UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number: 0-29042
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1707115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
As of April 30, 2002, there were 10,385,399 shares of Registrant's no par value
common stock issued and outstanding.
FORM 10-Q INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2002
(unaudited) and December 31, 2001 . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations
for the Three Months Ended
March 31, 2002 and 2001 . . . . . . . . . . . . 4
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001. . . . . . . 5
Condensed Notes to Unaudited Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . .. . . . . 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31,
2002 December 31,
(Unaudited) 2001
------------ -----------
ASSETS
Investments available for sale:
Fixed maturities, at market . . . . . . . . . . . . . . . . . . .. $ 73,991 $ 77,896
Equity securities, at market. . . . . . . . . . . . . . . . . . . 9,696 14,396
Short-term investments, at amortized cost, which approximates market. 10,348 13,266
Other invested assets . . . . . .. . . . . . . . . . . . . . . . . 1,454 1,469
----------- --------------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . 95,489 107,027
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 7,951 3,385
Receivables, net of allowance of $248 and $1,526, respectively. . . 50,341 44,688
Reinsurance recoverable on paid and unpaid losses . . . . . . . . . . 35,661 31,546
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . 43,931 40,039
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . 923 763
Property and equipment, net of accumulated depreciation . . . . . . 9,175 9,890
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . 4,333 4,376
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,615 2,418
----------- --------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,419 $ 244,132
=========== ==============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Liabilities:
Loss and loss adjustment expense reserves . . . . . . . .. . . . . $ 78,070 $ 81,142
Unearned premiums . . . . . . . . . . . . . . . . . . . .. . . . . 64,262 59,216
Reinsurance payables. . . . . . . . . . . . . . . . . . .. . . . . 63,784 58,226
Distributions payable on preferred securities . . . . . .. . . . . 37,039 33,203
Deferred income . . . . . . . . . . . . . . . . . . . . .. . . . . 3,250 3,625
Payable to affiliates . . . . . . . . . . . . . . . . . .. . . . . 471 596
Other liabilities . . . . . . . . . . . . . . . . . . . .. . . . . 20,835 17,136
----------- --------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 267,711 253,144
----------- --------------
Minority interest:
Company-obligated mandatorily redeemable preferred stock of trust
subsidiary holding solely parent debentures .. . . . . . . . . . 135,000 135,000
----------- --------------
Shareholders' (Deficit):
Common stock, no par value, 100,000,000 shares authorized,
10,385,399 shares issued and outstanding in both 2002 and 2001. . 38,136 38,136
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 5,851 5,851
Unrealized loss on investments available for sale . . . . . . . . (3,164) (2,613)
Retained (deficit). . . . . . . . . . . . . . . . . . . . . . . . (193,115) (185,386)
----------- --------------
Total Shareholders' (Deficit) . . . . . . . . . . . . . . . . . . . . (152,292) (144,012)
----------- --------------
Total Liabilities and Shareholders' (Deficit) . . . . . . . . . . . . $ 250,419 $ 244,132
=========== ==============
<FN>
See condensed notes to consolidated financial statements.
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended
March 31
-----------------
2002 2001
--------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,755 $ 48,222
Less ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,973) (31,393)
--------- ---------
Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,782 $ 16,829
========= =========
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,766 $ 18,728
Fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,643 2,926
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 -
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,244 1,598
Net realized capital (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . (748) (769)
--------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,280 22,483
--------- ---------
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . 12,671 17,745
Policy acquisition and general and administrative expenses. . . .. . . . . . 6,459 10,518
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . 43 43
--------- ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,173 28,306
--------- ---------
Loss from continuing operations before income taxes and minority interest . . . (3,893) (5,823)
--------- ---------
Total income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------- ---------
Loss from continuing operations before minority interest. . . . . . . . . . . . (3,893) (5,823)
--------- ---------
Minority interest:
Distributions on preferred securities, net of tax of nil in both . 3,836 3,609
2002 and 2001
--------- ---------
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . (7,729) (9,432)
Discontinued operations:
Loss from operations of discontinued segment, less applicable income
taxes of nil in both 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . - -
--------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,729) $ (9,432)
========= =========
Weighted average shares outstanding - basic and fully diluted . . . . . . . . . 10,385 10,385
========= =========
Net loss from continuing operations per share - basic and fully diluted . . . . $ (0.74) $ (0.91)
========= =========
Net loss of discontinued operations per share-basic and fully diluted . . . . . $ - $ -
========= =========
Net loss per share - basic and fully diluted. . . . . . . . . . . . . . . . . . $ (0.74) $ (0.91)
========= =========
<FN>
See condensed notes to consolidated financial statements.
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31
-----------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,729) $ (9,432)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation, amortization, impairment and other. . . . . . . 911 1,119
Net realized capital loss . . . . . . . . . . . . . .. . . . . 748 769
Net changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . (5,653) (11,059)
Reinsurance recoverable on losses, net. . . . . . . . . . . . . (4,115) (16,394)
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . (3,892) (10,635)
Deferred policy acquisition costs . . . . . . . . . . . . . . . (160) 459
Loss and loss adjustment expense reserves . . . . . . . . . . . (3,072) (8,058)
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . 5,046 8,636
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . 5,558 25,707
Distribution payable on preferred securities. . . . . . . . . . 3,836 3,609
Other assets and liabilities. . . . . . . . . . . . . . . . . . 3,120 6,322
Net assets from discontinued operations . . . . . . . . . . . . (1,327) (872)
-------- ---------
Net cash (used in) operations . . . . . . . . . . . . . . . . . . . (6,729) (9,829)
-------- ---------
Cash flows from investing activities, net of assets acquired:
Net sales of short-term investments . . . . . . . . . . . . . . 2,917 5,500
Proceeds from sales, calls and maturities of fixed maturities . 7,356 7,338
Purchase of fixed maturities. . . . . . . . . . . . . . . . . . (4,293) (756)
Proceeds from sales of equity securities. . . . . . . . . . . . 4,796 3,802
Purchase of equity securities . . . . . . . . . . . . . . . . . (562) (4,475)
Purchase of property and equipment. . . . . . . . . . . . . . . (121) (1,114)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (13)
Net investing activities from discontinued operations . . . . . . . 1,434 604
-------- ---------
Net cash provided by investing activities . . . . . . . . . . . . . 11,527 10,886
-------- ---------
Cash flows from financing activities, net of assets acquired:
Loans from and (repayment to) related parties . . . . . . .. . . (125) 272
Net financing activities from discontinued operations . . .. . . (107) (317)
-------- ---------
Net cash (used in) financing activities . . . . . . . . . . . . . . (232) (45)
-------- ---------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . 4,566 1,012
Cash and cash equivalents, beginning of period. . . . . . . . . . . 3,385 1,363
-------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . $ 7,951 $ 2,375
======== =========
<FN>
See condensed notes to consolidated financial statements.
SYMONS INTERNATIONAL GROUP, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months Ended March 31, 2002
1. OVERVIEW OF THE COMPANY AND BASIS OF PRESENTATION
Symons International Group, Inc. (the "Company") owns insurance companies that
underwrite and market nonstandard private passenger automobile insurance. The
Company's principal insurance company subsidiaries are Pafco General Insurance
Company ("Pafco") and Superior Insurance Company ("Superior"). The Company is a
73.1% owned subsidiary of Goran Capital Inc. ("Goran").
As previously announced, the Company sold its crop insurance operations to
Acceptance Insurance Companies, Inc. ("Acceptance") on June 6, 2001. The crop
insurance business was written through the Company's subsidiary, IGF Insurance
Company ("IGF"), which is in runoff. Accordingly, the financial statements
included in this report reflect the results of the crop insurance segment as
"discontinued operations".
The parent company for Pafco and Superior is Superior Insurance Group, Inc.
("Superior Group"). Pafco, Superior and Superior's subsidiaries, Superior
Guaranty Insurance Company ("Superior Guaranty") and Superior American Insurance
Company ("Superior American"), are engaged in the writing of insurance coverage
for automobile physical damage and liability policies for nonstandard risks.
Nonstandard risk insureds are those individuals who are unable to obtain
insurance coverage through standard market carriers due to factors such as poor
premium payment history, driving experience or violations, particular occupation
or type of vehicle. The Company offers several different policies that are
directed towards different classes of risk within the nonstandard market.
Premium rates for nonstandard risks are higher than for standard risks. Since it
can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when standard coverage becomes more restrictive. Nonstandard policies have
relatively short policy periods and low limits of liability. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
The financial statements included in this report are the consolidated financial
statements of the Company and its subsidiaries. The consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). In management's opinion, these
financial statements include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the results of
operations for the interim periods presented. Pursuant to SEC rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements, unless
significant changes have taken place since the end of the most recent fiscal
year. For this reason, the accompanying consolidated financial statements and
notes thereto should be read in conjunction with the financial statements and
notes for the year ended December 31, 2001 included in the Company's 2001 Annual
Report on Form 10-K. Results for any interim period are not necessarily
indicative of results to be expected for the year.
2. PREFERRED SECURITIES
On August 12, 1997, the Company's trust subsidiary issued $135 million in
preferred securities (the "Preferred Securities") bearing interest at an annual
rate of 9.5%. The principal assets of the trust subsidiary are senior
subordinated notes of the Company in the principal amount of $135 million with
an interest rate and maturity date substantially identical to those of the
Preferred Securities. Expenses of the issue aggregated $5.1 million and are
being amortized over the term of the Preferred Securities.
The Preferred Securities represent Company-obligated mandatorily redeemable
securities of a trust subsidiary holding solely parent debentures and have a
term of 30 years with semi-annual interest payments that commenced February 15,
1998. The Company may redeem the Preferred Securities in whole or in part after
10 years. The annual Preferred Security obligations of approximately $13 million
per year must be funded from the Company's nonstandard automobile management
company, which receives management and billing fees from its insurance
subsidiaries. Under the terms of the indenture, the Company is permitted to
defer semi-annual interest payments for up to five years. The Company elected to
defer the interest payments due in February and August 2000 and 2001 and
February 2002 and may continue this practice through 2004.
The trust indenture for the Preferred Securities contains certain restrictive
covenants including covenants based on the Company's consolidated coverage ratio
of earnings before interest, taxes, depreciation and amortization ("EBITDA"). If
the Company's EBITDA falls below 2.5 times consolidated interest expense
(including Preferred Security distributions) for the most recent four quarters,
the following restrictions become effective:
- - The Company may not incur additional indebtedness or guarantee additional
indebtedness.
- - The Company may not make certain restricted payments including making
loans or advances to affiliates, repurchasing common stock or paying
dividends in excess of a stated limitation.
- - The Company may not increase its level of non-investment grade securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade, fixed income securities.
These restrictions currently apply, as the Company's consolidated coverage ratio
was (0.77) at March 31, 2002, and will continue to apply until the Company's
consolidated coverage ratio complies with the terms of the trust indenture. The
Company complied with these additional restrictions as of December 31, 2001 and
is in compliance as of March 31, 2002. Upon completion of the audit for 2001, it
was discovered that the Company was not in compliance with the covenant dealing
with the percentage of investment in other than "Permitted Investments" as
defined by the indenture. The indenture allows for no more than 15% of total
invested assets to be in non-investment grade securities as defined in the
indenture. At December 31, 2001, approximately 21% of the Company's investment
portfolio was invested in equity securities and non-investment grade bonds. The
Company rectified the situation as of March 29, 2002 through the sale of
approximately $8 million of the non-investment grade securities, the proceeds of
which were invested in Permitted Investments.
3. REGULATORY AFFAIRS
Two of the Company's insurance company subsidiaries, Pafco and IGF are domiciled
in Indiana and prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("IDOI"). While neither Pafco nor IGF currently has surplus from which
to pay dividends, statutory requirements place limitations on the amount of
funds that can be remitted to the Company from Pafco and IGF. The Indiana
statute allows 10% of surplus in regard to policyholders or 100% of net income,
whichever is greater, to be paid as dividends only from earned surplus; however,
the consent orders with the IDOI, described below, prohibit the payment of any
dividends by Pafco and IGF. Another insurance company subsidiary, Superior and
Superior's insurance company subsidiaries, Superior American and Superior
Guaranty, are domiciled in Florida and prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Florida Department of Insurance ("FDOI"). The Florida statute also contains
limitations with regard to the payment of dividends. Superior may pay dividends
of up to 10% of surplus or 100% of net income, whichever is greater, from earned
surplus. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations, and general administrative rules. The NAIC
adopted the Codification of Statutory Accounting Principles guidance
("Codification"), as the NAIC's primary guidance on statutory accounting
effective January 1, 2001. The IDOI and FDOI have adopted Codification.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.
On June 6, 2001, IGF sold substantially all of its crop insurance assets to
Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets
and as a result of losses experienced by IGF in its crop insurance operations,
the IDOI and IGF entered into a consent order (the "Consent Order") relating to
IGF. IGF has discontinued writing new business and its operations are presently
in run off.
The IDOI has continued to monitor the status of IGF. The Consent Order prohibits
IGF from taking any of the following actions without prior written consent of
the IDOI:
- - Sell or encumber any of its assets, property, or business in force;
- - Disburse funds, except to pay direct unaffiliated policyholder claims and
normal operating expenses in the ordinary course of business (which
does not include payment to affiliates except for the reimbursement of
costs for running IGF by the Company, and does not include payments in
excess of $10,000);
- - Lend its funds or make investments, except in specified types of
investments;
- - Incur debts or obligations, except in the ordinary course of business to
unaffiliated parties;
- - Merge or consolidate with another company;
- - Enter into new, or amend existing, reinsurance agreements;
- - Complete, enter into or amend any transaction or arrangement with an
affiliate, and
- - Disburse funds or assets to any affiliate.
The Consent Order also requires IGF to provide the IDOI with monthly written
updates and immediate notice of any material change regarding the status of
litigation with Mutual Service Casualty Insurance Company and with Continental
Casualty Company, statutory reserves, number of non-standard automobile
insurance policies in-force by state, and reports of all non-claims related
disbursements. IGF's failure to comply with the Consent Order could cause the
IDOI to begin proceedings to have a rehabilitator or liquidator appointed for
IGF to extend the provisions of the Consent Order.
Pafco has been subject to an agreed to order of the IDOI since February 17, 2000
that requires Pafco, among other matters, to:
- - Refrain from doing any of the following without the IDOI's prior written
consent:
- Selling assets or business in force or transferring property, except in
the ordinary course of business;
- Disbursing funds, other than for specified purposes or for normal operating
expenses and in the ordinary course of business (which does not include
payments to affiliates, other than under written contracts previously
approved by the IDOI, and does not include payments in excess of $10,000);
- Lending funds;
- Making investments, except in specified types of investments;
- Incurring debt, except in the ordinary course of business and to
unaffiliated parties;
- Merging or consolidating with another company; or
- Entering into new, or modifying existing, reinsurance contracts.
- - Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the ratio of gross written premium to surplus
and net written premium to surplus does not exceed 4.0 and 2.4, respectively;
and provide the IDOI with regular reports demonstrating compliance with these
monthly writings limitations.
- - Continue to comply with prior IDOI agreements and orders to correct business
practices under which Pafco must provide monthly financial statements to
the IDOI, obtain prior IDOI approval of reinsurance arrangements and
affiliated party transactions, submit business plans to the IDOI that address
levels of surplus and net premiums written, and consult with the IDOI on a
monthly basis
Pafco's inability or failure to comply with any of the above could result in the
IDOI requiring further reductions in Pafco's permitted premium writings or in
the IDOI instituting future proceedings against Pafco. Restrictions on premium
writings result in lower premium volume. Management fees payable to Superior
Group are based on gross written premium; therefore lower premium volume results
in reduced management fees paid by Pafco.
Pafco has agreed with the Iowa Department of Insurance ("IADOI") that it will
not write any new non-standard business in Iowa, until such time as Pafco has
reduced its overall non-standard automobile policy counts in the state or:
- - Has increased surplus, or
- - Has achieved a net written premium to surplus ratio of less than three to
one, or
- - Has surplus reasonable to its risk.
Pafco has continued to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance with
IADOI requirements.
Superior and Pafco also provide monthly financial information to the departments
of insurance in certain states in which they write business, and Pafco has
agreed to obtain IDOI prior approval of any new affiliated party transactions.
On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the
Notice and a determination that the order contemplated by the Notice not be
issued was held in February 2001. The administrative law judge entered a
recommended order on June 1, 2001 that was acceptable to the Company. On August
30, 2001, the FDOI rejected the recommended order and issued its final order
which the Company believes improperly characterized billing and policy fees paid
by Superior to Superior Group. On September 28, 2001, Superior filed an appeal
of the final order to the Florida District Court, which is pending. On March 4,
2002, the FDOI filed a petition in the Circuit Court of the Second Judicial
Circuit in and for Leon County, Florida seeking court enforcement of the FDOI's
final order. Superior filed a motion with the FDOI for stay of the FDOI's final
order. Superior also filed a motion for stay with the District Court of Appeals,
which was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI
granted a stay of the final order which is conditional upon the cessation of the
payment of billing fees by Superior to Superior Group and the posting of a $15
million appeal bond. Superior is unwilling to agree to the conditions imposed by
the FDOI's conditional stay. On May 6, 2002, Superior filed a motion with the
district court seeking a stay of the final order pending Superior's appeal or,
in the alternative, a consolidation of the FDOI's enforcement action with the
pending appeal.
In 1999, Superior ceased writing business in Illinois and agreed to obtain the
approval of the Illinois Department of Insurance prior to writing any new
business in Illinois. In July 2001, Superior agreed with the Department of
Insurance in Texas to obtain its prior approval before writing any new business
in that state. On October 9, 2001, the State Corporation Commission of Virginia
issued an order to take notice regarding an order suspending Superior's license
to write business in that state. An administrative hearing for a determination
that the suspension order not be issued was held March 5, 2002. On May 3, 2002,
the hearing examiner issued his report and recommended that Superior's license
not be suspended and that Superior file its Risk Based Capital plans and monthly
and quarterly financial information with the Virginia Bureau of Insurance. The
nonstandard automobile insurance policies written in Virginia by Superior
accounted for approximately 13.1% of the total gross written premiums of the
Company in 2001.
The Company's operating subsidiaries, their business operations, and their
transactions with affiliates, including the Company, are subject to regulation
and oversight by the IDOI, the FDOI, and the insurance regulators of other
states in which the subsidiaries write business. The Company is a holding
company and all of its operations are conducted by its subsidiaries. Regulation
and oversight of insurance companies and their transactions with affiliates is
conducted by state insurance regulators primarily for the protection of
policyholders and not for the protection of other creditors or of shareholders.
Failure to resolve issues with the IDOI and the FDOI or other state insurance
regulators in a mutually satisfactory manner could result in future regulatory
actions or proceedings that materially and adversely affect the Company.
4. COMMITMENTS AND CONTINGENCIES
As previously reported, IGF, which is a wholly owned subsidiary of the Company,
had been a party to a number of pending legal proceedings and claims relating to
agricultural production interruption insurance policies (the "AgPI Program")
which were sold during 1998. All of the policies of insurance which were issued
in the AgPI Program were issued by and under the name of Mutual Service Casualty
Insurance Company ("MSI"), a Minnesota corporation with its principal place of
business located in Arden Hills, Minnesota. Sales of this product resulted in
large underwriting losses by IGF.
Approximately $29 million was paid through March 31, 2002 in settlement of legal
proceedings and claims related to the AgPI Program. The Company has retained a
reserve of approximately $3 million as a provision for expenses and settlement
of ongoing litigation.
All AgPI policyholder claims were settled during 2000. However, on January 12,
2001 a case was filed in the Superior Court of California, County of Fresno,
entitled S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira
v. Mutual Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo
& Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought
by four AgPI policyholders who had previously settled their AgPI claims pursuant
to binding settlement agreements who now seek additional compensation by
asserting through litigation that IGF and the third party carrier paid less than
the policy limits they were promised when they purchased the policy and that
each settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any
recovery payable to plaintiff would be limited to their actual economic losses
regardless of how much plaintiffs thought they had been promised (i.e.
plaintiffs cannot be paid policy limits without regard to actual losses
incurred). The plaintiffs then filed their third amended complaint to which IGF
filed another demurrer, contending that plaintiffs failed to make the amendments
required by the court's previous rulings. This latest demurrer is to be heard on
May 24, 2002. Discovery is proceeding.
As previously reported in the Company's December 31, 2001 Form 10-K, MSI and IGF
are arbitrating their dispute over responsibility for claims paid to MSI
insureds. Also as previously reported, an action was filed against the Company,
IGF, IGF Holdings, Inc. ("IGFH"), Granite Reinsurance Company, Ltd. ("Granite
Re"), a wholly owned subsidiary of Goran, Goran and certain affiliates of those
companies, as well as certain members of the Symons family, and Acceptance in
the United States District Court for the Southern District of Indiana which
alleges that the June 6, 2001 sale of IGF's assets to Acceptance and the
payments by Acceptance to the Company, Goran and Granite Re violated Indiana law
and are voidable. On April 18 and 19, 2002, the parties engaged in a mediation
session and reached an agreement to settle the disputed claims in the
arbitration proceeding and the federal court action. The settlement contemplates
execution of a written agreement that is currently being drafted. Pending
execution of the written agreement, the mediator has reported to the court that
a settlement has been reached.
As previously reported, the Company and two of its subsidiaries, IGFH and IGF,
are parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the
"SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired
certain crop insurance operations of CNA. The obligations of the Company, IGFH,
IGF and CNA under the SAA are the subject of an action pending in United States
District Court for the Southern District of Indiana, Indianapolis Division.
Claims have also been asserted in the action against Goran, Granite Re, Pafco,
Superior and certain members of the Symons family. Although the Company
continues to believe that it has claims against CNA and defenses to CNA's claims
which may offset or reduce amounts owing by the Company or its affiliates to
CNA, there can be no assurance that the ultimate resolution of the claims
asserted by CNA against the Company and its affiliates will not have a material
adverse effect upon the Company's and its affiliates' financial condition or
results of operations. There have been no material developments since last
reported in the Company's December 31, 2001 Form 10-K.
The Company is a defendant in a case filed on February 23, 2000, in the United
States District Court for the Southern District of Indiana entitled Robert Winn,
et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S.
Other parties named as defendants are Goran, three individuals who were or are
officers or directors of the Company or of Goran, PricewaterhouseCoopers LLP and
Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a
class consisting of purchasers of the Company's stock or Goran's stock during
the period February 27, 1998, through and including November 18, 1999.
Plaintiffs allege, among other things, that defendants misrepresented the
reliability of the Company's reported financial statements, data processing and
financial reporting systems, internal controls and loss reserves in violation of
Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC
Rule 10b-5 promulgated thereunder. The individual defendants are also alleged to
be liable as "controlling persons" under Sec.20(a) of the 1934 Act. The Company
and the individual defendants filed a motion to dismiss the amended consolidated
complaint for failure to state a claim and for failure to plead with
particularity as required by Fed. R. Civ. P.9(b) and the Private Securities
Litigation Reform Act of 1995. The accounting firms also filed motions to
dismiss. On February 19, 2002 the court entered an order granting in part and
denying in part defendants' motion to dismiss. On March 15, 2002, the Company
and the individual defendants filed a motion for reconsideration of the court's
ruling on the motion to dismiss, or alternatively to certify an order for
appeal, which was denied on May 1, 2002. Discovery in the case is proceeding.
As previously reported, an action has been brought in Florida against Superior
which purports to be brought on behalf of a class consisting of healthcare
providers improperly paid discounted rates on services to patients based upon a
preferred provider contract with a third party. The plaintiff alleges that
Superior breached a third party beneficiary contract, committed fraud and
engaged in racketeering activity in violation of federal and Florida law by
obtaining discounted rates offered by a third party with whom the plaintiff
contracted directly. Superior believes that the allegations of wrongdoing as
alleged in the complaint are without merit and intends to vigorously defend the
claims brought against it. There have been no material developments since last
reported in the Company's December 31, 2001 Form 10-K.
IGF is a defendant in a declaratory action entitled Kevin L. Stevens, Bank of
America, Conservator of the Estate of Samuel Jay Ramsey and Gael Ramsey v. IGF
Insurance Company originally filed on February 21, 2001 in the Circuit Court of
Green County, Missouri. The action was subsequently removed to the Federal
District Court for the Western District of Missouri. On October 11, 2001, the
Missouri District Court granted declaratory judgment in favor of the Company's
insured, Stevens, and held that IGF was responsible for payment of the premium
attributable to a $15,000,000 appeal bond for Steven's appeal from a judgment
against him in a related personal injury action. On April 23, 2002, the United
States Court of Appeals for the Eighth Circuit vacated the judgment and held
that Stevens need not post a bond to appeal the adverse judgment; therefore, IGF
was not obligated to pay the bond premium.
As previously reported, an action has been brought in Florida against Superior
which purports to be brought on behalf of a class consisting of healthcare
providers that rendered treatment to and obtained a valid assignment of benefits
from Superior. The plaintiff alleges that Superior reduced or denied claims for
medical expenses payable to the plaintiff without first obtaining a written
report in violation of Florida law. The plaintiff also alleges that Superior
inappropriately reduced the amount of benefits payable to the plaintiff in
breach of Superior's contractual obligations to the plaintiff. Superior
believes the allegations of wrongdoing in violation of law are without merit and
intends to vigorously defend the claims brought against it. There have been no
material developments since last reported in the Company's December 31, 2001
Form 10-K.
As previously reported, an action has been brought against Superior in Florida
by a purported class consisting of (i) healthcare providers that rendered
treatment to Superior insureds and claimants of Superior insureds and (ii) such
insureds and claimants. The plaintiff alleges that Superior improperly reduced
medical benefits payable and improperly calculated interest in violation of
Florida law. The Company believes the claim is without merit and intends to
vigorously defend the charges brought against it. There have been no material
developments since last reported in the Company's December 31, 2001 Form 10-K.
As previously reported, actions have been brought in Florida against Superior
Guaranty purporting to be on behalf of a class of purchasers of insurance from
Superior Guaranty allegedly charged service or finance charges in violation of
Florida law. Superior Guaranty believes that the allegations of wrongdoing as
alleged in the complaint are without merit and intends to vigorously defend the
claims brought against it. There have been no material developments since last
reported in the Company's December 31, 2001 Form 10-K.
The Company is a 50% owner in a limited liability corporation ("LLC")
established to provide business services to the Company and an unrelated third
party. The fair market value of the LLC's operating assets approximated its
outstanding debt at March 31, 2002.
The Company and its subsidiaries are named as defendants in various other
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the Company's subsidiaries. The Company, in
establishing its loss reserves, has considered these actions. The Company
believes that the ultimate disposition of these lawsuits will not materially
affect the Company's operations or financial position.
5. LOSS DEVELOPMENT ON PRIOR ACCIDENT YEARS
During the first quarter of 2002, the Company experienced unfavorable
development on its year-end 2001 loss and LAE reserves in the amount of $1.5
million. This was primarily due to unfavorable settlement of outstanding claims
that resulted in an increase in the loss and loss adjustment expense ratio for
the first quarter by 13.1 percentage points.
6. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
7. LOSS PER SHARE
Basic and diluted net loss per share are computed by dividing net loss as
reported by the average number of shares outstanding as follows:
Three Months Ended
March 31
----------------
(in thousands) 2002 2001
------ ------
Basic:
Weighted-average common shares outstanding. 10,385 10,385
====== ======
Diluted:
Weighted-average common shares outstanding. 10,385 10,385
====== ======
<FN>
The Company has 1,890,000 stock options outstanding as of March 31, 2002. Common
stock equivalents are anti-dilutive; therefore, fully diluted loss per share is
the same as basic loss per share.
8. DISCONTINUED OPERATIONS
In December 2000, the Company initiated the divestiture of its crop insurance
segment. This business was predominantly written through IGF. The transaction
was completed in June 2001 and transferred ownership of substantially all of the
crop insurance assets of the Company and IGF, effective with the 2001 crop
cycle, to Acceptance. Upon completion of the sale, the net assets of the
discontinued operations were reduced to zero. IGF and its affiliates received
approximately $27.4 million at closing and Acceptance assumed all of the crop
insurance in-force policies for the 2001 crop year. For agreeing not to compete
in the crop insurance industry for a period of three years from the date of
sale, the Company received $4.5 million at closing that is being amortized to
income on a straight-line basis over three years. An additional $9.0 million in
reinsurance premium is payable to Granite Re under a multi-year reinsurance
treaty whereby Granite Re has agreed to reinsure a portion of the crop insurance
business of Acceptance and provide an indemnity on behalf of IGF. The results
of the crop insurance segment have been reflected as "Discontinued Operations"
in the accompanying unaudited consolidated financial statements in accordance
with Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations --- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Summarized results of operations for discontinued operations were as follows:
STATEMENTS OF OPERATIONS:
(in thousands)
Three Months Ended
March 31
------------------
2002 2001
------ --------
Gross premiums written. . . . . . . . . . . . . . . . . . . $ - $94,390
====== ========
Net premiums written. . . . . . . . . . . . . . . . . . . . $ 2 $ 7,888
====== ========
Net premiums earned . . . . . . . . . . . . . .. . . . . $ 2 $ 2,798
Net investment and fee income . . . . . . . . .. . . . . 189 (316)
Net realized capital gain (loss). . . . . . . .. . . . . (123) 2
------ --------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 68 2,484
------ --------
Loss and loss adjustment expenses . .. . . . . . . . . . (19) 5,871
Policy acquisition and general and administrative
expenses. 87 (3,623)
Interest and amortization expense . . . . . . . . . .. . - 236
------ --------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . 68 2,484
------ --------
Earnings before income taxes. . . . . . . . . . . . . . . . - -
Income tax expense. . . . . . . . . . . . . . . . . . . . . - -
------ --------
Net earnings from discontinued operations . . . . . . . . . $ - $ -
====== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS
All statements, trend analyses, and other information contained in this report
relative to markets for the Company's products and/or trends in the Company's
operations or financial results, as well as other statements which include words
such as "anticipate," "could," "feel(s)," "believes," "plan," "estimate,"
"expect," "should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) the effect on customers, agents,
employees and others due to the Company's receipt of a going concern opinion
from its accountants; (ii) general economic conditions, including prevailing
interest rate levels and stock market performance; (iii) factors affecting the
Company's nonstandard automobile operations such as rate increase approval,
policy renewals, new business written, and premium volume; (iv) the factors
described in this section and elsewhere in this report; and (v) adverse actions
by insurance regulatory officials.
OVERVIEW OF THE COMPANY
Symons International Group, Inc. (the "Company") owns insurance companies that
underwrite and market nonstandard private passenger automobile insurance. The
Company's principal insurance company subsidiaries are Pafco General Insurance
Company ("Pafco") and Superior Insurance Company ("Superior"). The Company is a
73.1% owned subsidiary of Goran Capital Inc. ("Goran").
As previously announced, the Company sold its crop insurance operations to
Acceptance Insurance Companies, Inc. ("Acceptance") on June 6, 2001. The crop
insurance business was written through the Company's subsidiary, IGF Insurance
Company ("IGF"), which is in runoff. Accordingly, the financial statements
included in this report reflect the results of the crop insurance segment as
"discontinued operations".
Pafco, Superior and Superior's subsidiaries, Superior Guaranty Insurance Company
("Superior Guaranty") and Superior American Insurance Company ("Superior
American"), are engaged in the writing of insurance coverage for automobile
physical damage and liability policies for nonstandard risks. Nonstandard risk
insureds are those individuals who are unable to obtain insurance coverage
through standard market carriers due to factors such as poor premium payment
history, driving experience or violations, particular occupation or type of
vehicle. The Company offers several different policies that are directed
towards different classes of risk within the nonstandard market. Premium rates
for nonstandard risks are higher than for standard risks. Since it can be
viewed as a residual market, the size of the nonstandard private passenger
automobile insurance market changes with the insurance environment and grows
when the standard coverage becomes more restrictive. Nonstandard policies have
relatively short policy periods and low limits of liability. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
SIGNIFICANT LOSSES HAVE BEEN REPORTED AND ARE LIKELY TO CONTINUE
The Company has reported net losses on a quarterly basis since the third quarter
of 1998. Net losses from continuing operations for the quarter ended March 31,
2002 totaled $(7,729,000) compared to losses of $(9,432,000) for the same period
in 2001. The Company previously reported losses from continuing operations of
$(30,736,000) for the year 2001, $(71,384,000) for 2000 and $(65,443,000) for
1999. Results from continuing operations before the effects of income taxes and
minority interest were losses of $(15,930,000) and $(59,946,000) for 2001 and
2000, respectively. Losses from continuing operations decreased in 2001 from
2000 largely due to lower volume and corresponding actions taken to reduce
operating expenses and the recognition in 2000 of approximately $33.5 million of
goodwill impairment. Although the Company has taken a number of actions to
address factors contributing to these past losses, there can be no assurance
that operating losses will not continue.
RECENT AND FURTHER REGULATORY ACTIONS MAY ADVERSELY AFFECT THE COMPANY'S FUTURE
OPERATIONS
The Company's insurance company subsidiaries, their business operations, and
their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the IDOI, the FDOI and the insurance
regulators of other states in which the insurance company subsidiaries write
business. Moreover, the insurance company subsidiaries' losses, adverse trends
and uncertainties discussed in this report have been and continue to be matters
of concern to the domiciliary and other insurance regulators of the Company's
insurance company subsidiaries and have resulted in enhanced scrutiny and
regulatory action by several regulators (see Note 3, "Regulatory Affairs" in the
Condensed Notes to the Consolidated Financial Statements). The primary purpose
of insurance regulation is the protection of policyholders rather than
shareholders. Failure to resolve issues with the IDOI and the FDOI, and with
other regulators, in a manner satisfactory to the Company could impair the
Company's ability to execute its business strategy or result in future
regulatory actions or proceedings that could otherwise materially and adversely
affect the Company's operations.
THE COMPANY IS SUBJECT TO A NUMBER OF PENDING LEGAL PROCEEDINGS
As discussed elsewhere in this report, the Company is involved in a number of
pending legal proceedings (see Part II - Item 1, "Legal Proceedings"). Although
the Company believes that many of the allegations of wrongdoing are without
merit and intends to vigorously defend the claims brought against it, there can
be no assurance that such proceedings will not have a material adverse effect on
the Company's financial position or results of operations. Furthermore, the
existence of these lawsuits diverts the time and attention of management and
they are expensive to defend, whether or not the Company is ultimately
successful.
THE TERMS OF THE TRUST PREFERRED SECURITIES MAY RESTRICT THE COMPANY'S ABILITY
TO ACT
The Company has issued through a wholly owned trust subsidiary $135 million
aggregate principal amount in trust originated preferred securities ("Preferred
Securities"). The Preferred Securities have a term of 30 years with annual
interest at 9.5% paid semi-annually. The obligations of the Preferred Securities
are funded from the Company's nonstandard automobile insurance management
company. The Company elected to defer the semi-annual interest payments due in
February and August 2000 and 2001 and the payment due in February 2002 and may
continue to defer such payments for up to an aggregate of five years as
permitted by the indenture for the Preferred Securities. All of the deferred
interest (if all payments due in 2002, 2003, and 2004 are deferred) of
approximately $84 million will become due and payable in February 2005. Although
there is no present default under the indenture that would accelerate the
payment of the Preferred Securities, the indenture contains a number of
covenants that may restrict the Company's ability to act in the future. These
covenants include restrictions on the Company's ability to incur or guarantee
debt, make payment to affiliates, repurchase its common stock, pay dividends on
common stock or increase its level of certain investments other than
investment-grade, fixed-income securities. There can be no assurance that
compliance with these restrictions and other provisions of the indenture for the
Preferred Securities will not adversely affect the cash flow of the Company.
REVIEW OF CONSOLIDATED OPERATIONS
NET LOSS
The net loss for the three months ended March 31, 2002 totaled $(7,729,000) or
$(.74) per share (basic and diluted). This is an improvement of $1,703,000 or
$0.17 per share from the net loss for the same period in 2001. The decreased
net loss is due primarily to lower premiums earned in 2002 and decreased policy
acquisition and general and administrative expenses offset by higher losses.
There was no loss on discontinued operations for the three months ended March
31, 2002 and 2001, respectively. Refer to Note 8. "Discontinued Operations" of
the Condensed Notes to Consolidated Financial Statements for additional
information.
GROSS PREMIUMS WRITTEN
Gross premiums written decreased 9.3% for the three months ended March 31, 2002
compared to the three months ended March 31, 2001. The primary reasons for this
decline in volume are the withdrawal from certain competitive markets and other
underwriting initiatives intended to increase profitability.
NET PREMIUMS WRITTEN
Net premiums written represent the portion of premiums retained by the Company
after consideration for risk sharing through reinsurance contracts. As a result
of losses in the Company's insurance subsidiaries and the corresponding growth
in the Company's retained deficit and to manage overall risk retention, the
Company entered into a reinsurance agreement to cede a portion of its gross
written premiums to National Union Fire Insurance Company of Pittsburgh, PA, an
unrelated third party. For the three months ended March 31, 2002, the Company
ceded approximately 71.4% of its gross written premiums.
NET PREMIUMS EARNED
Net premiums earned decreased 37.2% or $6,962,000 for the quarter ended March
31, 2002 as compared to the same period in 2001. Premiums are earned ratably
over the term of the underlying insurance contracts and the reduction in net
premiums earned is a result of the decreases in written premium and policies in
force.
FEE INCOME
Fee income is derived from installment billings and other services provided to
policyholders. In the first quarter of 2002, fee income was 9.7% lower as
compared to the same period in 2001. The reduction in fee income is attributable
to the reduction in policies in force and the overall decline in written premium
in the first quarter of 2002.
NET INVESTMENT INCOME
Net investment income decreased 22.2% for the three months ended March 31, 2002
as compared to the same period in 2001. This decrease is reflective of the
decline in invested assets during a period of declining premiums and the
liquidation of investments to pay prior year losses settled in 2002.
NET REALIZED CAPITAL (LOSSES)
Net realized capital losses were $(748,000) for the first quarter of 2002 as
compared to net realized capital losses of $(769,000) for the same period in
2001. Capital losses resulted primarily from the liquidation of longer duration
fixed income securities in the first quarter of 2002 in order to rebalance the
investment positions in the portfolio. These transactions resulted in higher
cash proceeds that were reinvested in shorter duration investment instruments.
Capital losses were also realized due to the continued liquidation of
investments to fund operations and claim payments under unfavorable market
conditions.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The loss and loss adjustment expense ratio for the Company for the three months
ended March 31, 2002 was 107.7% of net premiums earned as compared to 94.8% for
first quarter 2001 and to 91.5% for the entire year of 2001. During the first
quarter of 2002, the Company experienced unfavorable development on its loss and
loss adjustment expense reserves for accidents occurring in 2001 and prior which
increased the loss and loss adjustment expense ratio for the quarter by 13.1
percentage points.
POLICY ACQUISITION AND GENERAL AND ADMINISTRATIVE EXPENSE
The Company reduced policy acquisition and general and administrative expenses
for the first quarter of 2002 to $6,459,000 from $10,518,000 for the same period
in 2001, a reduction of approximately 39%. This reduction is reflective of the
decline in gross written premiums, an increase in ceding commissions associated
with the quota share reinsurance contract, and overall operating expense
reduction initiatives. As a percentage of gross premiums earned, the Company
experienced a decrease in its operating expense ratio, net of fee income, from
40.5% for the first quarter of 2001 to 32.4% for 2002. This decrease in the
expense ratio is the result of reduced operating expenses and an increase in
ceding commissions earned under the quota share reinsurance contract.
INCOME TAXES
At March 31, 2002, the Company's net deferred tax assets are fully offset by a
100% valuation allowance that resulted in no tax benefit in the first quarters
of both 2002 and 2001.
REVIEW OF CONSOLIDATED FINANCIAL POSITION
CASH AND INVESTMENTS
Total cash and investments at March 31, 2002 and December 31, 2001 was $103.4
million and $110.4 million, respectively. The decline in invested assets
resulted from continued liquidations to fund claim payments and operating
expenses as well as the portfolio rebalancing mentioned above. Refer to "Net
Realized Capital (Losses)" above for a discussion of other changes in cash and
investment balances.
REINSURANCE RECEIVABLES AND PAYABLES
The Company negotiated a third-party quota share reinsurance agreement that
became effective January 1, 2000. Under the quota share agreement, the Company
may cede a portion of its nonstandard automobile insurance premiums and related
losses based on a variable percentage of up to 75% of Superior's and up to 75%
of Pafco's earned premiums. The Company's ceding percentage for the first
quarter of 2002 totaled 71.4%. The decrease in the amount of premiums and losses
ceded under this contract directly affect reinsurance balances due and payable
on the face of the financial statements.
RECEIVABLES
Receivables, exclusive of the allowance for doubtful accounts, have increased by
approximately $4.4 million, or 9.5%, from December 31, 2001. This increase is
primarily attributable to an increase in billable premiums due to higher written
premiums in the first quarter of 2002 versus the fourth quarter of 2001. The
allowance for doubtful accounts was reduced in the first quarter of 2002 by
approximately $1.2 million, or 83.8%, for permanent write-offs.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Total loss and loss adjustment expense reserves decreased from $81,142,000 as of
December 31, 2001 to $78,070,000 as of March 31, 2002, a reduction of
approximately $3.1 million. This decrease is consistent with the Company's
declining volume of business.
UNEARNED PREMIUMS
At March 31, 2002, unearned premiums were $64,262,000, an increase of $5,046,000
from December 31, 2001. This is consistent with the increase in receivables
discussed above.
DEFERRED INCOME
In connection with the sale of the crop insurance book of business to Acceptance
on June 6, 2001, the Company received a payment of $4.5 million for agreeing not
to engage in the crop insurance business for three years from the sale date. The
payment is being amortized to income on a straight-line basis over a three-year
period.
SHAREHOLDERS' (DEFICIT)
Shareholders' (deficit) has increased by $(8,280,000) from December 31, 2001.
This increase is primarily the result of the net loss of $(7,729,000) for the
three months ended March 31, 2002 coupled with an unrealized loss of $(551,000)
on investments available for sale.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds available to the management and holding companies
are fees from policyholders, management fees and dividends from its primary
subsidiaries.
Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged
to policyholders who elect to make their premium payments in installments.
Superior Group also receives management fees under its management agreement with
its insurance subsidiaries. When the Florida Department of Insurance ("FDOI")
approved the acquisition of Superior by Superior Group, it prohibited Superior
from paying any dividends (whether extraordinary or not) for four years from the
date of acquisition (May 1, 1996) without the prior written approval of the
FDOI, which restriction expired in April 2000. As a result of regulatory
actions taken by the Indiana Department of Insurance ("IDOI") with respect to
Pafco and IGF, those subsidiaries may not pay dividends without prior approval
by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of
the Indiana Insurance Code, without the prior approval of the Indiana Insurance
Commissioner. The management fees charged to Pafco, Superior and IGF are
subject to review by the IDOI and FDOI.
The nonstandard automobile insurance subsidiaries' primary source of funds is
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, payment of
claims settlement costs, operating expenses (primarily management fees),
commissions to independent agents, premium taxes, dividends and the purchase of
investments. There is variability in cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, the
Company maintains investment programs intended to provide adequate funds to pay
claims. During the first quarter of 2002 and during 2001 and 2000, due to
reduced premium volume, the Company has liquidated investments to pay claims.
The Company historically has tried to maintain duration averages of 3.5 years.
However, the reduction in new funds due to lower premium volume has and will
continue to cause the Company to shorten the duration of its investments. The
Company may incur additional costs in selling longer bonds to pay claims, as
claim payments tend to lag premium receipts. Due to the decline in premium
volume, the Company has experienced a reduction in its investment portfolio, but
to date has not experienced any problems meeting its obligations for claims
payments.
The Company had $1.2 million available at March 31, 2002 under its $2.5 million
revolving credit facility ("Facility") with Granite Reinsurance Company, Ltd., a
related party. An additional $750,000 was drawn on the line in April 2002,
leaving $450,000 available at May 15, 2002. The terms of the Facility call for
monthly interest payments at the prime rate (as printed in the Wall Street
Journal on the first business day of each month) plus 5.25% (the total rate was
10.0% at May 1, 2002) computed on an annual basis and not to exceed 18% per
annum calculated on the average principal outstanding each month. All principal
borrowed under the Facility is due on December 20, 2004.
On August 12, 1997, the Company issued through a wholly owned trust subsidiary
$135 million aggregate principal amount in trust originated preferred securities
(the "Preferred Securities"). The Preferred Securities have a term of 30 years
with semi-annual interest payments of $6.4 million that commenced February 15,
1998. The Company may redeem the Preferred Securities in whole or in part after
10 years.
The Company may defer interest payments in accordance with the terms of the
trust indenture for a period of up to five years. The unpaid interest
installment amounts accrue interest at 9.5%. The Company deferred the
semi-annual interest payments due in February and August 2000 and 2001 and
February 2002 and may continue this deferral practice for all remaining payments
due in 2002, 2003, and 2004.
The following table sets forth the minimum required obligations of the Company
under the Preferred Securities for interest and principal payments for each of
the next four years and thereafter assuming all semi-annual interest payments
due in 2002, 2003, and 2004 are deferred (in thousands):
2002 2003 2004 2005 Thereafter Total
----- ----- ----- ------- ----------- --------
Interest payments. $ - $ - $ - $96,779 $ 282,150 $378,929
Principal payments - - - - 135,000 135,000
----- ----- ----- ------- ----------- --------
Total due. . . . . $ - $ - $ - $96,779 $ 417,150 $513,929
===== ===== ===== ======= =========== ========
13
The trust indenture contains certain restrictive covenants including those based
upon the Company's consolidated coverage ratio of earnings before interest,
taxes, depreciation and amortization (EBITDA). If the Company's EBITDA falls
below 2.5 times consolidated interest expense (including Preferred Securities
distributions) for the most recent four quarters, the following restrictions
become effective:
- - The Company may not incur additional indebtedness or guarantee additional
indebtedness.
- - The Company may not make certain restricted payments including making loans
or advances to affiliates, repurchasing common stock or paying dividends in
excess of a stated limitation.
- - The Company may not increase its level of non-investment grade securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply, as the Company's consolidated coverage ratio
was (0.77) in 2002, and will continue to apply until the Company's consolidated
coverage ratio complies with the terms of the trust indenture. The Company
complied with these additional restrictions as of March 31, 2002. In March 2002,
the Company discovered it did not comply with the covenant dealing with the
percentage of investment in other than "Permitted Investments" as defined by the
indenture. The indenture allows for no more than 15% of total invested assets to
be in non-investment grade securities as defined above. At December 31, 2001,
approximately 21% of the Company's investment portfolio was invested in equity
securities and non-investment grade bonds. The Company rectified the situation
as of March 29, 2002 through the sale of approximately $8 million of the
non-investment grade securities, the proceeds of which were invested in
Permitted Investments.
Net cash used by operating activities in the first quarter of 2002 aggregated
$(6,729,000) compared to $(9,829,000) for the same period in 2001. The
improvement is primarily due to the lower net loss in the first quarter of 2002
and lower premium volume.
The Company believes cash flows from premiums, investment income and billing
fees are sufficient to meet obligations to policyholders and operating expenses
for the foreseeable future. This is due primarily to the lag time between
receipt of premiums and the payment of claims. 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 operating debt service (not including the
Preferred Securities) for the foreseeable future.
The Company experienced, beginning in the fourth quarter of 2001 and continuing
in the first quarter of 2002, adverse loss experience on a substantial portion
of its new business written in certain markets. In late February and early March
2002, the Company commenced further analysis of loss ratios by individual agency
and a review of claim settlement procedures. Based on this and other analysis,
the Company took the following actions in late March and in April 2002 to
improve the financial position and operating results of the Company:
- - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the
insured must obtain a new policy at prevailing rates and current
underwriting guidelines;
- - Terminated or placed on new business moratorium several hundred agents whose
loss ratios were abnormally high when compared to the average for the
remaining agents (these agents accounted for approximately 16% of the total
gross written premium in 2001);
- - Increased underwriting requirements in certain markets including: higher
down payments, new policy fees, and shorter policy terms;
- - Hired a consultant with significant auto claims experience to review
processes and suggest modifications to the claims function.
As previously reported in the Company's December 31, 2001 Annual Report on Form
10-K, the Company expected the above actions to result in a decline of
approximately 10 to 15% in gross written premiums from 2001 levels. Based on
actual results through April 2002, the Company now expects a decline of from 20
to 25% in gross written premiums for calendar year 2002 from 2001 levels with a
corresponding decrease in management fees payable to Superior Group. In April
2002, the Company eliminated approximately 60 full-time positions, primarily in
its claims and underwriting departments. This represents approximately 17% of
the Company's employees before the layoffs. In addition, the Company has
undertaken other cost savings initiatives and process changes in order to reduce
operating expenses.
Shareholders' equity reflected a deficit of $(152) million at March 31, 2002,
which does not reflect the statutory surplus upon which the Company conducts its
various insurance operations. The Company's insurance subsidiaries, not
including IGF, after the effects of Codification, had statutory surplus of
approximately $17.7 million at March 31, 2002.
Given the financial position and loss experience of the Company over the past
several years as described above, the Company's accountants issued an opinion
based on their audit of the December 31, 2001 Consolidated Financial Statements
which includes an emphasis paragraph that raises the question of whether or not
the Company can continue as a going concern. The Company's plans to improve
financial results are described above.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to Qualitative and Quantitative Disclosures about Market
Risk was included under Item 1. Business in the December 31, 2001 Form 10-K. No
material changes have occurred in market risk since this information was
disclosed in the December 31, 2001 Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, IGF, which is a wholly owned subsidiary of the Company,
had been a party to a number of pending legal proceedings and claims relating to
agricultural production interruption insurance policies (the "AgPI Program")
which were sold during 1998. All of the policies of insurance which were issued
in the AgPI Program were issued by and under the name of Mutual Service Casualty
Insurance Company ("MSI"), a Minnesota corporation with its principal place of
business located in Arden Hills, Minnesota. Sales of this product resulted in
large underwriting losses by IGF.
Approximately $29 million was paid through March 31, 2002 in settlement of legal
proceedings and claims related to the AgPI Program. The Company has retained a
reserve of approximately $3 million as a provision for expenses and settlement
of ongoing litigation.
All AgPI policyholder claims were settled during 2000. However, on January 12,
2001 a case was filed in the Superior Court of California, County of Fresno,
entitled S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira
v. Mutual Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo
& Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought
by four AgPI policyholders who had previously settled their AgPI claims pursuant
to binding settlement agreements who now seek additional compensation by
asserting through litigation that IGF and the third party carrier paid less than
the policy limits they were promised when they purchased the policy and that
each settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any recovery
payable to plaintiff would be limited to their actual economic losses regardless
of how much plaintiffs thought they had been promised (i.e. plaintiffs cannot be
paid policy limits without regard to actual losses incurred). The plaintiffs
then filed their third amended complaint to which IGF filed another demurrer,
contending that plaintiffs failed to make the amendments required by the court's
previous rulings. This latest demurrer is to be heard on May 24, 2002. Discovery
is proceeding.
As previously reported in the Company's December 31, 2001 Form 10-K, MSI and IGF
are arbitrating their dispute over responsibility for claims paid to MSI
insureds. Also as previously reported, an action was filed against the Company,
IGF, IGF Holdings, Inc. ("IGFH"), Granite Reinsurance Company, Ltd. ("Granite
Re"), a wholly owned subsidiary of Goran, Goran and certain affiliates of those
companies, as well as certain members of the Symons family, and Acceptance in
the United States District Court for the Southern District of Indiana which
alleges that the June 6, 2001 sale of IGF's assets to Acceptance and the
payments by Acceptance to the Company, Goran and Granite Re violated Indiana law
and are voidable. On April 18 and 19, 2002, the parties engaged in a mediation
session and reached an agreement to settle the disputed claims in the
arbitration proceeding and the federal court action. The settlement contemplates
execution of a written agreement that is currently being drafted. Pending
execution of the written agreement, the mediator has reported to the court that
a settlement has been reached.
The Company is a defendant in a case filed on February 23, 2000, in the United
States District Court for the Southern District of Indiana entitled Robert Winn,
et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S.
Other parties named as defendants are Goran, three individuals who were or are
officers or directors of the Company or of Goran, PricewaterhouseCoopers LLP and
Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a
class consisting of purchasers of the Company's stock or Goran's stock during
the period February 27, 1998, through and including November 18, 1999.
Plaintiffs allege, among other things, that defendants misrepresented the
reliability of the Company's reported financial statements, data processing and
financial reporting systems, internal controls and loss reserves in violation of
Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC
Rule 10b-5 promulgated thereunder. The individual defendants are also alleged to
be liable as "controlling persons" under Sec.20(a) of the 1934 Act. The Company
and the individual defendants filed a motion to dismiss the amended consolidated
complaint for failure to state a claim and for failure to plead with
particularity as required by Fed. R. Civ. P.9(b) and the Private Securities
Litigation Reform Act of 1995. The accounting firms also filed motions to
dismiss. On February 19, 2002, the court entered an order granting in part and
denying in part defendants' motion to dismiss. On March 15, 2002, the Company
and the individual defendants filed a motion for reconsideration of the court's
ruling on the motion to dismiss, or alternatively to certify an order for
appeal, which was denied on May 1, 2002. Discovery in the case is proceeding.
IGF is a defendant in a declaratory action entitled Kevin L. Stevens, Bank of
America, Conservator of the Estate of Samuel Jay Ramsey and Gael Ramsey v. IGF
Insurance Company originally filed on February 21, 2001 in the Circuit Court of
Green County, Missouri. The action was subsequently removed to the Federal
District Court for the Western District of Missouri. On October 11, 2001, the
Missouri District Court granted declaratory judgment in favor of the Company's
insured, Stevens, and held that IGF was responsible for payment of the premium
attributable to a $15,000,000 appeal bond for Steven's appeal from a judgment
against him in a related personal injury action. On April 23, 2002, the United
States Court of Appeals for the Eighth Circuit vacated the judgment and held
that Stevens need not post a bond to appeal the adverse judgment; therefore, IGF
was not obligated to pay the bond premium.
Except as set forth above, there have been no other material developments in any
of the pending legal proceedings previously reported by the Company in the
December 31, 2001 Form 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on May 14, 2002.
By: /s/ Douglas H. Symons
-----------------------------
Douglas H. Symons
President, Chief Executive Officer and Secretary
(principal executive officer)
By: /s/ Mark A. Paul
-----------------------------
Mark A. Paul
Vice President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)