which this
Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations
of the Company and the Trust under the Registration Rights Agreement. The form
and terms of the Exchange Preferred Securities are the same as the form and
terms of the Preferred Securities except that the Exchange Preferred Securities
have been registered under the Securities Act and will not be subject to the
$100,000 minimum Liquidation Amount transfer restriction and certain other
restrictions on transfer applicable to the Preferred Securities and will not
provide for any increase in the Distribution rate thereon. In that regard, the
Preferred Securities provide, among other things, that, if a registration
statement relating to the Exchange Offer has not been filed by September 30,
1997 and declared effective by February 9, 1998, the Distribution rate borne by
the Preferred Securities commencing on September 16, 1997 will increase by 0.25%
per annum until the Exchange Offer is consummated. Upon consummation of the
Exchange Offer, holders of Preferred Securities will not be entitled to any
increase in the Distribution rate thereon or any further registration rights
under the Registration Rights Agreement, except under limited circumstances. See
"Risk Factors -- Consequences of a Failure to Exchange Preferred Securities."
The Exchange Offer is not being made to, nor will the Trust accept
tenders for exchange from, holders of Preferred Securities in any jurisdiction
in which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect
to the Exchange Offer means any person in whose name the Preferred Securities
are registered on the books of the Trust or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Preferred Securities are held of record by The Depository Trust Company ("DTC")
who desires to deliver such Preferred Securities by book-entry transfer at DTC.
Pursuant to the Exchange Offer, the Company will exchange as soon as
practicable after the date hereof, the Company Guarantee for the Exchange
Guarantee and the Old Senior Subordinated Notes, in an amount corresponding to
the Preferred Securities accepted for exchange, for a like aggregate principal
amount of the Exchange Notes. The Exchange Guarantee, Exchange Notes and the
Exchange Preferred Securities have been registered under the Securities Act.
Terms of the Exchange Offer
The Trust hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $135,000,000 aggregate Liquidation Amount of Exchange Preferred
Securities for a like aggregate Liquidation Amount of Preferred Securities
properly tendered on or prior to the Expiration Date and not properly withdrawn
in accordance with the procedures described below. The Trust will issue promptly
after the Expiration Date, an aggregate Liquidation Amount of up to $135,000,000
of Exchange Preferred Securities in exchange for a like principal amount of
outstanding Preferred Securities tendered and accepted in connection with the
Exchange Offer. Holders may tender their Preferred Securities in whole or in
part in a Liquidation Amount of not less than $100,000 (100 Preferred
Securities) or any integral multiple of $1,000 Liquidation amount (one Preferred
Security) in excess thereof.
99
The Exchange Offer is not conditioned upon any minimum Liquidation
Amount of Preferred Securities being tendered. As of the date of this
Prospectus, $135,000,000 aggregate Liquidation Amount of the Preferred
Securities is outstanding.
Holders of Preferred Securities do not have any appraisal or
dissenters' rights in connection with the Exchange Offer. Preferred Securities
which are not tendered for or are tendered but not accepted in connection with
the Exchange Offer will remain outstanding and be entitled to the benefits of
the Declaration, but will not be entitled to any further registration rights
under the Registration Rights Agreement, except under limited circumstances. See
"Risk Factors -- Consequences of a Failure to Exchange Preferred Securities."
If any tendered Preferred Securities are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Preferred Securities
will be returned, without expense, to the tendering holders thereof promptly
after the Expiration Date.
Holders who tender Preferred Securities in connection with the Exchange
Offer will not be required to pay brokerage commissions or fees or, subject to
the instructions in the Letter of Transmittal, transfer taxes with respect to
the exchange of Preferred Securities in connection with the Exchange Offer. The
Company will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See " -- Fees and
Expenses."
NEITHER THE COMPANY, THE BOARD OF DIRECTORS OF THE COMPANY NOR ANY
ISSUER TRUSTEE OF THE TRUST MAKES ANY RECOMMENDATION TO HOLDERS OF PREFERRED
SECURITIES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION
OF THEIR PREFERRED SECURITIES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF PREFERRED
SECURITIES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF PREFERRED SECURITIES TO
TENDER BASED ON SUCH HOLDERS' OWN FINANCIAL POSITION AND REQUIREMENTS.
The term "Expiration Date" means 5:00 p.m., New York City time, on
_____________, 1997 unless the Exchange Offer is extended by the Company or the
Trust (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended).
The Company and the Trust expressly reserve the right in their
reasonable discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Preferred Securities for exchange, (ii)
to terminate the Exchange Offer (whether or not any Preferred Securities have
theretofore been accepted for exchange) if the Trust determines, in its
reasonable discretion, that any of the events or conditions referred to under "
- -- Conditions to the Exchange Offer" have occurred or exist or have not been
satisfied and (iii) to extend the Expiration Date of the Exchange Offer and
retain all Preferred Securities tendered pursuant to the Exchange Offer,
subject, however, to the right of holders of Preferred Securities to withdraw
their tendered Preferred Securities as described under " -- Withdrawal Rights."
If the Exchange Offer is amended in a manner determined by the Company and the
Trust to constitute a material change, or if the Company and the Trust waive a
material condition of the Exchange Offer, the Company and the Trust will
promptly disclose such amendment or waiver by means of a prospectus supplement
that will be distributed to the holders of the Preferred Securities. If any
facts or events arise which constitute a fundamental change in the information
set forth herein or if any material changes or material additions are made to
the Plan of Distribution described herein, the Company and the Trust will file a
post-effective amendment to the Registration Statement setting forth the
applicable information and will distribute an amended prospectus to the holders
of the Preferred Securities. At the time that such prospectus supplement or
amended prospectus is first given to holders of Preferred Securities, the
Exchange Offer is scheduled to expire at any time earlier than the expiration of
a period ending on the tenth business day from, and including, the date that
such prospectus supplement or amended prospectus is first so given, then the
Exchange Offer will be extended until the expiration of such period of ten
business days.
100
Any such delay in acceptance, extension, termination or amendment will
be followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company and the Trust may choose to make any public
announcement and subject to applicable law, the Company and the Trust shall have
no obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
Acceptance for Exchange and Issuance of Exchange Preferred Securities
Upon the terms and subject to the conditions of the Exchange Offer, the
Trust will exchange, and will issue to the Exchange Agent, Exchange Preferred
Securities for Preferred Securities validly tendered and not withdrawn promptly
after the Expiration Date.
In all cases, delivery of Exchange Preferred Securities in exchange for
Preferred Securities tendered and accepted for exchange pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of (i)
Preferred Securities or a book-entry confirmation of a book-entry transfer of
Preferred Securities into the Exchange Agent's account at DTC, (ii) the Letter
of Transmittal (or facsimile thereof), properly completed and duly executed,
with any required signature guarantees, or, in the case of a participant in the
book-entry transfer facility system, an Agent's Message and (iii) any other
documents required by the Letter of Transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Preferred Securities into the Exchange Agent's account at
DTC.
Subject to the terms and conditions of the Exchange Offer, the Trust
will be deemed to have accepted for exchange, and thereby exchanged, Preferred
Securities validly tendered and not withdrawn as, if and when the Trust gives
oral or written notice to the Exchange Agent of the Trust's acceptance of such
Preferred Securities for exchange pursuant to the Exchange Offer. The Exchange
Agent will act as agent for the Trust for the purpose of receiving tenders of
Preferred Securities, Letters of Transmittal and related documents, and as agent
for tendering holders for the purpose of receiving Preferred Securities, Letters
of Transmittal and related documents and transmitting Exchange Preferred
Securities to validly tendering holders. Such exchange will be made promptly
after the Expiration Date. If, for any reason whatsoever, acceptance for
exchange or the exchange of any Preferred Securities tendered pursuant to the
Exchange Offer is delayed (whether before or after the Trust's acceptance for
exchange of Preferred Securities) or the Trust extends the Exchange Offer or is
unable to accept for exchange or exchange Preferred Securities tendered pursuant
to the Exchange Offer, then, without prejudice to the Trust's rights set forth
herein, the Exchange Agent may, nevertheless, on behalf of the Trust and subject
to Rule 14e-1(c) under the Exchange Act, retain tendered Preferred Securities
and such Preferred Securities may not be withdrawn except to the extent
tendering holders are entitled to withdrawal rights as described under " --
Withdrawal Rights."
Pursuant to the Letter of Transmittal, a holder of Preferred Securities
will warrant and agree in the Letter of Transmittal that it has full power and
authority to tender, exchange, sell, assign and transfer Preferred Securities,
that the Trust will acquire good, marketable and unencumbered title to the
tendered Preferred Securities, free and clear of all liens, restrictions,
charges and encumbrances, and the Preferred Securities tendered for exchange are
not subject to any adverse claims or proxies. The holder also will warrant and
agree that it will, upon request, execute and deliver any additional documents
deemed by the Trust or the Exchange Agent to be necessary or desirable to
complete the exchange, sale, assignment and transfer of the Preferred Securities
tendered pursuant to the Exchange Offer.
101
Procedures for Tendering Preferred Securities
Valid Tender
Except as set forth below, in order for Preferred Securities to be
validly tendered pursuant to the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, or an Agent's Message in
case of book-entry delivery as described below, must be received by the Exchange
Agent at one of its addresses set forth under " -- Exchange Agent," and either
(i) tendered Preferred Securities must be received by the Exchange Agent, or
(ii) such Preferred Securities must be tendered pursuant to the procedures for
book-entry transfer set forth below and a book-entry confirmation must be
received by the Exchange Agent, in each case on or prior to the Expiration Date
or (iii) the guaranteed delivery procedures set forth below must be complied
with.
If less than all of the Preferred Securities are tendered, a tendering
holder should fill in the amount of Preferred Securities being tendered in the
appropriate box on the Letter of Transmittal. The entire amount of Preferred
Securities delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer
The Exchange Agent will establish an account with respect to the
Preferred Securities at DTC for purposes of the Exchange Offer within two
Business Days after the date of this Prospectus. Any financial institution that
is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the Preferred Securities by causing DTC to transfer such
Preferred Securities into the Exchange Agent's account at DTC in accordance with
DTC's procedures for transfers. Except in the case of a participant in the
book-entry transfer facility system who transfers the Preferred Securities by an
Agent's Message, delivery of Preferred Securities effected through book-entry
transfer into the Exchange Agent's account at DTC requires that the Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other required documents, must in any
case be delivered to and received by the Exchange Agent at its address set forth
under " -- Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedure set forth below must be complied with. A Holder who is a
participant in the book-entry transfer facility system and transfers the
Preferred Securities by an Agent's Message need not transmit the Letter of
Transmittal to the Exchange Agent to consummate the exchange.
The term "Agent's Message" means a message transmitted through
electronic means by a book-entry transfer facility to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the participant tendering
the Preferred Securities that such participant has received and agrees to be
bound by the Letter of Transmittal and/or the Notice of Guaranteed Delivery (as
discussed below), where applicable.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees
Certificates for the Preferred Securities need not be endorsed and
signature guarantees on the Letter of Transmittal are unnecessary unless (a) a
certificate for the Preferred Securities is registered in a name other than that
102
of the person surrendering the certificate or (b) such holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Preferred Securities must be duly endorsed or accompanied by a properly
executed bond power, with the endorsement or signature on the bond power and on
the Letter of Transmittal guaranteed by a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as an "eligible guarantor institution,"
including (as such terms are defined therein): (i) a bank, (ii) a broker,
dealer, municipal securities broker or dealer or government securities broker or
dealer, (iii) a credit union, (iv) a national securities exchange, registered
securities association or clearing agency, or (v) a savings association that is
a participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1 to
the Letter of Transmittal.
Guaranteed Delivery
If a holder desires to tender Preferred Securities pursuant to the
Exchange Offer and the certificates for such Preferred Securities are not
immediately available or time will not permit all required documents to reach
the Exchange Agent on or prior to the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, such Preferred
Securities may nevertheless be tendered, provided that all of the following
guaranteed delivery procedures are complied with:
(a) such tenders are made by or through an Eligible
Institution;
(b) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter
of Transmittal, or, in the case of a participant in the book-entry
transfer facility system, an Agent's Message, is received by the
Exchange Agent, as provided below, on or prior to the Expiration Date;
and
(c) the certificates (or a book-entry confirmation)
representing all tendered Preferred Securities, in proper form for
transfer, together with a properly completed and duly executed Letter
of Transmittal (or facsimile thereof), with any required signature
guarantees and any other documents required by the Letter of
Transmittal, or, in the case of a participant in the book-entry
transfer facility system, an Agent's Message, are received by the
Exchange Agent within three New York Stock Exchange trading days after
the date of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or
transmitted by facsimile or mailed to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of Exchange
Preferred Securities in exchange for Preferred Securities tendered and accepted
for exchange pursuant to the Exchange Offer will in all cases be made only after
timely receipt by the Exchange Agent of Preferred Securities, or of a book-entry
confirmation with respect to such Preferred Securities, and a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), together with
any required signature guarantees and any other documents required by the Letter
of Transmittal, or, in the case of a participant in the book-entry transfer
facility system, an Agent's Message. Accordingly, the delivery of Exchange
Preferred Securities might not be made to all tendering holders at the same time
and will depend upon when Preferred Securities, book-entry confirmation with
respect to Preferred Securities and other required documents are received by the
Exchange Agent.
The Trust's acceptance for exchange of Preferred Securities tendered
pursuant to any of the procedures described above will constitute a binding
agreement between the tendering holder and the Trust upon the terms and subject
to the conditions of the Exchange Offer.
103
Determination of Validity
All questions as to the form of documents, validity, eligibility
(including time of receipt) and acceptance for exchange of any tendered
Preferred Securities will be determined by the Company and the Trust, in their
sole discretion, whose determination shall be final and binding on all parties.
The Company and the Trust reserve the absolute right, in their sole and absolute
discretion, to reject any and all tenders determined by them not to be in proper
form or the acceptance of which, or exchange for, may, in the opinion of counsel
to the Company and the Trust, be unlawful. The Company and the Trust also
reserve the absolute right, subject to applicable law, to waive any of the
conditions of the Exchange Offer as set forth under " -- Conditions to the
Exchange Offer" or any condition or irregularity in any tender of Preferred
Securities of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
The interpretation by the Company and the Trust of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) will be final and binding. No tender of Preferred
Securities will be deemed to have been validly made until all irregularities
with respect to such tender have been cured or waived. Neither the Company, the
Trust, any affiliates or assigns of the Company or the Trust, the Exchange Agent
nor any other person shall be under any duty to give any notification of any
irregularities in tenders or incur any liability for failure to give any such
notification.
If any Letter of Transmittal, endorsement, bond power, power of
attorney, or any other document required by the Letter of Transmittal is signed
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company
and the Trust, proper evidence satisfactory to the Company and the Trust, in
their sole discretion, of such person's authority to so act must be submitted.
A beneficial owner of Preferred Securities that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact such entity promptly if such
beneficial holder wishes to participate in the Exchange Offer.
Resales of Exchange Preferred Securities
The Trust is making the Exchange Offer for the Exchange Preferred
Securities in reliance on the position of the Staff set forth in certain
interpretive letters addressed to third parties in other transactions. However,
neither the Company nor the Trust sought its own interpretive letter and there
can be no assurance that the Staff would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the Staff and subject to the two
immediately following sentences, the Company and the Trust believe that Exchange
Preferred Securities issued pursuant to the Exchange Offer in exchange for
Preferred Securities may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Preferred Securities are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Preferred Securities. However, any holder of Preferred Securities
who is an "affiliate" of the Company or the Trust or who intends to participate
in the Exchange Offer for the purpose of distributing Exchange Preferred
Securities, or any broker-dealer who purchased Preferred Securities from the
Trust to resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the Staff
set forth in the above-mentioned interpretive letters, (b) will not be permitted
or entitled to tender such Preferred Securities in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Preferred
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds
Preferred Securities acquired for its own account as a result of market-making
or other trading activities and exchanges such Preferred Securities for Exchange
Preferred Securities, then such broker-dealer must
104
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such Exchange Preferred Securities.
Each holder of Preferred Securities who wishes to exchange Preferred
Securities for Exchange Preferred Securities in the Exchange Offer will be
required to represent that (i) it is not an "affiliate" of the Company or the
Trust, (ii) any Exchange Preferred Securities to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Preferred Securities and (iv) if
such holder is not a broker-dealer, such holder is not engaged in, and does not
intend to engage in, a distribution (within the meaning of the Securities Act)
of such Exchange Preferred Securities. In addition, the Company and the Trust
may require such holder, as a condition to such holder's eligibility to
participate in the Exchange Offer, to furnish to the Company and the Trust (or
an agent thereof) in writing information as to the number of "beneficial owners"
(within the meaning of Rule 13d-3 under the Exchange Act) on behalf of whom such
holder holds the Preferred Securities to be exchanged in the Exchange Offer.
Each broker-dealer that receives Exchange Preferred Securities for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the
Exchange Preferred Securities for its own account as the result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Preferred Securities. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff in the interpretive
letters referred to above, the Company and the Trust believe that Participating
Broker-Dealers who acquired Preferred Securities for their own accounts as a
result of market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the Exchange Preferred
Securities received upon exchange of such Preferred Securities (other than
Preferred Securities which represent an unsold allotment from the original sale
of the Preferred Securities) with a prospectus meeting the requirements of the
Securities Act, which may be the prospectus prepared for an exchange offer so
long as it contains a description of the plan of distribution with respect to
the resale of such Exchange Preferred Securities. Accordingly, this Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of Exchange Preferred Securities received in exchange for Preferred
Securities where such Preferred Securities were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Registration Rights
Agreement, the Company and the Trust have agreed that this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of such Exchange Preferred Securities
for a period ending 90-days after the Expiration Date (subject to extension
under certain limited circumstances described below) or, if earlier, when all
such Exchange Preferred Securities have been disposed of by such Participating
Broker-Dealer. See "Plan of Distribution." However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of Exchange Preferred Securities received in exchange for Preferred Securities
pursuant to the Exchange Offer must notify the Company or the Trust, or cause
the Company or the Trust to be notified, on or prior to the Expiration Date,
that it is a Participating Broker-Dealer. Such notice may be given in the space
provided for that purpose in the Letter of Transmittal or may be delivered to
the Exchange Agent at one of the addresses set forth herein under " -- Exchange
Agent." Any Participating Broker-Dealer who is an "affiliate" of the Company or
the Trust may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders
Preferred Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal, that, upon receipt of notice
from the Company or the Trust of the occurrence of any event or the discovery of
any fact which makes any statement contained or incorporated by reference in
this Prospectus untrue in any material respect or which causes this Prospectus
to omit to state a material fact necessary in order to make the statements
contained or incorporated by reference herein, in light of the circumstances
under which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of Preferred Exchange Securities (or the
Exchange Guarantee or the Exchange Notes, as applicable) pursuant to this
Prospectus until the Company or the Trust has amended or supplemented this
Prospectus to correct such misstatement or omission and has
105
furnished copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company or the Trust has given notice that the sale of the
Exchange Preferred Securities (or the Exchange Guarantee or the Exchange Notes,
as applicable) may be resumed, as the case may be. If the Company or the Trust
give such notice to suspend the sale of the Exchange Preferred Securities (or
the Exchange Guarantee or the Senior Subordinated Notes, as applicable), it
shall extend the 90-day period referred to above during which Participating
Broker-Dealers are entitled to use this Prospectus in connection with the resale
of Exchange Preferred Securities by the number of days during the period from
and including the date of the giving of such notice to and including the date
when Participating Broker- Dealers shall have received copies of the amended or
supplemented Prospectus necessary to permit resales of the Exchange Preferred
Securities or to and including the date on which the Company or the Trust has
given notice that the sale of Exchange Preferred Securities (or the Exchange
Guarantee or the Exchange Notes, as applicable) may be resumed, as the case may
be.
Withdrawal Rights
Except as otherwise provided herein, tenders of Preferred Securities
may be withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective, a written or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth under " -- Exchange Agent" on
or prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Preferred Securities to be withdrawn, the
aggregate principal amount of Preferred Securities to be withdrawn, and (if
certificates for such Preferred Securities have been tendered) the name of the
registered holder of the Preferred Securities as set forth on the Preferred
Securities, if different from that of the person who tendered such Preferred
Securities. If Preferred Securities have been delivered or otherwise identified
to the Exchange Agent, then prior to the physical release of such Preferred
Securities, the tendering holder must submit the serial number shown on the
particular Preferred Securities to be withdrawn and the signature on the notice
of withdrawal must be guaranteed by an Eligible Institution, except in the case
of Preferred Securities tendered for the account of an Eligible Institution. If
Preferred Securities have been tendered pursuant to the procedures for
book-entry transfer set forth in " -- Procedures for Tendering Preferred
Securities," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Preferred Securities, in
which case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written or facsimile transmission. Withdrawals of tenders of Preferred
Securities may not be rescinded. Preferred Securities properly withdrawn will
not be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under " -- Procedures for
Tendering Preferred Securities."
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Trust, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, the Trust, any affiliates or assigns of the Company or the
Trust, the Exchange Agent nor any other person shall be under any duty to give
any notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Preferred Securities
which have been tendered but which are withdrawn will be returned to the holder
thereof promptly after withdrawal.
Distributions on Exchange Preferred Securities
Holders of Preferred Securities whose Preferred Securities are accepted
for exchange will not receive Distributions on such Preferred Securities and
will be deemed to have waived the right to receive any Distributions on such
Preferred Securities accumulated from and after August 12, 1997. Accordingly,
holders of Exchange Preferred Securities as of the record date for the payment
of Distributions on February 15, 1998 will be entitled to receive Distributions
accumulated from and after August 12, 1997.
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Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or any
extension of the Exchange Offer, the Company and the Trust will not be required
to accept for exchange, or to exchange, any Preferred Securities for any
Exchange Preferred Securities, and, as described below, may terminate the
Exchange Offer (whether or not any Preferred Securities have theretofore been
accepted for exchange) if any of the following conditions have occurred or exist
or have not been satisfied:
(a) there shall occur a change in the current interpretation
by the Staff which permits the Exchange Preferred Securities issued
pursuant to the Exchange Offer in exchange for Preferred Securities to
be offered for resale, resold and otherwise transferred by holders
thereof (other than broker-dealers and any such holder which is an
"affiliate" of the Company or the Trust within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Preferred Securities are acquired in the ordinary course of
such holder's business and such holders have no arrangement or
understanding with any person to participate in the distribution of
such Exchange Preferred Securities; or
(b) any law, statute, rule or regulation shall have been
adopted or enacted which, in the judgment of the Company or the Trust,
would reasonably be expected to impair its ability to proceed with the
Exchange Offer; or
(c) a stop order shall have been issued by the Commission or
any state securities authority suspending the effectiveness of the
Registration Statement or proceedings shall have been initiated or, to
the knowledge of the Company or the Trust, threatened for that purpose
or any governmental approval has not been obtained, which approval the
Company or the Trust shall, in its reasonable discretion, deem
necessary for the consummation of the Exchange Offer as contemplated
hereby.
If the Company or the Trust determines in its reasonable discretion
that any of the foregoing events or conditions has occurred or exist or has not
been satisfied, it may, subject to applicable law, terminate the Exchange Offer
(whether or not any Preferred Securities have theretofore been accepted for
exchange) or may waive any such condition or otherwise amend the terms of the
Exchange Offer in any respect. If such waiver or amendment constitutes a
material change to the Exchange Offer, the Company or the Trust will promptly
disclose such waiver or amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Preferred Securities. If such
waiver or amendment constitutes a fundamental change to the Exchange Offer, the
Company and the Trust will file a post-effective amendment to the Registration
Statement setting forth the applicable information and will distribute an
amended prospectus to the holders of the Preferred Securities. At the time that
such prospectus supplement or amended prospectus is first given to holders of
Preferred Securities, the Exchange Offer is scheduled to expire at any time
earlier than the expiration of a period ending on the tenth business day from,
and including, the date that such prospectus supplement or amended prospectus is
first so given, then the Exchange Offer will be extended until the expiration of
such period of ten business days.
Exchange Agent
Wilmington Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent, by registered or certified mail or by hand or overnight
delivery, as follows:
107
Wilmington Trust Company
One Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attention: Corporate Trust Services
CONFIRM BY TELEPHONE:
(302) 651-8869
FACSIMILE TRANSMISSIONS:
(ELIGIBLE INSTITUTIONS ONLY)
(302) 651-1079
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
The Company has agreed to pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. The Company will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus
and related documents to the beneficial owners of Preferred Securities, and in
handling or tendering for their customers.
Holders who tender their Preferred Securities for exchange will not be
obligated to pay any transfer taxes in connection therewith. If, however,
Exchange Preferred Securities are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of the Preferred Securities
tendered, or if a transfer tax is imposed for any reason other than the exchange
of Preferred Securities in connection with the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
Neither the Company nor the Trust will make any payment to brokers,
dealers or other nominees soliciting acceptance of the Exchange Offer.
108
DESCRIPTION OF EXCHANGE PREFERRED SECURITIES
The following summary of certain material terms of the Exchange
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Declaration. Capitalized terms not otherwise defined herein have the meanings
assigned to them in the Declaration. For the purposes of this section, as well
as the sections entitled, "Description of the Exchange Guarantee," "Description
of the Exchange Notes" and "Relationship Among the Exchange Preferred
Securities, the Declaration, the Exchange Notes and the Exchange Guarantee," the
"Company" refers to Symons International Group, Inc. exclusive of its
Subsidiaries or affiliates.
General
Pursuant to the terms of the Declaration, the Trust has issued the
Preferred Securities and the Common Securities and will issue the Exchange
Preferred Securities. The Exchange Preferred Securities will represent preferred
beneficial interests in the Trust and the holders of the Exchange Preferred
Securities and the Preferred Securities will be entitled to a preference over
the Common Securities in certain circumstances with respect to Distributions and
amounts payable on redemption of the Trust Securities or liquidation of the
Trust. See " -- Subordination of Common Securities." The Declaration has been
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). This summary of the material provisions of the Securities and
the Declaration does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Declaration, including the definitions therein of certain terms.
The Securities (including the Preferred Securities and the Exchange
Preferred Securities) are limited to $135,000,000 aggregate Liquidation Amount
at any one time outstanding. The Exchange Preferred Securities will rank pari
passu, and payments will be made thereon pro rata, with the Preferred Securities
and the Common Securities except as described under " -- Subordination of Common
Securities." Legal title to the Exchange Notes will be held by the Preferred
Trustee in trust for the benefit of the holders of the Securities and the Common
Securities. The Exchange Guarantee will be a guarantee on a subordinated basis
but will not guarantee payment of Distributions or amounts payable on redemption
of the Exchange Preferred Securities or on liquidation of the Trust when the
Trust does not have cash on hand legally available for such payments. See " --
Description of Exchange Guarantee."
Distributions
Distributions on the Exchange Preferred Securities will be fixed at a
rate per annum of 9 1/2% of the stated Liquidation Amount of $1,000 per Exchange
Preferred Security. The amount of Distributions payable for any period will be
computed on the basis of a 360-day year of twelve thirty-day months.
Distributions on the Exchange Preferred Securities will be cumulative,
will accrue from the date of initial issuance and will be payable semi-annually
in arrears on each February 15 and August 15, commencing February 15, 1998,
when, as and if the Trust has funds available for payment.
Distributions on the Exchange Preferred Securities must be paid
semi-annually on the dates payable to the extent that the Trust has funds
available for the payment of such Distributions. The Trust's funds available for
distribution to the holders of the Exchange Preferred Securities will be limited
to payments received from the Company on the Exchange Notes in which the Trust
has invested the proceeds from the issuance and sale of the Trust Securities.
See "Description of the Exchange Notes." The payment of Distributions, to the
extent of funds of the Trust available therefor, is guaranteed by the Company on
a limited basis, as set forth under "Description of the Exchange Guarantee."
Distributions on the Exchange Preferred Securities will be payable to
the holders thereof as they appear on the books and records of the Trust on the
relevant record dates, which will be one day prior to the relevant payment dates
(fifteen days if the Exchange Preferred Securities do not remain in
book-entry-only form). Subject to any applicable laws and regulations and the
provisions of the Declaration, each such payment will be made as described under
"Form,
109
Denomination, Book-Entry Procedures and Transfer" below. In the event that any
date on which Distributions are payable on the Exchange Preferred Securities is
not a Business Day (as defined below), payment of the Distribution payable on
such date will be made on the next succeeding day which is a Business Day
(without any distribution or other payment in respect of any such delay) except
that, if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on such date. A "Business Day" shall mean any
day other than a day on which banking institutions in the City of New York are
authorized or required by law to close.
So long as no Event of Default under the Indenture shall have occurred
and be continuing, the Company has the right under the Indenture to defer
payment of interest on the Exchange Notes at any time or from time to time for a
period not exceeding ten consecutive semi-annual periods (collectively, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity Date. As a consequence of any such deferral of interest payments
by the Company, semi-annual Distributions on the Exchange Preferred Securities
will also be deferred by the Trust during any such Extension Period.
Distributions to which holders of the Exchange Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate per annum of 9 1/2%
thereof, compounded semi-annually from the relevant payment date for such
Distributions. The term "Distributions" as used herein shall include any such
additional Distributions.
During any such Extension Period, the Company may extend such Extension
Period, provided that such extension does not cause such Extension Period to
exceed ten consecutive semi-annual periods or to extend beyond the Stated
Maturity Date. Upon the termination of any such Extension Period and the payment
of all amounts then due, and subject to the foregoing limitations, the Company
may elect to begin a new Extension Period. The Company must give the Preferred
Trustee and the Indenture Trustee notice of its election of any Extension Period
or any extension thereof at least five Business Days prior to the earlier of (i)
the date the Distributions on the Exchange Preferred Securities would have been
payable except for the election to begin or extend such Extension Period and
(ii) the date the Trustees are required to give notice to any securities
exchange or to holders of the Exchange Preferred Securities of the record date
or the date such Distributions are payable, but in any event not less than five
Business Days prior to such record date. There is no limitation on the number of
times that the Company may elect to begin an Extension Period. Such deferral
shall not be deemed a default under the Indenture. Such extension shall not be
deemed a default under the Indenture. See "Description of the Exchange Notes"
and "Certain United States Federal Income Tax Considerations."
During any such Extension Period, the Company may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's Capital Stock, (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Senior Subordinated Notes subject
to certain exceptions described herein or (iii) make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any subsidiary
of the Company if such guarantee ranks pari passu with or junior in right of
payment to the Senior Subordinated Notes (other than (a) dividends or
distributions in shares of, or options, warrants or rights to subscribe for or
purchase shares of, common stock of the Company, (b) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Exchange
Guarantee, (d) as a result of a reclassification of the Company's Capital Stock
or the exchange or conversion of one class or series of the Company's Capital
Stock for another class or series of the Company's Capital Stock, (e) the
purchase of fractional interests in shares of the Company's Capital Stock
pursuant to the conversion or exchange provisions of such Company Capital Stock
or the security being converted or exchanged and (f) purchases or issuances of
Common Stock in connection with any of the Company's stock option, stock
purchase, stock loan or other benefit plans for its directors, officers or
employees or any of the Company's dividend reinvestment plans, in each case as
now existing or hereafter established or amended). See "Description of Exchange
Notes."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Exchange
Notes.
110
Optional Redemption
The Company is permitted to redeem the Exchange Notes in whole or in
part, from time to time, after August 15, 2007, upon not less than thirty nor
more than sixty days' notice. See "Description of the Exchange Notes -- Optional
Redemption." Upon any redemption in whole or in part of the Exchange Notes at
the option of the Company, the proceeds from such redemption shall
simultaneously be applied by the Trust to redeem Exchange Preferred Securities
and Common Securities at the prices set forth herein, plus accrued and unpaid
Distributions thereon to the date fixed for redemption ("Redemption Price")
together with the related amount of the premium, if any, paid by the Company
upon the concurrent redemption of such Exchange Notes. See "Description of
Exchange Notes -- Optional Redemption."
In the event that fewer than all the outstanding Exchange Notes are to
be so redeemed, then the proceeds from such redemption shall be allocated to the
redemption pro rata of the Exchange Preferred Securities and the Common
Securities.
In the event of any redemption in part, the Trust shall not be required
to (i) issue, register the transfer of or exchange any of the Exchange Preferred
Securities during a period beginning at the opening of business fifteen days
before any selection for redemption of Exchange Preferred Securities and ending
at the close of business on the earliest date in which the relevant notice of
redemption is deemed to have been given to all holders of Exchange Preferred
Securities to be so redeemed and (ii) register the transfer of or exchange any
Exchange Preferred Securities so selected for redemption, in whole or in part,
except for the unredeemed portion of any Exchange Preferred Securities being
redeemed in part.
Tax Event or Investment Company Event Redemption or Distribution
If a Tax Event or Investment Company Event (as defined herein) shall
occur and be continuing, the Company shall cause the Trustees to dissolve and
liquidate the Trust and, after satisfaction of the liabilities of the Trust,
cause the Exchange Notes to be distributed to the holders of the Trust
Securities in liquidation of the Trust within ninety days following the
occurrence of such Tax Event; provided, however, that such liquidation and
distribution shall be conditioned on (i) the Trustees' receipt of an opinion of
independent tax counsel experienced in such matters (a "No Recognition
Opinion"), which opinion may rely on published revenue rulings of the Internal
Revenue Service, to the effect that the holders of the Exchange Preferred
Securities will not recognize any income, gain or loss for United States federal
income tax purposes as a result of such liquidation and distribution of Exchange
Notes and (ii) the Company being unable to avoid such Tax Event within such
90-day period by taking some ministerial action or pursuing some other
reasonable measure that will have no adverse effect on the Trust, the Company or
the holders of the Exchange Preferred Securities and will involve no material
cost. Furthermore, if (i) the Company has received an opinion (a "Redemption Tax
Opinion") of independent tax counsel experienced in such matters that, as a
result of a Tax Event, there is more than an insubstantial risk that the Company
would be precluded from deducting the interest on the Exchange Notes for United
States federal income tax purposes, even after the Exchange Notes were
distributed to the holders of the Exchange Preferred Securities upon liquidation
of the Trust as described above or (ii) the Trustees shall have been informed by
such tax counsel that it cannot deliver a No Recognition Opinion, the Company
shall have the right, upon not less than thirty nor more than sixty days' notice
and within ninety days following the occurrence of the Tax Event, to redeem the
Exchange Notes, in whole (but not in part) for cash, at 100% of the principal
amount thereof plus accrued and unpaid interest and, following such redemption,
all the Exchange Preferred Securities and Common Securities will be redeemed by
the Trust at the Liquidation Amount of $1,000 per Trust Security plus accrued
and unpaid Distributions; provided, however, that, if at the time there is
available to the Company or the Trust the opportunity to eliminate, within such
ninety-day period, the Tax Event by taking some ministerial action or pursuing
some other reasonable measure that will have no adverse effect on the Trust, the
Company or the holders of the Exchange Preferred Securities and will involve no
material cost, the Trust or the Company will pursue such measure in lieu of
redemption. See " -- Mandatory Redemption."
111
If the Company does not elect any of the options described above, the
Exchange Preferred Securities will remain outstanding until repayment of the
Exchange Notes, whether at maturity or redemption, and in the event a Tax Event
has occurred and is continuing pursuant to the Indenture, the Company will be
obligated to pay any additional taxes, duties, assessments and other
governmental charges (other than withholding taxes) to which the Trust has
become subject as a result of the Tax Event as additional interest on the
Exchange Notes.
"Tax Event" means that the Company shall have obtained an opinion of an
independent tax counsel experienced in such matters to the effect that, as a
result of (i) any amendment to or change (including any announced proposed
change) in the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein or (ii) any
amendment to or change in an interpretation or application of such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination on or after the date of issuance
of the Exchange Preferred Securities), which amendment or change is effective or
which proposed change, interpretation or pronouncement is announced on or after
the date of this Prospectus, there is more than an insubstantial risk that (i)
the Trust is or, within ninety days of the delivery of opinion of counsel, will
be subject to United States federal income tax with respect to interest received
or accrued on the Senior Subordinated Notes, (ii) interest payable to the Trust
on the Senior Subordinated Notes is not or, within ninety days of the delivery
of opinion of counsel, will not be deductible for United States federal income
tax purposes by the Company or (iii) the Trust is or, within ninety days of the
delivery of opinion of counsel, will be subject to more than a de minimis amount
of other taxes, duties, assessments or other governmental charges of whatever
nature imposed by the United States or any other taxing authority.
"Investment Company Event" means the receipt by the Company of an
Opinion of Counsel, rendered by an independent law firm having experience in tax
and securities matters, to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of law
or regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law"), the Trust is or will be considered an
"investment company" that is required to be registered under the 1940 Act, which
Change in 1940 Act Law becomes effective on or after the date of original
issuance of the Preferred Securities of the Trust.
Mandatory Redemption
The Exchange Notes will mature on August 15, 2027 and may be redeemed,
in whole or in part, at any time after August 15, 2007 or at any time in certain
circumstances upon the occurrence of a Tax Event or an Investment Company Event.
Upon the repayment of the Exchange Notes, whether at maturity, upon redemption,
by declaration or otherwise, after satisfaction of the liabilities of the Trust,
the proceeds from such repayment or redemption shall simultaneously be applied
to redeem Trust Securities having an aggregate Liquidation Amount equal to the
Exchange Notes so repaid or redeemed at the Redemption Price together with the
related amount of premium, if any, paid by the Company upon the concurrent
redemption of such Exchange Notes, provided that holders of the Trust Securities
shall be given not less than thirty nor more than sixty days' notice of such
redemption. See " -- Tax Event or Investment Company Event Redemption or
Distribution," "Description of the Exchange Notes -- General" and "Optional
Redemption." If less than all of the Exchange Notes are to be repaid or
redeemed, then the proceeds from such prepayment or redemption shall be
allocated to the redemption pro rata of the Exchange Preferred Securities and
the Common Securities. The amount of premium, if any, paid by the Company upon
the redemption of all or any part of the Exchange Notes to be repaid or redeemed
shall be allocated to the redemption pro rata of the Exchange Preferred
Securities and the Common Securities.
Change of Control Redemption
Upon the occurrence of a Change of Control Triggering Event (as defined
herein), a holder of Trust Securities has the right to require the Trust to
exchange all or any part of the holder's Trust Securities for Notes having an
aggregate principal amount equal to the aggregate Liquidation Amount of the
Trust Securities so offered. Upon the occurrence of such an event, the Company
will be required to immediately redeem any Exchange Notes so exchanged
112
at a redemption price equal to 101% of the principal amount thereof plus any
accrued and unpaid interest. See "Description of the Exchange Notes -- Change of
Control."
Liquidation Distribution Upon Dissolution
In the event of any voluntary or involuntary liquidation, dissolution,
winding up or termination of the Trust, the holders of Trust Securities at the
time will be entitled to receive out of the assets of the Trust available for
Distribution to holders of Trust Securities after satisfaction of liability to
creditors of the Trust an amount equal to the aggregate of the stated
Liquidation Amount of $1,000 per each of the Exchange Preferred Securities and
accrued and unpaid distributions thereon to the date of payment (the
"Liquidation Distribution"), unless, in connection with such liquidation,
dissolution, winding up or termination, Senior Subordinated Notes in an
aggregate principal amount equal to the Liquidation Distribution have been
distributed on a pro rata basis to the holders of the Exchange Preferred
Securities. If such Liquidation Distribution can be paid only in part because
the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Exchange Preferred Securities shall be paid on a pro rata basis. The holder(s)
of the Trust's Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Exchange Preferred
Securities, except that if a Declaration Event of Default has occurred and is
continuing, the Exchange Preferred Securities shall have a priority over the
Common Securities.
Pursuant to the Declaration, the Trust shall be dissolved and its
affairs shall be wound up upon the earliest to occur of the following: (i)
August 15, 2047, the expiration of the term of the Trust, (ii) the bankruptcy,
liquidation or dissolution of the Company, (iii) the revocation of the Company's
charter and the expiration of 90 days after the date of revocation without a
reinstatement thereof, (iv) the entry of a decree of judicial dissolution of the
Company or the Trust by a court of competent jurisdiction, (v) all of the Trust
Securities have been called for redemption and the Redemption Price has been
paid to the holders in accordance with the terms of the Trust Securities, (vi)
the distribution of all of the Trust Property (as defined in the Declaration),
(viii) the written direction to the Preferred Trustee from the Company at any
time (which direction is optional and wholly within the discretion of the
Company) to dissolve the Trust and distribute the Senior Subordinated Notes to
the holders thereof in exchange for the Exchange Preferred Securities, (ix) the
redemption of all of the Exchange Preferred Securities in connection with the
redemption of all of the Senior Subordinated Notes, (x) subject to certain
conditions, the occurrence of a Tax Event, (xi) the occurrence of an Investment
Company Event or (xii) the occurrence of a Change of Control Triggering Event.
Redemption Procedures
The Exchange Preferred Securities will not be redeemed unless all
accrued and unpaid Distributions have been paid on all Exchange Preferred
Securities for all semi-annual distribution periods terminating on or prior to
the date of redemption.
If the Trust gives a notice of redemption in respect of Exchange
Preferred Securities (which notice will be irrevocable), then, by 12:00 noon,
New York City time, on the redemption date, the Trust will irrevocably deposit
with DTC funds sufficient to pay the amount payable on redemption and will give
DTC irrevocable instructions and authority to pay such amount in respect of
Exchange Preferred Securities represented by the Global Exchange Preferred
Securities and will irrevocably deposit with the paying agent for the Exchange
Preferred Securities funds sufficient to pay such amount in respect of any
Exchange Preferred Securities and will give such paying agent irrevocable
instructions and authority to pay such amount to the holders of Exchange
Preferred Securities upon surrender of their certificates. Notwithstanding the
foregoing, Distributions payable on or prior to the redemption date for any
Exchange Preferred Securities called for redemption shall be payable to the
holders of such Exchange Preferred Securities on the relevant record dates for
the related Distribution dates. If notice of redemption shall have been given
and funds are deposited as required, then upon the date of such deposit, all
rights of holders of such Exchange Preferred Securities so called for redemption
will cease; except for the right of the holders of such Exchange Preferred
Securities to receive the redemption price and any Distributions payable on or
prior to the date of redemption, but without interest on such redemption price.
In the event that any date fixed for redemption of Exchange Preferred Securities
is not a Business
113
Day, then payment of the amount payable on such date will be made on the next
succeeding day which is a Business Day (without any interest on other payment in
respect of any such delay), except that, if such Business Day falls in the next
calendar year, such payment will be made on the immediately preceding Business
Day. In the event that payment of the redemption price in respect of Exchange
Preferred Securities is improperly withheld or refused and not paid by the Trust
or the sponsor pursuant to the Exchange Guarantee, Distributions on such
Exchange Preferred Securities will continue to accrue at the then applicable
rate, from the original redemption date to the date of payment, in which case
the actual payment date will be considered the date fixed for redemption for the
purpose of calculating the amount payable upon redemption (other than for the
purpose of calculating any premium).
Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Company or its
Subsidiaries may at any time and from time to time purchase outstanding Exchange
Preferred Securities by tender, in the open market or by private agreement. If
less than all of the Exchange Preferred Securities and Common Securities are to
be redeemed, then the aggregate Liquidation Amount of such Exchange Preferred
Securities and Common Securities to be redeemed shall be allocated pro rata to
the Preferred Securities and the Common Securities based upon the relative
liquidation amounts of such classes. The Preferred Trustee shall promptly notify
the trust registrar in writing of the portion of the Preferred Securities to be
redeemed. For all purposes of the Declaration, unless the context otherwise
requires, all provisions relating to the redemption of Exchange Preferred
Securities shall relate, in the case of any Preferred Securities redeemed or to
be redeemed only in part, to the portion of the aggregate Liquidation Amount of
Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least thirty days but nor
more than sixty days before the date of the redemption to each holder of Trust
Securities to be redeemed at its registered address. Unless the Company defaults
in payment of the redemption price on the Exchange Notes, on and after the date
of the redemption interest ceases to accrue on such Exchange Notes or portions
thereof (and Distributions cease to accrue on the Exchange Preferred Securities
or portions thereof) called for redemption.
Subordination of Common Securities
Payment of Distributions on, and the amount payable upon redemption or
liquidation of, the Trust Securities, as applicable, shall be made pro rata
based on the Liquidation Amount of such Trust Securities; provided, however,
that, if on any distribution date or redemption date a Declaration Event of
Default (as defined below) under the Declaration shall have occurred and be
continuing, no payment of any distribution on, or amount payable upon redemption
of, any Common Security, and no other payment on account of the redemption,
liquidation or other acquisition of Common Securities, shall be made unless
payment in full in cash of accumulated and unpaid Distributions on all
outstanding Exchange Preferred Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the amount payable
upon redemption of the Exchange Preferred Securities, the full amount thereof in
respect of all outstanding Exchange Preferred Securities, shall have been made
or provided for, and all funds available to the Preferred Trustee shall first be
applied to the payment in full in cash of all Distributions on, or the amounts
payable upon redemption of, Preferred Securities then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived the right to act with respect to any
such Declaration Event of Default until all such Declaration Events of Default
with respect to the Exchange Preferred Securities have been cured, waived or
otherwise eliminated. Until any such Declaration Events of Default with respect
to the Exchange Preferred Securities have been cured, waived or otherwise
eliminated, the Trustees shall act solely on behalf of the holders of the
Exchange Preferred Securities and not the holder of the Common Securities, and
only the holders of the Exchange Preferred Securities will have the right to
direct the Trustees to act on their behalf.
Declaration Events of Default
An event of default under the Indenture (an "Event of Default") or a
default by the Company under the Exchange Guarantee constitutes an event of
default under the Declaration with respect to the Trust Securities (a
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"Declaration Event of Default"); provided that pursuant to the Declaration, the
holder(s) of the Common Securities will be deemed to have waived any Declaration
Event of Default with respect to the Common Securities until all Declaration
Events of Default with respect to the Exchange Preferred Securities have been
cured, waived or otherwise eliminated. Until such Declaration Events of Default
with respect to the Exchange Preferred Securities have been so cured, waived or
otherwise eliminated, the Preferred Trustee will be deemed to be acting solely
on behalf of the holders of the Exchange Preferred Securities and only the
holders of the Exchange Preferred Securities will have the right to direct the
Preferred Trustee with respect to certain matters under the Declaration and,
therefore, the Indenture.
If a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest on or
principal of the Senior Subordinated Notes on the date such interest or
principal is otherwise payable (or in the case of redemption, the redemption
date), unless such payment is otherwise excused for the reasons herein stated,
then holders of not less than 25% in Liquidation Amount of outstanding Exchange
Preferred Securities have the right to appoint a trustee (the "Special Trustee")
to act on behalf of all holders of Exchange Preferred Securities. The Special
Trustee appointed in accordance with the preceding sentence will represent the
holders of all outstanding Exchange Preferred Securities unless the holders of
at least a majority in Liquidation Amount of the outstanding Exchange Preferred
Securities appoint an alternative Special Trustee in which case the Special
Trustee appointed in accordance with the preceding sentence will be required to
resign as Special Trustee. At no time can there be more than one Special Trustee
acting on behalf of the holders of Exchange Preferred Securities. The Special
Trustee will have the right to directly institute a proceeding against the
Company (a "Trustee Action") for enforcement of payment to the Holders of
Exchange Preferred Securities of the principal of or interest on the Exchange
Notes having a principal amount equal to the aggregate Liquidation Amount of the
Exchange Preferred Securities of such Holders. In connection with such action,
the rights of the Company as holder of Common Securities will be subrogated to
the rights of the Holders of Exchange Preferred Securities under the Declaration
to the extent of any payment made by the Company to such Holders in such Trustee
action. If the Preferred Trustee or the Special Trustee do not enforce such
payment obligations, a holder of Exchange Preferred Securities will have the
right to bring an action on behalf of the Trust to enforce the Trust's rights
under the Exchange Notes and the Indenture. The holders of Exchange Preferred
Securities will not be able to exercise directly any other remedy available to
the holders of the Exchange Notes.
Upon the occurrence of a Declaration Event of Default, the Preferred
Trustee as the sole holder of the Exchange Notes will have the right under the
Indenture to declare the principal of and interest on the Exchange Notes to be
immediately due and payable. The Company and the Trust are each required to file
annually with the Preferred Trustee an officer's certificate as to its
compliance with all conditions and covenants under the Declaration.
Merger, Consolidation or Amalgamation of the Trust
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below, or as described in "Liquidation Distribution Upon Dissolution."
The Trust may, without the consent of the holders of the Exchange Preferred
Securities, consolidate, amalgamate, merge with or into, or be replaced by, or
convey, transfer or lease its properties and assets substantially as an entirety
to, a trust organized as such under the laws of any state of the United States
of America; provided that (i) if the Trust is not the survivor, such successor
entity either (x) expressly assumes all of the obligations of the Trust under
the Trust Securities or (y) substitutes for the Trust Securities other
securities having substantially the same terms as the Trust Securities (the
"Successor Securities") as long as the Successor Securities rank the same as the
Trust Securities with respect to distributions and payments upon liquidation,
redemption and otherwise, (ii) the Company expressly appoints a trustee of the
successor entity that possesses the same powers and duties as the Preferred
Trustee as the holder of the Senior Subordinated Notes, (iii) the Exchange
Preferred Securities or any Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Exchange Preferred
Securities are then listed, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Exchange Preferred Securities (including any Successor Securities) to be
downgraded by any statistical rating organization, (v) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Securities (including any Successor
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Securities) in any material respect, (vi) such successor entity has a purpose
substantially identical to that of the Trust, (vii) the Company has provided a
guarantee to the holders of the Successor Securities with respect to such
successor entity having substantially the same terms as the Exchange Guarantee
and (viii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Company has received an opinion of
independent counsel to the Trust experienced in such matters to the effect that
(x) such successor entity will be treated as a grantor trust for United States
federal income tax purposes or otherwise as an entity that is not subject to
United States federal income tax at the entity level and the assets and income
of which are treated for United States federal income tax purposes as held and
derived directly by holders of interests in the entity, (y) following such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
neither the Company nor such successor entity will be required to register as an
investment company under the 1940 Act and (z) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease will not adversely
affect the rights, preferences, privileges and limited liability of the Exchange
Preferred Securities in any material respect. Notwithstanding the foregoing, the
Trust shall not, except with the consent of the holders of 100% in Liquidation
Amount of the Trust Securities, consolidate, amalgamate, merge with or into, be
replaced by, convey, transfer or lease its properties and assets substantially
as an entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into or replace it, if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Trust or the successor entity to be classified as other than a grantor trust for
United States federal income tax purposes or another entity which is not subject
to United States federal income tax at the entity level and the assets and
income of which are treated for United States federal income tax purposes as
held and derived directly by holders of interests in the entity.
Voting Rights
Except as described herein and under "Description of the Exchange
Guarantee -- Amendments and Assignment" and as provided in the Delaware Business
Trust Act and the Trust Indenture Act and as otherwise required by law and the
Declaration, the holders of the Preferred Securities will have no voting rights.
Subject to the requirement of the Preferred Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of this
paragraph, the holders of a majority in aggregate Liquidation Amount of the
Exchange Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Preferred
Trustee or Special Trustee, if approved, or direct the exercise of any trust or
power conferred upon the Preferred Trustee under the Declaration including the
right to direct the Preferred Trustee, as holder of the Senior Subordinated
Notes, to (i) exercise the remedies available under the Indenture with respect
to the Senior Subordinated Notes, (ii) waive any past Event of Default that may
be waived under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Exchange Notes shall be due and
payable or (iv) consent to any amendment, modification, or termination of the
Indenture or the Exchange Notes where such consent shall be required; provided,
however, that where a consent or action under the Indenture would require the
consent or act of the holders of more than a majority of the aggregate principal
amount of Exchange Notes affected thereby, only the holders of the percentage of
the aggregate stated Liquidation Amount of the Exchange Preferred Securities
which is at least equal to the percentage required under the Indenture may
direct the Preferred Trustee to give such consent or take such action. The
Trustees shall not revoke any action previously authorized or approved by a vote
of holders of Preferred Securities except by subsequent vote of the holders of
Preferred Securities. If the Preferred Trustee or the Special Trustee fails to
enforce its rights under the Exchange Notes to receive interest or principal on
the Exchange Notes on the date such interest or principal is otherwise payable
(or in the case of redemption, the redemption date), a holder of record of
Exchange Preferred Securities may institute a legal proceeding on behalf of the
Trust against the Company to enforce the Trust's rights under the Exchange Notes
without first instituting any legal proceeding against the Preferred Trustee or
any other person or entity. The holders of the Exchange Preferred Securities
would not be able to exercise directly any other remedies available to the
holder of the Exchange Notes unless the Preferred Trustee or the Indenture
Trustee, acting for the benefit of the Preferred Trustee, fails to do so. In
such event, the holders of at least 25% in aggregate Liquidation Amount of
outstanding Exchange Preferred Securities would have a right to institute such
proceedings. The Preferred Trustee shall notify all holders of the Exchange
Preferred Securities of any notice of default received from the Indenture
Trustee with respect to the Exchange Notes. Such notice shall state that such
Event of Default also constitutes a Declaration Event of Default. Except with
respect to directing the time, method and place
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of conducting a proceeding for a remedy, the Preferred Trustee shall not take
any of the actions described in clause (i), (ii) or (iii) above unless the
Preferred Trustee has obtained an opinion of tax counsel to the effect that, as
a result of such action, the Trust will not fail to be classified as a grantor
trust for United States federal income tax purposes or another entity which is
not subject to United States federal income tax at the entity level and the
assets and income of which are treated for United States federal income tax
purposes as held and derived directly by holders of interests in the entity.
In the event the consent of the Preferred Trustee, as the holder of the
Exchange Notes, is required under the Indenture with respect to any amendment,
modification or termination of the Indenture, the Preferred Trustee shall
request the direction of the holders of the Exchange Preferred Securities with
respect to such amendment, modification or termination and shall vote with
respect to such amendment, modification or termination as directed by a majority
in Liquidation Amount of the Exchange Preferred Securities; provided, however
that where a consent under the Indenture would require the consent of the
holders of more than a majority of the aggregate principal amount of the
Exchange Notes, the Preferred Trustee may only give such consent at the
direction of the holders of at least the same proportion in accordance with the
directions of the holders of the Exchange Preferred Securities unless the
Preferred Trustee has obtained an opinion of tax counsel to the effect that for
the purposes of United States federal income tax the Trust will not be
classified as other than a grantor trust or another entity which is not subject
to United States federal income tax at the entity level and the assets and
income of which are treated for United States federal income tax purposes as
held and derived directly by holders of interests in the entity.
A waiver of an Event of Default under the Indenture will constitute a
waiver of the corresponding Declaration Event of Default.
Any required approval of direction of holders of Exchange Preferred
Securities may be given at a separate meeting of holders of Exchange Preferred
Securities convened for such purpose, at a meeting of all of the holders of
Trust Securities or pursuant to written consent. The Trustees will cause a
notice of any meeting at which holders of Exchange Preferred Securities are
entitled to vote, or of any matter which action by written consent of such
holders is to be taken, to be mailed to each holder of record of Exchange
Preferred Securities. Each such notice will include a statement setting forth
the following information: (i) the date, place and purpose of such meeting or
the date by which such action is to be taken, (ii) a description of any
resolution proposed for adoption at such meeting on which such holders are
entitled to vote or of such consent of the holders of Exchange Preferred
Securities which will be required for the Trust to redeem and cancel Exchange
Preferred Securities or distribute Exchange Notes in accordance with the
Declaration.
Notwithstanding that holders of Exchange Preferred Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Exchange Preferred Securities that are owned at such time by the Company
or any entity directly or indirectly controlling or controlled by, or under
direct or indirect common control with, the Company, shall not be entitled to
vote or consent and shall, for purposes of such vote or consent, be treated as
if such Exchange Preferred Securities were not outstanding.
The procedures by which holders of Exchange Preferred Securities may
exercise their voting rights are described below.
Holders of the Exchange Preferred Securities will have no rights to
appoint or remove, or increase or decrease the number of, the Trustees, who may
be appointed, removed or replaced, increased or decreased solely by the Company
as the indirect or direct holder of all of the Common Securities.
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Modification of the Declaration
The Declaration may be modified and amended by the Trustees and the
Company, provided, that if any proposed amendment provides for, or the Trustees
or the Company otherwise propose to effect, (i) any action that would adversely
affect the powers, preferences or special rights of the Trust Securities,
whether by way of amendment to the Declaration or otherwise or (ii) the
dissolution, winding-up or termination of the Trust other than pursuant to the
terms of the Declaration, then the holders of the Trust Securities voting
together as a single class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of at least a majority in Liquidation Amount of the Trust Securities
affected thereby; provided that if any amendment or proposal referred to in
clause (i) above would adversely affect only the Exchange Preferred Securities
or the Common Securities, then only the affected class will be entitled to vote
on such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of at least a majority in Liquidation Amount
of such class of Trust Securities.
Notwithstanding the foregoing, no amendment or modification may be made
to the Declaration if such amendment or modification would (i) cause the Trust
to be classified for purposes of United States federal income taxation as other
than a grantor trust or another entity which is not subject to United States
federal income tax at the entity level and the assets and income of which are
treated for United States federal income tax purposes as held and derived
directly by holders of interests in the entity, (ii) reduce or otherwise
adversely affect the powers of the Trustees or (iii) cause the Trust to be
deemed an "investment company" which is required to be registered under the 1940
Act.
Form, Denomination, Book-Entry Procedures and Transfer
The Exchange Preferred Securities initially will be represented by one
or more Exchange Preferred Securities certificates in registered, global form
(collectively, the "Global Exchange Preferred Securities"). The Global Exchange
Preferred Securities will be deposited upon issuance with the Preferred Trustee
as custodian for DTC, in New York, New York, and registered in the name of DTC
or its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Exchange Preferred Securities may
be transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Exchange
Preferred Securities may not be exchanged for Exchange Preferred Securities in
certificated form except in the limited circumstances described below. See " --
Exchange of Book-Entry Preferred Securities for Certificated Exchange Preferred
Securities."
Depository Procedures
DTC has advised the Trust and the Company that DTC is a limited-purpose
trust company created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Trust and the Company that, pursuant to
procedure established by it, (i) upon deposit of the Global Exchange Preferred
Securities, DTC will credit the accounts of Participants with portions of the
Liquidation Amount of the Global Exchange Preferred Securities and (ii)
ownership of such interests in the Global Exchange Preferred Securities will be
shown on, and the transfer of ownership thereof will be effected only through,
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records maintained by DTC (with respect to the Participants ) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Exchange Preferred Securities).
Except as described below, owners of interests in the Global Exchange
Preferred Securities will not have Exchange Preferred Securities registered in
their name, will not receive physical delivery of Exchange Preferred Securities
in certificated form and will not be considered the registered owners or holders
thereof under the Declaration for any purpose.
Payments in respect of the Global Exchange Preferred Security
registered in the name of DTC or its nominee will be payable by the Preferred
Trustee to DTC in its capacity as the registered holder under the Trust
Agreement. Under the terms of the Declaration, the Preferred Trustee will treat
the persons in whose names the Exchange Preferred Securities, including the
Global Exchange Preferred Securities, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Preferred Trustee nor any agent thereof
has or will have any responsibility or liability for (i) any aspect of DTC's
records or any Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global
Exchange Preferred Securities, or for maintaining, supervising or reviewing any
of DTC's records or any Participant's or Indirect Participant's records relating
to the beneficial ownership interests in the Global Exchange Preferred
Securities or (ii) any other matter relating to the actions and practices of DTC
or any of its Participants or Indirect Participants. DTC has advised the Trust
and the Company that its current practice, upon receipt of any payment in
respect of securities such as the Exchange Preferred Securities, is to credit
the accounts of the relevant Participants with the payment on the payment date,
in amounts proportionate to their respective holdings in Liquidation Amount of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to be
beneficial owners of Exchange Preferred Securities will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Preferred Trustee, the Trust or the Company. None of the Trust, the
Company or the Preferred Trustee will be liable for any delay by DTC or any of
its Participants in identifying the beneficial owners of the Preferred
Securities, and the Trust or the Company and the preferred Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Beneficial interests in the Global Exchange Preferred Securities will
trade in DTC's Same-Day Funds Settlement System and secondary market trading
activity in such interest will therefore settle in immediately available funds,
subject in all cases to the rules and procedures of DTC and its participants.
DTC has advised the Trust and the Company that it will take any action
permitted to be taken by a holder of Exchange Preferred Securities only at the
direction of one or more Participants on whose account with DTC interests in the
Global Exchange Preferred Securities are credited and only in respect of such
portion of the Liquidation Amount of the Exchange Preferred Securities as to
which such Participant or Participants has or have given such direction However,
if there is a Indenture Event of Default, DTC reserves the right to exchange the
Global Exchange Preferred Securities for legended Exchange Preferred Securities
in certificated form and to distribute such Exchange Preferred Securities to its
Participants.
The information in this section concerning DTC and its book-entry
system has been obtained from sources that the Trust and the Company believe to
be reliable, but neither the Trust nor the Company takes responsibility for the
accuracy thereof.
Exchange of Book-Entry Exchange Preferred Securities for Certificated Exchange
Preferred Securities
A Global Exchange Preferred Security is exchangeable for Exchange
Preferred Securities in registered certificated form if (i) DTC (x) notifies the
Trust that it is unwilling or unable to continue as Depository for the Global
Exchange Preferred Security and the Trust thereupon fails to appoint a successor
Depository within ninety days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company in its sole discretion
elects to
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cause the issuance of the Exchange Preferred Securities in certificated form or
(iii) there shall have occurred and be continuing an Indenture Event of Default
or any event which after notice or lapse of time or both would be an Indenture
Event of Default. In addition, beneficial interests in a Global Exchange
Preferred Security may be exchanged for certificated Exchange Preferred
Securities upon request but only upon at least twenty days prior written notice
given to the Preferred Trustee by or on behalf of DTC in accordance with
customary procedures. In all cases, certificated Exchange Preferred Securities
delivered in exchange for any Global Exchange Preferred Security or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depository (in accordance with
its customary procedures) and will bear the legend referred to in "Notice to
Investors," unless the Preferred Trustee determines otherwise in compliance with
applicable law.
Payment and Paying Agency
Payments in respect of the Exchange Preferred Securities shall be made
to DTC, which shall credit the relevant accounts at DTC on the applicable
distribution dates or, in the case of certificated Exchange Preferred
Securities, such payments shall be made by check mailed to the address of the
holder entitled thereto as such address shall appear on the Register. The Paying
Agent shall initially be Wilmington Trust Company. The Paying Agent shall be
permitted to resign as Paying Agent upon thirty days' written notice to the
Trustees. In the event that Wilmington Trust Company shall no longer be the
Paying Agent, the Trustees shall appoint a successor to act as Paying Agent
(which shall be a bank or trust company.)
Registrar and Transfer Agent
Wilmington Trust Company will act as registrar and transfer agent for
the Exchange Preferred Securities. Registration of transfers of Exchange
Preferred Securities will be effected without charge by or on behalf of the
Trust, but upon payment (with the giving of such indemnity as the Trust or the
Company may require) in respect of any tax or other government charges which may
be imposed in relation to it. The Trust will not be required to register or
cause to be registered the transfer of Exchange Preferred Securities after such
Exchange Preferred Securities have been called for redemption.
Information Concerning the Preferred Trustee
The Preferred Trustee, prior to default, undertakes to perform only
such duties as are specifically set forth in the Declaration and, after default,
shall exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provision, the Preferred
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Exchange Preferred Securities, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The Preferred Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Preferred Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
Miscellaneous
The Company Trustees are authorized and directed to conduct the affairs
of and to operate the Trust in such a way that the Trust will not be deemed to
be an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for United States federal income tax
purposes or otherwise as an entity that is not subject to United States federal
income tax at the entity level and the assets and income of which are treated
for United States federal income tax purposes as held and derived directly by
holders of interests in the entity, and so that the Exchange Notes will be
treated as Indebtedness of the Company for United States federal income tax
purposes. In this connection, the Company Trustees and the Company are
authorized to take any action, not inconsistent with the applicable law, the
certificate of trust or the Indenture that the Trustees determine in their
discretion to be necessary or desirable for such purposes as long as such action
does not adversely affect in any material respect the interests of the holders
of the Preferred Securities.
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Expenses and Taxes
The Trust was created solely to facilitate an investment in the Senior
Subordinated Notes; consequently, the Company, as borrower, has agreed in the
Indenture, to pay all debts and obligations (other than with respect to the
Securities and Common Securities) and all costs and expenses of the Trust
(including, but not limited to, all costs and expenses relating to the
organization of the Trust, and fees and expenses of the Trustees and all costs
and expenses relating to the operation of the Trust) and to pay any and all
taxes, duties, assessments or governmental charges of whatever nature (other
than withholding taxes) imposed on the Trust by the United States, or any other
taxing authority, so that the net amounts received and retained by the Trust and
the Preferred Trustee after paying such expenses will be equal to the amounts
the Trust and the Preferred Trustee would have received had no such costs or
expenses been incurred by or imposed on the Trust.
The foregoing obligations of the Company are for the benefit of, and
shall be enforceable by, any person or entity to which any such debts,
obligations, costs, expenses and taxes are owed (each a "Creditor") whether or
not such Creditor has received notice thereof. Any such Creditor may enforce
such obligations of the Company directly against the Company, and the Company
has irrevocably waived any right or remedy to require that any such Creditor
take any action against the Trust or any other person before proceeding against
the Company. The Company shall execute such additional agreement as may be
necessary or desirable to effect the foregoing.
Governing Law
The Declaration and the Exchange Preferred Securities will be governed
by and construed in accordance with the laws of the State of Delaware.
Information Concerning the Delaware Trustee
The Delaware Trustee is Wilmington Trust Company. The Delaware Trustee
shall be one of the trustees of the Trust for the sole and limited purpose of
fulfilling the requirements of the Delaware Business Trust Act for a trustee
that is either a natural person who is a resident of Delaware or a legal entity
with its principal place of business in that State.
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DESCRIPTION OF THE EXCHANGE NOTES
The Old Senior Subordinated Notes were issued and the Exchange Notes
will be issued as separate series under the Indenture. The Indenture has been
qualified under the Trust Indenture Act. The following summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Indenture. Capitalized terms not otherwise defined
herein have the meaning assigned to the in the Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Tax Event, Change of Control Triggering Event or
Investment Company Event, Exchange Notes may be distributed to the holders of
the Exchange Preferred Securities in liquidation of the Trust. See "Description
of the Exchange Notes -- Tax Event or Investment Company Event Redemption or
Distribution" and "Description of the Exchange Notes -- Change of Control."
General
The Exchange Notes will be issued under the Indenture and will be
limited in aggregate principal amount to the sum of the aggregate stated
Liquidation Amount of the Trust Securities.
The Exchange Notes are not entitled to the benefit of any sinking fund.
The entire principal amount of the Exchange Notes will become due and payable,
together with any accrued and unpaid interest thereon, on August 15, 2027.
The Exchange Notes will initially be issued in fully registered
certificated form and held by the Preferred Trustee. If distributed to holders
of Exchange Preferred Securities in a dissolution of the Trust or following a
Change of Control Triggering Event, the Exchange Notes will then be issued as a
global security to the extent of any Global Exchange Preferred Securities at the
time representing any Exchange Preferred Securities and otherwise in fully
registered, certificated form. In the event that Exchange Notes are issued in
certificated form, such Exchange Notes will be in denominations of $1,000 and
integral multiples thereof and may be transferred or exchanged at the offices
described below.
Payments on Exchange Notes issued as a global security will be made in
immediately available funds to DTC, as the depository for the Exchange Notes. In
the event Exchange Preferred Securities are issued in certificated form,
principal and interest will be payable, the transfer of the Exchange Notes will
be registrable and Old Senior Subordinated Notes will be exchangeable for
Exchange Notes of other denominations of a like aggregate principal amount at
the corporate trust office of the Indenture Trustee; provided that, unless the
Exchange Notes are held by the Trust or any successor permissible as described
under "Description of the Exchange Preferred Securities -- Merger, Consolidation
or Amalgamation of the Trust," payment of interest may be made at the option of
the Company by check mailed to the addresses of the persons entitled thereto.
Interest
The Exchange Notes will bear interest at the rate of 9 1/2% per annum
from the original date of issuance, payable semi-annually in arrears on February
15 and August 15 (each, an "Interest Payment Date"), commencing February 15,
1998, to the person in whose name such Exchange Note is registered at the close
of business on the fifteenth day immediately preceding such Interest Payment
Date. Interest on the Exchange Notes will accrue from the most recent date on
which interest has been paid or, if no interest has been paid, from the Issue
Date. Interest in arrears for more than one semi-annual period (and interest
thereon) will accrue interest (compounded semi-annually) at the same rate, to
the extent permitted by applicable law.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve, thirty-day months. In the event that any date
on which interest is payable on the Exchange Notes is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day which is a Business Day (without
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any interest or other payment in respect of any such delay), except that, if
such Business Delay is in the next succeeding calendar year, such payment shall
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on such date.
Option to Extend Interest Payment Date
Unless an Event of Default has occurred and is continuing, the Company
will have the right under the Indenture at any time during the term of the
Exchange Notes to defer the payment of interest at any time or from time to time
for a period not exceeding ten consecutive semi-annual periods with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity Date. As a consequence of any such deferral, semi-annual
Distributions on the Exchange Preferred Securities by the Trust will be deferred
during any such Extension Period. At the end of an Extension Period, the Company
must pay all interest then accrued and unpaid (together with interest then
accrued at the annual rate of 9 1/2%, compounded semi-annually, to the extent
permitted by applicable law). During an Extension Period, interest will continue
to accrue and holders of Exchange Notes (and holders of the Trust Securities
while Trust Securities are outstanding) will be required to accrue interest
income (in the form of OID) for United States federal income tax purposes prior
to the receipt of cash attributable to such income. See "Certain United States
Federal Income Tax Considerations -- Interest Income and Original Issue
Discount."
During any such Extension Period, the Company may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's Capital Stock (which
includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu in all respect with or junior to
the Exchange Notes, subject to certain exceptions described herein or (iii) make
any guarantee payments with respect to any guarantee by the Company of the debt
securities of any Subsidiary of the Company if such guarantee ranks pari passu
with or junior in right of payment to the Exchange Notes (other than (a)
dividends or distributions in shares of or options, warrants or rights to
subscribe for or purchase shares of, Common Stock of the Company, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Exchange Guarantee, (d) as a result of a reclassification of
the Company's Capital Stock or the exchange or conversion of one class or series
of the Company's Capital Stock for another class or series of the Company's
Capital Stock, (e) the purchase of fractional interests in shares of the
Company's Capital Stock pursuant to the conversion or exchange provisions of
such Capital Stock or the security being converted or exchanged and (f)
purchases or issuances of Common Stock under any of the Company's stock option,
stock purchase, stock loan or other benefit plans for its directors, officers or
employees or any of the company's dividend reinvestment plans, in each case as
now existing or hereafter established or amended).
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed ten consecutive semi-annual periods or to
extend beyond the Stated Maturity Date. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest Payment
Date, the Company may elect to begin a new Extension Period, subject to the
above requirements. No interest shall be due and payable during an Extension
Period, except at the end thereof. The Company must give the Preferred Trustee
and Indenture Trustee notice of its election of any Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Exchange Preferred Securities would have been
payable except for the election to begin or extend such Extension Period or (ii)
the date the Trustees are required to give notice to any securities exchange or
to holders of Trust Securities of the record date or the date such Distributions
are payable, but in any event not less than five Business Days prior to such
record Date. The Indenture Trustee shall give notice of the Company's election
to begin or extend a new Extension Period to the holders of the Exchange
Preferred Securities. There is no limitation on the number of times that the
Company may elect to begin an Extension Period. No such extension shall be
deemed an Event of Default under the Indenture.
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Optional Redemption
The Company shall have the right to redeem the Exchange Notes, in whole
or in part, at any time or from time to time after August 15, 2007, upon not
less than thirty or more than sixty day's notice, at the Redemption Prices (as
defined in the Indenture) (expressed as a percentage of principal amount) set
forth below plus accrued and unpaid interest to the Redemption Date (as defined
in the Indenture) (subject to the right of holders of record on the relevant
Regular Record Date (as defined in the Indenture) to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date) if redeemed
during the twelve-month period beginning on August 15 of the years indicated
below:
Percentage of
Year Principal Amount
- ---- ----------------
2007...............................................................104.750%
2008...............................................................103.167%
2009...............................................................101.583%
2010 and thereafter................................................100.000%
In the event of any redemption in part, the Company shall not be
required to (i) issue, register the transfer of or exchange any Exchange Note
during a period beginning at the opening of business fifteen days before any
selection for redemption of Exchange Notes and ending at the close of business
on the earliest date on which the relevant notice of redemption is deemed to
have been given to all holders of Exchange Notes to be so redeemed or (ii)
register the transfer of or exchange any Exchange Notes so selected for
redemption, in whole or in part, except the unredeemed portion of any Exchange
Note being redeemed in part.
Subordination
The indebtedness evidenced by the Exchange Notes will be senior
subordinated obligations of the Company. The payment of the principal of
(including any payments on redemption or repurchase), premium (if any) and
interest on the Exchange Notes is subordinate in right of payment, as set forth
in the Indenture, to all Senior Indebtedness of the Company, whether outstanding
on the date the Exchange Notes are originally issued or thereafter incurred.
Although the Indenture contains limitations on the amount of Additional
Indebtedness that the Company may Incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "Certain Covenants."
The Exchange Notes will be issued in denominations of $1,000 and
integral multiples thereof. The Exchange Notes will mature on August 15, 2027
(the "Stated Maturity Date"). The Exchange Notes will be unsecured and
subordinate and rank junior in right of payment to the extent and in the manner
set forth in the Indenture to all Senior Indebtedness. Almost all of the
Company's assets consist of stock in the Subsidiaries. Consequently, the Company
relies primarily on dividends, interest and fees from such Subsidiaries to meet
its obligations. The Company is a legal entity separate and distinct from its
Subsidiaries. The principal sources of the Company's income are dividends,
interest and fees from its Subsidiaries. The Company's ability to meet debt
service obligations and pay operating expenses depends on receipt of sufficient
funds from its direct and indirect Subsidiaries. The inability of the Company's
direct and indirect Subsidiaries to pay dividends, interest and fees to the
Company in an amount sufficient to meet debt service obligations and pay
operating expenses would have a material adverse effect on the Company and the
Trust. The payment of dividends by the Company's Subsidiaries without prior
regulatory approval is subject to restrictions set forth in the insurance laws
and regulations of Indiana and Florida, the states of domicile of the Company's
Insurance Subsidiaries. The Company currently does not expect such regulatory
requirements to impair its ability to meet interest payment obligations and to
pay operating expenses in the future. However, the Company can give no assurance
that dividends will be declared or paid by its Subsidiaries. As of June 30,
1997, IGF and Pafco would be permitted to pay an aggregate of $12.7 million in
dividends without prior regulatory approval. In addition, payment of dividends
to the
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Company by the insurance Subsidiaries is subject to ongoing review by insurance
regulators and is subject to various statutory limitations and in certain
circumstances requires approval by insurance regulatory authorities. The right
of the Company to participate in any distribution of assets of any Subsidiary
upon such Subsidiary's liquidation or reorganization or otherwise is subject to
the prior claims of creditors of the Subsidiary, except to the extent the
Company may itself be recognized as a creditor of that Subsidiary. Accordingly,
the Exchange Notes will be effectively subordinated to all existing and future
liabilities of the Company's Subsidiaries, and holders of Exchange Notes should
look only to the assets of the Company for payments on the Exchange Notes. In
addition, because many of the Company's Subsidiaries are insurance companies
subject to regulatory control by various state insurance departments, the
ability of such Insurance Subsidiaries to pay dividends to the Company without
prior regulatory approval is limited by applicable laws and regulations. The
Indenture does not place a limitation on the amount of additional Senior
Indebtedness that may be incurred by the Company. However, the ability of the
Company and its Subsidiaries to incur indebtedness is restricted under the
Exchange Notes. The Company expects from time to time to incur additional
indebtedness constituting Senior Indebtedness. See "Description of the Exchange
Notes -- Certain Covenants."
The Company may not pay principal of, or premium (if any) or interest
on, the Exchange Notes and may not repurchase, redeem or otherwise retire any
Exchange Notes (collectively, "pay the Notes") if (i) the Specified Senior
Indebtedness is not paid when due or (ii) any other default on Specified Senior
Indebtedness of the Company occurs and the maturity of such Specified Senior
Indebtedness is accelerated in accordance with its terms, unless, in either
case, the default has been cured or waived and any such acceleration has been
rescinded or such Specified Senior Indebtedness has been paid in full. However,
the Company may pay the Exchange Notes without regard to the foregoing if the
Company and the Indenture Trustee receive written notice approving such payment
from a representative of the Specified Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of any
default (other than a default described in clause (i) or (ii) of the second
preceding sentence) with respect to any Specified Senior Indebtedness of the
Company pursuant to which the maturity thereof may be accelerated immediately
without further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not pay the Exchange Notes for a period (a "Payment Blockage Period") commencing
upon the receipt by the Indenture Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the representative of
the holders of such Specified Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter (or earlier if
such Payment Blockage Period is terminated (i) by written notice to the
Indenture Trustee and the Company from the representative of the holders of such
Specified Senior Indebtedness, (ii) because the default giving rise to such
Blockage Notice is no longer continuing or (iii) because such Specified Senior
Indebtedness has been repaid in full). Notwithstanding the provisions described
in the immediately preceding sentence, unless the holders of such Specified
Senior Indebtedness or the representative of such holders have accelerated the
maturity of such Specified Senior Indebtedness, the Company may resume payments
on the Exchange Notes after the end of such Payment Blockage Period. The
Exchange Notes shall not be subject to more than one Payment Blockage Period in
any consecutive 360-day period, irrespective of the number of defaults with
respect to Specified Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a
total or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, the holders of Senior
Indebtedness of the Company will be entitled to receive payment in full of such
Senior Indebtedness before the holders of Senior Subordinated Notes are entitled
to receive any payment, and until the Senior Indebtedness of the Company is paid
in full, any payment or distribution to which holders of Senior Subordinated
Notes would be entitled but for the subordination provisions of the Indenture
will be made to holders of such Senior Indebtedness as their interests may
appear. If a distribution is made to holders of Senior Subordinated Notes, that,
due to the subordination provisions, should not have been made to them, such
holders are required to hold it in trust for the holders of Senior Indebtedness
of the Company and pay it over to them as their interests may appear.
If payment of the Exchange Notes is accelerated because of an Event of
Default, the Company or the Indenture Trustee shall promptly notify the holders
of Senior Indebtedness of the Company or the representative of such holders of
the acceleration. If any Senior Indebtedness is outstanding, the Company may not
pay the Notes until five Business
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Days after the representatives of all the issues of Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the Notes only if the
Indenture otherwise permits payment at that time.
By reason of the subordination provisions contained in the Indenture,
in the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness of the Company may recover more, ratably, than the holders of
Exchange Notes, and creditors of the Company who are not holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the holders of Exchange Notes.
Certain Covenants
Limitation on Restricted Payments
(a) The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, make any Restricted Payment if at the time the
Company or such Subsidiary makes such Restricted Payment: (1) a Default
shall have occurred and be continuing (or would result therefrom), (2) the
Company is not able to Incur an additional $1.00 of Indebtedness pursuant
to paragraph (a) of the covenant described under "-- Limitation of
Incurrence of Indebtedness" or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed
the sum of: (A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the Issue Date to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, in case such Consolidated Net Income shall be a deficit, minus 100% of
such deficit), (b) the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary and Disqualified Stock) subsequent to the Issue Date (other than
an issuance or sale to a Subsidiary and other than an issuance or sale to
an employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees) and (C) the
amount by which Indebtedness of the Company is reduced on the Company's
balance sheet upon the conversion or exchange (other than by a Subsidiary),
subsequent to the Issue Date, of any indebtedness of the Company
convertible or exchangeable for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash, or the fair value of
any other property, distributed by the Company upon such conversion or
exchange).
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any purchase or redemption of stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified
Stock and other than Capital Stock issued or sold to a Subsidiary or an
employee stock ownership plan or to a trust established by the Company or
any of its Subsidiaries for the benefit of their employees); provided,
however, that (A) such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale shall be excluded from the calculation of amounts
under clause (3)(B) of paragraph (a) above, (ii) any purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value of
Subordinated Obligations made by exchange for, or out of the proceeds of
the substantially concurrent sale, of, Indebtedness of the Company which is
permitted to be Incurred pursuant to the covenant described under "--
Limitation on Incurrence of Indebtedness;" provided, however, that such
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments; or (iii) dividends paid within sixty days after the
date of declaration thereof if at such date of declaration such dividend
would have complied with this covenants; provided, however, that at the
time of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided, however, that such dividend
shall be included in the calculation of the amount of Restricted Payments.
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Limitation on Incurrence of Indebtedness
(a) The Company shall not, and shall not permit any Subsidiary to,
Incur, directly or indirectly, any Indebtedness unless, on the date of such
Incurrence (and after giving effect thereto), the Consolidated Coverage
Ratio exceeds 2.5 to 1.
(b) The foregoing limitations contained in paragraph (a) do not apply
to the Incurrence of any of the following Indebtedness: (1) Indebtedness
under the Credit Agreement, (2) Indebtedness owed to an held by a Wholly
Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to another Wholly Owned
Subsidiary) shall be deemed, in each case, to constitute the Incurrence of
such Indebtedness by the Company, (3) the Exchange Notes, (4) Capital Lease
Obligations and Indebtedness incurred, in each case, to provide all or a
portion of the purchase price or cost of construction of an asset or, in
the case of a sale/leaseback transaction, to finance the value of such
asset owned by the Company or a Subsidiary, in an aggregate principal
amount which, together with all other such Capital Lease Obligations and
Indebtedness outstanding on the date of such Incurrence (other than
Indebtedness permitted by paragraph (a) or clause (2) or (9) of this
paragraph (b)), does not exceed $3 million, (5) Refinancing Indebtedness in
respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to
clause (3) or (4) of this paragraph (b), (6) Hedging Obligations permitted
under the Credit Agreement as in effect on the Issue Date, (7) customer
deposits and advance payments received from customers for goods purchased
in the ordinary course of business and (8) Indebtedness in an aggregate
principal amount which, together with all other Indebtedness of the Company
and its Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by paragraph (a) or clauses (1) through (7) of this
paragraph (b)), does not exceed $5 million.
(c) Notwithstanding the foregoing, the Company shall not, and shall
not permit any Subsidiary to, Incur, directly or indirectly, any
Indebtedness (i) that is subordinate or junior in ranking in right of
payment to its Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment
to Senior Subordinated Indebtedness or (ii) pursuant to paragraph (b) above
if the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations unless such Indebtedness shall be subordinated to
the Exchange Notes to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with the foregoing
covenant, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, the Company,
in its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
Limitation on Restrictions on Distributions from Subsidiaries
The Company shall not, and shall not permit any Subsidiary to,
voluntarily create or otherwise cause or permit to exit or become effective any
consensual encumbrance or restriction on the ability of any subsidiary (a) to
pay dividends or make any other distribution on its Capital Stock to the Company
or any other Subsidiary or pay any Indebtedness owed to the Company or any other
Subsidiary, (b) to pay any management fees or billing fees to the Company or any
other Subsidiary, (c) to make any loans or advances to the Company or any other
Subsidiary or (d) transfer any of its property or assets to the Company or any
other Subsidiary, except: (i) any encumbrance or restriction pursuant to an
agreement in effect at or entered on the Issue Date, (ii) any encumbrance or
restriction with respect to a Subsidiary pursuant to an agreement relating to
any Indebtedness Incurred by such Subsidiary on or prior to the date on which
such subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to
127
provide all or any portion of the funds or credit support utilized to consummate
the transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the Company) and outstanding
on such date, (iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (i) or (ii) above or this clause (iii) or contained in any
amendment to an agreement referred to in clause (i) or (ii) above or this
clause; provided, however, that the encumbrances and restrictions with respect
to such Subsidiary contained in any such refinancing agreement or amendment are
not less favorable to the holders of Senior Subordinated Notes than encumbrances
and restrictions with respect to such Subsidiary contained in such agreements,
(iv) any such encumbrance or restriction consisting of customary non- assignment
provisions in leases governing leasehold interest or in licensing agreements to
the extent such provisions restrict the transfer of the lease or the property
leased thereunder or the licensing agreement or the rights licensed thereunder,
(v) in the case of clause (d) above, restrictions contained in security
agreements or mortgages securing Indebtedness or a Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such security
agreements or mortgages and(vi) any restriction with respect to a Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Subsidiary pending the
closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly consummate any Asset Disposition unless (i) the
Company or such Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (including as to the
value of all non-cash consideration), as determined in good faith by the
Board of Directors of the Company or such Subsidiary as the case may be, of
the shares and assets subject to such Asset Disposition and at least 75% of
the consideration thereof received by the Company or such Subsidiary is in
the form of cash, cash equivalents or Marketable Securities and (ii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition
is applied by the Company (or such Subsidiary, as the case may be) (A)
first, to the extent the Company elects (or is required by the terms of any
Senior Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness or Indebtedness (other than any Disqualified Stock) of a
Wholly Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within eighteen months from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash, (B) second, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A), to the
extent the Company elects, to acquire Additional Assets within eighteen
months from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash and (C) third, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A)
and (B), to make an offer to the holder of the Senior Subordinated Notes to
purchase Senior Subordinated Notes pursuant to and subject to the
conditions contained in the Indenture; provided, however, that in
connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A) or (C) above, the Company or such Subsidiary shall
retire such Indebtedness and shall cause the related loan commitment (if
any) to be permanently reduced in an amount equal to the principal amount
so prepaid, repaid or purchased. Notwithstanding the foregoing provisions
of this paragraph, the Company and the Subsidiaries shall not be required
to apply any Net Available Cash in accordance with this paragraph except to
the extent that the aggregate Net Available Cash from all Asset Disposition
which are not applied in accordance with this paragraph exceeds $5 million.
Pending application of Net Available Cash pursuant to this covenant, such
Net Available Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash
or cash equivalents: (x) the assumption of Indebtedness of the Company or
any Subsidiary and the release of the Company or such Subsidiary from all
liability on such Indebtedness in connection with such Asset Disposition
and (y) securities received by the Company or any Subsidiary from the
transferee that are promptly converted by the Company or such Subsidiary
into cash.
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(b) In the event of an Asset Disposition that requires the purchase of
the Senior Subordinated Notes pursuant to clause (a)(ii)(C) above, the
Company will be required to purchase Exchange Notes tendered pursuant to an
offer by the Company for the Exchange Notes at a purchase price of 101% of
their principal amount (without premium) plus accrue but unpaid interest,
in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. The Company shall not be
required to make such an offer to purchase Senior Subordinated Notes
pursuant to this covenant if the Net Available Cash available therefor is
less than $5 million (which lesser amount shall be carried forward for
purposes of determining whether such an offer is required with respect to
any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Senior
Subordinated Notes pursuant to this covenant. To the extent that the
provisions of any securities laws or regulations conflict with provisions
of this covenant, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its
obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions
(a) The Company shall not, and shall not permit any Subsidiary to,
enter into any transaction (including the purchase, sale, lease or exchange
of any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction")
(other than reinsurance with an Affiliate in the ordinary course of
business) unless the terms thereof (1) are no less favorable to the Company
or such Subsidiary than those that could be obtained at the time of such
transaction in arm's length dealings with a Person who is not such an
Affiliate, (2) if such Affiliate Transaction involves an amount in excess
of $1 million, (i) are set forth in writing and (ii) have been approved by
a majority of the members of the Board of Directors of the Company or such
Subsidiary having no personal stake in such Affiliate Transaction and (3)
if such Affiliate Transaction involves an amount in excess of $2.5 million,
have been determined by a nationally recognized investment banking firm to
be fair from a financial standpoint to the Company and its Subsidiaries.
(b) The provisions of paragraph (a) above shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described
under " -- Limitation on Restricted Payments," (ii) transactions or
payments pursuant to any employee arrangements or employee or director
benefit plans entered into by the Company or any of its Subsidiaries in the
ordinary course of business of the Company or such Subsidiary and (iii) any
Affiliate Transaction between the company and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries.
Senior Subordinated Indebtedness; Liens
The Company shall not, and shall not permit any Subsidiary to, Incur
(i) any Indebtedness if such Indebtedness is subordinate or junior in ranking in
any respect to any Senior Indebtedness, unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness or(ii) any Secured Indebtedness that is not
Senior Indebtedness unless (A) contemporaneously therewith effective provision
is made to secure the Senior Subordinated Noes equally and ratably with such
Secured Indebtedness for so long as such Secured Indebtedness is secured by a
Lien or (b) such Secured Indebtedness is permitted by clause (1), (4), (5) or
(7) of paragraph (b) of the covenant described under " -- Limitation on
Incurrence of Indebtedness."
129
Limitation on Mergers, Acquisitions and Sales of Assets
The Indenture provides that the Company may not consolidate or merge
with or into (whether or not the Company is the Surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties and assets in one or more related transactions, to another
Person unless (i) the Surviving Person is a corporation organized and existing
under the laws of the United States of America, any state thereof or the
District of Columbia, (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under the Senior Subordinated Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Indenture Trustee, (iii) at the time of and immediately
after such transaction, no Default or Event of Default shall have occurred and
be continuing, (iv) the Surviving Person will have Consolidated Net Worth
(immediately after the transaction) equal to or greater than the Consolidated
Net Worth of the Company immediately preceding the transaction, (v) at the time
of such transaction and after giving pro forma effect thereto, the Surviving
Person would be permitted to incur at least $1.00 of additional Indebtedness
pursuant to paragraph (a) of the covenant described under " -- Limitation on
Incurrence of Indebtedness" and (vi) the Company delivers to the Indenture
Trustee an Officers' Certificate (as defined in the Indenture) and an Opinion of
Counsel (as defined in the Indenture), each stating that such consolidation,
merger or transfer and such supplemental indenture, if any, complies with the
Indenture.
Ownership of the Trust
The Company shall continue (i) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided, however, that any
permitted successor of the Company under the Indenture may succeed to the
Company's ownership of such Common Securities and (ii) to use its reasonable
efforts to cause the Trust (x) to remain a statutory business trust, except in
connection with the distribution of Exchange Notes to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities, or certain mergers, consolidations or amalgamation, each as
permitted by the Declaration and (y) to otherwise continue to be classified for
United States federal income tax purposes as a grantor trust or another entity
which is not subject to United States federal income tax at the entity level and
the assets and income of which are treated for United States federal income tax
purposes as held and derived directly by holders of interests in the entity.
Change of Control
Upon the occurrence of a Change of Control Triggering event (as defined
herein), a holder of Trust Securities has the right to require the Trust to
exchange all or any part of the holder's Trust Securities for Senior
Subordinated Notes having an aggregate principal amount equal to the aggregate
Liquidation Amount of the Trust Securities so offered. Upon the occurrence of
such an event, the Company will be required to immediately redeem any Exchange
Notes so exchanged at a redemption price equal to 101% of the principal amount
thereof plus any accrued and unpaid interest.
The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Senior Subordinated Notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this covenant, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under this covenant by virtue
thereof.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of the Exchange Preferred Securities to exchange the
Exchange Preferred Securities for Exchange Notes and their right to require the
Company to redeem the Exchange Notes could cause a default under such
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the holders of Exchange Notes following the occurrence of
a Change of Control may be limited by the Company's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases. The provisions under the
Indenture
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relative to the Company's obligation to make an offer to repurchase the Exchange
Notes as a result of a Change of Control may be waived or modified with the
written consent of the holders of a majority in principal amount of the Exchange
Notes.
Events of Default
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the Exchange Notes: (i) failure for thirty days to pay interest
on the Exchange Notes when due or (ii) failure to pay principal of or premium,
if any, on the Exchange Notes when due, whether at maturity, upon redemption, by
judicial declaration or otherwise or (iii) failure to observe or perform any
other covenant contained in the Indenture for ninety days after notice as
provided in the Indenture or (iv) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any Subsidiary
(or the payment of which is guaranteed by the Company or any Subsidiary),
whether such Indebtedness or Guarantee now exists or is incurred after the Issue
Date, if (a) such default results in the acceleration of such Indebtedness prior
to its express maturity or shall constitute a default in the payment of such
Indebtedness and (b) the principal amount of any such Indebtedness that has been
accelerated or not paid at maturity, when added to the aggregate principal
amount of all other such Indebtedness, at such time, that has been accelerated
or not paid at maturity, exceeds $10 million or (v) the dissolution, winding up
or termination of the Trust, except in connection with the distribution of
Exchange Notes to the holders of Exchange Preferred Securities in liquidation of
the Trust and in connection with certain mergers, consolidations or amalgamation
permitted by the Declaration or (vi) certain events in bankruptcy, insolvency or
reorganization of the Company.
The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Exchange Notes may declare the principal of
and interest on the Exchange Notes due and payable immediately on the occurrence
of an Event of Default; provided, however, that, after such acceleration, but
before a judgment or decree based on acceleration, the holders of a majority in
aggregate principal amount of outstanding Exchange Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived as
provided in the Indenture. For information as to waiver of defaults, see " --
Modification of the Indenture."
The Preferred Trustee is the initial holder of the Exchange Notes.
However, while the Exchange Preferred Securities are outstanding, the Preferred
Trustee has agreed under the Indenture not to waive an Event of Default with
respect to the Exchange Notes without the consent of holders of a majority in
aggregate Liquidation Amount of the Exchange Preferred Securities then
outstanding.
A default under any other indebtedness of the Company or any of its
Subsidiaries or joint ventures or the Trust would not constitute an Event of
Default under the Exchange Notes.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee in case an Event of Default shall occur and be continuing,
the Indenture Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request or direction of any holders of
Exchange Notes, unless such holders shall have offered to the Indenture Trustee
reasonable indemnity. Subject to such provisions for the indemnification of the
Indenture Trustee, the holders of a majority in aggregate principal amount of
the Exchange Notes then outstanding will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee, or exercising any trust or power conferred on the Indenture
Trustee.
No Holder of any Exchange Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such Holder shall have previously given to the Indenture Trustee written notice
of a continuing Event of Default and, if the Preferred Trustee is not the Holder
of Exchange Notes, unless the holders of at least 25% in aggregate principal
amount of the Exchange Notes then outstanding shall also have made written
request, and offered reasonable indemnity, to the Indenture Trustee to institute
such proceeding as Indenture Trustee, and the Indenture Trustee shall not have
received from the holders of a majority in aggregate principal amount of the
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outstanding Exchange Notes a direction inconsistent with such request and shall
have failed to institute such proceeding within sixty days. However, such
limitations do not apply to a suit instituted by a Holder of an Exchange Note
for enforcement of payment of the principal of and premium, if any, or interest
on such Exchange Notes on or after the respective due dates expressed in such
Exchange Note.
The holders of a majority in aggregate outstanding principal amount of
the Exchange Notes affected thereby may, on behalf of the holders of all the
Exchange Notes, waive any past default, except a default in the payment of
principal, premium, if any, or interest. The Company is required to file
annually with the Indenture Trustee and the Trustees a certificate as to whether
or not the Company is in compliance with all the conditions and covenants under
the Indenture.
Modification of the Indenture
The Indenture contains provisions permitting the Company and the
Indenture Trustee, with the consent of the holders of not less than a majority
in principal amount of the Exchange Notes, to modify the Indenture or any
supplemental indenture, provided that no such modification may, without the
consent of the Holder of each outstanding Exchange Note (or a majority in
Liquidation Amount of the Exchange Preferred Securities so long as they remain
outstanding) affected thereby, (i) extend the Stated Maturity of any Exchange
Note, or reduce the principal amount thereof, or reduce the rate or extend the
time of payment of interest thereon, except a otherwise stated herein, or reduce
any premium payable upon the redemption thereof, (ii) change the place or
currency of payment of principal of, or any premium or interest on, any Exchange
Note, (iii) impair the right to institute suit for the enforcement of any
payment on or with respect to any Exchange Note, (iv) modify the subordination
provisions in a manner advise to the holders of the Exchange Notes or (v) reduce
the percentage in principal amount of Exchange Notes the holders of which are
required to consent to any modification or amendment of the Indenture.
In addition, the Company and the Indenture Trustee may execute, without
the consent of any holder of Exchange Notes, any supplemental indenture to cure
any ambiguities, comply with the Trust Indenture Act and for certain other
customary purposes; provided that any such action does not materially adversely
affect the interest of the holders of the Exchange Notes (or the Exchange
Preferred Securities so long as they remain outstanding).
Governing Law
The Indenture and the Exchange Notes are governed by and construed in
accordance with, the laws of the State of New York.
Information Concerning the Indenture Trustee
The Indenture Trustee, prior to default, undertakes to perform only
such duties as are specifically set forth in the Indenture, and, after default,
shall exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Exchange Notes, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
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Certain Definitions
As used in the Indenture:
"Additional Assets" means (i) any property or asset (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of
a Person that becomes a Subsidiary as a result of the acquisition of such
Capital Stock by the Company or another Subsidiary or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a
Subsidiary; provided that any such Subsidiary described in clauses (ii) or (iii)
above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that an Affiliate of the
Company shall not be deemed to include the Trust. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under " -- Certain Covenants
- -- Limitation on Restricted Payments," " -- Certain Covenants -- Limitation on
Affiliate Transactions" and " -- Certain Covenants -- Limitations on Sales of
Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial
owner of Capital Stock representing 5% or more of the total voting power of the
Voting Stock (on a fully diluted basis) of the Company or of rights or warrants
to purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of any
Subsidiary (other than directors qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a Subsidiary),
(ii) all or substantially all the assets of any division or line of business of
the Company or any Subsidiary or (iii) any other assets of the Company or any
Subsidiary outside of the ordinary course of business of the Company or such
Subsidiary (other than, in the case of (i), (ii) and (ii) above, (y) a
disposition by a Subsidiary to the Company or by the Company or a Subsidiary to
a Wholly Owned Subsidiary and (z) for purposes of the covenant described under "
- -- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock"
only, a disposition that constitutes a Restricted Payment permitted by the
covenant described under " -- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under " -- Certain Covenants -- Limitation
on Restricted Payments").
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means, with respect to the Company or a
Subsidiary, as the case may be, the Board of Directors (or other body performing
functions similar to any of those performed by a Board of Directors).
"Business Day" means any day other than (i) a Saturday or Sunday, (ii)
a day on which banking institutions in the City of New York are authorized or
required by law or executive order to remain closed or (iii) a day on which the
corporate trust office of the Indenture Trustee, or, with respect to the
Exchange Preferred Securities, the principal office of the Preferred Trustee
under the Declaration, is closed for business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated
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Maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participation or other equivalents of or
interests in (however designed) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means any transaction or series of transactions in
which any Person or group (within the meaning of Rule 13d-5 under the Exchange
Act and Section 13(d) and 14(d) of the Exchange Act) other than the Company and
its subsidiaries acquires all or substantially all of the Company's assets or
becomes the direct or indirect "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), by way of merger, consolidation, other business
combination or otherwise, of greater than 50% of the total voting power (on a
fully diluted basis as if all convertible securities had been converted and all
options and warrants had been exercised) entitled to vote in the election of
directors of the Company or the Surviving Person (if other than the Company).
"Change of Control Triggering Event" means a Change of Control.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such determination to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (1) if the Company or any Subsidiary has Incurred any Indebtedness since
the beginning of such period that remains outstanding or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving effect on a pro forma basis to
such Indebtedness as if such Indebtedness had been Incurred on the first day of
such period and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, (2) if since the
beginning of such period the Company or any Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable to the Indebtedness of such Subsidiary to the
extent the Company and its continuing Subsidiaries are not longer liable for
such Indebtedness after such sale), (e) if since the beginning of such period
the Company or any Subsidiary (by merger or otherwise) shall have made an
Investment in any Subsidiary (or any person which becomes a Subsidiary) or an
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction requiring a calculation to be made hereunder,
which constitutes all or substantially all of an operating unit of a business,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the first day of
such period and (4) if since the beginning of such period any Person (that
subsequently became a Subsidiary or was merged with or into the Company or any
Subsidiary since the beginning of such period) shall have made any Asset
Disposition, any Investment or acquisition of assets that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Subsidiary during such period, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if such
Asset Disposition, Investment or acquisition occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations shall
be determined in good faith by a responsible financial or accounting officer of
the Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest of such Indebtedness shall be calculated as
if the rate in effect on the
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date of determination had been the applicable rate for the entire period (taking
into account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of twelve months).
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Subsidiaries, plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Company or its Subsidiaries, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by the Company or any
Subsidiary and (x) the cash contributions to any employee stock ownership plan
or similar trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company ) in connection
with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Subsidiary, except that (A) subject to the
exclusion contained in clause (iv) below, the Company's equity in the net income
of any such person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to a
Subsidiary, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income, (ii) any net income (or
loss) of any Person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition,
(iii) any net income of any Subsidiary that is not a Wholly Owned Subsidiary if
such Subsidiary is subject to contractual, governmental or regulatory
restrictions, directly or indirectly, on owned of dividends or the making of
distributions by such Subsidiary, directly or indirectly, to the Company, except
that (A) subject to the exclusion contained in clause (iv) below, the Company's
equity in the net income of any such Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Subsidiary during such period to the Company or
another Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution paid to another Subsidiary that is not a Wholly
Owned Subsidiary, to the limitation contained in this clause) and (b) the
Company's equity in a net loss of any such Subsidiary for such period shall be
included in determining such Consolidated Net Income, (iv) any gain (but not
loss) realized upon the sale or other disposition of any assets of the Company
or its consolidated Subsidiaries (including pursuant to any sale and leaseback
arrangement) that is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other disposition
of any Capital Stock of any Person; (v) extraordinary gains or losses and (vi)
the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital surplus relating to such
Capital Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit and (B) any amounts attributable to Disqualified Stock.
"Credit Agreement" means the Revolving Credit Facility, among IGF
Insurance Company and Bretton Bank of Des Moines, Iowa dated February 25, 1993.
"Currency Agreement" means any foregoing currency exchange contract,
currency swap agreement or other similar agreement or arrangement designed and
entered into to protect the Company or any Subsidiary against fluctuations in
currency exchange rates.
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"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default (as defined herein).
"Disqualified Stock" means, with respect to any Person, any Capital
Stock that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Senior Subordinated Notes; provided, however, that any
Capital Stock that would constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the first anniversary of the Stated Maturity of the
Senior Subordinated Notes shall not constitute Disqualified Stock if the "asset
sale" or "change of control" provisions applicable to such Capital Stock are not
more favorable to the holders of such Capital Stock than the provisions
described under " -- Certain Covenants -- Limitation on Sale of Assets and
Subsidiary Stock" and " -- Change of Control."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company and its Subsidiaries, (b) depreciation expense and (c) amortization
expense, in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary that is not a Wholly Owned Subsidiary shall be
added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
(i) in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants (ii) statements and
pronouncements of the Financial Accounting Standards Board (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guaranty" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statements conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guaranty" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guaranty" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
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"Incur" means issue, assume, Guaranty, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable, (ii) all Capital
Lease Obligations of such Person, (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property or services, all conditional
sale obligations of such Person and all obligations of such Person under any
title retention agreement (other than (x) customary reservations or retentions
of title under agreements with suppliers entered into in the ordinary course of
business, (y) trade debt incurred in the ordinary course of business and due
within six months of the incurrence thereof and (z) obligations incurred under a
pension, retirement or deferred compensation program or arrangement regulated
under the Employee Retirement Income Security Act of 1974, as amended, or the
laws of a foreign government), (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, bank guaranty, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit and bank guaranties (A) not made under the Credit Agreement
and (B) securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following receipt by such Person of a demand for reimbursement following payment
on the letter of credit), (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any subsidiary of such Person, any Preferred Stock
(but excluding, in each case, any accrued dividends), (vi) all obligations of
the type referred to in clauses (i) through (v) of other Persons and all
dividends of other Persons for the payment of which, in either case, such Person
is responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guaranty, (vii) all obligations of the type
referred to in clauses (i) through (vi) of other Persons secured by any Lien on
any property or asset of such Person (whether or not such obligation is assumed
by such Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amounts of the obligation so secured
and (viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement designed
and entered into to protect the Company or any Subsidiary against fluctuations
in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extensions of credit (including by way of Guaranty or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase of acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person.
"Investment Grade" means a rating of BBB- or higher by S&P and Baa3 or
higher by Moody's and the equivalent in respect of Rating Categories of any
Rating Agency substituted for S&P or Moody's.
"Issue Date" means the date on which the Old Senior Subordinated Notes
were originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
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"Marketable Securities" means securities listed on a national
securities exchange which have a minimum weekly trading volume of at least
100,000 shares.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
non-cash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be repaid out of the proceeds from such Asset Disposition, (iii)
all distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition
and (iv) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed in such Asset Disposition and retained by the
Company or any Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Investment" means an Investment by the Company or any
Subsidiary in (i) a Person that will, upon the making of such Investment, be or
become a Subsidiary; provided, however, that the primary business of such
Subsidiary is a Related Business, (ii) a Person if a result of such Investment
such other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, the Company or a Subsidiary;
provided, however, that such Person's primary business is a Related Business,
(iii) Temporary Cash Investments, (iv) any demand deposit account with an
Approved Lender, (v) receivables owing to the Company or any Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Subsidiary deems reasonable under the circumstances, (vi) payroll,
travel and similar advances to cover matters that are expected at the time of
such advances ultimately to be treated as expenses for accounting purposes and
that are made in the ordinary course of business, (vii) loans or advances to
employees made in the ordinary course of business consistent with past practices
of the Company or such Subsidiary, (viii) stock, obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or any Subsidiary, or in satisfaction of judgments, (ix)
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under " -- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock" and (x) any Affiliate (the primary business of which is a
Related Business) that is not a Subsidiary (other than the Company); provided,
that the aggregate of all such Investments outstanding at any one time under
this clause (x) shall not exceed $1 million.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency, instrumentality or political subdivision thereof, or any other
entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
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"Principal" of a Senior Subordinated Note means the principal of the
Senior Subordinated Note plus the premium, if any, payable on the Senior
Subordinated Note which is due or overdue or is to become due at the relevant
time.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Subsidiary existing on the Issue Date or
Incurred in compliance with the Indenture including Indebtedness that Refinances
Refinancing Indebtedness; provided, however, that (i) such Refinancing
Indebtedness has a Stated Maturity no earlier that the Stated Maturity of the
Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being Refinanced and (iii)
such Refinancing Indebtedness has an aggregate principal amount (or if Incurred
with original issue discount, an aggregate issue price) that is equal to or less
than the aggregate principal amount (or if Incurred with original issue
discount, the aggregate accreted value) then outstanding or committed (plus fees
and expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Subsidiary that Refinances
Indebtedness of another Subsidiary.
"Related Business" means the business of providing property and
casualty insurance to individuals or farms and any business related, ancillary
or complementary to such business of the Company.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock)) and
dividends or distributions payable solely to the Company or a Subsidiary, and
other than pro rata dividends or other distributions made by a Subsidiary that
is not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other than a
corporation)), (ii) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Subsidiary held by any Affiliate of the Company (other than a
Subsidiary), including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition),
or (iv) the making of any Investment in any Person (other than a Permitted
Investment).
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by
a Lien.
"Senior Indebtedness" means, with respect to the Company, (i)
Indebtedness of such Person, whether outstanding on the Issue Date or thereafter
incurred and (ii) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
such Person, whether or not the claim for such interest is allowed as a claim
after such filing) in respect of (A) any Indebtedness of such Person under the
Credit Agreement, (B) Indebtedness of such Person for money borrowed and (c)
Indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are subordinate in right of
payment to the Exchange Notes; provided, however, that Senior Indebtedness
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shall not include (1) any obligation of such Person to any subsidiary of such
Person, (2) any liability for federal, state, local or other taxes owed or owing
by such Person, (3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities), (4) any Indebtedness of such Person
(and any accrued and unpaid interest in respect thereof) which is subordinate or
junior in any respect to any other Indebtedness or other obligation of such
Person or (5) that portion of any Indebtedness which at the time of incurrence
is incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means the Exchange Notes and any
other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Exchange Notes in right of payment
and is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of the Company that is not Senior Indebtedness.
"S&P" means Standard & Poor's Corporation and its successors.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) that is
subordinate or junior in right of payment to the Senior Subordinated Notes
pursuant to a written agreement to that effect.
"Subsidiary" means any corporation, association, partnership or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company or by one or more Subsidiaries, or by the
Company and one or more Subsidiaries.
"Surviving Person" means, with respect to any Person involved in any
merger, consolidation or other business combination or the sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
such Person's assets, the Person formed by or surviving such transaction or the
Person to which such disposition is made.
"Temporary Cash Investments" means any of the following: (a) securities
issued or directly and fully guaranteed or insured by the United States of
America or any agency or instrumentality thereof (provided that the full faith,
and credit of the United States of America is pledged in support thereof), (b)
time deposits and certificates of deposit, Eurodollar time deposits and
Eurodollar certificates of deposit of (i) any lender under the Credit Agreement
or (ii) any United States commercial bank of recognized standing (y) having
capital and surplus in excess of $500 million and (z) whose short-term
commercial paper rating from S&P is at least A-1 or the equivalent thereof or
from Moody's is at least P-1 or the equivalent thereof (any such bank being an
"Approved Lender"), in each case with maturities of not more than 270 days from
the date of acquisition, (c) commercial paper and variable or fixed rate notes
issued by an Approved Lender (or by the parent company thereof) and maturing
within six months of the date of acquisition, (d) repurchase agreements entered
into by a Person with a bank or trust company (including any of the lenders
under the Credit Agreement) or recognized securities dealer having capital and
surplus in excess of $500,000,000 for (i) direct obligations issued or fully
guaranteed by the United States of America, (ii) time deposits or certificates
of deposit described under subsection (b) above or (iii) commercial paper or
other notes described under subsection (c) above, in which, in each such case,
such bank, trust company or dealer shall have a perfected first priority
security interest (subject to no other Liens) and having, on the date of
purchase thereof, a fair market value of at least 100% of the amount of the
repurchase obligations, (e) obligations of any State of the United States or any
political subdivision thereof, the interest with respect to which is exempt from
federal income taxation under Section 103 of the United States Internal Revenue
Code, having a long term rating of at least AA- or Aa-3 by S&P or Moody's,
respectively, and maturing within three years from the date of acquisition
thereof, (f) Investments in municipal auction
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preferred stock (i) rated AAA (or the equivalent thereof) or better by S&P or
Aaa (or the equivalent thereof) or better by Moody's and (ii) with dividends
that reset at least once every 365 days and (g) Investments, classified in
accordance with GAAP as current assets, in money market investment programs
registered under the Investment Company Act of 1940, as amended, in each case
which are administered by reputable financial institutions having capital of at
least $100,000,000 and the portfolios of which are limited to Investments of the
character described in clauses (a), (b), (c), (e) and (f) above.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock
(other than director's qualifying shares and shares held by other Persons, to
the extent such shares are required by applicable law to be held by a Person
other than the Company or a Subsidiary) of which is owned by the Company or by
one or more Wholly Owned Subsidiaries, or by the Company and one or more Wholly
Owned Subsidiaries.
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DESCRIPTION OF EXCHANGE GUARANTEE
The Exchange Guarantee was executed and delivered by the Company
concurrently with the issuance by the Trust of the Exchange Preferred Securities
for the benefit of the holders from time to time of the Exchange Preferred
Securities. As soon as practicable after the date hereof, the Company Guarantee
will be exchanged by the Company for the Exchange Guarantee for the benefit of
the holders from time to time of the Exchange Preferred Securities. The Exchange
Guarantee has been qualified under the Trust Indenture Act. This summary of
certain provisions of the Exchange Guarantee does not purport to be complete and
is subject to, and qualified in its entirety by reference to, all of the
provisions of the Exchange Guarantee, including the definitions therein of
certain terms, and the Trust Indenture Act. The Guarantee Trustee will hold the
Exchange Guarantee for the benefit of the holders of the Exchange Preferred
Securities.
General
Pursuant to the Exchange Guarantee, the Company will irrevocably and
unconditionally agree to pay in full on a senior subordinated basis, to the
extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Exchange Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert,
other than the defense of payment. The following payments or distributions with
respect to the Exchange Preferred Securities, (the "Guarantee Payments"), will
be subject to the Exchange Guarantee (without duplication): (i) any accrued and
unpaid Distributions that are required to be paid on the Exchange Preferred
Securities, to the extent the Trust has funds legally available therefor, (ii)
the Redemption Price with respect to the Exchange Preferred Securities called
for redemption, to the extent the Trust has funds legally available therefor and
(iii) upon a voluntary or involuntary dissolution, winding up or liquidation of
the Trust (other than in connection with a Distribution of the Exchange Notes to
holders of Exchange Preferred Securities or redemption of all the Exchange
Preferred Securities), the less of (a) the aggregate of the Liquidation Amount
and all accrued and unpaid distributions on the Exchange Preferred Securities to
the date of payment, to the extent the Trust has funds legally available
therefor and (b) the amount of cash assets of the Trust remaining legally
available for distribution to holders of the Exchange Preferred Securities upon
the liquidation of the Trust. If the Company does not make interest payments on
the Exchange Notes held by the Trust, the Trust will not be able to pay
Distributions on the Exchange Preferred Securities and will not have funds
legally available therefor.
The Exchange Guarantee will be an irrevocable and unconditional
guarantee on a senior subordinated basis of the Trust's obligations under the
Exchange Preferred Securities, but will apply only to the extent that the Trust
has funds sufficient to make such payments and is not a guarantee of collection.
The Exchange Guarantee will rank subordinate and junior in right of payment to
all Senior Indebtedness of the Company. See " -- Status of the Exchange
Guarantee."
Almost all of the assets of the Company consist of stock of the
Subsidiaries. Accordingly, the Company relies primarily on dividends and fees
from such Subsidiaries to meet its obligations for payment of principal and
interest on its outstanding debt obligations and corporate expenses. The
inability of the Company's direct and indirect Subsidiaries to pay dividends to
the Company in an amount sufficient to meet debt service obligations and pay
operating expenses would have a material adverse effect on the Company and the
Trust. The payment of dividends by the Company's Subsidiaries without prior
regulatory approval is subject to restrictions set forth in the insurance laws
and regulations of Indiana and Florida, the states of domicile of the Company's
Insurance Subsidiaries. The Company currently does not expect such regulatory
requirements to impair its ability to meet interest payment obligations and to
pay operating expenses in the future. However, the Company can give no assurance
that dividends will be declared or paid by its Subsidiaries. In addition,
payment of dividends to the Company by the Insurance Subsidiaries is subject to
ongoing review by insurance regulators and is subject to various statutory
limitations and in certain circumstances requires approval by insurance
regulatory authorities. The right of the Company to participate in any
distribution of assets of any Subsidiary upon such Subsidiary's liquidation or
reorganization or otherwise, is subject to the prior claims of creditors of the
Subsidiary, except to the extent the Company may itself be recognized as a
creditor of that Subsidiary. Accordingly, the Exchange Notes will be effectively
subordinated to all existing and future liabilities of the Company's
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Subsidiaries, and holders of Exchange Notes should look only to the assets of
the Company for payments on the Exchange Notes. Accordingly, the Company's
obligations under the Exchange Guarantee, as well as its obligation to pay
interest and principal on the Exchange Notes, will be effectively subordinated
to all existing and future liabilities of the Company's Subsidiaries. See "Risk
Factors -- Holding Company Structure; Dividend and Other Restrictions;
Management Fees." As of June 30, 1997, the liabilities of the Company's
Subsidiaries were approximately $469 million.
The Company has, through the Exchange Guarantee, the Declaration, the
Exchange Notes and the Indenture, taken together, fully, irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Exchange
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Exchange Preferred Securities. See "Relationship
Among the Exchange Preferred Securities, the Declaration, the Exchange Notes and
the Exchange Guarantee."
The Company has also agreed separately to irrevocably and
unconditionally guarantee the obligations of the Trust with respect to the
Common Securities to the same extent as the Exchange Guarantee, except that upon
the occurrence and during the continuation of a Indenture Event of Default,
holders of Exchange Preferred Securities shall have priority over holders of
Common Securities with respect to distributions and payments on liquidation,
redemption or otherwise.
Status of the Exchange Guarantee
The Exchange Guarantee will constitute an unsecured senior subordinated
obligation of the Company and will rank subordinate and junior in right of
payment to all Senior Indebtedness of the Company as defined under "Description
of the Exchange Notes -- Certain Definitions." The Exchange Guarantee will
constitute a guarantee of payment and not of collection (i.e., the guaranteed
party may institute a legal proceeding directly against the Company to enforce
its rights under the Exchange Guarantee without first instituting a legal
proceeding against any other person or entity). The Exchange Guarantee will be
held for the benefit of the holders of the Exchange Preferred Securities. The
Exchange Guarantee will not be discharged except by payment of the Guarantee
Payments in full to the extent not paid by the Trust out of funds legally
available therefor or upon distribution of the Exchange Notes to the holders of
the Exchange Preferred Securities. The Exchange Guarantee does not place a
limitation on the amount of additional Senior Indebtedness that may be incurred
by the Company. However, the ability of the Company and its Subsidiaries to
incur indebtedness is restricted under the Exchange Notes. The Company expects
from time to time to incur additional indebtedness constituting Senior
Indebtedness. See "Description of the Exchange Notes -- Certain Covenants."
The Company may not make a Guarantee Payment to holders of Exchange
Preferred Securities if (i) the Specified Senior Indebtedness is not paid when
due or (ii) any other default on Specified Senior Indebtedness of the Company
occurs and the maturity of such Specified Senior Indebtedness is accelerated in
accordance with its terms, unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Specified Senior
Indebtedness has been paid in full. The failure to make a payment under the
Exchange Guarantee shall not be considered an Event of Default. However, the
Company may make a Guarantee Payment without regard to the foregoing if the
Company and the Guarantee Trustee receive written notice approving such payment
from a representative of the Specified Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of any
default (other than a default described in clause (i) or (ii) of the second
preceding sentence) with respect to any Specified Senior Indebtedness of the
Company pursuant to which the maturity thereof may be accelerated immediately
without further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not make a Guarantee Payment to holders of Preferred Securities for a period (a
"Payment Blockage Period") commencing upon the receipt by the Guarantee Trustee
(with a copy to the Company) of written notice (a "Blockage Notice") of such
default from the representative of the holders of such Specified Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if
143
such Payment Blockage Period is terminated (i) by written notice to the
Guarantee Trustee and the Company from the representative of the holders of such
specified Senior Indebtedness, (ii) because the default giving rise to such
Blockage Notice is no longer continuing or (iii) because such Specified Senior
Indebtedness has been repaid in full). Notwithstanding the provisions described
in the immediately preceding sentence, unless the holders of such Specified
Senior Indebtedness or the representative of such holders have accelerated the
maturity of such Specified Senior Indebtedness, the Company may resume Guarantee
Payments after the end of such Payment Blockage Period. The Exchange Guarantee
shall not be subject to more than one Payment Blockage Period in any consecutive
360-day period, irrespective of the number of defaults with respect to Specified
Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a
total or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, the holders of Senior
Indebtedness of the Company will be entitled to receive payment in full of such
Senior Indebtedness before the holders of Exchange Preferred Securities are
entitled to receive any Guarantee Payment, and until the Senior Indebtedness of
the Company is paid in full, any payment or Distribution to which holders of
Exchange Preferred Securities would be entitled but for the subordination
provisions of the Exchange Guarantee will be made to holders of such Senior
Indebtedness as their interests may appear. If a Distribution is made to holders
of Exchange Preferred Securities, that, due to the subordination provisions,
should not have been made to them, such holders are required to hold it in trust
for the holders of Senior Indebtedness of the Company and pay it over to them as
their interests may appear.
If a Guarantee Payment is to be made by the Company to holders of
Exchange Preferred Securities, the Company or the Guarantee Trustee shall
promptly notify the holders of Senior Indebtedness of the Company or the
representative of such holders of such Guarantee Payment. If any Senior
Indebtedness of the Company is outstanding, the Company may not pay such
Guarantee Payment until five Business Days after the representatives of all the
issues of Senior Indebtedness of the Company receive notice of such Guarantee
Payment and, thereafter, may pay such Guarantee Payment only if the Exchange
Guarantee otherwise permits payment at that time.
Amendments and Assignment
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Exchange Preferred Securities (in which case
no vote will be required), the Exchange Guarantee may not be amended without the
prior approval of the holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Exchange Preferred Securities. The manner
of obtaining any such approval will be as set forth under "Description of the
Exchange Preferred Securities -- Voting Rights." All guarantees and agreements
contained in the Exchange Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Exchange Preferred Securities then outstanding.
The Exchange Guarantee shall not be amended without the prior receipt by the
Company of an opinion of independent tax counsel to the effect that such
amendment of the Exchange Guarantee will not result in the recognition of
income, gain or loss by holders of the Exchange Preferred Securities.
Events of Default
An event of default under the Exchange Guarantee will occur upon the
failure of the Company to perform any of its payment or other obligations
thereunder. The holders of not less than a majority in aggregate Liquidation
Amount of the Exchange Preferred Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Exchange Guarantee or to direct the exercise
of any trust or power conferred upon the Guarantee Trustee under the Exchange
Guarantee.
Upon the occurrence of a payment default under the Exchange Guarantee,
any holder of the Exchange Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Exchange Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other persons or entity.
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The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether the Company is in compliance with
all the conditions and covenants applicable to it under the Exchange Guarantee.
Termination of the Exchange Guarantee
The Exchange Guarantee will terminate and be of no further force and
effect upon full payment of the Redemption Price of the Exchange Preferred
Securities, upon full payment of the amounts payable in accordance with the
Declaration upon liquidation of the Trust or upon distribution of Exchange Notes
to the holders in exchange for all of the Exchange Preferred Securities. The
Exchange Guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of the Exchange Preferred Securities must
restore payment of any sums paid under such Exchange Preferred Securities or
such Exchange Guarantee.
Governing Law
The Exchange Guarantee will be governed by and construed in accordance
with the laws of the State of New York.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Company in performance of the Exchange Guarantee, undertakes
to perform only such duties as are specifically set forth in the Exchange
Guarantee and, after default with respect to the Exchange Guarantee, must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
Guarantee Trustee is under no obligation to exercise any of the powers vested in
it by the Exchange Guarantee at the request of any holder of the Exchange
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby.
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RELATIONSHIP AMONG THE EXCHANGE PREFERRED SECURITIES,
THE DECLARATION, THE EXCHANGE NOTES
AND THE EXCHANGE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Exchange
Preferred Securities (to the extent the Trust has funds legally available for
the payment of such Distributions) are irrevocably guaranteed by the Company as
and to the extent set forth under "Description of the Exchange Guarantee." Taken
together, the Company's obligations under the Exchange Notes, the Indenture, the
Declaration and the Exchange Guarantee provide, in effect, a full, irrevocable
and unconditional guarantee of payments of Distributions and other amounts due
on the Exchange Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Exchange Preferred Securities. If and to the
extent that the Company does not make payments on the Exchange Notes, the Trust
will not pay Distributions or other amounts due on its Exchange Preferred
Securities. The Exchange Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds legally available to pay such
Distributions. In such event, the remedy of a holder of an Exchange Preferred
Security is to institute a legal proceeding directly against the Company on
behalf of the Trust for enforcement of the Company's obligations on the Exchange
Notes. The obligations of the Company under the Exchange Guarantee are
subordinate and junior in right of payment to all Senior Indebtedness of the
Company.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on
the Exchange Notes, such payments will be sufficient to cover Distributions and
other payments due on the Exchange Preferred Securities, primarily because (i)
the aggregate principal amount of the Exchange Notes will be equal to the sum of
the aggregate stated Liquidation Amount of the Exchange Preferred Securities and
Common Securities, (ii) the interest rate and interest and other payment dates
on the Exchange Notes will match the distribution rate and distribution and
other payment dates for the Exchange Preferred Securities, (iii) the Indenture
provides that the Company shall pay, and the Trust shall not be obligated to
pay, directly or indirectly, all and any costs, expenses and liabilities of such
Trust except the Trust's obligations to holders of its Exchange Preferred
Securities under such Exchange Preferred Securities and (iv) the Declaration
further provides that the Trust will not engage in any activity that is not
consistent with the limited purposes of such Trust.
Notwithstanding anything to the contrary in the Indenture, the Company
has the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Exchange Guarantee.
Enforcement Rights of Holders of Exchange Preferred Securities
If a Declaration Event of Default has occurred and is continuing and is
attributable to the failure of the Company to make payments on the Exchange
Notes, then holders of not less than 25% in Liquidation Amount of outstanding
Exchange Preferred Securities have the right to appoint a trustee (the "Special
Trustee") to act on behalf of all holders of Exchange Preferred Securities. The
Special Trustee appointed in accordance with the preceding sentence will
represent the holders of all outstanding Exchange Preferred Securities unless
the holders of at least a majority in Liquidation Amount of the outstanding
Exchange Preferred Securities appoint an alternative Special Trustee in which
case the Special Trustee appointed in accordance with the preceding sentence
will be required to resign as Special Trustee. At no time can there be more than
one Special Trustee acting on behalf of the holders of Exchange Preferred
Securities. The Special Trustee will have the right to directly institute a
proceeding (a "Trustee Action") for enforcement of payment to the holders of
Exchange Preferred Securities of the principal of or interest on the Exchange
Notes having a principal amount equal to the aggregate Liquidation Amount of the
Exchange Preferred Securities outstanding on or after the respective due date
specified in the Exchange Notes. The holders of the Exchange Preferred
146
Securities would not be able to exercise directly any other remedies available
to the holders of the Exchange Notes unless the Preferred Trustee or the Special
Trustee, acting for the benefit of the Preferred Trustee, fails to do so. In
such event, the holders of at least 25% in aggregate Liquidation Amount of
outstanding Exchange Preferred Securities would have a right to institute such
proceedings. In addition, if the Company fails to make interest or other
payments on the Senior Subordinated Notes when due, the Indenture provides that
a holder of Exchange Preferred Securities may institute legal proceeding
directly against the Company to enforce the Preferred Trustee's rights under the
Exchange Notes without first instituting a legal proceeding against the
Preferred Trustee, the Trust or any other person or entity. See "Description of
the Exchange Preferred Securities -- Voting Rights."
If the Company fails to make a payment under the Exchange Guarantee, a
holder of a Preferred Security may institute a legal proceeding directly against
the Company to enforce its rights under the Exchange Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity. If the Company fails to make payments in respect of the
Trust's costs and expenses as required by the Indenture, a creditor of the Trust
may institute a legal proceeding directly against the Company to enforce such
payments.
In the event of payment defaults under, or acceleration of, Senior
Indebtedness of the Company, the subordination provisions of the Indenture
provide that no payments may be made in respect of the Exchange Notes until such
Senior Indebtedness has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Exchange Notes
would constitute an Event of Default.
Limited Purpose of the Trust
The Trust's Exchange Preferred Securities evidence a beneficial
ownership interest in such Trust, and the Trust exists for the sole purpose of
issuing its Exchange Preferred Securities and Common Securities and investing
the proceeds thereof in the Exchange Notes. A principal difference between the
rights of a holder of an Exchange Preferred Security and a holder of an Exchange
Note is that a holder of an Exchange Note is entitled to receive from the
Company the principal amount of and interest accrued on Exchange Notes held,
while a holder of Exchange Preferred Securities is entitled to receive
distributions from the Trust (or from the Company under the applicable Company
Guarantee) if and to the extent the Trust has funds available for the payment of
such distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or
liquidation of any Trust involving the liquidation of the Exchange Notes after
satisfaction of liabilities to creditors of the Trust, the holders of the
Preferred Securities will be entitled to receive, out of assets held by such
Trust, the Liquidation Distribution in cash. See "Description of the Exchange
Preferred Securities -- Liquidation Distribution Upon Dissolution." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Preferred
Trustee, as holder of the Exchange Notes, would be a subordinated creditor of
the Company, subordinated in right of payment to all Senior Indebtedness, but
entitled to receive payment in full of principal and interest, before any
stockholders of the Company receive payments or distributions. Since the Company
is the guarantor under the Exchange Guarantee and has agreed to pay for all
costs, expenses and liabilities of the Trust (other than the Trust's obligations
to the holders of its Exchange Preferred Securities), the positions of a holder
of the Exchange Preferred Securities and a holder of the Exchange Notes relative
to other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company are expected to be substantially the
same.
147
DESCRIPTION OF OLD SECURITIES
The terms of the Old Securities are identical in all material respects
to the Exchange Securities, except that (i) the Old Securities have not been
registered under the Securities Act and are entitled to certain rights under the
Registration Rights Agreement (which rights will terminate upon consummation of
the Exchange Offer, except under limited circumstances), (ii) the Exchange
Preferred Securities will not contain the $100,000 minimum Liquidation Amount
transfer restriction and certain other restrictions on transfer applicable to
the Preferred Securities, (iii) the Exchange Preferred Securities will not
provide for any increase in the Distribution rate thereon, (iv) the Exchange
Notes will not contain the $100,000 minimum principal amount transfer
restriction and (v) the Exchange Notes will not provide for any increase in the
interest rate thereon. The Preferred Securities provide that, in the event that
a registration statement relating to the Exchange Offer has not been filed by
September 30, 1997 and declared effective by February 9, 1998, or, in certain
limited circumstances, in the event a shelf registration statement (the "Shelf
Registration Statement") with respect to the resale of the Preferred Securities
is not declared effective by February 9, 1998, then interest will accrue (in
addition to the stated interest rate on the Old Senior Subordinated Notes) at
the rate of 0.25% per annum on the principal amount of the Old Senior
Subordinated Notes and Distributions will accrue (in addition to the stated
Distribution rate on the Preferred Securities) at the rate of 0.25% per annum on
the Liquidation Amount of the Preferred Securities, for the period from the
occurrence of such event until such time as such required Exchange Offer is
consummated or any required Shelf Registration Statement is effective. The
Exchange Securities are not, and upon consummation of the Exchange Offer the
Preferred Securities will not be, entitled to any such additional interest or
Distributions. Accordingly, holders of Preferred Securities should review the
information set forth under "Risk Factors -- Consequences of a Failure to
Exchange Preferred Securities" and "Description of Exchange Preferred
Securities."
148
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal
income tax considerations of the purchase, ownership and disposition of the
Exchange Preferred Securities held as capital assets by a Holder. Unless
otherwise stated, this summary only addresses the tax consequences to a Holder
that acquired Preferred Securities upon original issuance at their original
issue price. As used herein, a "United States Person" means (i) a person that is
a citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) any trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United States
fiduciaries have the authority to control all the substantial decisions of such
trust. The tax treatment of a holder may vary depending on such holder's
particular situation. This summary does not address all the tax consequences
that may be relevant to a particular holder or to holders who may be subject to
special tax treatment, such as banks, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
or tax-exempt investors. In addition, this summary does not include any
description of any alternative minimum tax consequences or the tax laws of any
state, local or foreign government that may be applicable to a holder of
Preferred Securities. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury regulations promulgated thereunder
and administrative and judicial interpretations thereof, as of the date hereof,
all of which are subject to change, possibly on a retroactive basis. The
authorities on which this summary is based are subject to various
interpretations and the opinions of Tax Counsel are not binding on the Internal
Revenue Service ("IRS") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought by the Company from
the IRS with respect to the transactions described herein. Accordingly, there
can be no assurance that the IRS will not challenge the opinions expressed
herein or that a court would not sustain such a challenge. Nevertheless, Tax
Counsel has advised that it is of the view that, if challenged, the opinions
expressed herein would be sustained by a court with jurisdiction in a properly
presented case.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR
OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE EXCHANGE
PREFERRED SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE "DESCRIPTION
OF THE EXCHANGE PREFERRED SECURITIES - TAX EVENT OR INVESTMENT COMPANY EVENT
REDEMPTION OR DISTRIBUTION."
Exchange of Securities
The exchange of Preferred Securities for Exchange Preferred Securities
will not be a taxable event to holder for United States federal income tax
purposes. Under applicable Treasury Regulations, the exchange of Preferred
Securities for Exchange Preferred Securities pursuant to the Exchange Offer will
not be treated as an "exchange" for United States federal income tax purposes.
Accordingly, the Exchange Preferred Securities will have the same issue price as
the Preferred Securities, and a holder will have the same adjusted tax basis and
holding period in the Exchange Preferred Securities as the holder had in the
Preferred Securities immediately before the exchange.
Classification of the Trust
In connection with the issuance of the Exchange Preferred Securities,
Dann Pecar Newman & Kleiman, P.C. ("Tax Counsel") will render its opinion that
under current law and assuming full compliance with the terms of the Indenture,
the Trust will be classified as a grantor trust for United States federal income
tax purposes and not as an association taxable as a corporation. Accordingly,
for United Stated federal income tax purposes, each beneficial owner of
Preferred Securities generally will be considered the owner of an undivided
interest in the Exchange Notes and, thus,
149
will be required to include in its gross income its pro rata share of the
interest income or original issue discount ("OID") that is paid or accrued on
the Exchange Notes. See " -- Interest Income and Original Issue Discount."
Classification of the Exchange Notes
The Company, the Trust and the holders of the Preferred Securities (by
acceptance of a beneficial ownership interest in a Security) will agree to treat
the Exchange Notes as indebtedness for all United States tax purposes.
Accordingly, the Company intends to take the position that the Exchange Notes
will be classified as indebtedness for United States federal income tax
purposes. The following discussion assumes that the Exchange Notes will be
classified as indebtedness for such purposes.
Interest Income and Original Issue Discount
Because the Company has the right to defer the payment of stated
interest on the Exchange Notes, the stated interest on the Exchange Notes will
be considered to be original issue discount ("OID") (within the meaning of
Section 1273(a) of the Code). Consequently, holders must include such stated
interest in gross income on a daily economic accrual basis (using the
constant-yield-to-maturity method of accrual described in Section 1272 of the
Code, regardless of their regular method of tax accounting and in advance of
receipt of the cash attributable to such income. The application of these OID
accrual rules may accelerate the timing of a holder's recognition of such income
in certain situations. Actual payments of stated interest on the Exchange Notes,
however, will not be separately reported as taxable income. Any amount of OID
included in a holder's gross income with respect to an Exchange Preferred
Security will increase such holder's adjusted tax basis in such Exchange
Preferred Security, and the amount of Distributions received by a holder in
respect of such OID will reduce such holder's adjusted tax basis in such
Exchange Preferred Security.
Corporate holders of Exchange Preferred Securities will not be entitled
to a dividends-received deduction with respect to any income recognized by such
holders with respect to the Exchange Preferred Securities.
Distribution of Notes or Cash upon Liquidation of the Trust
As described under the caption "Description of Exchange Preferred
Securities -- Liquidation Distribution Upon Dissolution," Exchange Notes may be
distributed to holders in exchange for the Exchange Preferred Securities and in
liquidation of the Trust. Under current law, such a distribution would be
non-taxable, and will result in the holder receiving directly its pro rata share
of the Exchange Notes previously held indirectly through the Trust, with a
holding period and aggregate tax basis equal to the holder period and aggregate
tax basis such holder had in its Exchange Preferred Securities before such
distribution. If, however, the liquidation of the Trust were to occur because
the Trust is subject to United States federal income tax with respect to income
accrued or received on the Exchange Notes, the distribution of the Exchange
Notes to holders would be a taxable event to the Trust and to each holder and a
holder would recognize gain or loss as if the holder had exchanged its Exchange
Preferred Securities for the Exchange Notes it received upon liquidation of the
Trust.
A holder would accrue interest in respect of the Exchange Notes
received from the Trust in the manner described above under " -- Interest Income
and Original Issue Discount."
Under certain circumstances described herein (see "Description of
Exchange Preferred Securities -- Redemption"), the Exchange Notes may be
redeemed for cash, with the proceeds of such redemption distributed to holders
in redemption of their Exchange Preferred Securities. Under current law, such a
redemption would constitute a taxable disposition of the redeemed Exchange
Preferred Securities for United States federal income tax purposes, and a holder
would recognize gain or loss as if it sold such redeemed Exchange Preferred
Securities for cash. See " -- Resales of Exchange Preferred Securities."
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Sales of Exchange Preferred Securities
A holder that sells Exchange Preferred Securities will recognize gain
or loss equal to the difference between the amount realized by the holder on the
sale or redemption of the Exchange Preferred Securities (except to the extent
that such amount realized is characterized as a payment in respect of accrued
but unpaid interest on such holder's allocable share of the Exchange Notes that
such holder has not included in gross income previously) and the holder's
adjusted tax basis in the Exchange Preferred Securities sold or redeemed. Such
gain or loss generally will be a capital gain or loss and generally will be a
long-term capital gain or loss if the Exchange Preferred Securities have been
held for more than one year. Subject to certain limited exceptions, capital
losses cannot be applied to offset ordinary income for United Stated federal
income tax purposes.
A holder will be required to add any accrued and unpaid OID to its
adjusted tax basis for its Exchange Preferred Securities. To the extent the
selling price of such holder's Exchange Preferred Securities is less than the
adjusted tax basis (which will include any accrued and unpaid OID) a holder will
recognize a capital loss.
Possible Tax Law Changes
The United States Congress has recently passed and the President
approved certain changes to United States federal income tax law. While
President Clinton proposed as part of the legislation a denial to an issuer of
an interest deduction, for United States federal income tax purposes, on
instruments such as the Senior Subordinated Notes, the law does not include any
such provision. There can be no assurance, however, that future legislation will
not adversely affect the ability of the Company to deduct interest on the Senior
Subordinated Notes or otherwise affect the tax treatment of the transactions
described herein. Moreover, such legislation could give rise to a Tax Event
which would permit the Company to distribute the Senior Subordinated Notes to
the holders of the Preferred Securities or cause a redemption of the Preferred
Securities as described more fully under "Description of the Exchange Notes" and
"Description of the Exchange Preferred Securities." See also "Certain United
States Federal Income Tax Considerations -- Possible Tax Law Changes."
Non-United States Holders
As used herein, the term "Non-United States Holder" means any person
that is not a United States Person (as defined above). As discussed above, the
Exchange Preferred Securities will be treated as evidence of an indirect
beneficial ownership interest in the Exchange Notes. See " -- Classification of
the Trust." Thus, under present United States federal income tax law, and
subject to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent or
principal or interest (which for purposes of this discussion includes any
OID) with respect to the Preferred Securities (or on the Senior
subordinated Notes) to a Non-United States Holder; provided (i) that the
beneficial owner of the Preferred Securities (or Senior Subordinated Notes)
("Beneficial Owner") does not actually or constructively own 10% or more of
the total combined voting power of all classes of stock of the Company
entitled to vote within the meaning of section 871(h)(3) of the Code and
the regulations thereunder, (ii) the Beneficial Owner is not a controlled
foreign corporation that is related to the Company through stock ownership,
(iii) the Beneficial Owner is not a bank whose receipt of interest with
respect to the Exchange Preferred Securities (or on the Exchange Notes as
described in section 881(c)(3)(A) of the Code) and (iv) the Beneficial
Owner satisfies the statement requirement (described generally below) set
forth in section 871(h) and section 881(c) of the Code and the regulations
thereunder, and
(b) no withholding of United States federal income tax will be
required with respect to any gain realized by a Non-Untied States Holder
upon the sale or other disposition of the Exchange Preferred Securities (or
the Exchange Notes).
151
To satisfy the requirement referred to in (a)(iv) above, the Beneficial
Owner, or a financial institution holding the Exchange Preferred Securities (or
the Exchange Notes on behalf of such owner, must provide, in accordance with
specified procedures, to the Trust or any paying agent (a "Paying Agent"), a
statement to the effect that the Beneficial Owner is not a United States Holder.
Pursuant to current temporary Treasury regulations, these requirements will be
met if (1) the Beneficial Owner provides his name and address, and certifies,
under penalties of perjury, that it is not a United States person (which
certification may be made on an IRS Form W-8 (or successor form)) or (2) a
financial institution holder the Exchange Preferred Securities (or the Senior
Subordinated Notes) on behalf of the Beneficial Owner certifies, under penalties
of perjury, that such statement has been received by it and furnishes a paying
agent with a copy thereof.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of premium, if
any, and interest (including any OID) made to such Non-United States Holder will
be subject to a 30% withholding tax unless the Beneficial Owner provides the
Company or the relevant Paying Agent, as the case may be, with a properly
executed (1) IRS Form 1001 (or successor form) claiming an exemption from, or a
reduction of, such withholding United States income tax under the benefit of a
tax treaty or (2) IRS Form 4224 (or successor form) stating that interest paid
with respect to the Preferred Securities (or on the Senior Subordinated Notes)
is not subject to withholding tax because it is effectively connected with the
Beneficial Owner's conduct of a trade or business in the United States.
As discussed above, the Company will treat the Exchange Notes as
indebtedness for United States federal income tax purposes. If, however, the
Exchange Notes were to be recharacterized as equity, for United States federal
income tax purposes, the income on the Exchange Notes would be recharacterized
as dividends which would generally be subject to 30% withholding tax when paid
to a Non-United States Holder.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest with respect to the Exchange Preferred Securities (or
on the Exchange Notes) is effectively connected with the conduct of such trade
or business, the Non-United States Person, although exempt from the withholding
tax discussed above, will be subject to United States federal income tax on such
interest on a net income basis in the same manner as if it were a United States
Holder. In addition, if such Non-United States Holder is a foreign corporation,
it may be subject to a branch profits tax equal to 30% of its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, such interest would be included in such foreign corporation's
earnings and profits.
Any gain realized upon the sale or other taxable disposition of the
Exchange Preferred Securities (or the Exchange Notes) by a Non-United States
Holder generally will not be subject to United States federal income tax unless
(i) such gain is effectively connected with a trade or business carried on in
the United States by such Non-United States Holder, (ii) in the case of a
Non-United States Holder who is an individual, such individual is present in the
United States for 183 days or more in the taxable year of such sale or
disposition, and certain other conditions are met and (iii) in the case of any
gain representing accrued interest with respect to the Exchange Preferred
Securities (or on the Exchange Notes) the requirements described above are not
satisfied.
Information Reporting and Backup Withholding
Income on the Exchange Preferred Securities (or the Exchange Notes)
held of record by United States Persons (other than corporations and other
exempt holders) will be reported annually to such holders and to the IRS. The
Preferred Trustee currently intends to deliver such reports to holders of record
prior to January 31 following each calendar year. It is anticipated that persons
who hold Exchange Preferred Securities (or the Senior Subordinated Notes) as
nominees for beneficial holders will report the required tax information to
beneficial holders on Form 1099.
"Backup withholding" at a rate of 31% will apply to payments of
interest to non-exempt United States Persons unless the holder furnishes its
taxpayer identification number in the manner prescribed in applicable Treasury
regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions.
152
No information reporting or backup withholding will be required with
respect to payments made by the Trust or any Paying Agent to Non-United States
holders if a statement described in (a)(iv) under "Non-United States Holders"
has been received and the payor does not have actual knowledge that the
beneficial owner is a United States Person.
In addition, backup withholding and information reporting will not
apply if payments of the principal, interest, OID or premium with respect to the
Exchange Preferred Securities (or on the Exchange Notes) are paid or collected
by a foreign office of a custodian, nominee or other foreign agent on behalf of
the Beneficial Owner, of if a foreign office of a broker (as defined in
applicable Treasury regulations) pays the proceeds of the sale of the Exchange
Preferred Securities (or the Exchange Notes) to the owner thereof. If, however,
such nominee, custodian, agent or broker is, for United States federal income
tax purposes, a United States person, a controlled foreign corporation or a
foreign person that derives 50% or more of its gross income for certain periods
form the conduct of a trade or business in the United States, such payments will
not be subject to backup withholding but will be subject to information
reporting, unless (1) such custodian, nominee, agent or broker has documentary
evidence in its records that the Beneficial Owner is not a United States person
and certain other conditions are met or (2) the Beneficial Owner otherwise
establishes an exemption.
Payment of the proceeds from disposition of Exchange Preferred
Securities (or Exchange Notes) to or through a United States office of a broker
is subject to information reporting and backup withholding unless the holder or
beneficial owner establishes an exemption from information reporting and backup
withholding.
Any amounts withheld from a holder of the Exchange Preferred Securities
under the backup withholding rules generally will be allowed as a refund or a
credit against such holder's United States federal income tax liability,
provided the required information is furnished to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE EXCHANGE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
153
ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code ("Plans"), may purchase the Exchange Preferred Securities, subject to
the investing fiduciary's determination that the investment in the Exchange
Preferred Securities satisfied ERISA's fiduciary standards and other
requirements applicable to investments by the Plan.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R.
Section 2510.3-101) (the "DOL Regulation") concerning the definition of what
constitutes the assets of a Plan. The DOL Regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an equity investment will be
deemed for purposes of ERISA to be assets of the investing plan unless certain
exceptions apply.
There can be no assurance that any of the exceptions set forth in the
DOL Regulation will apply to the purchase of the Exchange Preferred Securities
offered hereby and, as a result, an investing Plan's assets could be considered
to include an undivided interest in the Exchange Notes and any other assets held
by the Trustees. In the event that assets of the Trust are considered assets of
an investing Plan, the Trust, the Trustee and other persons, in providing
services with respect to the Exchange Notes, may be considered fiduciaries to
such Plan and subject to the fiduciary responsibility provisions of Title I of
ERISA (including the prohibited transaction provisions thereof). In addition,
the prohibited transaction provisions of Section 4975 of the Code would apply
with respect to transactions engaged in by any "disqualified person," as defined
below, involving such assets unless a statutory or administrative exemption
applies.
The Trust and/or any of its affiliates may be considered a "party in
interest" (within the meaning of ERISA) or a "disqualified person" (within the
meaning of Section 4975 of the Code) with respect to the Plans. The acquisition
and ownership of the Exchange Preferred Securities by a Plan (or by an
individual retirement arrangement or other plan described in Section 4975(e)(1)
of the Code) may constitute or result in a prohibited transaction under ERISA or
Section 4975 of the Code, unless the preferred Securities are acquired pursuant
to and in accordance with an applicable exemption.
As a result, Plans should not acquire the Exchange Preferred Securities
unless such Exchange Preferred Securities are acquired pursuant to and in
accordance with an applicable prohibited transaction exemption. Any plans or
other entities whose assets include Plan assets subject to ERISA or Section 4975
of the Code proposing to acquire the Exchange Preferred Securities should
consult with their own counsel.
154
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Preferred Securities for its
own account in connection with the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Preferred
Securities. This Prospectus, as it may be amended or supplemented from time to
time, may be used by Participating Broker-Dealers during the period referred to
below in connection with resales of Exchange Preferred Securities received in
exchange for Preferred Securities if such Preferred Securities were acquired by
such Participating Broker-Dealers for their own accounts as a result of
market-making activities or other trading activities. The Company and the Trust
have agreed that this Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of such Exchange Preferred Securities for a period ending 90 days after the
Expiration Date (subject to extension under certain limited circumstances
described herein) or, if earlier, when all such Exchange Preferred Securities
have been disposed of by such Participating Broker-Dealer. However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of Exchange Preferred Securities received in exchange for
Preferred Securities pursuant to the Exchange Offer must notify the Company or
the Trust, or cause the Company or the Trust to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at one of the addresses set forth herein
under "The Exchange Offer -- Exchange Agent." See "The Exchange Offer -- Resales
of Exchange Preferred Securities."
Neither the Company or the Trust will receive any cash proceeds from
the issuance of the Exchange Preferred Securities offered hereby. Exchange
Preferred Securities received by broker-dealers for their own accounts in
connection with the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Preferred Securities or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such Exchange Preferred
Securities.
Any broker-dealer that resells Exchange Preferred Securities that were
received by it for its own account in connection with the Exchange Offer and any
broker or dealer that participates in a distribution or such Exchange Preferred
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of Exchange Preferred
Securities and any commissions or concession received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and be delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
155
LEGAL MATTERS
The validity of the Exchange Notes and the Exchange Guarantee will be
passed upon for the Company by Dann Pecar Newman & Kleiman, P.C., Indianapolis,
Indiana. Certain matters relating to United States federal income tax
considerations will be passed upon for the company by Dann Pecar Newman &
Kleiman, P.C., Indianapolis, Indiana. Certain matters of Delaware law relating
to the validity of the Exchange Preferred Securities will be passed upon for the
Trust by Richards, Layton & Finger, Wilmington, Delaware. Principals in the law
firm of Dann Pecar Newman & Kleiman, P.C. own less than 1% of the Common Stock
of the Company.
EXPERTS
The consolidated financial statements and related schedules of the
Company as of December 31, 1995 and 1996 and for each of the years in the
three-year period ended December 31, 1996 appearing in this Prospectus and the
Registration Statement have been audited and reported upon by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their report thereon appearing
elsewhere herein and are included herein upon the authority of said firm as
experts in accounting and auditing. The consolidated financial statements and
related schedules of Superior as of December 31, 1994 and 1995 and for each of
the years in the three-year period ended December 31, 1995 appearing in this
Prospectus and Registration Statement have been audited and reported upon by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
thereon appearing elsewhere herein and are included herein upon the authority of
said firm as experts in accounting and auditing.
156
GLOSSARY OF TERMS
1940 Act............................ The Investment Company Act of 1940, as amended.
1994 Reform Act..................... The Federal Crop Insurance Reform Act of 1994.
1996 Reform Act..................... The Federal Agriculture Improvement and Reform Act of 1996.
Acquisition......................... The acquisition by GGS Holdings of Superior Insurance
Company, a Florida property and casualty insurer primarily
engaged in the writing of nonstandard automobile insurance.
Actual Production History (APH)..... A plan of MPCI which provides the yield component and yield
forecast of an insured by utilizing the insured's
historic yield record. CRC plans use the policy terms
and conditions of the APH as their basic provisions of coverage.
A.M. Best........................... A.M. Best Company, Inc., a rating agency and publisher
for the insurance industry.
Board of Directors.................. With respect to the Company or a Subsidiary, as the case may be,
the Board of Directors (or other body performing
functions similar to any of those performed by a Board of Directors).
Buyout Transaction.................. A combination of the GGS Buyout and the Repayment from
the proceeds of this offering.
Buy-up Coverage..................... Multi-Peril Crop Insurance policy providing coverage in excess
of that provided by CAT Coverage. Buy-up Coverage is offered
only through private insurers.
Buy-up Expense Reimbursement Payment An expense reimbursement payment made by the FCIC to an MPCI
insurer equal to a percentage of Gross Premiums Written
for each Buy-up Coverage policy written by such MPCI insurer.
Casualty Insurance.................. Insurance which is primarily concerned with the losses caused
by injuries to third persons (i.e., not the policyholder)
and the legal liability imposed on the insured resulting therefrom.
It includes, but is not limited to, employers'
liability, workers' compensation, public liability, automobile
liability, personal liability and aviation liability insurance.
It excludes certain types of loss that by law or
custom are considered as being exclusively within the scope of other
types of insurance, such as fire or marine.
157
CAT Coverage (CAT).................. The minimum available level of Multi-Peril Crop
Insurance, providing coverage for 50% of a farmer's
historical yield for eligible crops at 60% of the price
per commodity unit for such crop set by the FCIC.
This coverage is offered through private insurers
and, in certain states, USDA field offices.
CAT Coverage Fee.................... A fixed administrative fee of $50 per policy for
which farmers may purchase CAT Coverage. The
CAT Coverage Fee takes the place of a premium.
CAT LAE Reimbursement Payment....... An LAE reimbursement payment made by the FCIC
to an MPCI insurer equal to 13.0% of MPCI Imputed
Premiums for each CAT Coverage policy written by
such MPCI insurer.
Cede; Ceding Company................ When an insurance company reinsures its risk with
another insurance company, it "cedes" business and
is referred to as the "ceding company."
Code................................ Internal Revenue Code of 1986, as amended.
Combined Ratio...................... The sum of the Expense Ratio and the Loss and LAE
Ratio determined in accordance with GAAP or SAP.
Commission.......................... The Securities and Exchange Commission.
Common Stock....................... The shares of common stock, no par
value, of the Company.
Company (Or SIG).................... Symons International Group, Inc. and its
Subsidiaries, unless the context indicates otherwise.
Contribution........................ The contribution by Pafco of IGF to IGF Holdings in
exchange for all of the capital stock of IGF Holdings.
Crop Revenue Coverage (CRC)......... CRC provides the insured with a guaranteed revenue
stream by combining both yield and price variability
protection and 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.
158
Crop Year........................... For MPCI, a crop year commences on July 1 and
ends on the following June 30. For example, the
1998 crop year begins July 1, 1997 and ends on June
30, 1998. For crop hail insurance, the crop year is
the calendar year.
Dividend............................ The payment by IGF Holdings to Pafco of a dividend
consisting of $7.5 million in cash and the IGF Note.
EBITDA.............................. Calculation of earnings before income taxes,
minority interest, depreciation and amortization.
Exchange Act........................ The Securities Exchange Act of 1934, as amended.
Expense Ratio....................... Under statutory accounting, the ratio of underwriting
expenses to net premiums written. Under GAAP
accounting, the ratio of underwriting expenses to net
premiums earned.
Federal Crop Insurance Corporation
(FCIC)............................. A wholly owned federal government corporation
within the United States Department of Agriculture
(USDA).
Florida Commissioner................ The Florida Commissioner of Insurance.
Florida Department.................. The Florida Department of Insurance.
Formation Transaction............... The formation of GGS Management Holdings, Inc.,
a corporation which previously was 52% owned by
the Company and 48% owned by the GS Funds.
Fortis.............................. Fortis, Inc., the parent company of Interfinancial, the
former holding company for Superior.
Generally Accepted Accounting
Principles (GAAP).................. Generally accepted accounting principles in the
United States of America as in effect as of the Issue
Date, including those set forth (i) in the opinions and
pronouncements of the Accounting Principles Board
of the American Institute of Certified Public
Accountants (ii) statements and pronouncements of
the Financial Accounting Standards Board (iii) in
such other statements by such other entity as
approved by a significant segment of the accounting
profession and (iv) the rules and regulations of the
SEC governing the inclusion of financial statements
(including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and
pronouncements in staff accounting bulletins and
similar written statements from the accounting staff
of the SEC.
159
GGS Agreement....................... The agreement by and among Goran, SIG, GGS
Holdings and the GS Funds dated January 31, 1996
evidencing the Formation Transaction.
GGS Buyout.......................... The agreement between SIG and GS Funds, an
affiliate of Goldman Sachs, for SIG to purchase GS
Funds' 48% interest in GGS Holdings with a portion
of the proceeds of this Offering.
GGS Holdings........................ GGS Management Holdings, Inc., a holding
company for Pafco and Superior controlled by the
Company.
GGS Management...................... GGS Management, Inc., a wholly owned subsidiary
of GGS Holdings.
GGS Senior Credit Facility.......... A $48 million senior bank facility extended to GGS
Management used to partially fund the purchase of
Superior.
Goldman Sachs....................... Goldman, Sachs & Co.
Goran............................... Goran Capital Inc., a Canadian federally chartered
corporation and the current approximately 67%
shareholder of the Company.
Goran Distribution.................. The distribution by the Company to Goran of all of
the outstanding capital stock of Symons International
Group, Inc. (Florida), a Florida-based surplus lines
underwriting manager.
Granite............................. Granite Insurance Company, a subsidiary of Goran.
Granite Re ......................... Granite Reinsurance Company Ltd., a subsidiary of
Goran domiciled in Barbados.
Gross Premiums Written.............. Direct premiums written plus premiums collected in
respect of policies assumed, in whole or in part, from
other insurance carriers.
GS Funds............................ Investments funds affiliated with Goldman Sachs,
consisting of GS Capital Partners II, L.P.; GS Capital
Partners II Offshore, L.P.; Stone Street Funds L.P.;
Bridge Street Funds L.P.; and Goldman Sachs & Co.
Verwaltungs GmbH.
IBCL................................ The Indiana Business Corporation Law.
IGF................................. IGF Insurance Company, an indirect wholly owned
subsidiary of the Company.
160
IGFH Bank Debt...................... A bank loan in the principal amount of $7.5 million
issued by IGF Holdings which was repaid from
proceeds of the IPO.
IGF Holdings........................ IGF Holdings, Inc., a wholly owned subsidiary of the
Company.
IGF Note............................ A subordinated promissory note of IGF Holdings in
the principal amount of approximately $3.5 million
issued to Pafco by IGF Holdings as part of the
Dividend.
IGF Revolver........................ IGF's revolving line of credit used to finance
premium payables on amounts not yet received from
farmers.
Incurred but Not Reported (IBNR)
Claims.............................. Claims under policies that have been incurred but
have not yet been reported to the Company by the
insured.
Incurred But Not Reported (IBNR)
Reserves............................ IBNR reserves include LAE related to losses
anticipated from IBNR Claims and may also provide
for future adverse loss development on reported
claims.
Indiana Commissioner................ The Indiana Commissioner of Insurance.
Indiana Department.................. The Indiana Department of Insurance.
Initial Public Offering (IPO)....... The Company's initial public offering of Common
Stock in November 1996.
Insurance Regulatory Information
System (IRIS)...................... A system of ratio analysis developed by the NAIC
primarily intended to assist state insurance
departments in executing their statutory mandates to
oversee the financial condition of insurance
companies.
Insurers or Insurance Subsidiaries.. The direct and indirect consolidated insurance
subsidiaries of the Company, which include IGF,
Pafco and Superior.
Interfinancial...................... Interfinancial, Inc., a wholly owned subsidiary of
Fortis, Inc. and the former holding company for
Superior.
IRS................................. Internal Revenue Service.
LIBOR............................... An annual rate equal to the London Interbank
Offered Rate for the corresponding deposits of
United States dollars.
161
Loss Adjustment Expenses (LAE)...... Expenses incurred in the settlement of claims,
including outside adjustment expenses, legal fees and
internal administrative costs associated with the
claims adjustment process, but not including general
overhead expenses.
Loss and LAE Ratio (Loss Ratio)..... The ratio of Losses and LAE incurred to premiums
earned.
Loss and LAE Reserves............... Liabilities established by insurers to reflect the
ultimate estimated cost of claim payments as of a
given date.
MPCI Excess LAE Reimbursement
Payment............................ A small excess LAE reimbursement payment made
by the FCIC to an MPCI insurer of two hundredths
of one percent of MPCI Retention determined after
ceding to the FCIC's three reinsurance pools, to the
extent that loss ratios on a per state basis exceeds
certain levels.
MPCI Imputed Premium................ For purposes of the profit/loss sharing arrangement
with the federal government, the amount of
premiums credited to the Company for all CAT
Coverage it sells, as such amount is determined by
formula.
MPCI Premium........................ For purposes of the profit/loss sharing arrangement
with the federal government, the amount of
premiums credited to the Company for all Buy-up
Coverage sold, consisting of amounts paid by
farmers plus the amount of any related federal
premium subsidies.
MPCI Retention...................... The aggregate amount of MPCI Premium and MPCI
Imputed Premium on which the Company retains
risk after allocating farms to the three federal
reinsurance pools.
Multi-Peril Crop Insurance (MPCI)... A federally-regulated and subsidized crop insurance
program that provides producers of crops with
varying levels of insurance protection against
substantially all natural perils to growing crops.
NAIC................................ The National Association of Insurance
Commissioners.
NASDAQ National Market.............. The NASDAQ Stock Market's National Market.
NCIS................................ National Crop Insurance Services, Inc., the actuarial
data facility for the commercial crop insurance
industry.
162
Net Premiums Earned................. The portion of net premiums written applicable to the
expired period of policies and, accordingly,
recognized as income during a given period.
Net Premiums Written ............... Total premiums for insurance written (less any return
premiums) during a given period, reduced by
premiums ceded in respect of liability reinsured by
other carriers.
Nonstandard Automobile Insurance.... Personal lines automobile insurance written for those
individuals presenting an above average risk profile
in terms of payment history, driving experience,
record of prior accidents or driving violations,
particular occupation or type of vehicle and other
factors.
OID................................. Original issue discount under the Code.
Pafco............................... Pafco General Insurance Company, an Indiana
property and casualty insurance company.
Policies In-Force................... Policies written and recorded on the books of an
insurance carrier which are unexpired as of a given
date.
Price Election...................... The maximum per unit commodity price by crop to
be used in computing MPCI Premiums, which is set
each year by the FCIC.
Quota Share Reinsurance............. A form of reinsurance in which the reinsurer shares
a proportional part of both the original premiums and
the losses of the reinsured.
Reinsurance......................... The practice whereby a company called the
"reinsurer" assumes, for a share of the premium, all
or part of a risk originally undertaken by another
insurer called the "ceding" company or "cedent."
Reinsurance may be affected by "treaty" reinsurance,
where a standing agreement between the ceding and
reinsuring companies automatically covers all risks
of a defined category, amount and type, or by
"facultative" reinsurance where reinsurance is
negotiated and accepted on a risk-by-risk basis.
Repayment........................... The payment of GGS Senior Credit Facility
indebtedness with a portion of the proceeds from this
offering.
Retention........................... The amount of liability, premiums or losses which an
insurance company keeps for its own account after
reinsurance.
163
Risk-based Capital (RBC)
Requirements........................ Capital requirements for property and casualty
insurance companies adopted by the NAIC to assess
minimum capital requirements and to raise the level
of protection that statutory surplus provides for
policyholder obligations.
Securities Act...................... The Securities Act of 1933, as amended.
Senior Subordinated Notes........... The Company's securities to be purchased with the
proceeds of the Offering.
Short-Tail.......................... A "short-tail" insurance product is one where losses
are known comparatively quickly; ultimate losses
under a "long-tail" insurance product are sometimes
not known for years.
SIG (Or The Company)................ Symons International Group, Inc., a specialty insurer
which underwrites and markets nonstandard private
passenger automobile insurance and crop insurance.
SIGF................................ Symons International Group, Inc. (Florida), a Florida
based surplus lines underwriting manager and a
subsidiary of Goran.
SIGL................................ Symons International Group, Ltd., a Canadian
corporation and the controlling shareholder of Goran.
Standard Automobile Insurance....... Personal lines automobile insurance written for those
individuals presenting an average risk profile in
terms of loss history, driving record, type of vehicle
driven and other factors.
Statutory Accounting Practices (SAP) Accounting practices which consist of recording
transactions and preparing financial statements in
accordance with the rules and procedures prescribed
or permitted by state regulatory authorities.
Statutory accounting emphasizes solvency rather
than matching revenues and expenses during an
accounting period.
Subsidiaries........................ All of the direct and indirect consolidated
subsidiaries of the Company.
164
Superior............................ Superior Insurance Company, a Florida property and
casualty insurer primarily engaged in the writing of
nonstandard automobile insurance and its principal
subsidiaries, Superior American Insurance Company,
a Florida insurance company and Superior Guaranty
Insurance Company, a Florida insurance company.
Superior Purchase Agreement......... Stock Purchase Agreement, dated January 31, 1996,
by and among Goran, the Company, Fortis and
Interfinancial pursuant to which the Company
purchased Superior.
Tail................................ The period of time that elapses between the
incurrence and settlement of losses under a policy.
Transactions........................ The Formation Transaction, the Acquisition and
other related transactions, including the Transfer and
the Dividend.
Transfer............................ The transfer by Pafco of all of the outstanding capital
stock of IGF to IGF Holdings and the distribution of
IGF Holdings to the Company.
Treaty Reinsurance.................. The reinsurance of a specified type or category of
risks defined in a reinsurance agreement (a "treaty")
between a primary insurer or other reinsured and a
reinsurer. Typically, in treaty reinsurance, the
primary insurer or reinsured is obligated to offer and
the reinsurer is obligated to accept a specified portion
of all such type or category of risks originally
underwritten by the primary insurer or reinsured.
Underwriting........................ The insurer's or reinsurer's process of reviewing
applications submitted for insurance coverage,
deciding whether to accept all or part of the coverage
requested and determining the applicable premiums.
USDA................................ United States Department of Agriculture.
165
INDEX TO FINANCIAL STATEMENTS
Symons International Group, Inc. and Subsidiaries
Report of Independent Accountants...........................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and 1996
and June 30, 1997...........................................................F-3
Consolidated Statements of Earnings
for the Years Ended December 31, 1994,
1995 and 1996 and the Six Months Ended
June 30, 1996 and 1997......................................................F-4
Consolidated Statements of Changes
in Stockholder's Equity for the
Years Ended December 31, 1994, 1995
and 1996 and the Six Months Ended
June 30, 1996 and 1997......................................................F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1994,
1995 and 1996 and the Six Months
Ended June 30, 1996 and 1997................................................F-6
Notes to Consolidated Financial Statements.....................F-7 through F-37
Superior Insurance Company and Subsidiaries
Report of Independent Accountants..........................................F-38
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1994 and 1995 and
June 30, 1996..............................................................F-39
Consolidated Statements of Earnings
for the Years Ended December 31, 1993,
1994 and 1995 and the Six Months
Ended June 30, 1995 and 1996...............................................F-40
Consolidated Statements of Changes
in Stockholder's Equity for the
Years Ended December 31, 1993, 1994
and 1995 and the Six Months Ended
June 30, 1995 and 1996....................................................F-41
Consolidated Statements of Cash
Flows for the Years Ended December
31, 1993, 1994 and 1995 and the
Six Months Ended June 30, 1995 and 1996....................................F-42
Notes to Consolidated Financial Statements....................F-43 through F-58
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Symons International Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Symons
International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of earnings, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Symons
International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand
Indianapolis, Indiana
March 21, 1997
F-2
SYMONS INTERNATIONAL GROUP, INC.
Consolidated Balance Sheets
as of December 31, 1995 and 1996 and June 30, 1997
(dollars in thousands, except share data)
December 31, December 31, June 30,
1995 1996 1997
-------------- -------------- --------------
ASSETS: (unaudited)
Investments
Available for Sale:
Fixed Maturities, at market $ 12,931 $ 127,681 $ 143,905
Equity Securities, at market 4,231 27,920 32,031
Short-term investments, at amortized cost which
approximates market 5,283 9,565 11,742
Real Estate, at cost 487 466 457
Mortgage Loans, at cost 2,920 2,430 2,290
Other 50 75 75
Investments in and advances to related parties 2,952 1,152 2,418
Cash and cash equivalents 2,311 13,095 18,329
Receivables (net of allowance for doubtful account
of $927, $1,480 and $1,340
(unaudited) in 1995, 1996 and June 30, 1997 8,203 65,194 176,045
Reinsurance recoverable on paid and unpaid losses, net 54,136 48,294 70,694
Prepaid reinsurance premiums 6,263 14,983 73,927
Deferred policy acquisition costs 2,379 12,800 13,121
Deferred income taxes 1,421 3,329 2,899
Property and equipment, net of accumulated depreciation 5,502 8,137 9,555
Federal income taxes recoverable --- 319 ---
Goodwill --- 2,122 2,114
Other 1,447 7,117 8,039
----- ----- -----
Total Assets $ 110,516 $ 344,679 $ 567,641
======= ======= =======
LIABILITIES:
Losses and loss adjustment expenses $ 59,421 $ 101,719 $ 137,924
Unearned premiums 17,497 87,285 160,741
Reinsurance payable 6,206 6,508 100,475
Payables to affiliates 6,474 366 ---
Federal income tax payable 133 --- 1,594
Line of credit and notes payable 5,811 --- ---
Term debt --- 48,000 44,872
Other 5,439 18,291 23,411
----- ------ ------
Total Liabilities 100,981 262,169 469,017
------- ------- -------
Minority Interest in Consolidated Subsidiary --- 21,610 26,724
--- ------ ------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, no par value, 100,000,000 shares
authorized and 7,000,000, 10,450,000 and
10,450,000 (unaudited) issued and outstanding
in 1995, 1996 and 1997, respectively 1,000 38,969 39,019
Additional paid-in capital 3,130 5,905 5,905
Unrealized gain/(loss) on investments, net of
deferred tax benefit (expense) of
$23 in 1995, $625 in 1996 and $(72)
(unaudited) at June 30, 1997 (45) 820 2,184
Retained earnings 5,450 15,206 24,792
----- ------ ------
Total Stockholders' Equity 9,535 60,900 71,900
----- ------ ------
Total Liabilities and Stockholders' Equity $ 110,516 $ 344,679 $ 567,641
======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
SYMONS INTERNATIONAL GROUP, INC.
Consolidated Statements of Earnings
for the Years Ended December 31, 1994, 1995 and 1996
and the Six Months Ended June 30, 1996 and 1997
(dollars in thousands, except per share data)
Six Months Ended
Years Ended December 31, June 30,
--------------------------------------------- ----------------------------
(unaudited)
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Gross premiums written $ 103,134 $ 124,634 $ 305,499 $ 146,950 $ 279,065
Less ceded premiums (67,995) (71,187) (95,907) (69,908) (128,541)
-------- -------- -------- -------- ---------
Net premiums written 35,139 53,447 209,592 77,042 150,524
Change in unearned premiums (3,013) (3,806) (17,833) (17,976) (14,512)
------- ------- -------- -------- --------
Net premiums earned 32,126 49,641 191,759 59,066 136,012
Net investment income 1,241 1,173 6,733 1,533 5,276
Other income 1,632 2,170 9,286 4,062 10,791
Net realized capital gain/(loss) (159) (344) (1,015) 228 1,684
----- ----- ------- --- -----
Total Revenues 34,840 52,640 206,763 64,889 153,763
------ ------ ------- ------ -------
Expenses:
Loss and loss adjustment expenses 26,470 35,971 137,109 45,275 103,293
Policy acquisition and general
and administrative expenses 5,801 7,981 42,013 12,283 30,397
Interest expense 1,184 1,248 3,938 1,261 2,744
----- ----- ----- ----- -----
Total Expenses 33,455 45,200 183,060 58,819 136,434
------ ------ ------- ------ -------
Earnings before income taxes
and minority interest 1,385 7,440 23,703 6,070 17,329
----- ----- ------ ----- ------
Income taxes:
Current income tax expense 462 2,275 7,982 1,190 7,252
Deferred income tax expense (benefit) (1,180) 344 64 664 (1,069)
------- --- -- --- -------
Total Income Taxes (718) 2,619 8,046 1,854 6,183
----- ----- ----- ----- -----
Net earnings before minority interest 2,103 4,821 15,657 4,216 11,146
Minority interest 14 --- (2,401) 88 (1,560)
-- --- ------- -- -------
Net Earnings $ 2,117 $ 4,821 $ 13,256 $ 4,304 $ 9,586
===== ===== ====== ===== =====
Weighted average shares outstanding 7,000 7,000 7,537 7,000 10,617
===== ===== ===== ===== ======
Net earnings per share $ 0.30 $ 0.69 $ 1.76 $ 0.61 $ 0.90
==== ==== ==== ==== ====
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
SYMONS INTERNATIONAL GROUP, INC.
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1994,
1995 and 1996
and the Six Months ended June 30, 1996 and 1997
(dollars in thousands)
Additional Unrealized Gain Retained Total
Common Paid-In (Loss) on Earnings Stockholders'
Stock Capital Investments (Deficit) Equity
----- ------- ----------- --------- ------
Balance at January 1, 1994 $ 1,000 $ 3,130 $ (423) $ (1,488) $ 2,219
Unrealized gain on fixed maturities,
resulting from a change in accounting
principle, net of deferred taxes --- --- 139 --- 139
Change in unrealized loss on
investments, net of deferred taxes --- --- (220) --- (220)
Net Earnings --- --- --- 2,117 2,117
--- --- --- ----- -----
Balance at December 31, 1994 1,000 3,130 (504) 629 4,255
Change in unrealized loss on
investments, net of deferred taxes --- --- 459 --- 459
Net Earnings --- --- --- 4,821 4,821
--- --- --- ----- -----
Balance at December 31, 1995 1,000 3,130 (45) 5,450 9,535
Sale of subsidiary stock --- 3,389 --- --- 3,389
Change in unrealized loss on
investments, net of deferred taxes
(unaudited) --- --- 529 --- 529
Net Earnings (unaudited) --- --- --- 4,304 4,304
--- --- --- ----- -----
Balance at June 30, 1996 (unaudited) $ 1,000 $ 6,519 $ 484 $ 9,754 $ 17,757
===== ===== === ===== ======
Balance at December 31, 1995 $ 1,000 $ 3,130 $ (45) $ 5,450 $ 9,535
Sale of subsidiary stock --- 2,775 --- --- 2,775
Change in unrealized loss on
investments, net of deferred taxes --- --- 865 --- 865
Issuance of common stock 37,969 --- --- --- 37,969
Dividend to parent --- --- --- (3,500) (3,500)
Net Earnings --- --- --- 13,256 13,256
--- --- --- ------ ------
Balance at December 31, 1996 $ 38,969 $ 5,905 $ 820 $ 15,206 $ 60,900
Adjustment of Offering costs 50 --- --- --- 50
Change in unrealized gain on
investments, net of deferred taxes
(unaudited) --- --- 1,364 --- 1,364
Net Earnings (unaudited) --- --- --- 9,586 9,586
--- --- --- ----- -----
Balance at June 30, 1997
(unaudited) $ 39,019 $ 5,905 $ 2,184 $ 24,792 $ 71,900
====== ===== ===== ====== ======
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
SYMONS INTERNATIONAL GROUP, INC.
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1994,1995 and 1996
and the Six Months Ended June 30, 1996 and 1997
(dollars in thousands)
Six Months Ended
Years Ended December 31, June 30,
--------------------------------------------- --------------------------
(unaudited)
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings For the Period $ 2,117 $ 4,821 $ 13,256 $ 4,304 $ 9,586
Adjustments to reconcile Net
Earnings to Net Cash provided
from (used in) Operations:
Minority interest (14) --- 2,401 (88) 1,560
Depreciation and amortization 690 742 2,194 221 1,169
Deferred income tax expense (benefit) (1,180) 344 64 664 (1,068)
Net realized capital loss/(gain) 159 344 1,015 (228) (1,684)
Net changes in operating assets and
liabilities (net of assets acquired):
Receivables (9,057) 6,462 (22,673) (48,085) (110,851)
Reinsurance recoverable on paid and
unpaid losses, net 25,130 (41,250) 5,842 (29,475) (22,400)
Prepaid reinsurance premiums (3,343) 725 (8,720) (3,824) (58,944)
Deferred policy acquisition costs (727) (900) (2,496) (2,888) (321)
Other assets 98 1,019 (2,923) (3,264) (1,198)
Losses and loss adjustment expenses (24,874) 30,152 (2,125) (10,216) 36,205
Unearned premiums 6,356 3,081 24,508 52,077 73,456
Reinsurance payables 1,982 2,133 (1,978) 46,349 93,967
Federal income taxes recoverable/(payable) 759 325 (1,270) (490) 1,913
Other liabilities (1,398) 1,656 2,908 2,925 5,120
------- ----- ----- ----- -----
Net Cash Provided From (used in) Operations (3,302) 9,654 10,003 7,982 26,510
------- ----- ------ ----- ------
Cash Flow Provided From (Used In)
Investing Activities:
Cash paid for Superior net of cash acquired --- --- (66,590) (66,389) ---
Net (Purchases)/Sales of short-term investments (308) (4,493) 8,026 11,342 (2,177)
Purchases of fixed maturities (7,587) (12,517) (73,503) (24,976) (36,846)
Proceeds from sales, calls and
maturities of fixed maturities 8,460 8,603 56,903 17,896 20,964
Proceeds from sales of equity securities 10,510 29,599 19,796 65,944 16,531
Purchase of equity securities (10,122) (28,173) (34,157) (86,177) (15,188)
Proceeds from the sale of real estate 1,165 --- --- --- ---
Purchases of mortgage loans (50) (100) --- --- ---
Proceeds from repayment of mortgage loans 60 120 490 360 140
Purchase of property and equipment (655) (1,874) (3,734) (579) (2,294)
----- ------- ------- ----- -------
Net cash provided from (used in)
investing activities 1,473 (8,835) (92,769) (82,579) (18,870)
----- ------- -------- -------- --------
Cash flow provided from (used in)
from financing activities:
Proceeds from initial public offering,
net of expenses --- --- 37,969 --- ---
Proceeds from line of credit and notes payable 26,900 1,620 --- 7,750 ---
Proceeds from term debt --- --- 48,000 48,000 (3,128)
Payments on line of credit and notes payable (26,459) (1,250) (5,811) (5,811) ---
Proceeds from consolidated subsidiary
minority interest owner --- --- 21,200 21,200 2,304
Payment of dividend to parent --- --- (3,500) --- ---
Repayments from related parties 711 44 1,800 1,063 ---
Loans from and (repayments to) related parties 425 1,036 (6,108) 84 (1,582)
--- ----- ------- -- -------
Net cash provided from financing activities 1,577 1,450 93,550 72,286 (2,406)
----- ----- ------ ------ -------
Increase (decrease) in cash and cash equivalents (252) 2,269 10,784 (2,311) 5,234
Cash and cash equivalents, beginning of year 294 42 2,311 2,311 13,095
--- -- ----- ----- ------
Cash and cash equivalents, end of year $ 42 $ 2,311 $ 13,095 $ -- 18,329
== ===== ====== ===== ======
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. Nature of Operations and Significant Accounting Policies
Symons International Group, Inc. (the "Company") is a 67% owned
subsidiary of Goran Capital, Inc. (Goran). The Company is primarily involved in
the sale of personal nonstandard automobile insurance and crop insurance.
Nonstandard automobile represents approximately 61% of the Company's premium
volume. The Company's products are marketed through independent agents and
brokers, within a 31-state area, primarily in the Midwest and Southern United
States. The following is a description of the significant accounting policies
and practices employed:
a. Principles of Consolidation: The consolidated financial statements
include the accounts, after intercompany eliminations, of the Company and its
subsidiaries as follows:
GGS Management Holdings, Inc. (GGS Holdings)-a holding company for the
nonstandard automobile operations which includes GGS Management, Inc.,
Pafco General Insurance Company, Pafco Premium Finance Company and the
Superior entities, as described below - 52% owned;
GGS Management, Inc. (GGS)-a management company for the nonstandard
automobile operations-52% owned;
Superior Insurance Company (Superior)-an insurance company domiciled
in Florida-52% owned;
Superior American Insurance Company (Superior American)-an insurance
company domiciled in Florida-52% owned;
Superior Guaranty Insurance Company (Superior Guaranty)-an insurance
company domiciled in Florida-52% owned;
Pafco General Insurance Company (Pafco)-an insurance company domiciled
in Indiana-52% owned;
IGF Holdings, Inc. (IGF Holdings)-a holding company for the crop
operations which includes IGF and Hail Plus Corp.-100% owned; and
IGF Insurance Company (IGF)-an insurance company domiciled in
Indiana-100% owned.
On January 31, 1996, the Company entered into an agreement with GS
Capital Partners II, L.P. (Goldman Funds) to create a company, GGS Holdings, to
be owned 52% by the Company and 48% by Goldman Funds. GGS Holdings created GGS,
a management company for the nonstandard automobile operations which include
PGIC and the Superior entities.
On April 30, 1996, GGS Holdings acquired the Superior entities through
a purchase business combination. The Company's Consolidated Results of
Operations for the year ended December 31, 1996 include the results of
operations of the Superior entities subsequent to April 30, 1996. (See Note 2.)
F-7
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
On January 1, 1996, the Company sold its excess and surplus lines
insurance operations, Symons International Group, Inc. of Florida (SIGF), with a
net book value of $2, to Goran for $2. Accordingly, no gain or loss was
recognized in 1996 on the transaction.
b. Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles (GAAP)
which differ from statutory accounting practices (SAP) prescribed or permitted
for insurance companies by regulatory authorities in the following respects:
Certain assets are excluded as "Nonadmitted Assets" under statutory
accounting.
Costs incurred by the Company relating to the acquisition of new
business are expensed for statutory purposes.
The investment in wholly owned subsidiaries is consolidated for GAAP
rather than valued on the statutory equity method. The net income or loss and
changes in unassigned surplus of the subsidiaries is reflected in net income for
the period rather than recorded directly to unassigned surplus.
Fixed maturity investments are reported at amortized cost or market
value based on their National Association of Insurance Commissioners' (NAIC)
rating.
The liability for losses and loss adjustment expenses and unearned
premium reserves are recorded net of their reinsured amounts for statutory
accounting purposes.
Deferred income taxes are not recognized on a statutory basis.
Credits for reinsurance are recorded only to the extent considered
realizable. Under SAP, credit for reinsurance ceded are allowed to the extent
the reinsurers meet the statutory requirements of the Insurance Departments of
the States of Indiana and Florida, principally statutory solvency.
c. Use of Estimates: The preparation of financial statements of insurance
companies requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information becomes
known which could impact the amounts reported and disclosed herein.
F-8
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Net earnings and capital and surplus for the insurance subsidiaries
reported on the statutory accounting basis is as follows:
1996 1995 1994
---------- ---------- ---------
Capital and surplus:
Superior entities $ 57,121 $ N/A $ N/A
Pafco 18,112 11,875 7,848
IGF 29,412 9,219 4,512
Net earnings (losses):
Superior entities $ 1,978 $ N/A $ N/A
Pafco 5,151 (553) (571)
IGF 12,122 6,574 1,511
d. Premiums: Premiums are recognized as income ratably over the life of the
related policies and are stated net of ceded premiums. Unearned premiums are
computed on the semimonthly pro rata basis.
e. Investments: Investments are presented on the following bases: Fixed
maturities and equity securities-at market value-all such securities are
classified as available for sale and are carried at market value with the
unrealized gain or loss as a component of stockholders' equity, net of deferred
tax, and accordingly, has no effect on net income.
Real estate-at cost, less allowances for depreciation.
Mortgage loans-at outstanding principal balance.
Realized gains and losses on sales of investments are recorded on the
trade date and are recognized in net income on the specific identification
basis. Interest and dividend income are recognized as earned.
f. Cash and Cash Equivalents: For purposes of the statement of cash flows, the
Company includes in cash and cash equivalents all cash on hand and demand
deposits with original maturities of six months or less.
g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are
comprised of agents' commissions, premium taxes and certain other costs which
are related directly to the acquisition of new and renewal business, net of
expense allowances received in connection with reinsurance ceded, which have
been accounted for as a reduction of the related policy acquisition costs and
are deferred and amortized accordingly. These costs are deferred and amortized
over the terms of the policies to which they relate. Acquisition costs that
exceed estimated losses and loss adjustment expenses and maintenance costs are
charged to expense in the period in which those excess costs are determined.
F-9
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
h. Property and Equipment: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5 years
and the declining balance method for other property and equipment over their
estimated useful lives ranging from five to seven years. Asset and accumulated
depreciation accounts are relieved for dispositions, with resulting gains or
losses reflected in net earnings.
i. Other Assets: Other assets consists primarily of goodwill, debt acquisition
costs, and organization costs. Goodwill resulting from the acquisition of the
Superior entities is amortized over a 25-year period on a straight-line basis
based upon management's estimate of the expected benefit period. Deferred debt
acquisition costs are amortized over the term of the debt (six years).
Organization costs are amortized over five years.
j. Losses and Loss Adjustment Expenses: Reserves for losses and loss adjustment
expenses include estimates for reported unpaid losses and loss adjustment
expenses and for estimated losses incurred but not reported. These reserves have
not been discounted. The Company's losses and loss adjustment expense reserves
include an aggregate stop-loss program. The Company retains an independent
actuarial firm to estimate reserves. Reserves are established using individual
case-basis valuations and statistical analysis as claims are reported. Those
estimates are subject to the effects of trends in loss severity and frequency.
While management believes the reserves are adequate, the provisions for losses
and loss adjustment expenses are necessarily based on estimates and are subject
to considerable variability. Changes in the estimated reserves are charged or
credited to operations as additional information on the estimated amount of a
claim becomes known during the course of its settlement. The reserves for losses
and loss adjustment expenses are reported net of the receivables for salvage and
subrogation of approximately $4,766 and $948 at December 31, 1996 and 1995,
respectively.
k. Income Taxes: The Company utilizes the liability method of accounting for
deferred income taxes. Under the liability method, companies will establish a
deferred tax liability or asset for the future tax effects of temporary
differences between book and taxable income. Changes in future tax rates will
result in immediate adjustments to deferred taxes. (See Note 11.) Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
l. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies and the terms of the
reinsurance contracts. Premiums ceded to other companies have been reported as a
reduction of premium income.
m. Certain Accounting Policies for Crop Insurance Operations: In 1996, IGF
instituted a policy of recognizing (i) 35% of its estimated Multi Peril Crop
Insurance (MPCI) gross premiums written for each of the first and second
quarters, (ii) commission expense at a rate of 16% of MPCI gross premiums
written recognized, and (iii) Buy-up Expense Reimbursement at a rate of 31% of
MPCI gross premiums written recognized along with normal operating expenses
incurred in connection with premium writings. In the third quarter, if a
sufficient volume of policyholder acreage reports have been received and
processed by IGF, IGF's policy is to recognize MPCI gross premiums written for
the first nine months based on a reestimate which takes into account actual
gross premiums processed. IGF followed the foregoing approach for the 1996 third
quarter. If an insufficient volume of policies has been processed, IGF's policy
is to recognize in the third quarter 20% of its full year estimate of MPCI gross
premiums written, unless other circumstances require a different approach. The
remaining amount of gross premiums written is recognized in the fourth quarter,
when all amounts are reconciled. In prior years, recognition of MPCI gross
premiums written was 30%,
F-10
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
30%, 30% and 10%, for the first, second, third and fourth quarters,
respectively. Commencing with its June 30, 1995 financial statements, IGF also
began recognizing MPCI underwriting gain or loss during the first and second
quarters, as well as the third quarter, reflecting IGF's best estimate of the
amount of such gain or loss to be recognized for the full year, based on, among
other things, historical results, plus a provision for adverse developments.
n. Accounting Changes: On January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, (Statement 115). In accordance with
Statement 115, prior period financial statements have not been restated to
reflect the change in accounting principle. The cumulative effect as of January
1, 1994 of adopting Statement 115 had no effect on net earnings. The effect of
this change in accounting principle was an increase to stockholders' equity of
$139, net of deferred taxes of $73, of net unrealized gains on fixed maturities
classified as available for sale that were previously carried at amortized cost.
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement is effective for financial statements for fiscal
years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the Company's results of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based
Compensation, was issued. It introduces the use of a fair value-based method of
accounting for stock-based compensation. It encourages, but does not require,
companies to recognize compensation expense for stock-based compensation to
employees based on the new fair value accounting rules. Companies that choose
not to adopt the new rules will continue to apply the existing accounting rules
contained in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. However, SFAS No. 123 requires companies that choose not to
adopt the new fair value accounting rules to disclose pro forma net income and
earnings per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company has
adopted the disclosure provisions of SFAS No. 123 (see Note 22).
In February 1997, SFAS No. 128, Earnings per Share, was issued. This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures, and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15.
F-11
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
This statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This statement requires restatement of all prior period EPS
data presented. The Company has determined the adoption of this statement will
not have a material effect on its consolidated financial statements.
o. Vulnerability from Concentration: At December 31, 1996, the Company did not
have a material concentration of financial instruments in an industry or
geographic location. Also at December 31, 1996, the Company did not have a
concentration of (1) business transactions with a particular customer, lender or
distributor, (2) revenues from a particular product or service, (3) sources of
supply of labor or services used in the business, or (4) a market or geographic
area in which business is conducted that makes it vulnerable to an event that is
at least reasonably possible to occur in the near term and which could cause a
serious impact to the Company's financial condition.
p. Earnings Per Share: The Company's net earnings per share calculations are
based upon the weighted average number of shares of common stock outstanding
during each period, as restated for the 7,000-for-1 stock split. The weighted
average shares outstanding in 1996 have been increased by 44,000 shares for the
$3.5 million dividend paid to Goran from the proceeds of the offering, in
accordance with GAAP. Earnings per share for the first quarter of 1997 were
computed using actual weighted average shares outstanding during the first
quarter of 1997 of 10,450,000 plus 191,000 assumed shares from stock options
proceeds calculated based upon the treasury stock method.
q. Unaudited Interim Financial Statements: The consolidated financial statements
for the six months ended June 30, 1996 and 1997 have been prepared using the
applicable accounting principles used in the audited financial statements. These
statements are unaudited but, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments and accruals)
necessary for a fair presentation of the financial information set forth herein.
The operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997.
2. Corporate Reorganization and Acquisition
In April 1996, Pafco contributed all of the outstanding shares of
capital stock of IGF to IGF Holdings, a wholly owned and newly formed subsidiary
of Pafco, and the Board of Directors of IGF Holdings declared an $11,000
distribution to Pafco in the form of cash of $7,500 and a note payable of $3,500
(PGIC Note). IGF Holdings borrowed the $7,500 portion of the distribution from a
bank (IGFH Note). The notes were paid in full from the proceeds of the Offering.
Immediately following the distribution, Pafco distributed all of the outstanding
common stock of IGF Holdings to the Company. Although the Company believes the
plan of reorganization or spin off did not result in gain or loss, no assurance
can be given that the Internal Revenue Service will not challenge the
transaction.
On January 31, 1996, the Company entered into an agreement (Agreement)
with GS Capital Partners II, L.P. to create GGS Holdings, to be owned 52% by the
Company and 48% owned by the Goldman Funds. In accordance with the Agreement, on
April 30, 1996, the Company contributed certain fixed assets and PGIC with a
combined book value, determined in accordance with GAAP, of $17,186, to GGS
Holdings. Goldman Funds contributed $21,200 to GGS Holdings, in accordance with
the Agreement. In return for the cash contribution of $21,200, Goldman Funds
received a minority interest share in GGS Holdings at the date of contribution
of $18,425, resulting in a $2,775 increase to additional paid-in capital. At
December 31, 1996, Goldman Funds' minority interest share consisted of the
following:
Contribution, April 30, 1996 $ 18,425
GGS Holdings earnings 2,401
Unrealized gains, net of deferred tax of $599 784
--------------
$ 21,610
--------------
F-12
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
In connection with the above transactions, GGS Holdings acquired (the
"Acquisition") all of the outstanding shares of common stock of Superior
Insurance Company and its wholly owned subsidiaries, domiciled in Florida,
(collectively referred to as "Superior") for cash of $66,590. In conjunction
with the Acquisition, the Company's funding was through a senior bank facility
of $48,000 and a cash contribution from Goldman Funds of $21,200.
The acquisition of Superior was accounted for as a purchase and was
recorded as follows:
Assets required:
Invested assets $ 118,665
Receivables 34,933
Deferred acquisition costs 7,925
Other assets 2,082
--------------
Total 163,605
--------------
Liabilities assumed:
Unpaid losses and loss adjustment expense 44,423
Unearned premiums 45,280
Other liabilities 10,863
--------------
Total 100,566
--------------
Net assets acquired 63,039
Purchase price 66,590
--------------
Excess purchase price 3,551
Less amounts allocated to deferred income taxes 1,334
on unrealized gains on investments
--------------
Goodwill $ 2,217
==============
The Company's results from operations for the year ended December 31,
1996 include the results of Superior subsequent to April 30, 1996.
3. Initial Public Offering
On November 5, 1996, the Company sold 3,000,000 shares at $12.50 per
share in an initial public offering of common stock (the "IPO"). An additional
450,000 shares were sold in December 1996 representing the exercise of the
overallotment option. The Company generated net proceeds, after underwriter's
discount and expenses, of $37,900 from the IPO. The proceeds were used to repay
the IGFH Note and PGIC Note totaling $11,000, repay
F-13
indebtedness to Goran and Granite Re of approximately $7,500, pay Goran a
dividend of $3,500 and contribute capital to IGF of $9,000. The remainder will
be used for general corporate purposes, including acquisitions. After completion
of the IPO, Goran owns 67% of the total common stock outstanding.
Assuming that these transactions, described in Notes 2 and 3, took
place (including the IPO) at January 1, 1995 or at January 1, 1996, the pro
forma effect of these transactions on the Company's Consolidated Statements of
Earnings is as follows:
1996 1995
----------------- ------------------
(unaudited)
Revenues $ 250,848 $ 159,899
Net Earnings $ 15,238 $ 6,701
Net Earnings Per Common Share $ 1.42 $ 0.65
Assuming that these transactions took place (including the IPO) at
January 1, 1995 or January 1, 1996 and that shares outstanding only included
shares issued in connection with the IPO whose proceeds were used to repay
indebtedness, the pro forma effect of these transactions on the Company's net
income per common share is as follows:
1996 1995
----------------- ------------------
(unaudited)
Net Earnings Per Common Share $1.86 $0.81
================= ==================
Outstanding shares used in the above calculation include the 7,000,000
shares outstanding before the IPO plus 1,200,000 shares issued in connection
with the IPO whose proceeds were used to pay external indebtedness. The latter
calculation was determined by dividing the aggregate amount of the repayment of
the $7.5 million IGFH Note and the $7.5 million repayment of parent indebtedness
by the IPO price of $12.50 per share.
The pro forma results are not necessarily indicative of what actually
would have occurred if these transactions had been in effect for the entire
periods presented. In addition, they are not intended to be a projection of
future results.
F-14
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
4. Investments
Investments are summarized as follows:
Unrealized
------------------------------
Cost or Estimated
Amortized Cost Gain Loss Market Value
-------------- ---- ---- ------------
December 31, 1996 Fixed maturities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 55,034 $ 343 $ (233) $ 55,144
Foreign governments 1,515 0 (30) 1,485
Obligations of states and political subdivisions 2,945 11 (4) 2,952
Corporate securities 67,545 977 (422) 68,100
------ --- ----- ------
Total Fixed Maturities 127,039 1,331 (689) 127,681
------- ----- ----- -------
Equity Securities:
Common stocks 25,734 2,884 (698) 27,920
Short-term investments 9,565 0 0 9,565
Real estate 466 0 0 466
Mortgage loans 2,430 0 0 2,430
Other loans 75 0 0 75
-- - - --
Total Investments $ 165,309 $ 4,215 $ (1,387) $ 168,137
======= ===== ======= =======
December 31, 1995 Fixed maturities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 10,978 $ 63 $ (1) $ 11,040
Obligations of states and political subdivisions 1,470 57 (1) 1,526
Corporate securities 364 1 0 365
--- - - ---
Total Fixed Maturities 12,812 121 (2) 12,931
------ --- --- ------
Equity Securities:
Preferred stocks 100 1 (4) 97
Common stocks 4,318 108 (292) 4,134
----- --- ----- -----
4,418 109 (296) 4,231
----- --- ----- -----
Short-term investments 5,283 0 0 5,283
Real estate 487 0 0 487
Mortgage loans 2,920 0 0 2,920
Other loans 50 0 0 50
-- - - --
Total Investments $ 25,970 $ 230 $ (298) $ 25,902
====== === ===== ======
At December 31, 1996, 90.2% of the Company's fixed maturities were
considered investment grade by The Standard & Poors Corporation or Moody's
Investor Services, Inc. Securities with quality ratings Baa and above are
considered investment grade securities. In addition, the Company's investments
in fixed maturities did not contain any significant geographic or industry
concentration of credit risk.
F-15
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The amortized cost and estimated market value of fixed maturities at
December 31, 1996, by contractual maturity, are shown in the table which
follows. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalty:
Amortized Estimated
Cost Market Value
---------------- -----------------
Maturity:
Due in 1 year or less $ 6,412 $ 6,423
Due after 1 year through 5 years 70,848 71,086
Due after 5 years through 10 years 43,109 43,404
Due after 10 years 6,670 6,768
---------------- -----------------
Total $ 127,039 $ 127,681
================ =================
Gains and losses realized on sales of investments in fixed maturities
are as follows:
1996 1995 1994
---------------- --------------- ----------------
Proceeds from sales $ 40,153 $ 7,903 $ 4,083
Gross gains realized 92 106 119
Gross losses realized 561 291 29
Real Estate is reported net of accumulated depreciation of $164 and
$143 for 1996 and 1995, respectively. Investments in a single issuer greater
than 10% of stockholders' equity at December 31, 1996 are as follows:
Description Fixed Maturities
- ---------------------------------------- --------------------
United States Treasury Notes $ 26,318
Federal National Mortgage Association $ 14,885
--------------------
$ 41,203
--------------------
F-16
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
An analysis of net investment income for the years ended December 31,
1996, 1995, and 1994 follows:
1996 1995 1994
-------------- -------------- ------------
Fixed maturities $ 5,714 $ 534 $ 470
Equity securities 756 256 677
Cash and short-term investments 281 194 99
Real Estate 51 52 273
Mortgage Loans 207 231 132
Other 25 270 96
-------------- -------------- ------------
Total Investment Income 7,034 1,537 1,747
Investment Expenses (301) (364) (506)
-------------- -------------- ------------
Net Investment Income $ 6,733 $ 1,173 $ 1,241
-------------- -------------- ------------
In 1992, PGIC acquired a hotel property through a deed in lieu of
foreclosure on a mortgage it held in the amount of $2,985. In 1993, the property
was renovated and changed to a Comfort Inn. In June 1994, the property was sold
for net proceeds of $4,166, resulting in a gain on sale of $147. Upon the sale,
PGIC issued an 8% mortgage loan due in the year 2001 in the amount of $3,000. It
calls for monthly principal payments of $10 plus interest. All payments on the
mortgage were current at December 31, 1996.
Investments with a market value of $23,419 and $6,410 (amortized cost
of $22,749 and $6,296) as of December 31, 1996 and 1995, respectively, were on
deposit in the United States and Canada. The deposits are required by law to
support certain reinsurance contracts, performance bonds and outstanding loss
reserves on assumed business.
Fixed maturities and short-term investments with a market value of
$1,539 (amortized cost of $1,571) as of December 31, 1996 were pledged as
collateral on an unused letter of credit of $1,500 issued to a ceding reinsurer.
5. Deferred Policy Acquisition Costs
Policy acquisition costs are capitalized and amortized over the life
of the policies. Policy acquisition costs are those costs directly related to
the issuance of insurance policies including commissions, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
Policy acquisition costs both acquired and deferred, and the related
amortization charged to income were as follows:
F-17
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
1996 1995 1994
------------ ------------ ----------
Balance, Beginning of year $ 2,379 $ 1,479 $ 752
Deferred policy acquisition
costs purchase in the
Superior acquisition 7,925 0 0
Costs deferred during year 27,657 8,050 5,579
Amortization during year (25,161) (7,150) (4,852)
------------ ------------ ----------
Balance, end of year $ 12,800 $ 2,379 $ 1,479
------------ ------------ ----------
6. Property and Equipment
Property and equipment at December 31 are summarized as follows:
Accumulated
1996 Cost Depreciation 1996 Net 1995 Net
---------------- ---------------- -------------- ---------------
Land $ 226 $ 0 $ 226 $ 226
Buildings 4,342 (1,186) 3,156 3,209
Office furniture and equipment 2,023 (999) 1,024 610
Automobiles 20 (7) 13 1
Computer equipment 5,535 (1,817) 3,718 1,456
---------------- ---------------- -------------- ---------------
$ 12,146 $ (4,009) $ 8,137 $ 5,502
================ =============== ============== ===============
Accumulated depreciation at December 31, 1995 was $2,226. Depreciation
expense related to property and equipment for the years ended December 31, 1996,
1995 and 1994 were $1,783, $637, and $374, respectively.
F-18
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
7. Other Assets
Other assets at December 31, 1996 includes the following intangible
assets:
Accumulated Amortization
Cost Amortization Expense
----------------- ----------------- ----------------
Goodwill $ 2,217 $ 95 $ 95
Deferred debt costs 1,386 154 154
Organization costs 1,689 162 162
----------------- ----------------- ----------------
$ 5,292 $ 411 $ 411
----------------- ----------------- ----------------
No such amounts existed at December 31, 1995.
8. Line of Credit
At December 31, 1996, IGF maintained a revolving bank line of credit in
the amount of $7,000. At December 31, 1996 and 1995, the outstanding balance was
$0 and $5,811, respectively. Interest on this line of credit was at the New York
prime rate (8.25% at December 31, 1996) plus 0.25% adjusted daily. This line is
collateralized by the crop-related uncollected premiums, reinsurance recoverable
on paid losses, Federal Crop Insurance Corporation (FCIC) annual settlement, and
a first lien on the real estate owned by IGF. The line requires IGF to maintain
its primary banking relationship with the issuing bank, limits dividend payments
and capital purchases and requires the maintenance of certain financial ratios.
At December 31, 1996, IGF was in compliance with all covenants associated with
the line, except the covenant pertaining to certain investments as a percentage
of total admitted assets, for which IGF obtained a waiver.
The weighted average interest rate on the line of credit was 8.6%,
9.7%, and 8.1% during December 31, 1996, 1995, and 1994, respectively.
9. Term Debt
The term debt, with an outstanding principal balance of $48,000,
matures on April 30, 2002, and will be repaid in 11 consecutive semiannual
installments, the first of which will occur on the first anniversary of the
closing date. The first installments of principal repayments will be $3,128 and
$2,886 in 1997, respectively, with the remaining annual installments over the
term of the debt to be paid as follows: 1998-$6,494; 1999-$7,938; 2000-$9,742;
2001- $11,612; and 2002-$6,200. Interest on the term debt is payable quarterly
at LIBOR plus 2.75%. In 1996, the Company entered into an interest rate swap
agreement to protect the Company against interest rate volatility. As a result,
the Company fixed its interest rate on the term debt at 8.31% through November
1996, 8.85% through January 1997, 9.08% through April 1997, 9.24% through July
1997, and 8.80% through October 1999. The term debt is collateralized by a
pledge of all of the tangible and intangible assets of GGS Holdings, including
all of the outstanding shares of GGS, and by a pledge of all of the tangible and
intangible assets of GGS, including all of the outstanding shares of capital
stock of PGIC and Superior.
F-19
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
As of December 31, 1996, GGS was in default of six covenants in the
term debt. The first covenant required Pafco and Superior to maintain a Combined
Ratio of statutory net premiums written to surplus of 3:1. The commercial bank
lenders under the term debt have amended the agreement to cure this default.
While there can be no assurance that GGS will have in the future sufficient cash
flow after satisfaction of its debt service requirements to permit GGS to infuse
sufficient capital into its insurance subsidiaries to permit them to maintain a
ratio of net premiums written to surplus not in excess of 3:1, the Company
believes that it or GGS will be able either to contribute additional capital to
PGIC and Superior or, if necessary, to obtain reinsurance, reduce premium
writings, or obtain additional financing in order to permit them to satisfy this
covenant in future years.
The second covenant violation relates to insufficient funds posted by
an affiliate reinsurer to cover its obligations under reinsurance treaties with
Pafco. The affiliate has posted sufficient funds in 1997, and the Company does
not expect future violations of this covenant to occur. The commercial bank
lenders under the term debt have agreed that this violation has been cured. The
third violation relates to Superior's risk-based capital ratio being less than
300% due to growth in premium writings. The commercial lenders under the term
debt have amended the agreement to cure this default.
10. Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment
expenses is summarized as follows:
1996 1995 1994
--------------- --------------- --------------
Balance at January 1 $ 59,421 $ 29,269 $ 54,143
Less reinsurance recoverables 37,798 12,542 36,891
--------------- --------------- --------------
Net balance at January 1 21,623 16,727 17,252
--------------- --------------- --------------
Reserves acquired in connection with
the Superior acquisition 44,423 0 0
--------------- --------------- --------------
Incurred related to:
Current year 138,618 35,184 26,268
Prior years (1,509) 787 202
--------------- --------------- --------------
Total incurred 137,109 35,971 26,470
--------------- --------------- --------------
Paid related to:
Current year 102,713 21,057 16,647
Prior years 28,182 10,018 10,348
--------------- --------------- --------------
Total paid 130,895 31,075 26,995
--------------- --------------- --------------
Net balance at December 31 72,260 21,623 16,727
Plus reinsurance recoverables 29,459 37,798 12,542
--------------- --------------- --------------
Balance at December 31 $ 101,719 $ 59,421 $ 29,269
=============== =============== ==============
F-20
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The foregoing reconciliation shows that the (redundancies) deficiencies
of $(1,509), $787, and $202 in the December 31, 1995, 1994 and 1993 reserves,
respectively, emerged in the following year. These (redundancies) deficiencies
resulted from (lower) higher than anticipated losses resulting from a change in
settlement costs relating to those estimates.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated price increases due
to inflation are considered in estimating the ultimate claim costs, the increase
in average severities of claims is caused by a number of factors that vary with
the individual type of policy written. Future average severities are projected
based on historical trends adjusted for implemented changes in underwriting
standards, policy provisions, and general economic trends. Those anticipated
trends are monitored based on actual development and are modified if necessary.
Liabilities for loss and loss adjustment expenses have been established
when sufficient information has been developed to indicate the involvement of a
specific insurance policy. In addition, a liability has been established to
cover additional exposure on both known and unasserted claims. These liabilities
are reviewed and updated continually.
11. Income Taxes
The Company files a consolidated federal income tax return with its
wholly owned subsidiaries. GGS Holdings files a consolidated tax return with its
wholly owned subsidiaries. Intercompany tax sharing agreements between the
Company and its wholly owned subsidiaries and GGS Holdings and its wholly owned
subsidiaries provide that income taxes will be allocated based upon separate
return calculations in accordance with the Internal Revenue Code of 1986, as
amended. Intercompany tax payments are remitted at such times as estimated taxes
would be required to be made to the Internal Revenue Service.
A reconciliation of the differences between federal tax computed by
applying the federal statutory rate of 35% in 1996 and 34% in 1995 and 1994 to
income before income taxes and the income tax provision is as follows:
1996 1995 1994
--------- --------- ----------
Computed income taxes at statutory rate $ 8,296 $ 2,531 $ 468
Dividends received deduction (158) (54) (30)
Tax-exempt interest (270) (32) (36)
Change in valuation allowance (23) (237) (1,492)
Change in tax rate (14) 0 0
Other 215 414 372
--------- --------- ----------
Income Taxes $ 8,046 $ 2,622 $ (718)
--------- --------- ----------
F-21
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
State income taxes for 1996, 1995 and 1994 are not significant.
Therefore, state income taxes have been recorded in general and administrative
expenses and not as part of income taxes.
The net deferred tax asset at December 31, 1996 and 1995 is comprised
of the following:
1996 1995
------------ ------------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 2,705 $ 422
Unearned premiums 5,061 764
Allowance for doubtful accounts 518 315
Unrealized losses on investments 0 23
Net operating loss carryforwards 328 457
Other 685 411
------------ ------------
9,297 2,392
Valuation allowance 0 23
------------ ------------
Net deferred tax asset 9,297 2,369
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs (4,480) (809)
Unrealized gains on investments (1,224) 0
Other (264) (139)
------------ ------------
(5,968) (948)
------------ ------------
Net deferred tax asset $ 3,329 $ 1,421
============ ============
The Company is required to establish a "valuation allowance" for any
portion of its deferred tax assets which is unlikely to be realized. No
valuation allowance was established as of December 31, 1996 since management
believes it is more likely than not that the Company will realize the benefit of
its deferred tax assets through utilization of such amounts under the carryback
rules and through future taxable income.
F-22
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
As of December 31, 1996, the Company has unused net operating loss
carryovers available as follows:
Years ending not later than December 31, Amount
- ---------------------------------------------- ---------------
2000 $ 811
2002 126
---------------
Total $ 937
===============
Federal income tax attributed to the Company has been examined through
1993. In the opinion of management, the Company has adequately provided for the
possible effects of future assessments related to prior years.
12. Leases
The Company has certain commitments under long-term operating leases
for a branch office and sales offices for Superior Insurance Company. Rental
expense under these commitments was $751 for 1996. Future minimum lease payments
required under these noncancellable operating leases are as follows:
1997 $ 928
1998 466
1999 373
2000 62
2001 and thereafter 0
--------------
Total $ 1,829
==============
13. Reinsurance
The Company limits the maximum net loss that can arise from a large
risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain
levels of risks with other insurers or reinsurers, either on an automatic basis
under general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. In addition, the Company assumes reinsurance on
certain risks. The Company remains contingently liable with respect to
reinsurance, which would become an ultimate liability of the Company in the
event that such reinsuring companies might be unable, at some later date, to
meet their obligations under the reinsurance agreements.
F-23
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Approximately 66% of amounts recoverable from reinsurers are with the
FCIC, a branch of the federal government. Another 28% of recoverable amounts are
with Granite Re, a foreign corporation, which has not applied for an A.M. Best
rating. An additional 5% of uncollateralized recoverable amounts are with
companies which maintain an A.M. Best rating of at least A+. Company management
believes amounts recoverable from reinsurers are collectible. Amounts
recoverable from reinsurers relating to unpaid losses and loss adjustment
expenses were $29,459, $37,798, and $12,542 as of December 31, 1996, 1995, and
1994, respectively. These amounts are reported gross of the related reserves for
unpaid losses and loss adjustment expenses in the accompanying Consolidated
Balance Sheets.
On April 29, 1996, PGIC and IGF entered into a 100% quota share
reinsurance agreement, whereby all of IGF's nonstandard automobile business from
1996 and forward was ceded to PGIC effective January 1, 1996.
On April 29, 1996, PGIC retroactively ceded all of its commercial
business relating to 1995 and previous years to Granite Re, with an effective
date of January 1, 1996. Amounts ceded for outstanding losses and loss
adjustment expenses and unearned premiums were approximately $3,519 and $2,380,
respectively. No gain or loss was recognized in 1996 on the transaction. On this
date, PGIC also entered into a 100% quota share reinsurance agreement with
Granite Re, whereby all of PGIC's commercial business from 1996 and forward was
ceded to Granite Re effective January 1, 1996. (See Note 17.)
F-24
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Reinsurance activity for 1996, 1995, and 1994, which includes
reinsurance with related parties, is summarized as follows:
Direct Assumed Ceded Net
--------------- -------------- --------------- --------------
1996
Premiums written $ 298,596 $ 6,903 $ (95,907) $ 209,592
Premiums earned 279,061 6,903 (94,205) 191,759
Incurred losses and loss adjustment 223,879 4,260 (91,030) 137,109
expenses
Commission expenses (income) 44,879 3,663 (46,716) 1,826
1995
Premiums written $ 123,381 $ 1,253 $ (71,187) $ 53,447
Premiums earned 116,860 1,256 (68,475) 49,641
Incurred losses and loss adjustment
expenses 125,382 2,839 (92,250) 35,971
Commission expenses (income) 17,177 174 (27,092) (9,741)
1994
Premiums written $ 102,178 $ 956 $ (67,995) $ 35,139
Premiums earned 96,053 1,308 (65,235) 32,126
Incurred losses and loss adjustment
expenses 57,951 1,588 (33,069) 26,470
Commission expenses (income) 19,619 48 (24,174) (4,507)
The Company and its subsidiaries have entered into transactions with
various related parties including transactions with Goran, and its affiliates,
Symons International Group, Ltd. (SIG Ltd.), Goran's parent, Granite Insurance
Company (Granite), and Granite Reinsurance Company, Ltd. (Granite Re), Goran's
subsidiaries.
F-25
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The following balances were outstanding at December 31, 1996 and 1995:
1996 1995
--------------- --------------
Investments in and advances to related parties:
Nonredeemable, nonvoting preferred stock of Granite $ 702 $ 702
Secured notes receivable from related parties 0 1,355
Unsecured mortgage loan from director and officer 278 278
Due from directors and officers 172 199
Other receivables from related parties 0 418
--------------- --------------
$ 1,152 $ 2,952
=============== ==============
Payable to affiliates:
Loan and related interest payable to Goran $ 0 $ 2,232
Loan and related interest payable to Granite Re 0 3,733
Other payable to Goran 350 500
Other payables to related parties 16 9
--------------- --------------
$ 366 $ 6,474
=============== ==============
F-26
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The following transactions occurred with related parties in the years
ended December 31, 1996, 1995, and 1994:
1996 1995 1994
-------------- --------------- --------------
Management fees charges by Goran $ 139 $ 414 $ 494
Reinsurance under various treaties, net:
Ceded premiums earned 5,463 5,235 (73)
Ceded losses and loss adjustment expenses incurred 5,168 2,612 0
Ceded commissions 2,620 1,142 0
Consulting fees charged by various related parties 180 26 75
Interest charged by Goran 196 208 188
Dividend income from Granite Re 0 0 18
Interest charged by Granite Re 385 346 312
The unsecured mortgage loan to the Chairman and CEO of the Company was
repaid in full in February 1997.
Amounts due from directors and officers of the Company bear interest at
the 180-day Treasury bill rate payable semiannually. Loan principal is payable
on demand.
The loans payable, including accrued interest, to Goran and Granite Re
at December 31, 1995, were repaid in full in 1996 from the proceeds of the
offering.
15. Stockholders' Equity
On July 29, 1996, the Board of Directors approved an increase in the
authorized common stock of the Company from 1,000 shares to 100,000,000 shares.
The common stock remains no par value. On July 29, 1996, the Board approved a
7,000-for-1 stock split of the Company's issued and outstanding shares. All
share and per share amounts have been restated to retroactively reflect the
stock split. On July 29, 1996, the Board of Directors authorized the issuance of
50,000,000 shares of preferred stock. No shares of preferred stock have been
issued.
16. Effects of Statutory Accounting Practices and Dividend Restrictions
At December 31, 1996 and 1995, PGIC's statutory capital and surplus was
$18,112 and $11,875, respectively, and IGF's statutory capital and surplus was
$29,412 and $9,219, respectively. The minimum regulatory requirement for capital
and surplus is $1,250. The Indiana statute allows 10% of surplus as regards
policyholders or 100% of net income, whichever is greater, to be paid as
dividends only from earned surplus. Statutory requirements place limitations on
the amount of funds which can be remitted to the Company from PGIC and to PGIC
from IGF.
F-27
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Subsequent to Board of Directors and regulatory approval, IGF declared
and paid in April 1996 and December 1995 extraordinary dividends to PGIC in the
amounts of $11 million and $2 million on the 2,494,000 shares of convertible
preferred stock owned by PGIC. In December 1995, upon Board of Directors of PGIC
and regulatory approval, PGIC declared and paid to the Company a $1.5 million
extraordinary dividend on the common stock owned by the Company.
At December 31, 1996, the Superior entities' statutory capital and
surplus was $57,121. In the consent order approving the Acquisition, the Florida
Department has prohibited Superior from paying any dividends for four years
without the prior written approval of the Florida Department.
17. Regulatory Matters
PGIC and IGF, domiciled in Indiana, prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance (IDOI). The Superior entities, domiciled in
Florida, prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Florida Department of
Insurance (FDOI). Prescribed statutory accounting practices include a variety of
publications of the NAIC, as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
IGF received written approval through December 31, 1996 from the IDOI
to reflect its business transacted with the FCIC as a 100% cession with any net
underwriting results recognized in ceding commissions for statutory accounting
purposes, which differs from prescribed statutory accounting practices. As of
December 31, 1996, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit results of the FCIC business, net of
reinsurance of $12,277, $9,653, and $3,257, are netted with policy acquisition
and general and administrative expenses for the years ended December 31, 1996,
1995, and 1994, respectively, in the accompanying Consolidated Statements of
Earnings.
PGIC received approval from the IDOI to record its quota share
reinsurance agreement with Granite Re for its commercial business as reinsurance
effective January 1, 1996 for statutory accounting purposes, which differs from
prescribed statutory practices. SAP prescribed by the IDOI require certain
administrative matters to be completed by an insurance company to recognize a
reinsurance agreement as of its effective date. As of December 31, 1996, these
permitted transactions increased statutory surplus by $512 over what it would
have been had prescribed accounting practices been followed.
The NAIC is considering the adoption of a recommended statutory
accounting standard for crop insurers, the impact of which is uncertain since
several methodologies are currently being examined. Although the Indiana
Department has permitted the Company to continue for its statutory financial
statements through December 31, 1996 its practice of recording its MPCI business
as 100% ceded to the FCIC with net underwriting results recognized in ceding
commissions, the Indiana Department has indicated that in the future it will
require the Company to adopt the MPCI accounting practices recommended by the
NAIC or any similar practice adopted by the Indiana Department. Since such a
standard would be adopted industry-wide for crop insurers, the Company would
also be required to conform its future GAAP financial statements to reflect the
new MPCI statutory accounting methodology and to restate all historical GAAP
financial statements consistently with this methodology for comparability. The
Company cannot predict what accounting methodology will eventually be
implemented or when the Company will be required to adopt such methodology. The
Company anticipates that any such new crop accounting methodology will not
affect GAAP net earnings.
F-28
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The NAIC has promulgated risk-based capital (RBC) requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio (the
"Ratio") of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Generally, a Ratio in excess of 200% of authorized control level RBC requires no
corrective actions by PGIC, IGF or regulators. As of December 31, 1996, IGF,
PGIC and the Superior entities had Ratios that were in excess of the minimum RBC
requirements.
The NAIC currently has a project under way to codify SAP, as existing
SAP does not address all accounting issues and may differ from state to state.
Upon completion, the Codification is expected to replace prescribed or permitted
SAP in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the Codification is uncertain at this
time, yet implementation could be required as early as January 1, 1998. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting is, however, expected to
materially impact statutory capital and surplus.
18. Commitments and Contingencies
The Company, and its subsidiaries, are named as defendants in various
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the subsidiaries. These actions were considered by
the Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial position.
IGF is responsible for the administration of a run-off book of
business. FCIC has requested that IGF take responsibility for the claim
liabilities under its administration of these policies, and IGF has requested
reimbursement of certain expenses from the FCIC with respect to this run-off
activity. It is the Company's opinion, and that of its legal counsel, that there
is no material liability on the part of the Company for claim liabilities of
other companies under IGF's administration.
The increase in number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. The Company recognizes its obligations for guaranty fund assessments
when it receives notice that an amount is payable to a guaranty fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
F-29
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The Company received a commitment from a commercial bank which provided
funds to certain executives and a director of the Company to purchase 69,500
shares in the Directed Share Program in the Company's Offering. The Company
agreed to guarantee 100% of the aggregate principal amount, including unpaid
accrued interest, extended by the commercial bank under this commitment. The
amount of the Company's guarantee under this commitment is approximately $869.
The Company 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 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.
19. Supplemental Cash Flow Information
Cash paid for interest and income taxes are summarized as follows:
1996 1995 1994
------------- --------------- --------------
Cash paid for interest $ 5,178 $ 553 $ 685
Cash paid for income taxes,
net of refunds $ 9,825 $ 1,953 $ 166
During 1994, IGF exchanged 700,000 shares of Granite Reinsurance
Company, Ltd. stock for 9,800 shares of Granite Insurance Company stock,
recording no gain or loss. In addition, PGIC exchanged an investment in real
estate for a mortgage loan of $3,000 plus cash of $1,166.
During 1996, the Company contributed the stock of PGIC and certain
assets of the Company totaling $17,186 to GGS Holdings in exchange for a 52%
ownership interest in GGS Holdings. In addition, Goldman Funds received a
minority interest share of $18,425 in GGS Holdings for its $21,200 contribution,
resulting in a $2,775 increase to additional paid-in capital from the sale of
PGIC common stock and certain assets.
20. Disclosures About Fair Values of Financial Instruments
The following discussion outlines the methodologies and assumptions
used to determine the estimated fair value of the Company's financial
instruments. Considerable judgment is required to develop these fair values and,
accordingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one-time, current market exchange of all of the
Company's financial instruments.
a. Fixed Maturity and Equity Securities: Fair values for fixed
maturity and equity securities are based on market values
obtained from the NAIC Securities Valuation Office. Such
values approximate quoted market prices from published
information.
b. Mortgage Loan: The estimated fair value of the mortgage loan
was established using a discounted cash flow method based on
credit rating, maturity and future income when compared to the
expected yield for mortgages having similar characteristics.
The estimated fair value of the mortgage loan was $2,360 at
December 31, 1996.
F-30
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
c. Short-term Investments, and Cash and Cash Equivalents: The
carrying value for assets classified as short-term
investments, and cash and cash equivalents in the accompanying
Consolidated Balance Sheets approximates their fair value.
d. Short-term and Long-term Debt: Fair values for long-term debt
issues are estimated using discounted cash flow analysis based
on the Company's current incremental borrowing rate for
similar types of borrowing arrangements. In 1996, the rate on
the Company's term debt approximated 8.38%, below the current
rate of 8.41% for similar types of borrowing arrangements. The
estimated fair value of the term debt was $49,047 at December
31, 1996. For short-term debt, the carrying value approximates
fair value.
e. Advances to Related Parties and Payables to Affiliates: It is
not practicable to determine the fair value of the advances to
related parties or the payables to affiliates as of December
31, 1996 and 1995, because these are related party obligations
and no comparable fair value measurement is available.
21. Segment Information
The Company has two business segments: Nonstandard automobile and Crop
insurance. The Nonstandard automobile segment offers personal nonstandard
automobile insurance coverages through a network of independent general
agencies. These products are sold by PGIC in seven states, Superior in eight
states, and IGF in six states. Effective in the first quarter of 1996, all
nonstandard automobile business will be retained in PGIC (see Note 13). The Crop
segment writes MPCI and crop hail insurance in 31 states through independent
agencies with its primary concentration in the Midwest. Activity which is not
included in the major business segments is shown as "Corporate and Other."
"Corporate and Other" includes operations not directly related to the
business segments and unallocated corporate items (i.e., corporate investment
income, interest expense on corporate debt and unallocated overhead expenses).
Identifiable assets by business segment are those assets in the
Company's operations in each segment. Corporate and other assets are principally
cash, short-term investments, related-party assets, intangible assets, and
property and equipment. Capital expenditures are reported exclusive of the
Acquisition.
F-31
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Segment information for 1994 through 1996 is as follows (certain
information for 1995 and 1994 is not available by segment due to general use by
all segments of corporate assets):
Year Ended December 31,
1996 1995 1994
-------------- --------------- ---------------
Revenue:
Nonstandard automobile $ 181,799 $ 36,363 $ 27,784
Crop 24,865 12,830 4,873
Corporate and other 99 3,447 2,183
-------------- --------------- ---------------
Total Revenue $ 206,763 $ 52,640 $ 34,840
============== =============== ===============
Earnings (loss) before taxes and
minority interest:
Nonstandard automobile $ 7,434 $ (1,989) $ 772
Crop 17,685 11,040 2,152
Corporate and other (1,416) (1,611) (1,539)
-------------- --------------- ---------------
Total earnings (loss) before taxes and
minority interest $ 23,703 $ 7,440 $ 1,385
============== =============== ===============
Identifiable assets:
Nonstandard automobile $ 260,332
Crop 72,916
Corporate and other 6,550
--------------
Total identifiable assets: $ 339,798
==============
Depreciation and amortization
Nonstandard automobile $ 1,568
Crop 574
Corporate and other 52
--------------
Total depreciation and amortization $ 2,194
==============
Capital expenditures:
Nonstandard automobile $ 2,058
Crop 1,676
Corporate and other 0
--------------
Total capital expenditures $ 3,734
==============
F-32
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
22. Stock Option Plans
On November 1, 1996, the Company adopted the SIG 1996 Stock Option Plan
(the "SIG Stock Option Plan"). The SIG Stock Option Plan provides the Company
authority to grant nonqualified stock options and incentive stock options to
officers and key employees of the Company and its subsidiaries and nonqualified
stock options to nonemployee directors of the Company and Goran. A total of
1,000,000 shares of common stock have been reserved for issuance under the SIG
Stock Option Plan. On November 1, 1996, the Company issued 830,000 stock options
to the Company's nonemployee directors and certain Goran directors and certain
officers, and certain other key employees of the Company and Goran. The options
were granted at an exercise price equal to the Offering price of the Company's
common stock. The Company has granted (i) options to purchase 20,000 shares of
common stock to the nonemployee directors of the Company, (ii) options to
purchase 791,000 shares of common stock to officers and key employees of the
Company and the subsidiaries, (iii) options to purchase 6,000 shares of common
stock to certain nonemployee directors of Goran and (iv) options to purchase
13,000 shares of common stock to certain employees of Goran and its subsidiaries
who have provided valuable services or assistance for the benefit of the Company
and the subsidiaries. The options granted to the Company's Chairman (375,000
shares) vest and become exercisable in full on the first anniversary of the
grant date. All of the remaining outstanding stock options vest and become
exercisable in six equal installments on the first, second and third
anniversaries of the date of grant.
The Board of Directors of GGS Holdings adopted the GGS Management
Holdings, Inc. 1996 Stock Option Plan (the "GGS Stock Option Plan"), effective
as of April 30, 1996. A maximum of 10% of the issued and outstanding shares of
GGS Holding's common stock (on a fully diluted basis assuming exercise in full
of all options) may be made the subject of options granted under the GGS Stock
Option Plan. A total of 111,111 shares of common stock of GGS Holdings have
actually been reserved for issuance under the GGS Stock Option Plan, which
authorizes the granting of nonqualified and incentive stock options to such
officers and other key employees as may be designated by the Board of Directors
of GGS Holdings. During 1996, 55,972 options have been granted under the GGS
Stock Option Plan. Stock options granted under the GGS Stock Option Plan will be
exercisable at such times and at such exercise prices as the Board of Directors
of GGS Holdings shall determine, but in any event not prior to the earlier of
(i) an initial public offering of GGS Holdings, and (ii) a GGS Holdings Sale, as
defined, and not later than ten years from the date of the grant. Options
granted under the GGS Stock Option Plan vest at a rate of 20% per year for five
years after the date of the grant. The exercise price of options granted as of
April 30, 1996 is, with respect to 50% of the shares subject to each such
option, $44.17 per share. The exercise price per share for the remaining 50% is
$44.17, subject to a compound annual increase in the exercise price of 10% for
the duration of the vesting period. The exercise price of any options granted
under the GGS Stock Option Plan after April 30, 1996, will be subject to a
similar formula, with 50% of the shares subject to any such option having an
exercise price determined by the Board of Directors in its discretion, and the
other 50% having an exercise price which increases on each anniversary of the
date of the grant for the duration of the vesting period. No option granted
under the GGS Stock Option Plan is transferable by the option holder other than
by the laws of descent and distribution. Shares received upon exercise of such
an option are not transferable, except as provided in the Stockholder Agreement
among the Company and the Goldman Funds.
F-33
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
At December 31, 1996, the Company applied APB Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans in the
accompanying Statement of Earnings. Had compensation cost for the Company's
stock option plan been determined consistent with FASB Statement No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996
----------------------------------------
As Reported Pro Forma
----------------- -----------------
Net earnings $13,256 $13,021
======= =======
Net earnings per share $1.76 $1.73
===== =====
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used: no dividend yield for all years; expected volatility of 40%
for the SIG Stock Option Plan and no percentage for the GGS Stock Option Plan,
since the GGS Holdings stock is privately held; risk-free interest rate of 6.0%
to 6.5% for the SIG Stock Option Plan and 6.4% for the GGS Stock Option Plan;
and an expected life of two to four years for the SIG Stock Option Plan and five
years for the GGS Stock Option Plan.
23. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
Quarters
----------------------------------------------------------------------------
First Second Third Fourth Total
--------------- -------------- --------------- --------------- ---------------
1996
Gross written premiums $ 41,422 $ 105,528 $ 71,813 $ 86,736 $ 305,499
Net earnings 1,586 2,718 4,589 4,363 13,256
Earnings per share 0.22 0.39 0.66 0.49 1.76
1995
Gross written premiums $ 28,272 $ 67,487 $ 16,978 $ 11,897 $ 124,634
Net earnings 1,066 940 1,464 1,351 4,821
Earnings per share 0.15 0.14 0.21 0.19 0.69
F-34
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
As is customary in the crop insurance industry, insurance company
participants in the FCIC program receive more precise financial results from the
FCIC in the fourth quarter based upon business written on spring-planted crops.
On the basis of FCIC-supplied financial results, IGF recorded, in the fourth
quarter, an additional underwriting gain, net of reinsurance, on its FCIC
business of $5,572 during 1996 and $3,139 during 1995.
24. Subsequent Events (Unaudited):
The Company is currently negotiating the 1998 Standard Reinsurance
Agreement with the FCIC. The current government proposal is to reduce the MPCI
Expense Reimbursement to 24.5% and reduce the profit sharing arrangement. The
negotiations are on-going and the ultimate results cannot be determined at this
time. There can be no assurance that the Company will negotiate terms for the
1998 Standard Reinsurance Agreement which are favorable to the Company.
During the first half of 1997, and most noticeably in the second quarter of
1997, the Company, as part of its efforts to reduce costs and combine the
operations of the two nonstandard automobile insurance companies, has combined
the claims settlement practices as well as the reserving philosophies of
Superior and Pafco. Superior had historically provided higher case reserves and
lower IBNR levels than Pafco while paying claims in a manner where such payments
were generally less than applicable reserves. Pafco had historically carried
adequate reserves while paying claims in a manner where such payments were
generally greater than applicable reserves. In connection with this change in
claims management philosophy, the Company will record additional Loss and LAE
Reserves, relating primarily to operations at Pafco, resulting in an after tax
charge to earnings of approximately $1.8 million or $0.17 per share in the
second quarter of 1997. While the Company believes these actions are necessary,
the establishment and monitoring of reserve levels is a highly subjective
process involving numerous assumptions and estimates. Therefore, actual results
may ultimately differ from current estimates.
The effects of these additional Loss and LAE Reserves on the Company's
historical and pro forma results of operations and financial condition as of and
for the six months ended June 30, 1997 follows. The following amounts have been
credited for the minority interest owner's share of the after tax effects of the
reserve adjustment:
F-35
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
As Adjusted
Historical June Pro Forma
30, 1997 June 30, 1997
------------------- -------------
Earnings before income taxes, minority
interest and extraordinary item $ 6,582 $ 7,565
Net earnings from continuing operations 4,118 4,350
Earning per common share 0.39 0.41
EBITDA 8,440 8,440
Adjusted EBITDA 7,498 7,498
Ratio of EBITDA to interest expense and
Distributions on Preferred Securities 2.62x
Ratio of Adjusted EBITDA to interest
expense and Distributions on
Preferred Securities 2.33x
Ratio of earnings to fixed charges 5.61x 2.34x
Stockholder's Equity $ 64,075 $ 63,368
Loss Ratio 80.1% 80.1%
Combined Ratio 100.7% 101.3%
The Company sold the Trust Preferred Securities (the "Preferred
Securities") on August 12, 1997 in an aggregate amount of $ 135,000,000. These
Preferred Securities were offered through a wholly-owned trust subsidiary of the
Company and are backed by Senior Subordinated Notes to the Trust from the
Company. These Preferred Securities were issued under Rule 144A of the SEC and
the Company will ultimately file a Form S-1 Registration Statement. The proceeds
of this offering were used to repurchase the remaining minority interest in
GGSH, repay the Term Debt and provide capital to the nonstandard automobile
insurers.
Assuming this offering took place at January 1, 1996 or at January 1,
1997, the pro forma effect of this offering on the Company's consolidated
statement of earnings is as follows:
December 31, June 30,
1996 1997
(unaudited) (unaudited)
Revenues $ 206,763 $ 71,533
Net earnings $ 9,751 $ 6,141
Net earnings per common share $ 1.29 $ 0.58
F-36
SYMONS INTERNATIONAL GROUP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Effective January 1, 1997, the Company's nonstandard automobile
insurers entered into a quota share reinsurance treaty, for all new and renewal
policies written on or after the effective date, by placing 90% with Vesta Fire
Insurance Company and 10% with Granite Re. Also in 1997 the Company increased
its quota share reinsurance percentage to 40% from 15% on crop/hail business.
F-37
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Superior Insurance Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Superior Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Superior Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities in 1993.
As discussed in Notes 1 and 6 to the consolidated financial statements,
the Company adopted Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes, during the year ended December 31, 1993.
/s/ Coopers & Lybrand
Atlanta, Georgia
June 14, 1996
F-38
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
as of December 31, 1994 and 1995 and June 30, 1996
(dollars in thousands, except share data)
December 31, December 31, (unaudited)
1994 1995 June 30, 1996
--------------- --------------- ---------------
ASSETS:
Investments:
Available for Sale:
Fixed Maturities, at market $ 93,860 $ 99,556 $ 102,777
Equity Securities, at market 7,140 8,070 13,987
Short-term investments, at amortized cost which
approximates market 5,538 8,462 3,739
Other investment, at cost 808 274 ---
Cash and cash equivalents 11 1,430 4,331
Receivables (net of allowance for doubtful account
of $310 and $500 at December
31, 1994 and 1995, respectively, and $500(unaudited)
in at June 30, 1996 31,425 30,209 32,894
Reinsurance recoverable on paid and unpaid losses, net 1,099 987 1,478
Accrued investment income 1,888 1,602 1,586
Deferred policy acquisition costs 9,004 7,574 8,038
Deferred income taxes 3,785 44 1,511
Property and equipment 357 697 657
Federal income taxes receivable 3,521 --- ---
Other assets 3,428 1,225 1,160
--------------- --------------- ---------------
Total Assets $ 161,864 $ 160,130 $ 172,158
=============== =============== ===============
LIABILITIES:
Losses and loss adjustment expenses $ 54,577 $ 47,112 $ 47,155
Unearned premiums 44,593 41,048 47,016
Draft payables 6,509 6,070 7,998
Federal income tax payable --- 177 1,284
Accrued expenses 4,307 4,107 4,088
--------------- --------------- ---------------
Total Liabilities 109,986 98,514 107,541
--------------- --------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $ 100 par value, 30,000 shares
authorized, issued and outstanding 3,000 3,000 3,000
Additional paid-in capital 37,025 37,025 37,025
Unrealized gain/(loss) on investments, net
of deferred tax benefit (expense)
of (412) in 1994 and 2,605 in 1995,
1,702 (unaudited) at June 30, 1996 (765) 4,838 1,808
Retained earnings 12,618 16,753 22,784
--------------- --------------- ---------------
Total Stockholders' Equity 51,878 61,616 64,617
--------------- --------------- ---------------
Total Liabilities and Stockholders' Equity $ 161,864 $ 160,130 $ 172,158
=============== =============== ===============
F-39
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
for the Years Ended December 31, 1993, 1994 and 1995
and the Six Months ended June 30, 1995 and 1996
(dollars in thousands, except per share data)
Six Months Ended
Years Ended December 31, June 30,
--------------------------------------------- ----------------------------
(unaudited)
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Gross premiums written $ 115,660 $ 112,906 $ 94,756 $ 42,915 $ 69,119
Less ceded premiums (366) (391) (686) (400) (412)
----- ----- ----- ----- -----
Net premiums written 115,294 112,515 94,070 42,515 69,707
Change in unearned premiums 2,842 322 3,544 7,538 (5,968)
----- --- ----- ----- -------
Net premiums earned 118,136 112,837 97,614 50,053 62,739
Net investment income 8,170 7,024 7,093 4,161 3,476
Other income 5,879 3,344 4,171 1,692 3,092
Net realized capital gain/(loss) 3,559 (200) 1,954 711 2,104
----- ----- ----- --- -----
Total Revenues 135,744 123,005 110,832 56,617 71,411
------- ------- ------- ------ ------
Expenses:
Losses and loss adjustment expenses 85,902 92,378 72,343 38,129 45,963
Policy acquisition and general and
administrative expenses 36,292 38,902 32,705 17,212 17,104
------ ------ ------ ------ ------
Total Expenses 122,194 131,280 105,048 55,341 63,067
------- ------- ------- ------ ------
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle 13,550 (8,275) 5,784 1,276 8,344
------ ------- ----- ----- -----
Income taxes:
Current income tax expense (benefit) 3,207 (2,770) 925 (539) 2,153
Deferred income tax expense (benefit) 774 (1,030) 724 700 160
--- ------- --- --- ---
Total Income Taxes 3,981 (3,800) 1,649 161 2,313
----- ------- ----- --- -----
Earnings (loss) before cumulative effect of
a change in accounting principle 9,569 (4,475) 4,135 1,115 6,031
Cumulative effect of a change in
accounting principle 1,389 --- --- --- ---
----- --- --- --- ---
Net Earnings (loss) $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031
====== ======= ===== ===== =====
F-40
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1993, 1994 and 1995
and the Six Months ended June 30, 1995 and 1996
(dollars in thousands)
Additional Unrealized Retained Total
Common Paid-In Gain (Loss) Earnings Stockholders'
Stock Capital Investments (Deficit) Equity
----- ------- ----------- --------- ------
Balance at January 1, 1993 $ 1,500 $ 37,025 $ 655 $ 29,635 $ 68,815
Change in unrealized (loss) gain on
investments, net of deferred taxes --- --- 3,983 --- 3,983
Cash dividends paid --- --- --- (10,000) (10,000)
Common stock dividends paid 1,500 --- --- (1,500) ---
Net Earnings --- --- --- 10,958 10,958
--- --- --- ------ ------
Balance at December 31, 1993 3,000 37,025 4,638 29,093 73,756
Change in unrealized (loss) gain on
investments, net of deferred taxes --- --- (5,403) --- (5,403)
Cash dividends paid --- --- --- (12,000) (12,000)
Net Loss --- --- --- (4,475) (4,475)
--- --- --- ------- -------
Balance at December 31, 1994 3,000 37,025 (765) 12,618 51,878
Change in unrealized gain on
investments, net of deferred taxes
(unaudited) --- --- 4,211 --- 4,211
Net Earnings (unaudited) --- --- --- 1,115 1,115
---------- -------- -------- ---------- --------
Balance at June 30, 1995
(unaudited) $ 3,000 $ 37,025 $ 3,446 $ 13,733 $ 57,204
===== ====== ===== ====== ======
Balance at December 31, 1994 $ 3,000 $ 37,025 $ (765) $ 12,618 $ 51,878
Change in unrealized loss on
investments, net of deferred taxes --- --- 5,603 --- 5,603
Net Earnings --- --- --- 4,135 4,135
--- --- --- ----- -----
Balance at December 31, 1995 3,000 37,025 4,838 16,753 61,616
Change in unrealized loss on
investments, net of deferred taxes
(unaudited) --- --- (3,030) --- (3,030)
Net Earnings (unaudited) --- --- --- 6,031 6,031
-------- ----------- -------- ------ ------
Balance at June 30, 1996
(unaudited) $ 3,000 $ 37,025 $ 1,808 $ 22,784 $ 64,617
===== ====== ===== ====== ======
F-41
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1993,1994 and 1995
and the Six Months ended June 30, 1995 and 1996
(dollars in thousands)
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------- --------------------------
(unaudited)
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Cash Flows from Operating Activities:
Net Earnings(loss) For The Period $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031
Adjustments to reconcile net
earnings to net cash provided
from (used in) operations:
Net amortization on fixed maturities 909 499 205 108 124
Depreciation of property and equipment 128 185 214 81 97
Deferred income tax expense (benefit) (615) (1,030) 724 700 160
Net loss/(gain) on sale of fixed assets
and investments (3,546) 210 (1,940) (711) (2,104)
Net changes in operating assets
and liabilities:
Receivables (4,052) (1,303) 1,216 6,839 (2,685)
Reinsurance recoverable on unpaid losses (12) --- 49 4 ---
Accrued investment income 504 524 286 177 16
Federal income taxes receivable/(payable) (23) (4,075) 3,698 (558) 1,107
Deferred policy acquisition costs 248 (78) 1,430 1,684 (464)
Other assets 89 (2,382) 2,203 2,210 65
Losses and loss adjustment expenses (4,260) 985 (7,402) (4,966) 43
Unearned premiums (2,842) (322) (3,545) (7,538) 5,968
Drafts payables (2,091) (1,897) (439) (562) 1,928
Accrued expenses --- 4,307 (200) (835) (19)
--- ----- ----- ----- ----
Net cash provided from (used in) operations (4,605) (8,852) 634 (2,252) 10,627
------- ------- --- ------- ------
Cash Flow From (Used In) Investing Activities:
Net (purchases)/sales of short-term investments 5,322 1,845 (2,924) (2,242) 4,723
Proceeds from sales, calls and maturities of
fixed maturities 91,866 77,224 58,725 36,513 49,057
Purchases of fixed maturities (76,991) (64,678) (56,222) (32,461) (55,323)
Proceeds from sales of equity securities 91,397 136,121 87,319 43,210 80,205
Purchase of equity securities (92,605) (133,482) (86,663) (43,022) (86,233)
Proceeds from the sale of other investments --- --- 1,105 382 274
Proceeds from sales of property and equipment 30 33 --- --- ---
Purchases of property and equipment (388) (198) (555) (139) (69)
----- ----- ----- ----- ----
Net cash provided from (used in) investing
activities 18,631 16,865 785 2,241 (7,366)
------ ------ --- ----- -------
Cash flow used in financing activities:
Payment of dividends (10,000) (12,000) --- --- ---
-------- -------- --- --- ---
Net cash used in financing activities (10,000) (12,000) --- --- ---
-------- -------- --- --- ---
Increase (decrease) in cash and cash equivalents 4,026 (3,987) 1,419 (11) 2,901
Cash and cash equivalents, beginning of year (28) 3,998 11 11 1,430
---- ----- -- -- -----
Cash and cash equivalents, end of year $ 3,998 $ 11 $ 1,430 $ -- $ 4,331
===== == ===== == =====
Supplemental cash flow information:
Cash paid for income taxes, net of refunds $ 3,230 $ 1,305 $ (2,773) $ 19 $ 1,046
===== ===== ====== == =====
F-42
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
1. Nature of Operations and Significant Accounting Policies
Superior Insurance Company, Inc. ("Superior" or the "Company") was a
wholly-owned subsidiary of Interfinancial Inc. (the "Parent"). Interfinancial
Inc. is a wholly-owned subsidiary of Fortis, Inc. Fortis, Inc. is equally owned
by Fortis AMEV, The Netherlands ("AMEV") and Fortis AG, Brussels, Belgium. As
further discussed in Note 14 the Company was sold by the Parent to GGS Holdings
on May 1, 1996.
The Company writes primarily private passenger automobile insurance
coverage. Approximately one-half of the Company's business is written in the
State of Florida. As such, a significant portion of agents' balances and
uncollected premiums is due from Florida policyholders.
The following is a description of the significant accounting policies
and practices employed:
Principles of Consolidation
The consolidated financial statements include the accounts, after
intercompany eliminations, of the Company and its wholly owned subsidiaries as
follows: Superior American Insurance Company ("Superior American") and Superior
Guaranty Insurance Company ("Superior Guaranty").
Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") which differ from
statutory accounting practices ("SAP") prescribed or permitted for insurance
companies by regulatory authorities in the following respects:
o Certain assets are included in the balance sheet that are
excluded as "Nonadmitted Assets" under statutory accounting.
o Costs incurred by the Company relating to the acquisition of
new business which are expensed for statutory purposes are
deferred and amortized on a straight-line basis over the term
of the related policies. Commissions allowed by reinsurers on
business ceded are deferred and amortized with policy
acquisition costs.
o The investment in wholly owned subsidiaries is consolidated
for GAAP rather than valued on the statutory equity method.
The net earnings or loss and changes in unassigned surplus of
the subsidiaries is reflected in net earnings for the period
rather than recorded directly to unassigned surplus.
o Investments in bonds are designated at purchase as held to
maturity, trading, or available for sale. Held-to-maturity
fixed maturity investments are reported at amortized cost, and
the remaining fixed maturity investments are reported at fair
value with unrealized holding gains and losses reported in
operations for those designated as trading and as a separate
component of stockholders' equity for those designated as
available for sale. All securities have been designated as
available for sale. For SAP, such fixed maturity investments
would be reported at amortized cost or market value based on
their NAIC rating.
F-43
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
o The liability for losses and loss adjustment expenses and
unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes.
o Deferred income taxes are not recognized on a statutory basis.
o Credits for reinsurance are recorded only to the extent
considered realizable. Under SAP, credit for reinsurance ceded
are allowed to the extent the reinsurers meet the statutory
requirements of the Insurance Department of the State of
Florida, principally statutory solvency.
A reconciliation of statutory net earnings and capital and surplus to
GAAP net earnings and stockholders' equity for Superior Insurance Company is as
follows:
1993 1994 1995
---------------------------- ------------------------------ -----------------------------
Capital Net Capital Net Capital Net
and Earnings and Earnings and Earnings
Surplus Surplus Surplus
Statutory Balance $ 56,656 $ 10,597 $ 43,577 $ 201 $ 49,277 $ 5,639
Non-admitted assets 130 --- 225 --- 472 ---
Investments market
value adjustment 5,571 --- (1,988) --- 5,279 ---
Deferred acquisition
costs 8,926 (248) 9,004 78 7,574 (1,430)
Losses and loss
adjustment expense 2,677 59 (1,600) (4,822) --- 600
Deferred income tax (154) 615 3,785 1,030 44 (724)
Rent rebate --- --- (333) (333) (277) 55
Pension and other
postretirement
benefits (50) 49 (548) (479) (667) (120)
Other --- (114) (244) (150) (86) 115
----- ----- ----- ----- ---- ---
GAAP Balance $ 73,756 $ 10,958 $ 51,878 $ (4,475) $ 61,616 $ 4,135
====== ====== ====== ======= ====== =====
Premiums
Premiums are recognized as income ratably over the life of the related
policies and are stated net of ceded premiums. Unearned premiums are computed on
the semimonthly pro rata basis.
F-44
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Investments
During 1993, the Company adopted Financial Accounting Standards Board's
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Accordingly, investments are presented on the following bases:
o Fixed maturities and equity securities -- at market value --
all such securities are classified as available for sale and
are carried at market value with the unrealized gain or loss
as a component of stockholders' equity.
o Short-term investments -- at amortized cost, which approxi-
mates market
o Other investment at cost
Realized gains and losses on sales of investments are recorded on the
trade date and are recognized in net earnings on the specific identification
basis. Other than temporary market value declines are recognized in the period
in which they are determined. Other changes in market values of debt and equity
securities are reflected as unrealized gain or loss directly in stockholders'
equity, net of deferred tax, and, accordingly, have no effect on net earnings.
Interest and dividend income are recognized as earned.
Cash And Cash Equivalents
For purposes of the statement of cash flows, the Company includes in
cash and cash equivalents all cash on hand and demand deposits with original
maturities of three months or less.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs are comprised of agents' commissions,
premium taxes and certain other costs which are related directly to the
acquisition of new and renewal business, net of expense allowances received in
connection with reinsurance ceded, which have been accounted for as a reduction
of the related policy acquisition costs and are deferred and amortized
accordingly. These costs, to the extent that they are considered recoverable,
are deferred and amortized over the terms of the policies to which they relate.
Property And Equipment
Property and equipment are recorded at cost. All additions to property
and equipment made in 1995 are depreciated based on the straight-line method
over their estimated useful lives. Additions made prior to 1995 are depreciated
using the declining balance method over their estimated useful lives ranging
from five to seven years. Asset and accumulated depreciation accounts are
relieved for dispositions, with resulting gains or losses reflected in net
income.
F-45
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Losses And Loss Adjustment Expenses
The liability for losses and loss adjustment expenses includes
estimates for reported unpaid losses and loss adjustment expenses and for
estimated losses incurred, but not reported. This liability has not been
discounted. The Company's losses and loss adjustment expense liability includes
an aggregate stop-loss program. The Company retains an independent actuarial
firm to estimate the liability. The liability is established using individual
case-basis valuations and statistical analysis as claims are reported. Those
estimates are subject to the effects of trends in loss severity and frequency.
While management believes the liability is adequate, the provisions for losses
and loss adjustment expenses are necessarily based on estimates and are subject
to considerable variability. Changes in the estimated liability are charged or
credited to operations as additional information on the estimated amount of a
claim becomes known during the course of its settlement. The liability for
losses and loss adjustment expenses is reported net of the receivables for
salvage and subrogation of approximately $2,242 and $1,622 at December 31, 1994
and 1995, respectively.
Income Taxes
During January 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. The Company adopted SFAS No. 109 during the year ended December
31, 1993. The Statement adopts the liability method of accounting for deferred
income taxes. Under the liability method, companies establish a deferred tax
liability or asset for the future tax effects of temporary differences between
book and taxable income. Changes in future tax rates result in immediate
adjustments to deferred taxes. (See Note 6). Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with those
used in accounting for the original policies and the terms of the reinsurance
contracts. Premiums ceded to other companies have been reported as a reduction
of premium income.
Other Income
Other income consists of finance and service fees paid by policyholders
in relation to installment billings.
Recently Issued Accounting Pronouncements
In March 1995, SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was issued. SFAS
No. 121 requires that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This Statement is
effective for financial statements for fiscal years beginning after December 31,
1995. The Company intends to adopt SFAS No. 121 in 1996. Based upon management's
review and analysis, adoption of SFAS No. 121 is not expected to have a material
impact on the Company's results of operations in 1996.
F-46
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Vulnerability From Concentration
At December 31, 1995, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic location.
Also at December 31, 1995, the Company did not have a concentration of (1)
business transactions with a particular customer, lender or distributor, (2)
revenues from a particular product or service, (3) sources of supply of labor or
services used in the business, or (4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a serious
impact to the Company's financial condition, except for the market and
geographic concentration described in the following paragraph.
The Company writes nonstandard automobile insurance primarily in
California and Florida. As a result, the Company is always at risk that there
could be significant losses arising in certain geographic areas. The Company
protects itself from such events by purchasing catastrophe insurance.
Use of Estimates
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
Unaudited Interim Financial Statements
The consolidated financial statements for the six months ended June 30,
1995 and 1996 have been prepared using the applicable accounting principles used
in the audited financial statements. These statements are unaudited but, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments and accruals) necessary for a fair presentation of the
financial information set forth herein.
F-47
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
2. Investments
Investments are summarized as follows:
Unrealized
------------------------------
Amortized Estimated
Cost Gain Loss Market Value
---- ---- ---- ------------
December 31, 1995 Fixed maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 28,612 $ 1,057 $ --- $ 29,669
Obligations of states and political
subdivisions 24,595 1,251 (15) 25,831
Corporate securities 41,070 2,988 (2) 44,056
------ ----- --- ------
Total Fixed Maturities 94,277 5,296 (17) 99,556
------ ----- ---- ------
Equity Securities:
Preferred stocks 713 25 --- 738
Common stocks 5,193 2,370 (231) 7,332
----- ----- ----- -----
5,906 2,395 (231) 8,070
----- ----- ----- ------
Short-term investments (1) 8,462 --- --- 8,462
Other investments 274 --- --- 274
--- --- --- ---
Total Investments $ 108,919 $ 7,691 $ (248) $ 116,362
======= ===== ===== =======
December 31, 1994 Fixed maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $ 25,312 $ 31 $ (767) $ 24,576
Obligations of states and political
subdivisions 30,567 380 (680) 30,267
Corporate securities 39,969 292 (1,244) 39,017
------ --- ------ ------
Total Fixed Maturities 95,848 703 (2,691) 93,860
------ --- ------- -------
Equity Securities:
Preferred stocks 713 32 --- 745
Common stocks 5,616 1,201 (422) 6,395
----- ----- ----- -----
6,329 1,233 (422) 7,140
----- ----- ----- -----
Short-term investments 5,538 --- --- 5,538
Other investments 808 --- --- 808
--- --- --- ---
Total Investments $ 108,523 $ 1,936 $ (3,113) $ 107,346
======= ===== ======= =======
F-48
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
The amortized cost and estimated market value of fixed maturities at
December 31, 1995 and 1994, by contractual maturity, are shown in the table
which follows. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without penalty:
1995 1994
----------------------------------- ----------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Maturity:
Due in 1 year or less $ 2,508 $ 2,510 $ 5,514 $ 5,521
Due after 1 year through 5 years 31,166 32,164 20,403 20,086
Due after 5 years through 10 years 33,012 35,338 33,522 32,550
Due after 10 years 27,591 29,544 36,409 35,703
------ ------ ------ ------
Total $ 94,277 $ 99,556 $ 95,848 $ 93,860
====== ====== ====== ======
Gains and losses realized on sales of investments in fixed maturities
are as follows:
1993 1994 1995
--------------- -------------- --------------
Gross gains realized on fixed maturities $ 3,040 $ 779 $ 1,442
Gross losses realized on fixed maturities 95 1,270 322
Gross gains realized on equity securities 637 694 507
Gross losses realized on equity securities 28 457 256
An analysis of net investment income for the years ended December 31,
1993, 1994, and 1995 follows:
1993 1994 1995
-------------- -------------- --------------
Fixed maturities $ 7,939 $ 6,691 $ 6,630
Equity securities 461 538 603
Short-term investments 141 106 68
-------------- -------------- --------------
Total Investment Income 8,541 7,335 7,301
Investment Expenses 371 311 208
-------------- -------------- --------------
Net Investment Income $ 8,170 $ 7,024 $ 7,093
-------------- -------------- --------------
F-49
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Investments with an approximate market value of $17,384 and $2,366
(approximate amortized cost of $16,907 and $2,362) as of December 31, 1995 and
1994, respectively, were on deposit in the United States and Canada. The
deposits are required by law to support certain reinsurance contracts,
performance bonds and outstanding loss liabilities on assumed business.
In May 1990, Superior entered into a limited partnership agreement with
AMEV Venture Management ("AVM"), an AMEV affiliate. The Limited Partnership,
AMEV Venture III, is an investment pool which is managed by AVM as a general
partner. The purpose of the pool is to make speculative investments in small
business, with the partners sharing in the profits/losses resulting from the
pool. Superior committed to an investment of $2,000 which is approximately 8% of
the total pool. This investment is carried at cost and included in, "other
investment". As of May, 1996, the Company had disposed of its remaining interest
in this investment.
24. Deferred Policy Acquisition Costs
Policy acquisition costs are capitalized and amortized over the life of
the policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions and underwriting expenses
net of reinsurance commission income on such policies. Policy acquisition costs
deferred and the related amortization charged to earnings were as follows:
1993 1994 1995
--------------- --------------- --------------
Balance, beginning of year $ 9,174 $ 8,926 $ 9,004
Costs deferred during year 23,561 23,029 17,606
Amortization during year (23,809) (22,951) (19,036)
--------------- --------------- --------------
Balance, end of year $ 8,926 $ 9,004 $ 7,574
--------------- --------------- --------------
25. Property and Equipment
Property and equipment at December 31 are summarized as follows:
1995
Accumulated
1994 Net 1995 Cost Depreciation 1995 Net
--------- -------- ----------- ---------
Office furniture and equipment $ 62 $ 1,099 $ 723 $ 376
Automobiles --- 20 20 ---
Computer equipment 295 1,086 765 321
Leasehold improvements --- 6 6 ---
--------- -------- ----------- ---------
$ 357 $ 2,211 $ 1,514 $ 697
--------- -------- ----------- ---------
F-50
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Accumulated depreciation at December 31, 1994 was approximately $1,370.
Depreciation expense related to property and equipment for the years ended
December 31, 1995, 1994 and 1993 was approximately $214, $185 and $128,
respectively.
5. Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
1993 1994 1995
Balance at January 1 $ 57,164 $ 52,610 $ 54,577
Less reinsurance recoverables 361 68 1,099
----------- ---------- ----------
Net balance at January 1 56,803 52,542 53,478
----------- ---------- ----------
Incurred related to:
Current year 92,619 91,064 77,266
Prior years (6,717) 1,314 (4,923)
----------- ---------- ----------
Total incurred 85,902 92,378 72,343
----------- ---------- ----------
Paid related to:
Current year 57,929 56,505 48,272
Prior years 32,234 34,937 31,424
----------- ---------- ----------
Total paid 90,163 91,442 79,696
----------- ---------- ----------
Net balance at December 31 52,542 53,478 46,125
Plus reinsurance recoverables
on unpaid losses 68 1,099 987
----------- ---------- ----------
Balance at December 31 $ 52,610 $ 54,577 $ 47,112
----------- ---------- ----------
The foregoing reconciliation shows that redundancies of approximately
$4,923 and $6,717 in the liabilities at January 1, 1995 and at January 1, 1993,
respectively, emerged during 1995 and 1993. These redundancies resulted from
lower than anticipated losses resulting from a change in settlement costs
relating to those estimates. The reconciliation shows that a deficiency of
approximately $1,314 in the liabilities at January 1, 1994 emerged during 1994.
This deficiency resulted from higher than anticipated losses resulting primarily
from a change in the settlement cost of loss reported in 1990.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and loss adjustment expenses. While
anticipated price increases due to inflation are considered in estimating the
ultimate claim costs, the increase in average severities of claims is caused by
a number of factors that vary with the individual type of policy written. Future
average severities are projected based on historical trends adjusted for
implemented changes
F-51
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
in underwriting standards, policy provisions, and general economic trends. Those
anticipated trends are monitored based on actual development and are modified if
necessary.
Case liabilities (and costs of related litigation) have been
established when sufficient information has been developed to indicate the
involvement of a specific insurance policy. In addition, incurred but not
reported liabilities have been established to cover additional exposure on both
known and unasserted claims. Those liabilities are reviewed and updated
continually.
6. Income Taxes
For the year ended December 31, 1995, the Company will file a
consolidated federal income tax return with its former subsidiaries owned by
Fortis, Inc. An intercompany tax sharing agreement between the Company and its
subsidiaries provided that income taxes will be allocated based upon the
percentage that each subsidiary's separate return tax liability bears to the
total amount of tax liability calculated for all members of the group in
accordance with the Internal Revenue Code of 1986, as amended. Intercompany tax
payments are remitted at such times as estimated taxes would be required to be
made to the Internal Revenue Service. A reconciliation of the differences
between federal tax computed by applying the federal statutory rate of 35% to
earnings before income taxes and the income tax provision is as follows:
1993 1994 1995
--------------- -------------- --------------
Computed income taxes at statutory rate $ 4,743 $ (2,896) $ 2,024
Dividends received deduction (118) (69) (53)
Tax-exempt interest (1,136) (866) (538)
Proration 188 140 89
Other 304 (109) 127
--------------- -------------- --------------
Income tax expense (benefit) $ 3,981 $ (3,800) $ 1,649
=============== ============ ==============
As described in Note 1, the Company adopted SFAS No. 109 effective in
1993. The effect on years prior to 1993 of changing to this method was a benefit
of approximately $1,389 and is reflected in the consolidated statement of
earnings as the cumulative effect of a change in accounting principle. The
current or deferred tax consequences of a transaction are measured by applying
the provisions of enacted tax laws to determine the amount of taxes payable
currently or in future years. The method of accounting for income taxes prior to
SFAS No. 109 provided that deferred taxes, once recorded, were not adjusted for
changes in tax rates.
F-52
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
The net deferred tax asset at December 31, 1994 and 1995 is comprised of the
following:
1994 1995
---------------- ---------------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 1,848 $ 1,454
Unearned premiums 3,122 2,873
Allowance for doubtful accounts 109 175
Unrealized losses on investments 412 ---
Salvage and subrogation 694 541
Other 751 257
---------------- ---------------
6,936 5,300
---------------- ---------------
Deferred tax liabilities:
Deferred policy acquisitions costs 3,151 2,651
Unrealized gain on investments --- 2,605
---------------- ---------------
3,151 5,256
---------------- ---------------
Net deferred tax asset $ 3,785 $ 44
---------------- ---------------
The Company is required to establish a "valuation allowance" for any
portion of its deferred tax assets which is unlikely to be realized. No
valuation allowance was established as of December 31, 1995 or 1994 on the
deferred tax assets, since management believes it is more likely than not that
the Company will realize the benefit of its deferred tax assets.
Federal income tax attributed to the Company has been examined through
1993. In the opinion of management, the Company has adequately provided for the
possible effects of future assessments related to prior years.
7. Retirement and Other Employee Benefits
As part of the sale of the Company, as described in Note 14, the
Company withdrew from all of the plans mentioned below and paid Fortis
approximately $557 to assume the related liabilities.
Superior participated in a non-contributory defined benefit pension
plan ("the Pension Plan") administered by Fortis, Inc., covering substantially
all employees who were at least 21 years of age and who had one year of service
with Superior. The Pension Plan provided benefits payable to participants on
retirement or disability and to beneficiaries of participants in the event of
death. The benefits were based on years of service and the employee's
compensation during such years of service. The Company's funding policy was to
contribute annually at least the amount required to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974.
F-53
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Contributions were intended to provide not only for benefits attributed
to service to date, but also for those expected to be earned in the future. The
net periodic pension cost allocated to Superior under the Pension Plan for 1993,
1994 and 1995 was approximately $206, $186 and $119, respectively. In 1993,
pension expense includes a one-time accrual for implementation of SFAS 106 of
approximately $81.
Superior also participated in a contributory profit sharing plan ("the
Profit Sharing Plan") sponsored by Fortis, Inc. This Profit Sharing Plan covered
all employees with one year of service to the Company and provided benefits
payable to participants on retirement or disability and to beneficiaries of
participants in the event of death. The amount expensed for the Profit Sharing
Plan for 1993, 1994 and 1995 was approximately $252, $381 and $146,
respectively.
In addition to retirement benefits, the Company participated in other
health care and life insurance benefit plans ("postretirement benefits") for
retired employees, sponsored by Fortis, Inc. Health care benefits, either
through a Fortis-sponsored retiree plan for retirees under age 65 or through a
cost offset for individually purchased Medigap policies for retirees over age
65, were available to employees who retired on or after January 1, 1993, at age
55 or older, with 15 or more years of service. Life insurance, on a retiree pay
all basis, was available to those who retired on or after January 1, 1993. Both
the retiree medical and retiree life programs were implemented in 1993. The
Company made contributions to these plans as claims were incurred; no claims
were incurred during 1993, 1994 or 1995. In 1993, the NAIC issued new rules that
required the projected future cost of providing postretirement benefits, such as
health care and life insurance, be recognized as an expense as employees render
service instead of when the benefits are paid.
As required, Superior complied with the new rules beginning in 1995 and
elected to record these costs on a prospective basis. The effect of this
accounting change on the financial statements of the Company was not material.
8. Reinsurance
The Company limits the maximum net loss that can arise from a large
risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain
levels of risks with other insurers or reinsurers. Superior has a casualty
excess of loss treaty which covers losses in excess of $100 up to a maximum of
$2,000. Superior maintains both auto and property catastrophe excess
reinsurance. Superior's first automobile casualty excess contains limits of $200
excess of $100, its second casualty excess contains limits of $700 excess of
$300 and its third casualty excess has a limit of $1,000 excess of $1,000.
Further, Superior's first layer of property catastrophe excess reinsurance
covers 95% of $500 excess of $500 with an annual limit of $1,000 and its second
layer or property catastrophe excess reinsurance covers 95% of $2,000 excess of
$1,000 with an annual limit of $4,000.
The Company remains contingently liable with respect to reinsurance,
which would become an ultimate liability of the Company in the event that such
reinsuring companies might be unable, at some later date, to meet their
obligations under the reinsurance agreements.
In 1993, 1994 and 1995, 100% of amounts recoverable from reinsurers are
with Prudential Re, which maintains an A.M. Best rating of A. Company management
believes amounts recoverable from reinsurers are collectible.
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were approximately $1,099 and $987 as of December 31, 1994
and 1995, respectively.
F-54
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Reinsurance activity for 1993, 1994 and 1995, which includes
reinsurance with related parties, is summarized as follows:
Direct Assumed Ceded Net
--------------- -------------- -------------- --------------
1993
Premiums written $ 88,877 $ 26,783 $ 366 $ 115,294
Premiums earned 87,618 31,183 665 118,136
Incurred losses and loss adjustment expenses 64,228 21,896 222 85,902
Commission expenses (income) 13,700 4,570 --- 18,270
1994
Premiums written $ 92,540 $ 20,366 $ 391 $ 112,515
Premiums earned 89,755 23,437 355 112,837
Incurred losses and loss adjustment expenses 73,181 20,244 1,047 92,378
Commission expenses (income) 14,165 3,192 --- 17,357
1995
Premiums written $ 84,840 $ 9,916 $ 686 $ 94,070
Premiums earned 84,641 13,592 619 97,614
Incurred losses and loss adjustment expenses 63,462 8,777 (104) 72,343
Commission expenses (income) 12,314 1,324 --- 13,638
9. Related-party Transactions
The Company and its subsidiaries have entered into transactions with
various related parties including transactions with its affiliated companies and
Fortis, Inc. The following transactions occurred with related parties in the
years ended December 31, 1993, 1994, and 1995:
1993 1994 1995
-------------- -------------- --------------
Management fees charged by Fortis $ 832 $ 842 $ 729
Reinsurance with affiliated companies, net:
Assumed premiums earned 8,321 9,092 7,786
Assumed losses and loss adjustment expenses incurred 8,480 6,266 5,847
Assumed commissions 1,337 1,755 1,112
F-55
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
10. Effects of Statutory Accounting Practices and Dividend Restrictions
Under state of Florida insurance regulations, the maximum amount of
dividends Superior, Superior American and Superior Guaranty can pay to their
stockholders without prior approval of the Insurance Commissioner of the State
of Florida is limited. The maximum amount of dividends which Superior can pay to
its stockholders during 1996 is approximately $4,900. The maximum amount of
dividends which Superior American can pay to its stockholder during 1996 is
approximately $320.
11. Regulatory Matters
Superior, Superior American and Superior Guaranty, domiciled in
Florida, prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Florida Department of
Insurance ("FDOI"). Prescribed statutory accounting practices include a variety
of publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. Superior, Superior American and Superior Guaranty utilize no
significant permitted practices.
The NAIC has promulgated risk-based capital ("RBC") requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio (the
"Ratio") of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Generally, a Ratio in excess of 200% of authorized control level RBC (the
"company action level") requires no corrective actions by Superior, Superior
American, Superior Guaranty, or regulators. As of December 31, 1995, all six
company's RBC level were in excess of the company action level.
12. Leases
The Company has certain commitments under long-term operating leases
for its home and sales offices. Rental expense under these commitments was $800,
$483 and $1,012 for 1993, 1994 and 1995, respectively. Future minimum lease
payments required under these noncancelable operating leases are as follows:
1996 $ 948
1997 921
1998 440
1999 350
2000 and thereafter 58
-------------
Total $ 2,717
=============
F-57
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
13. Contingencies
The Company, and its subsidiaries, are named as defendants in various
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the Company and its subsidiaries. These actions
were considered by the Company in establishing its loss liabilities. The Company
believes that the ultimate disposition of these lawsuits will not materially
affect the Company's operations or financial position.
The increase in number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. The Company recognizes its obligations for guaranty fund assessments
when it receives notice that an amount is payable to a guaranty fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
14. Subsequent Event (Unaudited)
On January 31, 1996, the Symons International Group, Inc. ("Symons")
entered into an agreement ("Agreement") with GS Capital Partners II, L.P. to
create a company, GGS Management Holdings, Inc. ("GGS Holdings") to be owned 52%
by Symons and 48% by investment funds associated with Goldman, Sachs & Co.
In connection with the above transaction, on April 30, 1996, GGS
Holdings acquired all of the outstanding shares of common stock of the Company
and its wholly owned subsidiaries, Superior American and Superior Guaranty, for
cash of approximately $66,389.
Subsequent to its acquisition on April 30, 1996, the Company has
entered into a quota share reinsurance arrangement with Pafco General Insurance
Company ("Pafco"), a wholly owned subsidiary of the Company's ultimate parent,
Symons International Group, Inc. ("Registrant"), whereby Pafco shall cede 100%
of its gross premiums written on or after May 1, 1996 that are in excess of six
times outstanding capital and surplus.
When the FDOI approved the acquisition of Superior by GGS Holdings, it
prohibited Superior from paying any dividends (whether extraordinary or not) for
four years from the date of acquisition without the prior written approval of
the FDOI.
F-57
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
The acquisition of the Company was accounted for under the purchase
method of accounting and was recorded as follows:
Assets Acquired:
Invested assets $ 118,665
Receivables 34,933
Deferred acquisition costs 7,925
Other assets 2,082
------------------
Total 163,605
------------------
Liabilities Assumed:
Unpaid losses and loss adjustment expenses 44,423
Unearned premiums 45,280
Other liabilities 10,863
------------------
Total 100,566
------------------
Net Assets Acquired 63,039
Purchase Price 66,590
Excess Purchase Price 3,551
Less amounts allocated to deferred income
taxes on unrealized gains on investments 1,334
------------------
Goodwill $ 2,217
==================
Goodwill is amortized over a 25 year period on a straight line basis
based upon management's estimate of the expected benefit period.
F-58
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Chapter 37 of the Indiana Business Corporation Law, as amended (the
"ICBL"), grants to each corporation broad powers to indemnify directors,
officers, employees or agents against liabilities and expenses incurred in
certain proceedings if the conduct in question as found to be in good faith and
was reasonably believed to be in the corporation's best interests. The
indemnification rights provided by the Registrant's articles of incorporation
and by-laws generally provide the maximum indemnification protection available
under law to the directors and officers of the Registrant, subject to certain
restrictions on such indemnification in the event of the occurrence of certain
changes of control and subject to restrictions on indemnification for
liabilities incurred by directors and officers who unsuccessfully defend actions
brought against them by or in right of the corporation. Directors, officers,
employees or agents of the Registrant who also are directors, officers,
employees or agents of Goran receive similar indemnification protection under
Goran's by-laws. In addition, Goran carries directors and officers insurance
policies.
The above discussion of the Company's By-laws and the IBCL is not
intended to be exhaustive and is qualified in its entirety by such By-laws and
the IBCL.
The Declaration provides that:
(a) to the fullest extent permitted by applicable law, to
indemnify and hold harmless (i) each Trustee, (ii) any Affiliate of
any Trustee, (iii) any officer, director, shareholder, employee,
representative or agent of any Trustee and (iv) any employee or agent
of the Trust or its Affiliates (referred to herein as an "Indemnified
Person") from and against any loss, damage, liability, tax, penalty,
expense or claim of any kind or nature whatsoever incurred by such
Indemnified Person by reason of the creation, operation, dissolution,
winding-up or termination of the Trust or any act or omission
performed or omitted by such Indemnified Person in good faith on
behalf on behalf of the Trust and in a manner such Indemnified Person
reasonably believed to be within the scope of authority conferred on
such Indemnified Person by this Declaration, except that no
Indemnified Person shall be entitled to be indemnified in respect of
any loss, damage or claim incurred by such Indemnified Person by
reason of its negligence (or, in the case of the Delaware Trustee and
its related Indemnified Persons, gross negligence) or willful
misconduct with respect to such acts or omission; and
(b) to the fullest extent permitted by applicable law, to advance
expenses (including legal fees) incurred by an Indemnified Person in
defending any claim, demand, action, suit or proceeding prior to the
final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Company of (i) a written affirmation by or on
behalf of the Indemnified Person of its or his good faith belief that
it or he has met the standard of conduct set forth herein and (ii) an
undertaking by or on behalf of the Indemnified Person to repay such
amount if it shall be determined that the Indemnified Person is not
entitled to be indemnified as authorized in the preceding subsection.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The exhibits furnished with this Registration Statement are listed
beginning on Page E-1.
(b) The following financial statement schedules of the Registrant
are included in the Registration Statement beginning on Page
II-6.
Report of Independent Accountants
Schedule II Condensed Financial Information of
Registrant
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts
Schedule VI Supplemental Information Concerning Property
-Casualty Insurance Operations
ITEM 22. UNDERTAKINGS
The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement
to include any facts or events arising after the effective date of the
Registration Statement which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement and to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in
the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
each undersigned Registrant pursuant to the foregoing provisions, or otherwise,
each Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by each
undersigned Registrant of expenses incurred or paid by a director, officer of
controlling person of each Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, each Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired or involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Symons
International Group, Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Indianapolis, and State of Indiana, on
the _16th__ day of September, 1997.
SYMONS INTERNATIONAL GROUP, INC.
By__/s/ Alan G. Symons__________________________
Alan G. Symons
Chief Executive Officer
II-3
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board of September 16, 1997
G. Gordon Symons Directors
* Chief Executive Officer and September 16, 1997
Alan G. Symons Director (Principal
Executive Officer)
* President and Chief
Douglas H. Symons Operating Officer and September 16, 1997
Director
Vice President, Chief
* Financial Officer and September 16, 1997
Gary P. Hutchcraft Treasurer (Principal
Financial and Accounting
Officer)
* Vice President, General
David L. Bates Counsel and Secretary September 16, 1997
*
John J. McKeating Director September 16, 1997
*
Robert C. Whiting Director September 16, 1997
James G. Torrance, Q.C. Director September __, 1997
*
David R. Doyle Director September 16, 1997
*
Jerome B. Gordon Director September 16, 1997
*By:__/s/ Alan G. Symons_____________
Alan G. Symons
Attorney-in-Fact
II-4
Pursuant to the requirements of the Securities Act of 1933, SIG Capital
Trust I certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Indianapolis, and State of Indiana, on the _16th_
day of September, 1997.
SIG CAPITAL TRUST I
By__/s/ Alan G. Symons___________________________
Alan G. Symons
Company Trustee
By__/s/ Douglas H. Symons________________________
Douglas H. Symons
Company Trustee
By__/s/ Gary P. Hutchcraft_______________________
Gary P. Hutchcraft
Company Trustee
II-5
Report of Independent Accountants
Board of Directors and Stockholder of
Symons International Group, Inc. and Subsidiaries
In connection with our audits of the consolidated balance sheets of Symons
International Group, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of operations, changes in stockholder's
equity and cash flows for the three years in the period ended December 31, 1996,
which financial statements are included in the registration statement, we have
also audited the financial statement schedules listed in Item 21 herein.
In our opinion, these financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included herein.
/s/ COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 21, 1997
II-6
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
As Of December 31,
(In Thousands)
1995 1996
ASSETS
Assets:
Investments In And Advances To Related Parties $18,589 $77,514
Cash and Cash Equivalents 0 6,160
Deferred Income Taxes 52 0
Property and Equipment 337 8
Other 57 168
Intangible Assets 0 83
Total Assets $19,035 $83,933
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to Affiliates $8,671 $350
Federal Income Tax Payable 0 81
Line of Credit and Notes Payable 0 0
Other 829 992
Total Liabilities $9,500 $1,423
Minority Interest 0 21,160
Stockholders' Equity:
Common Stock, No Par, 1,000,000
Shares Authorized, 10,450,000 $1,000 $38,969
Issued and Outstanding
Additional Paid-In Capital 3,130 5,905
Unrealized Loss On Investments
(Net of Deferred Taxes of ($23,000) (45) 820
in 1995 and $1,225,000 in 1996)
Retained Earnings 5,450 15,206
Total Stockholders' Equity $9,535 $60,900
Total Liabilities and Stockholders' Equity $19,035 $83,933
II-7
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Net Investment Income $37 $1,522 $98
Net Realized Investment Losses (8) (52) 0
Other Income 8,533 7,626 5,353
Total Revenue 8,562 9,096 5,451
Expenses:
Policy Acquisition and General and 7,528 7,891 4,269
Administrative Expenses
Interest Expense 874 621 613
Total Expenses 8,402 8,512 4,882
Income Before Taxes and Minority
Interest 160 584 569
Provision for Income Taxes:
Current Year 176 293 228
Prior Year (70) 0 0
Provision for Income Taxes 106 293 228
Net Income Before Equity in Net
Income of Subsidiaries 54 291 341
Equity in Net Income of Subsidiaries 2,063 4,530 12,915
Net Income for the Period $2,117 $4,821 $13,256
II-7
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Net Income $2,117 $4,821 $13,256
Cash Flows From Operating Activities:
Adjustments to Reconcile Net Cash
Provided by (Used In)
Operations:
Equity In Net Income of Subsidiaries (2,063) (4,530) (12,915)
Depreciation of Property and Equity 91 37 52
Net Realized Capital Loss 8 (52) 0
Amortization of Intangible Assets 169 88 3
Net Changes in Operating Assets
and Liabilities:
Federal Income Taxes
Recoverable (Payable) 206 (176) 81
Other Assets (70) 216 (145)
Other Liabilities (1,060) 518 163
Net Cash Provided From (Used In)
Operations (602) 922 495
Cash Flow Used In Investing Activities:
Purchase of Property and Equipment (58) (179) 0
Net Cash Used in Investing Activities: (58) (179) 0
Cash Flows Provided by (Used In)
Financing Activities:
Proceeds From Common Stock Offering 0 0 37,969
Repayment of Loans (1,750) (1,250) 0
Contributed Capital 0 0 (20,475)
Loans From Related Parties 2,410 507 (8,329)
Payment of Dividend to Parent 0 0 (3,500)
Net Cash Provided By (Used In)
Financing Activities 660 (743) 5,665
Increase (Decrease) in Cash and
Cash Equivalents 0 0 6,160
Cash and Cash Equivalents -
Beginning of Year 0 0 0
Cash and Cash Equivalents -
End of Year 0 0 6,160
II-8
SYMONS INTERNATIONAL GROUP, 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 Symons International Group, Inc. The
condensed financial information includes the accounts and activities of the
Parent Company which acts as the holding company for the insurance subsidiaries.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Direct Amount $102,178 $123,381 $298,596
Assumed From Other Companies $956 $1,253 $6,903
Ceded to Other Companies $67,995 $71,187 ($95,907)
Net Amount $35,139 $53,447 $209,592
Percentage of Amount Assumed to Net 2.7% 2.3% 3.3%
II-9
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31,
(In Thousands)
1994 -Allowance for 1995-Allowance for 1996-Allowance for
Doubtful Accounts Doubtful Accounts Doubtful Accounts
Additions:
Balance at Beginning of $1,179 $1,209 $927
Period
Reserves Acquired in the 0 0 500
Superior Acquisition
Charged to Costs and (86) 2,523 5,034
Expenses (1)
Charged to Other 0 0 0
Accounts
Deductions from (116) (2) 2,805 (2) 4,981
Reserves
Balance at End of Period $1,209 $927 $1,480
(1) In 1993, the Company began to direct bill policyholders rather than agents
for premiums. 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 approximately
$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,
1994, 1995 and 1996 was adequate.
(2) Uncollectible accounts written off, net of recoveries.
II-10
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31,
(In Thousands)
Deferred Reserves Discount, Unearned Earned Net Claims and Amorti- Paid Premiums
Policy for if any, Premiums Premiums Invest- Adjustment zation of claims Written
Acqui- Unpaid deducted ment Expenses Deferred and Claim
sition Claims in Income Incurred Related Policy Adjust-
Costs and Column to: Acqui- ment
Claim C sition Expenses
Adjust- Costs
ment
Expense
Current Prior
Years Years
1994 1,479 29,269 0 14,416 32,126 1,241 26,268 202 4,852 26,995 103,135
1995 2,379 59,421 0 17,497 49,641 1,173 35,184 787 7,150 31,075 124,634
1996 12,800 101,719 0 87,285 191,759 6,733 137,679 (570) 27,657 130,895 305,499
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.
II-11
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Registrant's Restated Articles of Incorporation*
3.2 Bylaws of Symons International Group, Inc, as restated July
29, 1996*
4.1 Indenture between Symons International Group, Inc. and
Wilmington Trust Company dated as of August 15, 1997,
relating to the Senior Subordinated Notes
4.2 Form of Certificate of Exchange Notes (in substantially the
form of Section 2.2 to Exhibit 4.1)
4.3 Certificate of Trust of SIG Capital Trust I, dated August 4,
1997
4.4 Amended and Restated Declaration of Trust for SIG Capital
Trust I, dated August 15, 1997
4.5 Form of Exchange Preferred Security Certificate for SIG
Capital Trust I (included as Exhibit D to Exhibit 4.4)
4.6 Form of Exchange Guarantee of Symons International Group,
Inc. relating to the Exchange Preferred Securities
4.7 Registration Rights Agreement among Symons International
Group, Inc., SIG Capital Trust I and the Initial Purchasers,
dated August 11, 1997
5.1 5.1 Opinion of Dann Pecar Newman & Kleiman, P.C. as to
legality of the Exchange Notes and the Exchange Guarantee to
be issued by Symons International Group, Inc.
5.2 Opinion of Richards, Layton & Finger as to legality of the
Exchange Preferred Securities to be issued by SIG Capital
Trust I
8 Opinion of Dann Pecar Newman & Kleiman, P.C. as to certain
federal income tax matters
10 The GS Funds Stock Purchase Agreement
12.1 Computation of ratio of earnings to combined fixed charges
and preferred stock dividends
21 Subsidiaries of Symons International Group, Inc.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Dann Pecar Newman & Kleiman, P.C. (included in
Exhibit 5.1)
23.3 Consent of Richards, Layton & Finger (included in Exhibit
5.2)
24 Power of Attorney of certain officers and directors of
Symons International Group, Inc.
25.1 Form T-1 Statement of Eligibility of Wilmington Trust
Company to act as trustee under the Indenture
25.2 Form T-1 Statement of Eligibility of Wilmington Trust
Company to act a trustee under the Amended and Restated
Declaration of Trust of SIG Capital Trust I
25.3 Form T-1 Statement of Eligibility of Wilmington Trust
Company to act as trustee under the Exchange Guarantee for
the benefit of the holders of Exchange Preferred Securities
of SIG Capital Trust I
E-1
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Exchange Agent Agreement
- ------------------
*Incorporated by reference to the similarly designated
exhibit to the Registration Statement of Symons International Group, Inc. on
S-1, Registration No. 333-9129.
E-2