[COVER]
SIG LOGO
1996 Annual Report
[Large SIG logo with three photos]
Corporate Profile
Symons International Group, Inc. owns niche insurance companies principally in
the crop and nonstandard automobile insurance markets. Its crop subsidiary, IGF
Insurance Company of Des Moines, Iowa is the fifth largest crop insurer in the
United States. Its nonstandard automobile division, Pafco General Insurance
Company of Indianapolis, Indiana and Superior Insurance Company of Tampa,
Florida, is the sixteenth largest provider of nonstandard automobile insurance
in the United States. The crop segment markets and sells crop and multi-peril
coverages to farmers. This is the fastest growing sector of the commercial
insurance market. The nonstandard automobile division markets and sells
insurance through the independent agency system to drivers who are unable to
obtain coverage from insurers at standard or preferred rates. This market is the
fastest growing of the personal lines market.
The common stock of Symons International Group, Inc. was initially offered to
the public on November 5, 1996 and trades on The NASDAQ Stock Market's National
Market under the symbol "SIGC".
Table of Contents
Financial Highlights 1
Chairman's Report 2
Selected Financial Data 4
Management's Discussion and Analysis 6
Consolidated Financial Statements 20
Notes to Consolidated Financial Statements 24
Report of Independent Accountants 49
Stockholder Information 50
Board of Directors and Executive Officers 51
Subsidiary and Branch Offices IBC
[GRAPH OMITTED]
1992 1993 1994 1995 1996
Gross Premiums Written $109,219 $88,936 $103,134 $124,634 $305,499
Gross Premiums Written By Year
Financial Highlights
(in thousands, except per share data)
For the years ended December 31, 1992 1993 1994 1995 1996
- ------------------------------------ -------- -------- -------- -------- --------
Gross premiums written $109,219 $88,936 $103,134 $124,634
$305,499
Net earnings (loss)(1) $ 817 $ (323) $ 2,117 $ 4,821 $ 13,256
Net operating earnings
(loss)(2) $ 496 $ (244) $ 2,222 $ 5,048 $ 13,916
Earnings (loss) per share(1) $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 1.76
Operating earnings (loss)
per share (1)(2) $ 0.07 $ (0.03) $ 0.32 $ 0.72 $ 1.85
Stockholders' equity $ 1,193 $ 2,219 $ 4,255 $ 9,535 $ 60,900
Return on beginning equity 168.8% (27.1%) 95% 113.3%
139.0%
Book value per share $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 5.83
Market value per share(3) N/A N/A N/A N/A $ 16.75
(1) In 1993, the Company recognized an increase to net earnings as a result of
a cumulative effect of a change in accounting principle of $1,175. Earnings
and operating earnings per share excluding this effect were $(0.20).
(2) Operating earnings and per share amounts exclude the after tax effects of
realized capital gains and losses.
(3) The Company's shares were first publicly traded on November 5, 1996.
CORPORATE STRUCTURE
[graphic omitted]
Symons International Group,
Inc, Indianapolis, Indiana
("SIG or the "Company")
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100% Owned 52% Owned Funds Affiliated
IGF Holdings, Inc. GGS Management ----48%---- with Goldman
("IGFH") Holdings, Inc. Sachs & Co.
("GGSH" or "GGS Holdings") ("GS Funds")
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100% Owned 100% Owned
IGF Insurance GGS Management, Inc.
Company "GGS Management"
("IGF")
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-----------------------------------
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100% Owned 100% Owned
PAFCO General Superior Insurance Company
Insurance Company ("Superior")
("Pafco") |
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----------------------------
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100% Owned 100% Owned
Superior Guranty Superior
Insurance Company American
Insurance
Company
Chairman's Report
- --------------------------------------------------------------
Symons International Group, Inc.
- --------------------------------------------------------------
1996 saw Symons International Group, Inc. ("SIG") change from being a
wholly-owned subsidiary of Goran to a 67% owned newly listed (NASDAQ) public
company on the occasion of its Initial Public Offering on November 5, 1996.
Three million of its ten million outstanding common shares were offered to the
public at $12.50 per share, and a further 450,000 shares were issued under the
terms of the "over-allotment" agreement. The total proceeds were $43.1 million.
While this was a significant adventure for SIG, it came late in a year of
several outstanding achievements produced by its subsidiary companies.
The year started with the completion on January 31, 1996, of an agreement with
the Fortis Group to purchase their nonstandard automobile insurance division,
the Superior Group of Insurance Companies. The purchase price was 105% of the
"book" value, which developed a selling value to Fortis of $66,600,000, a most
satisfactory arrangement for SIG as we will demonstrate.
The funds were raised by the following:
The substantial financial house of Goldman Sachs, through their affiliate, GS
Capital Partners II, L.P. contributed $21.2 million in cash to a newly formed
nonstandard automobile insurance holding company, GGS Management Holdings Inc.
We contributed our previously wholly-owned, nonstandard auto insurer, Pafco
General Insurance Company. For its contribution, GS Capital Partners II, L.P.
received a 48% interest in GGS Management Holdings, Inc. and we, of course,
retained the other 52% of GGS Management Holdings, Inc. in SIG.
With the assistance of our new investors, GS Capital Partners II, L.P., GGS
Management Holdings, Inc. borrowed $48 million thus satisfying the cash
requirement for the acquisition and a definitive agreement was concluded for the
purchase with Fortis on January 31, 1996. The necessary application seeking
approval of the purchase was expeditiously made to the regulators and by April
30, 1996, the Florida Department of Insurance sanctioned the deal and GGS
Management Holdings, Inc. was in business.
With the keys to Superior firmly in our hands, we proceeded to make several
major improvements in the sales and administration of the nonstandard automobile
companies. This field of insurance is one of our core lines and we felt most
comfortable with the acquisition from the outset. Our first chore was to
implement proven and constructive systems and to reduce redundancies that might
prevail within our two active nonstandard auto insurers. Time proved that these
changes were effective in that by the end of 1996, only eight months after we
acquired Superior, gross premiums of the Company had risen from $95 million in
1995 to $159 million. For 1996, we were also able to reduce the operating ratios
from 107.6% of premiums to 99.5% over this period.
During 1996 we reduced operation costs and increased production at Pafco as
well.
In combination with Pafco, the two nonstandard entities now under the banner of
GGS Management Holdings, Inc. moved into 16th place in this the fastest growing
segment of personal insurance.
IGF Insurance Company, our crop insurer, now occupies 5th place in volume of
income in the crop insurance business, which has been categorized as the fastest
growing segment of the commercial insurance business. The company, since we
acquired it in November 1990, has progressed from a relatively small writer of
this sophisticated line of insurance, doing $22 million of premium income in
1990, to gross premiums for 1996 of $110 million - an increase of 56% over 1995.
Pre-tax earnings increased from $11 million in 1995 to $17.7 million in 1996.
A gentleman employed with a major investment house asked a short time ago if we
expected to see results, such as we have displayed over the past years, continue
into the future. It is a good question and if we could look into a crystal ball
and come up with the answer that might prove useful, too. The fact of the matter
is that there have been sound and understandable reasons for our growth and we
can take credit for that. We have stuck to the business philosophy developed
some years back of being a "niche" company, carefully selecting our areas of
development. These have been the nonstandard auto insurance and crop insurance
segments. We have made antidilutive acquisitions, and managed above average
growth while increasing profitability. As the large standard auto insurers
tightened their underwriting criteria, this threw a large number of motorists
into the nonstandard market. As the nonstandard market grew to accept more
business, various legislators brought in tougher laws to eliminate the uninsured
motorist. Florida even introduced bounty hunters to hound out the noninsured
motorists. Other states have been introducing tighter laws to impose a mandatory
obligation to insure with seizure of the car and large fines in the event of
non-compliance. The market for nonstandard auto insurance has now reached more
than $17 billion and there is still some shortfall in the capacity to absorb
these premiums by the insurers. We are selective in the risks we accept which
accounts for our results bettering the averages.
Dating as far back as the period following the Dust Bowl of the 30's, there was
a lack of insurance markets to accept the risks of farmers for damage or loss of
crops. This was not a serious problem in the past for many farmers were not
prone to purchase the coverage and relied on the luck of the draw, or as the
more religious put it, the hand of God to look after them. The time came,
however, when losses became too severe for the well-being of the nation's
farmers and the central government in the U.S. had to step in and offer to
provide assistance with the creation of a sound insurance market. With
reluctance, the Federal Crop Insurance Corporation was established and for some
time, along with a small group of speciality insurance companies, a suitable
market existed.
In 1993 devastating floods hit the farms in mid-America following some turbulent
and unpredictable weather in the years preceding. There were disaster areas
aplenty and of course many farmers, as was their tradition, had not insured. The
demands for "Disaster Fund" assistance was loud and insistent and the
government, of course with taxpayers funds, did its best to render useful
assistance. The upshot of this was the 1994 Crop Reform bill
and the 1996 Freedom to Farm legislature. These bills, while modernizing many
aspects of protection to farmers and the way in which they conducted their
business affairs, imposed an obligation on the farmers to purchase protection
for their own security. Premiums in the crop insurance industry have doubled
since while the number of insurance providers has shrunk. IGF has increased its
segment of this business by a greater amount than the overall factor of growth.
We have added many capable people to our staff over the past few years, some
through acquisition of companies such as IGF and Superior, but others garnered
from other insurers and businesses. Our goal is to continue to grow by increased
sales and acquisitions, but the proof of the pudding is in the eating and we
have become an efficient producer of business, both in the nonstandard auto
field and crop insurance business. We have developed unique marketing strategies
and our underwriting results and expense ratios are comparable to the largest
and most experienced companies.
G. Gordon Symons, Chairman
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
- --------------------------------------------------------------------------------
OF SYMONS INTERNATIONAL GROUP, INC.
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company and its Subsidiaries and should
be read in conjunction with the consolidated financial statements of the Company
and the notes thereto, included elsewhere in this Report.
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(in thousands except per share amounts and ratios)
Consolidated Statement of
Operations Data:
Gross Premiums Written $ 109,219 $ 88,936 $ 103,134 $ 124,634 $ 305,499
Net Premiums Written 35,425 31,760 35,139 53,447 209,592
Net Premiums Earned 35,985 31,428 32,126 49,641 191,759
Net Investment Income 1,319 1,489 1,241 1,173 6,733
Other Income - - - - 886 1,632 2,170 9,286
Net Realized Capital Gain
(Loss) 486 (119) (159) (344) (1,015)
--------- --------- --------- --------- ---------
Total Revenues 37,790 33,684 34,840 52,640 206,763
========= ========= ========= =========
=========
Losses and Loss Adjustment
Expenses 27,572 25,080 26,470 35,971 137,109
Policy Acquisition and General
and Administrative Expenses 7,955 8,914 5,801 7,981 42,013
Interest Expense 459 996 1,184 1,248 3,938
--------- --------- --------- --------- ---------
Total Expenses 35,986 34,990 33,455 45,200 183,060
========= ========= ========= =========
=========
Earnings (Loss) Before Taxes,
Extraordinary Item, Cumulative
Effect Of An Accounting Change
And Minority Interest 1,804 (1,306) 1,385 7,440 23,703
Income Taxes 996 83 (718) 2,619 8.046
========= ========= ========= =========
=========
Earnings (Loss) Before
Extraordinary Item,
Cumulative Effect Of An
Accounting Change And
Minority Interest $ 808 $ (1,389) $ 2,103 $ 4,821 $ 15,657
Net Earnings (Loss) $ 817 $ (323) $ 2,117 $ 4,821 $ 13,256
========= ========= ========= =========
=========
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
Per Common Share Data:
Earnings (Loss) Before
Extraordinary Item,
And Cumulative Effect Of
An Accounting Change And
Minority Interest $ 0.12 $ (0.20) $ 0.30 $ 0.69 $ 2.08
--------- --------- --------- --------- ---------
Net Earnings (Loss) $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 1.76
========= ========= ========= =========
=========
Weighted Average Shares
Outstanding 7,000 7,000 7,000 7,000 7,537
GAAP Ratios:
Loss and LAE Ratio 76.6% 79.8% 82.4% 72.5% 71.5%
Expenses Ratio 23.4 31.5 21.7 18.6 24.0
--------- --------- --------- --------- ---------
Combined Ratio 100.0% 111.3% 104.1% 91.1% 95.5%
========= ========= ========= =========
=========
Consolidated Balance Sheet Data:
Investments $ 27,941 $ 21,497 $ 18,572 $ 25,902 $ 178,429
Total Assets 75,001 81,540 66,628 110,516 344,679
Losses and Loss Adjustment
Expenses 38,616 54,143 29,269 59,421 101,719
Total Debt 11,528 9,341 10,683 11,776 48,000
Minority Interest 55 - - - - 16 - - - - 21,610
Total Shareholders Equity 1,193 2,219 4,255 9,535 60,900
Book Value Per Share $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 5.83
Statutory Capital And Surplus:
Pafco $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 18,112
IGF $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 29,412
Superior $57,121
[photographs of automobiles down right margin]
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
- --------------------------------------------------------------------------------
Overview
Symons International Group, Inc. (the "Company" or "SIG") is a 67% subsidiary of
Goran Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering
(the "Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran.
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Formation of GGS Management Holdings, Inc. ("GGSH" or "GGS Holdings"), The
Holding Company For Its Nonstandard Operations
SIG entered into a Letter of Intent on June 3, 1995 with Fortis, Inc. to buy
Superior Insurance Company ("Superior"), a nonstandard automobile insurance
company operating principally in Florida, Texas, California and four other
states. SIG needed to finance the purchase so it turned to Goldman Sachs & Co.
("Goldman Sachs") which has a large fund that invests in equity of growing and
profitable companies. SIG formed GGSH through contribution of its nonstandard
subsidiary, Pafco General Insurance Company ("Pafco") and a contribution by
Goldman Sachs of about $21 Million, or 48% of GGS Holdings' stock. With this
cash and the value of Pafco, GGS Holdings borrowed from Chase Manhattan Bank,
N.A. ("Chase") $48 Million through a term loan of 6 years at LIBOR plus 2.75%.
With these funds, GGS Holdings bought Superior for $66.6 Million in cash and
closed the deal on April 30, 1996 (the "Acquisition"). Today, GGS Holdings is
the sixteenth largest nonstandard automobile insurance writer in the United
States with gross written premiums for 1996 of $187,176,000 compared to
$49,005,000 for 1995. GGS Holdings is an acquisition and growth company in the
nonstandard automobile insurance sector, which is the fastest growing sector of
the personal lines market.
[photographs of automobiles down left margin and across top of page]
The Company wanted to define its business as two distinct units, crop and
nonstandard. The Company also wanted Goldman Sachs to invest only in the
nonstandard division. In order to accomplish this, SIG moved IGF Insurance
Company ("IGF") out from being a subsidiary of Pafco to become a subsidiary of
SIG. After all the accountants and lawyers got through their deliberations, IGF
Holdings, Inc. ("IGFH") was formed as a subsidiary of SIG and IGFH owned 100% of
IGF, now the fifth largest crop insurer in the United States. To replace the
value of IGF to Pafco, IGF paid a dividend of $11 Million to Pafco and funded
same through our friendly local bank for $7.5 Million (the "IGFH Bank Debt") and
a note back from Pafco for $3.5 Million. Both of these loans were paid off
through the Offering proceeds.
Nonstandard Automobile Insurance Operations
The Company owns 52% of GGS Holdings, our nonstandard division, with the
remaining 48% owned by certain funds affiliated with Goldman Sachs. GGS
Holdings, through its wholly-owned subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile insurance for "nonstandard
risks". 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 policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. The nonstandard automobile market is the fastest growing sector of
the personal lines market. This is fueled by two main factors. (A) As states
clamp down on uninsured motorists, more insureds find their way to our market.
For example, Florida, our biggest state, has bounty hunters who take your plates
off your car if you fail to have insurance. Further, California just passed
strong laws to enforce insurance or lose your car. (B) The baby boomers'
children are now reaching driving age and they mainly find their way to our
market.
[photographs of crops down right margin]
Crop Insurance Operations
General
Crop insurance consists of two main products. Hail insurance, which is
controlled by the private insurance industry, receives no subsidy from the
government. The other, Multi-Peril Crop Insurance ("MPCI"), is a government
sponsored product that receives subsidy for the farmer to reduce their cost and
provide protection for major catastrophic loss. When a farmer wants to borrow
money to buy his seed, the bank wants insurance on the seed so it knows the loan
can be repaid either through normal harvest or through an insurance policy
covering the yield on the crop. There are many types of coverages and
percentages that farmers can purchase. Our job is to work with our independent
agent to counsel the farmer on the best coverage and premium for his farm. The
government supports this effort through commissions it pays us to do this work
and through premium subsidy for the farmer's insurance costs. The government
also provides back-up risk protection to the 18 or so crop insurance providers
in the event of major loss. Based on the results for any given year, the Company
and the government share in the results of profit and loss. In order to protect
IGF from the loss part of this equation, IGF buys third party reinsurance to
reduce the downside from a loss year.
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, which is also reflected in other income. 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
[photographs of crops down left margin]
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 U.S. 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 (.02%)
of MPCI Retention (as defined herein) to the extent the Company's MPCI loss
ratios on a per state basis exceed certain levels (the "MPCI Excess LAE
Reimbursement Payment"). For 1994, 1995 and 1996, the Buy-up Expense
Reimbursement Payment has been set at 31% of the MPCI Premium, but it is
scheduled to be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999. The
Company is working to reduce costs in order to preserve the profit margins of
the Company. For GAAP income statements 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 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 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 has
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 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.
Discontinuance of Surplus Lines Underwriting Unit
Prior to January 1, 1996, the Company, through its wholly-owned subsidiary,
Symons International Group, Inc. - Florida ("SIGF"), a surplus lines
underwriting unit based in Florida, provided commercial insurance products
through independent insurance agents. SIGF writes these specialty products
through Pafco as well as a number of other insurers. Effective January 1, 1996,
the Company transferred SIGF to Goran and reinsured all current and future
policies issued by Pafco on this business through Goran's subsidiary, Granite
Reinsurance Company Ltd. ("Granite Re").
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 operations nor does it include
the results of operations of Superior prior to May 1, 1996.
Year Ended December 31,
1993 1994 1995 1996
(in thousands, except ratios)
Nonstandard -Automobile Insurance Operations:
Gross premiums written $ 52,187 $ 45,593 $ 49,005 187,176
Net premiums written 26,479 28,114 37,302 186,579
Net premiums earned 26,747 25,390 34,460 168,746
Net investment income 1,144 904 624 6,489
Other income, principally
billing fees 886 1,545 1,787 7,578
Net realized capital loss (44) (55) (508) (1,014)
Total revenues 28,733 27,784 36,363 181,799
Losses and loss adjustment
expenses 17,152 18,303 25,423 124,385
Policy acquisition and general and
administrative expenses 5,855 8,709 12,929 46,796
Interest and amortization of
intangibles - - - - - - - - - - - 3,184
Total expenses 23,007 27,012 38,352 174,365
Earnings (loss) before income
taxes $ 5,726 $ 772 $ (1,989) $ 7,434
GAAP Ratios (Nonstandard Automobile Only):
Loss ratio 55.5% 62.3% 65.8% 65.1%
LAE ratio 8.6% 9.8% 8.0% 8.6%
Expense ratio, net of bilLing fees 18.6% 28.2% 32.3% 25.1%
Combined ratio 82.7% 100.3% 106.1% 98.8%
Crop Insurance Operations:
Gross premiums written $ 35,156 $ 54,455 $ 70,374 $ 110,059
Net premiums written 4,281 4,565 11,608 23,013
Net premiums earned 4,281 4,565 11,608 23,013
Net investment income 347 339 674 181
Other income 0 73 384 1,672
Net realized capital gain (loss) 114 (104) 164 (1)
Total revenues 4,742 4,873 12,830 24,865
Losses and loss adjustment expenses 6,774 7,031 8,629 12,724
Policy acquisition and general and
administrative expenses 1,468 (4,802) (7,466) (6,095)
Interest expense 235 492 627 551
Total expenses 8,477 2,721 1,790 7,180
Earnings (loss) before income taxe $ (3,735) $ 2,152 $ 11,040 $ 17,685
Statutory Capital and Surplus:
Pafco $ 8,132 $ 7,848 $ 11,875 $ 18,112
IGF 2,789 4,512 9,219 29,412
Superior 56,656 43,577 49,277 57,121
Results of Operations
Overview
1996 Compared To 1995
Net earnings and earnings per share increased 175.0% to $13,256,000 and 155.1%
to $1.76 in 1996 from $4,821,000 and $0.69 in 1995. Improved earnings in 1996
were attributable to both the nonstandard automobile and crop segments. The
nonstandard automobile segment benefited from significant premium growth from
the acquisition of Superior, elimination of quota share reinsurance and internal
growth. The nonstandard automobile segment also benefited from lower loss and
expense ratios due to improved claims management, introduction of multi-tiered
products and operating efficiencies through reengineering, management changes
and gains from technological advancements. The crop insurance segment also
benefited from significant premium growth in both crop hail and MPCI premiums.
The crop insurance segment's profitability was enhanced by a lower crop hail
loss ratio and improved MPCI underwriting gains.
1995 Compared To 1994
Net earnings and earnings per share increased 128% to $4,821,000 and 130% to
$0.69 in 1995 from $2,117,000 and $0.30 in 1994. Improved earnings in 1995 were
attributable to the crop insurance segment which demonstrated premium growth,
lower loss ratios and higher MPCI underwriting gains than in 1994.
Years Ended December 31, 1996 and 1995:
Gross Premiums Written. Gross premiums written in 1996 increased to $305,499,000
from $124,634,000 in 1995 reflecting a 282% increase in nonstandard automobile
insurance and an increase of 56.4% in crop insurance. Other written premiums
consist of premiums on commercial business which were 100% ceded to Granite Re
effective January 1, 1996. The increase in nonstandard automobile gross premiums
written was due to the Acquisition, which generated gross premiums written of
$118,661,000 subsequent to the Acquisition, as well as a 21% increase in
policies in-force issued by Pafco. The increase in Pafco policies in-force
primarily resulted from improved service and product improvements. The increase
in crop insurance gross premiums written was primarily due to (i) farmers
electing higher percentage of crop price levels to be insured under MPCI Buy-up
Coverages, (ii) an increase in MPCI policies in-force and (iii) an increase in
the number of acres insured, together with an increase of $10,990,000, or 64.8%,
in crop hail premiums in 1996 compared to 1995.
Net Premiums Written. The Company's net premiums written in 1996 increased
292.1% to $209,592,000 from $53,447,000 in 1995 was due to the Acquisition,
which generated net premiums written for Superior of $118,298,000 subsequent to
the Acquisition, and the increase in gross premiums written in Pafco's
nonstandard automobile insurance business. In addition, the increase in net
premiums written resulted from the Company's election not to renew, as of
January 1, 1996, its 25% quota share reinsurance on its nonstandard automobile
business. As a result of increases over time in its statutory capital, the
Company determined that it no longer required the additional capacity provided
by this coverage in order to maintain acceptable premium to surplus ratios.
Since all MPCI premiums are reported as 100% ceded, MPCI gross premiums written
have no effect on net premiums written.
Net Premiums Earned. The Company's net premiums earned in 1996 increased 286.3%
reflecting the increase in net premiums written. The ratio of net premiums
earned to net premiums written for nonstandard automobile business in 1996
decreased to 90.4% from 92.4% in 1995 due to growth in net premiums written in
1996 exceeding growth in net premiums written in 1995.
Net Investment Income. The Company's net investment income in 1996 increased
474.0%. This increase was due primarily from the investment earnings of
$4,996,000 at Superior subsequent to the Acquisition. Also contributing to the
increase in net investment income is an increase in average invested assets (not
including Superior) to $30,911,000 in 1996 from $22,653,000 in 1995.
Other Income. The Company's other income in 1996 increased 327.9% due
principally to (i) billing fee revenue of $4,655,000 at Superior subsequent to
the Acquisition, (ii) increased billing fee revenue at Pafco of $998,000 from
nonstandard automobile insurance policies, resulting from the increase in the
in-force policy count described above, and an increase in fees charged per
installment in late 1995, and (iii) increased CAT Coverage Fees and CAT LAE
Reimbursement Payments resulting from the introduction of CAT Coverages in the
Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act").
Net Realized Capital Gain (Loss). The Company recorded a net realized capital
loss from the sale of investments of $1,015,000 in 1996 compared to a net
realized capital loss from the sale of investments of $344,000 in 1995. The net
realized capital loss in 1996 was the result of sales of securities to shorten
the portfolio's overall maturity to provide a better duration match with claims
payments.
Losses and LAE. The loss and LAE ratio for the nonstandard automobile segment in
1996 was 73.7% as compared to 73.8% in 1995. The reduction in the loss and LAE
ratio for 1996 was a function of rate increases and improved claim closure
ratios. Crop hail loss ratios decreased in 1996 to 55.3% from 74.3% in 1995 due
to more favorable weather conditions and a broader geographic expansion of
premiums which serves to reduce exposure.
Policy Acquisition and General and Administrative Expenses. The expense ratio
for the nonstandard automobile segment decreased to 29.6% in 1996 from 37.5% in
1995. Excluding interest on the Acquisition debt and amortization of goodwill
and other intangibles associated with the Acquisition would reduce this ratio to
27.7% in 1996. This decrease was due to several factors including (i) lower
commission expense at Superior through utilization of multi-tiered products,
(ii) lower staff expenses as a result of higher utilization and work flow
re-engineering, and (iii) technological advancements in the underwriting,
premium processing and claims areas. As a result of the unique 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 $6,095,000 in 1996 compared to a contribution to income of $7,466,000 in
1995. This decrease in contribution resulted from a combination of several
factors. The primary difference is the decrease in ceding commission income of
$2,036,000 which is due to only a 10%
quota share agreement for crop hail in 1996 versus a 25% quota share in 1995.
Other items include a commission expense increase of $6,217,000 due to higher
premium writings and an increase in other operating expenses of $4,153,000. This
net increase in expense of $10,370,000 was reduced by an increase of $8,490,000
in Buy-up Expense Reimbursement and an increase in the MPCI underwriting gain of
$2,624,000.
Interest Expense. The Company's interest expense in 1996 increased to $3,938,000
from $1,248,000 in 1995 due primarily to interest of $2,774,000 on the $48
Million indebtedness incurred by a subsidiary of GGSH to partially fund the
Acquisition (the "GGS Senior Credit Facility").
Income Tax Expense. The effective tax rate in 1996 reflects a 33.9% provision
compared to a 35.2% provision in 1995. The reduction in the effective tax rate
is due to higher tax-exempt interest and dividend income.
Years Ended December 31, 1995 and 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 due to the increased number of its deductible options and 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.
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 LAE 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 unique
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 premium writings 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.
[photographs of a building down right margin]
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.
Liquidity and Capital Resources
The primary sources of funds available to the Company and its Subsidiaries are
premiums, billing fees, expense reimbursements, investment income and proceeds
from the maturity of invested assets. Such funds are used principally for the
payment of claims, operating expenses, 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 generally intended to provide adequate
funds to pay claims without the forced sale of investments.
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 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. The
nonstandard automobile segment generates sufficient cash from operations to
preclude the need for working capital borrowings while the timing of receipts
and payments in the crop segment is such that an operating line of credit is
necessary.
[photographs of a building down right margin and across top of page]
After the Offering, the Company, on a stand-alone basis, requires funds to
defray operating expenses consisting primarily of legal, accounting and other
fees and expenses in connection with the disclosure and regulatory obligations
of a public company. In order to satisfy its cash requirements, the Company
intends to rely primarily on the fees from an administrative agreement between
the Company and IGF (the "Administration Agreement") pursuant to which the
Company provides certain executive management, accounting, investing, marketing,
data processing and reinsurance services in exchange for a fee in the amount of
$150,000 quarterly. In addition, the Company is currently in the process of
seeking approval from the Indiana Department of Insurance to implement a new
arrangement whereby the underwriting, marketing and administrative functions of
IGF will be assumed by, and employees will be transferred to, IGFH. There can,
however, be no assurance that the required regulatory approval will be obtained.
In accordance with industry practice, the FCIC will continue to pay Buy-up
Expense Reimbursement Payments to IGF, which will in turn pay management fees to
IGFH. Accordingly, IGFH will be able to pay dividends to the Company to the
extent that such fees exceed the operating and other expenses of IGFH. There
can, however, be no assurance that IGFH will have sufficient excess cash flow to
permit the payment of any dividends to the Company.
As a result of the covenants contained in the credit agreement with respect to
the GGS Senior Credit Facility, GGS Holdings and its subsidiaries, Pafco and
Superior, are not expected to constitute a significant source of funds for the
Company. The GGS Senior Credit Facility restricts the ability of GGS Management,
Inc., a wholly-owned subsidiary of GGSH ("GGS Management") to undertake certain
actions, including making, or permitting any of its subsidiaries to make,
certain restricted payments in excess of $100,000 per year in the aggregate. For
purposes of the GGS Senior Credit Facility, "restricted payments" include
dividends in the form of cash or other tangible or intangible property (other
than stock, options, warrants or other rights to purchase stock), as well as
administrative, advisory, management and billing fees payable by GGS Management
to any of its affiliates (other than investment banking fees payable to Goldman
Sachs). As a result, this covenant restricts the ability of GGS Management to
pay dividends to its parent company, GGS Holdings, in excess of $100,000 per
year.
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 of Insurance approved the
acquisition of Superior by GGS Holdings, it prohibited Superior from paying any
dividends (whether extraordinary or not) for four years without the prior
written approval of the Florida Department of Insurance, and extraordinary
dividends, within the meaning of the Indiana Insurance Code, cannot be paid by
Pafco without the prior approval of the Indiana Commissioner of Insurance. The
management fees charged to Pafco and Superior by GGS Management are subject to
review by the Indiana and Florida Departments of Insurance.
The GGS Senior Credit Facility, with an outstanding principal balance of $48
million, matures on April 30, 2002 and will be repaid in 11 consecutive
semi-annual installments, the first of which will occur on the first anniversary
of the closing date of the GGS Senior Credit Facility. The first installments of
principal repayments will be $3,128,000 and $2,886,500, respectively, with the
remaining annual installments to be paid as follows: 1998 - $6,494,500; 1999 -
$7,938,000; 2000 - $9,742,000; 2001 - $11,611,500; and 2002 $6,199,500. At the
election of GGS Management, interest on the GGS Senior Credit Facility shall be
payable either at the "Base Rate" option or LIBOR option, plus in each case the
applicable margin. The Base Rate is defined as the higher of (i) the federal
funds rate plus 1/2 of 1% or (ii) the prime commercial lending rate of the
lending bank. LIBOR is defined as an annual rate equal to the London Interbank
Offered Rate for the corresponding deposits of U.S. dollars. The applicable
margin for Base Rate loans is 1.50% and for LIBOR loans is 2.75%. In May, 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 GGS Senior Credit Facility at 8.85% through January 31, 1997, 9.08%
through April 30, 1997, 9.24% through July 30, 1997 and 8.80% through October
30, 1999. The GGS Senior Credit Facility is collateralized by a pledge of all of
the tangible and intangible assets of GGS Holdings, including all of the
outstanding shares of GGS Management, and by a pledge of all of the tangible and
intangible assets of GGS Management, including all of the outstanding shares of
capital stock of Pafco and Superior. GGS Management intends to rely primarily on
management fees from Pafco and Superior and billing fee income to satisfy these
debt service requirements which are subject to review by the Indiana and Florida
Departments of Insurance.
As of December 31, 1996, GGS Management was in default of three covenants in the
GGS Senior Credit Facility. The first covenant requires Pafco and Superior to
maintain a combined ratio of statutory net premiums written for the prior four
quarters to surplus of 3:1 (three dollars of premiums to 1 dollar of surplus).
As at December 31, 1996 such ratio was 3.06:1. The commercial bank lenders under
the GGS Senior Credit Facility amended the agreement to cure this default for
the four consecutive fiscal quarters ended December 31, 1996. As of December 31,
1996, GGS Management contributed additional capital to Pafco $3,737,000 and GGS
Holdings contributed $4,800,000 to Superior in the form of a note payable, due
March 28, 1997, of which the Company guaranteed $2,496,000. The Company loaned
$500,000 to GGS Holdings, which was used to fund a portion of the note at
December 31, 1996. The outstanding balance of the note payable from GGS Holdings
to Superior of $4,300,000 at December 31, 1996 was funded by its due date. The
Company believes that premium volume in 1997 will be at a level where capital
contributions from GGS Management will be necessary to maintain compliance with
this covenant. The Company believes GGS Management will have sufficient cash
flow after debt service to provide a significant portion of this capital need.
However, GGS Management believes, based on 1997 projcted premium writings, it
will need to either obtain reinsurance, reduce premium writings or obtain
additional funding of approximately $12,000,000 from either SIG or additional
financing. The Company is currently exploring its options including negotiating
with its lenders. Should the Company experience less than satisfactory loss
experience, it will reduce its premium writings either internally or through
additional reinsurance. Certain factors will influence the Company's ability to
maintain adequate capital including actual level of premium writings, loss
trends, commission rates, investment yields and cash flow. There can be no
assurance that GGS Management's plans will provide adequate capital.
The second covenant violation relates to insufficient funds posted by an
affiliate reinsurer to cover ceded premiums and loss reserves. Such deficiency
was approximately $770,000 at December 31, 1996, or less than 10% of total funds
required to be held for ceded premiums and loss reserves. In addition to cash,
the affiliate had posted a $1.5 Million letter of credit as of December 31,
1996. However, reserve development calculated subsequent to December 31 created
most of the deficiency. The affiliate has posted sufficient funds in March, 1997
and the Company doesnot expect future violations of this covenant to occur. The
commercial bank lenders have agreed in writing that this violation has been
cured.
The third covenant violation relates to Superior's risk-based capital rating
being less than 3 to 1 as of December 31, 1996 due to premium growth. The
commercial bank lenders have amended the agreement to cure this violation as of
December 31, 1996.
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 on
both a short and long term basis. 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 or funding of surplus for premium growth. The Company also believes
cash flows in the crop segment from premiums and expense reimbursements are
sufficient to meet the segment's obligations on both a short and long term
basis. Due to the more seasonal nature of the crop segment's operations, it is
necessary to obtain short term funding at times during a calendar year in the
form of 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 or funding of surplus for premium growth.
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.
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. 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 1/4%, 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. 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.
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 Variances Between GAAP and SAP
The financial statements in this Annual Report 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.
New Accounting Standards
On January 1, 1994, the Company adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". In
accordance with SFAS No. 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 has no effect on net income. The
effect of this change in accounting principle was an increase in stockholders'
equity of $139,000, net of deferred taxes of $73,000 on 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
chosen not to adopt the new rules but has provided the appropriate disclosure as
required.
In February 1996, SFAS No. 128, Earning 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 simpliflies the standards for computing Earning 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 presention
of basic and diluted EPS on the face of theincome 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 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.
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 not yet determined the effects of adopting this
Statement.
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 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 of Insurance
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 of Insurance. 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 can not
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.
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.
Consolidated FINANCIAL STATEMENTS
as of December 31, 1996 and 1995
(in thousands, except share data)
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
Assets 1996 1995
Investments
Available for sale:
Fixed maturities, at market $127,681 $12,931
Equity securities, at market 27,920 4,231
Short-term investments, at
amortized cost, which
approximates market 9,565 5,283
Real estate, at cost 466 487
Mortgage loans, at cost 2,430 2,920
Other 75 50
-------- --------
Total investments 168,137 25,902
Investments in and advances to
related parties 1,152 2,952
Cash and cash equivalents 13,095 2,311
Receivables (net of allowance
for doubtful accounts of
$1,480 and $927 in 1996 and
1995, respectively) 65,194 8,203
Reinsurance recoverable on paid
and unpaid losses, net 48,294 54,136
Prepaid reinsurance premiums 14,983 6,263
Federal income taxes recoverable 319 ---
Deferred policy acquisition costs 12,800 2,379
Deferred income taxes 3,329 1,421
Property and equipment, net of
accumulated depreciation 8,137 5,502
Other assets 9,239 1,447
-------- --------
Total assets $344,679 $110,516
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $101,719 $ 59,421
Unearned premiums 87,285 17,497
Reinsurance payables 6,508 6,206
Payables to affiliates 366 6,474
Federal income tax payable --- 133
Line of credit and notes payable --- 5,811
Term debt 48,000 ---
Other 18,291 5,439
-------- --------
Total liabilities 262,169 100,981
-------- --------
Minority interest in consolidated
subsidiary 21,610 ---
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value,
100,000,000 shares authorized,
10,450,000 and 7,000,000 shares
issued and outstanding in 1996
and 1995, respectively 38,969 1,000
Additional paid-in capital 5,905 3,130
Unrealized gain (loss) on invest-
ments, net of deferred tax of
$625 in 1996 and $(23) in 1995 820 (45)
Retained earnings 15,206 5,450
-------- --------
Total stockholders' equity 60,900 9,535
-------- --------
Total liabilities and stockholders'
equity $344,679 $110,516
======== ========
Consolidated FINANCIAL STATEMENTS
for the years ended December 31, 1996, 1995
and 1994 (in thousands, except per share data)
- --------------------------------------------------------------------------------
Consolidated Statements of Earnings
- --------------------------------------------------------------------------------
1996 1995 1994
Gross premiums written $ 305,499 $ 124,634 $ 103,134
Less ceded premiums (95,907) (71,187) (67,995)
--------- --------- ---------
Net premiums written 209,592 53,447 35,139
Change in unearned premiums (17,833) (3,806) (3,013)
Net premiums earned 191,759 49,641 32,126
Net investment income 6,733 1,173 1,241
Other income 9,286 2,170 1,632
Net realized capital loss (1,015) (344)
--------- --------- ---------
Total revenues 206,763 52,640 34,840
--------- --------- ---------
Expenses:
Losses and loss adjustment expenses 137,109 35,971 26,470
Policy acquisition and general
and administrative expenses 42,013 7,981 5,801
Interest expense 3,938 1,248 1,184
Total expenses 183,060 45,200 33,455
--------- --------- ---------
Earnings before income taxes
and minority interest 23,703 7,440 1,385
--------- --------- ---------
Income taxes:
Current income tax expense 7,982 2,275 462
Deferred income tax expense
(benefit) 64 344 (1,180)
Total income taxes 8,046 2,619 (718)
--------- --------- ---------
Net earnings before minority
interest 15,657 4,821 2,103
Minority interest (2,401) --- 14
--------- --------- ---------
Net earnings $ 13,256 $ 4,821 $ 2,117
========= ========= =========
Weighted average shares outstanding 7,537 7,000 7,000
========= ========= =========
Net earnings per share $ 1.76 $ 0.69 $ 0.30
========= ========= =========
Consolidated FINANCIAL STATEMENTS
for the years ended
December 31, 1996, 1995 and 1994 (in thousands)
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
Unrealized
Additional Gain(Loss) Retained Total
Common Paid-in 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 --- 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
======= ====== ======= ======== =======
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,1995 and 1994
(in thousands)
1996 1995 1994
Cash flows from operating activities:
Net earnings $ 13,256 $ 4,821 $ 2,117
Adjustments to reconcile net earnings
to net cash provided from (used in)
operations:
Minority interest 2,401 --- (14)
Depreciation and amortization 2,194 742 690
Deferred income tax expense (benefit) 64 344 (1,180)
Net realized capital loss 1,015 344 159
Net changes in operating as
sets and liabilities
(net of assets acquired):
Receivables (22,673) 6,462 (9,057)
Reinsurance recoverable on paid and
unpaid losses, net 5,842 (41,250) (25,130)
Prepaid reinsurance premiums (8,720) 725 (3,343)
Federal income taxes recoverable
(payable) (1,270) 325 759
Deferred policy acquisition costs (2,496) (900) (727)
Other assets (2,923) 1,019 98
Losses and loss adjustment expenses (2,125) 30,152 (24,874)
Reinsurance payables (1,978) 2,133 1,982
Unearned premiums 24,508 3,081 6,356
Other liabilities 2,908 1,656 (1,398)
-------- -------- --------
Net cash provided from (used in) operations 10,003 9,654 (3,302)
-------- -------- --------
Cash flow from investing activities:
Cash paid for Superior (66,590) --- ---
Net sales (purchases) of short-term
investments 8,026 (4,493) (308)
Proceeds from sales, calls and
maturities of fixed maturities 56,903 8,603 8,460
Purchases of fixed maturities (73,503) (12,517) (7,587)
Proceeds from sales of equity securities 19,796 29,599 10,510
Purchase of equity securities (34,157) (28,173) (10,122)
Proceeds from the sale of real estate --- --- 1,165
Purchases of mortgage loans --- (100) (50)
Proceeds from repayment of mortgage loans 490 120 60
Purchase of property and equipment (3,734) (1,874) (655)
-------- -------- --------
Net cash (used in) provided from investing
activities (92,769) (8,835) 1,473
-------- -------- --------
Cash flow from financing activities:
Proceeds from initial public offering,
net of expenses 37,969 --- ---
Proceeds from line of credit and
notes payable --- 1,620 26,900
Proceeds from term debt 48,000 0 ---
Payments on line of credit and notes
payable (5,811) (1,250) (26,459)
Proceeds from consolidated subsidiary
minority interest owner 21,200 --- ---
Payment of dividend to parent (3,500) --- ---
Repayments from related parties 1,800 44 711
Loans from and (repayments to) related
parties (6,108) 1,036 425
-------- -------- --------
Net cash provided from financing
activities 9,355 1,450 1,577
-------- -------- --------
Increase (decrease) in cash and
cash equivalents 10,784 2,269 (252)
Cash and cash equivalents, beginning
of year 2,311 42 294
-------- -------- --------
Cash and cash equivalents, end of year $ 13,095 $ 2,311 $ 42
======== ======== ========
Notes to Consolidated Financial Statements
(Dollars in thousands)
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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. (GGSH)-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;
Pafco Premium Finance Company (PPFC)-an Indiana-based premium finance
company-52% owned;
IGF Holdings, Inc. (IGFH)-a holding company for the crop operations which
includes IGF and Hail Plus Corp.-100% owned;
IGF Insurance Company (IGF)-an insurance company domiciled in Indiana-100%
owned; and
Hail Plus Corp.-an Iowa-based premium finance company-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, GGSH, to be owned 52% by
the Company and 48% by Goldman Funds. GGSH created GGS, a management company for
the nonstandard automobile operations which include PGIC and the Superior
entities.
On April 30, 1996, GGSH 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.)
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.
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
PGIC 18,112 11,875 7,848
IGF 29,412 9,219 4,512
Net earnings (losses):
Superior entities 1,978 N/A N/A
PGIC 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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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 three 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.
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 income.
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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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%, 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).
Notes to Consolidated Financial Statements
(Dollars in thousands)
In February 1996, 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.
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 not yet determined the effects of adopting this
statement.
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 generally accepted accounting principles. Stock options were not
considered to be common stock equivalents and, thus, not included in the
calculation of earnings per share as the Company's shares have been traded for
less than one calendar quarter.
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). IGFH
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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
On January 31, 1996, the Company entered into an agreement (Agreement) with GS
Capital Partners II, L.P. to create GGSH, 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 generally accepted accounting principles,
of $17,186, to GGSH. Goldman Funds contributed $21,200 to GGSH, in accordance
with the Agreement. In return for the cash contribution of $21,200, Goldman
Funds received a minority interest share in GGSH 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
GGSH earnings 2,401
Unrealized gains, net of deferred tax of $599 784
-------
$21,610
=======
In connection with the above transactions, GGSH 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 acquired:
Invested assets $118,665
Receivables 34,933
Deferred acquisition 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 required 63,039
Purchase price 65,590
--------
Excess purchase price 3,551
Less amounts allocated to deferred income
taxes on unrealized gains on investments 1,334
--------
Goodwill $ 2,217
========
Notes to Consolidated Financial Statements
(Dollars in thousands)
2. Corporate Reorganization and Acquisitin, continued:
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 "Offering"). 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 Offering. The proceeds were used to repay the IGFH
Note and PGIC Note totaling $11,000, repay 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 Offering, Goran owns 67% of the
total common stock outstanding.
Assuming that these transactions, described in Notes 2 and 3, took place
(including the Offering) 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 Income 15,238 6,701
======== ========
Net Income per common share 1.42 0.65
======== ========
Assuming that these transactions took place (including the Offering) 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 Income per common share $ 1.86 $ 0.81
======== ========
Outstanding shares used in the above calculation include the 7,000,000 shares
outstanding before the Offering plus 1,200,000 shares issued in connection with
the Offering 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 Offering 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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
4. Investments:
Investments are summarized as follows:
Cost or Estimated
Amortized Unrealized Market
December 31, 1996 Cost Gain Loss Value
--------- ----------------------- ---------
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government operations 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 operations 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
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
========= ========= ========= =========
Notes to Consolidated Financial Statements
(Dollars in thousands)
4. Investments, continued:
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.
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:
Estimated
Amortized Market
Maturity: Cost Value
-------- --------
Due in one year or less $ 6,412 $ 6,423
Due after one year through
five years 70,848 71,086
Due after five years through
ten years 43,109 43,404
Due after ten 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:
Fixed
Description Maturities
----------
United States Treasury Notes $26,318
Federal National Mortgage Association $41,203
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:
1996 1995 1994
Balance, beginning of year $ 2,379 $ 1,479 $ 752
Deferred policy acquisition
costs purchased 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
======== ======= ======
Notes to Consolidated Financial Statements
(Dollars in thousands)
6. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
1996 Accumulated 1996 1995
Cost Depreciation Net Net
------- ------------- ------ ------
Land $ 226 $ 0 $ 226 $ 226
Buildings 4,342 (1,186) 3,156 3,209
Office furniture and
equipment 2,032 (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.
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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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 GGSH, 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.
As of December 31, 1996, GGS was in default of three 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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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 required in
connection with the
Superior Acquisition 44,423 0 0
-------- ------- -------
Incurred related to:
Current year 183,618 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
======== ======= =======
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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
11. Income Taxes:
The Company files a consolidated federal income tax return with its wholly owned
subsidiaries. GGSH files a consolidated tax return with its wholly owned
subsidiaries. Intercompany tax sharing agreements between the Company and its
wholly owned subsidiaries and GGSH 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)
====== ====== ======
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
====== ======
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
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 noncancelable 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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
13. Reinsurance, continued:
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.)
Reinsurance activity for 1996, 1995, and 1994, which includes reinsurance with
related parties, is summarized as follows:
1996 Direct Assumed Ceded Net
-------- ------ -------- --------
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 expenses 223,879 4,260 (91,030) 137,109
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)
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
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
====== ======
1996 1995
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
====== ======
The following transactions occurred with related parties in the years ended
December 31, 1996, 1995, and 1994:
1996 1995 1994
Management fees charged
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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
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
Notes to Consolidated Financial Statements
(Dollars in thousands)
18. Commitments and Contingencies:, continued
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.
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 GGSH in exchange for a 52% ownership interest in
GGSH. In addition, Goldman Funds received a minority interest share of $18,425
in GGSH 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.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
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 three 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.
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) $ 722
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 $ 3,374
========
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 three equal installments on the first, second and third
anniversaries of the date of grant.
The Board of Directors of GGSH 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 GGSH'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 GGSH 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 GGSH. During 1996, 55,922 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 GGSH shall determine, but in any event not
prior to the earlier of (i) an initial public offering of GGS Holdings, and (ii)
a GGSH 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.
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 GGSH Stock Option Plan,
since the GGSH stock is privately held; risk-free interest rate of 6.0% to 6.50%
for the SIG Stock Option Plan and 6.4% for the GGSH Stock Option Plan; and an
expected life of two to four years for the SIG Stock Option Plan and five years
for the GGSH Stock Option Plan.
23. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
Quarters
-------------------------------------
1996 First Second Third Fourth Total
------- -------- ------- ------- --------
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
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.
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations on the Company's business and results of
operations, (ii) the competitive advantage afforded to the Company's crop
insurance operations by approaches adopted by management in the areas of
information, technology, claims handling and underwriting, (iii) the sufficiency
of the Company's cash flow to meet the operating expenses, debt service
obligations and capital needs of the Company and its subsidiaries, and (iv) the
impact of declining MPCI Buy-up Expense Reimbursements on the Company's results
of operations, are forward-looking statements. The company desires to take
advantage of the "safe harbor" afforded such statements under the Private
Securities Litigation Reform Act of 1995 when they are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking statements. Such
cautionary statements which discuss certain risks associated with the Company's
business including the variability of the results of operations of the Company's
crop insurance business as a result of weather and natural perils, the highly
competitive nature of both the Company's crop insurance and nonstandard
automobile insurance business and the effects of state and federal regulation,
the capital intensive nature of the property and casualty business and potential
limitations on the ability of the Company to raise additional capital set forth
under the heading "Forward-Looking Statements -- Safe Harbor Provisions" in Item
1 - Business in the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996.
- --------------------------------------------------------------------------------
MANAGEMENT RESPONSIBILITY
- --------------------------------------------------------------------------------
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which involve the use
of judgement and estimates in applying the accounting principles selected. Other
financial information in this Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains systems of internal controls which are designed to provide
reasonable assurance that accounting records are reliable and to safe-guard the
Compnay's assets. The independent accounting firm of Coopers & Lybrand L.L.P.
has audited and reported on the Company's financial statements. Their opinion is
based upon audits conducted by them in accordance that the consolidated
financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representative to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations to
the Board of Directors.
Alan G. Symons
Chief Executive Officer
/s/ Gary P. Hutchraft
Gary P. Hutchraft
Vice Presidnet and Chief Financial Officer
March 21, 1997
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 consolidated 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
STOCKHOLDER INFORMATION
Corporate Offices
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
(317) 259-6300
Registrar and Transfer Agent
National City Bank
4100 West 150th Street
3rd Floor
Cleveland, Ohio 44135-1385
Independent Public Accountants
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
Annual Meeting of Stockholders
Tuesday, May 20, 1997
10:00 a.m.
Corporate Offices
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K for Symons International Group, Inc.
for the year ended December 31, 1996, filed with the Securities and Exchange
Commission, may be obtained, without charge, upon request to the individual and
address noted under Shareholder Inquiries.
Market and Dividend Information
Symons International Group, Inc. effected its initial public offering on
November 5, 1996. Symons International Group, Inc.'s common stock trades on the
NASDAQ Stock Market's National Market under the symbol SIGC. The initial
offering price of its shares of Common Stock was $12.50 per share. The high and
low trading prices of the Common Stock for the period from November 5, 1996
through December 31, 1996 were $16.75 and $12.50, respectively.
Trading Period High Low
- -------------- ---- ---
11/5/96-12/31/96 $16.75 $12.50
As of March 20, 1997, the Company had approximately 120 stockholders based on
the number of holders of record and an estimate of the number of individual
participants represented by securities position listings.
Symons International Group, Inc. did not declare or pay cash dividends on its
common stock during the year ended December 31, 1996. The Company does not plan
to pay cash dividends on its common stock in order to retain earnings to support
the growth of its business.
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Tel: (317) 259-6402
Board of Directors
G. Gordon Symons
Chairman of the Board
Symons International Group, Inc.
Goran Capital Inc.
Alan G. Symons
Chief Executive Officer, Symons International Group, Inc.
President and Chief Executive Officer, Goran Capital Inc.
Douglas H. Symons
President and Chief Operating Officer, Symons International Group, Inc.
Vice President and Chief Operating Officer, Goran Capital Inc.
John K. McKeating
Retired former President and Owner of Vision 2120 Optometric Clinics
Robert C. Whiting
President, Prime Advisors, Ltd
James G. Torrance, Q.C.
Partner Emeritus, Smith, Lyons
Barristers & Solicitors
David R. Doyle
Vice President and Chief
Fnancial Officer
Avantec, Inc.
Executive Officers
G. Gordon Symons
Chairman of the Board
Symons International Group, Inc.
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Douglas H. Symons
President and Chief Operating Officer
Symons International Group, Inc.
Gary P. Hutchcraft
Vice President, Chief Financial Officer and Treasurer
Symons International Group, Inc.
David L. Bates
Vice President, General Counsel and Secretary
Symons International Group, Inc.
Dennis G. Daggett
President and Chief Operating Officer
IGF Insurance Company
Thomas F. Gowdy
Executive Vice President
IGF Insurance Company
Roger C. Sullivan Jr.
Executive Vice President
Superior Insurance Company
Donald J. Goodenow
Executive Vice President
Pafco General Insurance Company
COMPANY, SUBSIDIARIES AND BRANCH OFFICES
CORPORATE OFFICE IGF South
Symons International Group, Inc. 101 Business Park Drive
4720 Kingsway Drive Jackson, Mississippi 39213
Indianapolis, Indiana 46205 Tel: 601 957-9780
Tel: 317 259-6300 Fax: 601 957-9793
Fax: 317 259-6395
IGF East
SUBSIDIARIES AND BRANCHES 4720 Kingsway Drive
Pafco General Insurance Company Indianapolis, Indiana 46205
4720 Kingsway Drive Tel: 317 259-6300
Indianapolis, Indiana 46205 Fax: 317 259-6395
Tel: 317 259-6300
Fax: 317 259-6395 IGF West
407 Campus Drive
Superior Insurance Company Garden City, Kansas 67846
280 Interstate North Circle, N.W. Tel: 316 276-4111
Atlanta, Georgia 30339 Fax: 316 275-6453
Tel: 770 952-4885
Fax: 770 952-6616 IGF North
208 S. Main
Superior Insurance Company Stanley, North Dakota 58784
3030 N. Rocky Point Drive Tel: 701 628-3536
Suite 770 Fax: 701 628-3537
Tampa, Florida 33607
Tel: 813 281-2444 IGF California
Fax: 831 281-8036 1750 Bullard Avenue
Suite 106
Superior Insurance Company Fresno, California 93710
1745 West Orangewood Road Tel: 209 432-0196
Orange, California 92868 Fax: 209 432-0294
Tel: 714 978-6811
Fax: 714 978-0353
IGF Insurance Company
Corporate Office
2882 106th Street
Des Moines, Iowa 50322
Tel: 515 276-2766
Fax: 515 276-8305
SIG Logo
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana
46205
Tel: 317-259-6300
Fax: 317-259-6395