Exhibit 13
SIG LOGO
1998 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. IGF Insurance Company of
Des Moines, Iowa is the fourth largest crop insurer in the United States. Pafco
General Insurance Company of Indianapolis, Indiana and Superior Insurance
Company of Tampa, Florida, combined is the twelfth largest provider of
nonstandard automobile insurance in the United States. The crop segment markets
and sells crop insurance and other fee based services 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 segment 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
Chairman's Report
Selected Financial Data
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Report of Independent Accountants
Stockholder Information
Board of Directors and Executive Officers
Subsidiary and Branch Offices
GRAPH 1994 1995 1996 1997 1998
$103,134 $124,634 $305,499 $460,600 $553,190
Gross Premiums Written By Year
1
Financial Highlights
(in thousands, except per share data)
For the years ended December 31,
1998 1997 1996 1995 1994
Gross premiums written $553,190 $460,600 $305,499 $124,634 $103,134
Net operating earnings (loss) (1) $(17,239) $11,845 $13,916 $5,048 $2,222
Net earnings (loss) $(14,417) $16,305 $13,256 $4,821 $2,117
Basic operating earnings (loss) per share (1) $(1.66) $1.11 $1.85 $0.72 $0.32
Basic earnings (loss) per share $(1.39) $1.56 $1.76 $0.69 $0.30
Stockholders' equity $61,995 $78,363 $60,900 $9,535 $4,255
Return on average equity (20.5%) 21.9% 61.4% 69.9% 65.4%
Book value per share $5.97 $7.50 $5.83 $1.36 $0.61
Market value per share (2) $7.25 $19.22 $16.75 N/A N/A
Weighted average outstanding shares-basic 10,402 10,450 7,537 7,000 7,000
(1) Operating earnings and per share amounts exclude the after tax effects of
realized capital gains and losses and any extraordinary items.
(2) 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")
Wholly-owned subsidiaries
|
---------------------------
| |
IGF Holdings, Inc. GGS Management, Inc.
("IGFH") ("GGS Management")
| | |
IGF Insurance PAFCO General Superior Insurance
Company Insurance Company Company
("IGF") ("PAFCO") ("Superior")
| |
Superior Guaranty Superior American
Insurance Company Insurance Company
2
Chairman's Report to our Shareholders
Greetings:
SYMONS INTERNATIONAL GROUP, INC. MILESTONES:
Usually I am in a good frame of mind when I sit down to rough out the Chairman's
comments for the annual report. This year I am far less happy for as you are
aware, our results, at least with respect to the profit aspects, are less than I
would have liked.
You will be aware of that, yet many of our shareholders are "profit" trained and
while that is not a bad formula for investing, it is not the only criterion for
considering the merits of an insurance company. Scattered in among our results,
there is a statement to the effect that Gross Premium rose to $546.8 million in
1998, up 22% from $449 million in 1997. We have concentrated on eliminating
those factors that had such a negative effect on our results.
When we acquired the crop insurance book of CNA, we had to close offices and
take other measures to reduce redundant personnel at a cost of $3.5 million.
During 1998 we upgraded our computer and reporting systems at an operating cost
in excess of $5 million. Adding to these non-recurring items, a further $12
million in reserve increases for years prior due to projected increases in the
cost of auto repairs, and higher liability settlements. As new business cures,
it becomes better with age. At the same time, the cost to put the business on
the books reduces thus improving our profitability. Today we have a company with
one of the lowest operating costs in both non-standard automobile insurance and
crop insurance. With this low operating cost, we can compete with the best of
our competition.
Those added expenses are in part, the cost of acquisition. What happened to our
crop insurers in 1998 was catastrophic. In the year of the worst loss record for
the industry, we took our share of hail and hurricane damage with losses in 1998
exceeding premiums by $16 million. We do not expect to see anything like that in
1999, in fact we are optimistic about the crop year ahead.
There have been a number of changes in the crop insurance industry with respect
to legislation put into effect by the U.S. government to increase the subsidies
to farmers. The effect on the crop insurance sector will increase the federal
government MPCI. insurance program from $1.8 billion to approximately $2.2
billion for 1999. This has a direct effect on the premium revenues we receive
and with the acquisition of new business in 1998 our premium levels will be
proportionately higher. The effect of this is to proportionately reduce costs as
a result of the size of the business we are handling. We have taken an ultra
conservative approach to the underwriting of the business through the use of
broader terms and scope of coverage available to us now from the re-insurance
markets.
As you may recall, up to the end of the second quarter of 1998, we were moving
along nicely, anticipating good results represented by volume gains in both crop
and non-standard auto insurance. Halfway through the year, the non-standard
automobile insurance writers took a very competitive attitude to the business,
forcing many of the smaller insurers to cut rates to remain competitive and
protect their market share. There is no sure reason for this action, but many
felt that the leading underwriter of non-standard auto, Progressive Insurance
Company's decision to go direct, cutting out many agents and reducing rates had
some effect on the psyche of the underwriting fraternity.
The summer months brought in the most severe weather patterns to hit the crop
insurance companies. Devastating heat and drought in Texas followed by
hurricanes and storms with large hail losses throughout the U.S. To add to this
burden, world commodity prices tumbled, leading us to the end of the crop year
with very poor underwriting results despite a large gain in our book of
business.
A little more information on our crop insurance business. When we acquired IGF
Insurance Company in 1990, it wrote $23 million of premiums and there were 55
crop insurers. In 1999 we will write in excess of approximately $300 million of
crop business and are the fourth ranked company in the field of 17 crop
insurers. The Gross Premium for the industry has grown from $1.3 billion in 1990
to $2.2 billion in 1998. With the recently announced
3
federal legislation increasing the support for farmers buying crop insurance by
$400 million in 1999 and an additional $1.5 billion for the crop year 2001
onward, a large number of farmers who heretofore did not buy crop insurance will
find the incentive to do so through the generosity of their government. We will
also be the benefactors of this largesse for our share of the business should be
considerably enhanced in view of the gains we have made in our share of the
market. Oh yes, we expect to see better underwriting results in 1999.
We have some cause for optimism in 1999, for among other factors:
o Our crop insurance sales are showing the result early in the year that
would signal a banner year income.
o We increased the amount of re-insurance applicable to our crop
insurance enterprise to reduce exposure to catastrophic losses.
o Crop insurance has two components, fee income and premium income. We
developed Geo AgPLUS, a fee based innovative soil analysis service using
GPS (global positioning system) and through the advent of other fee based
products, we are increasing our fee income as it relates to our risk
income.
o We improved our operational staff by several new appointments and added
an in-house senior actuary to our professional staff.
o At considerable but necessary expense, we developed and are installing
a state of the art computer system to replace one that was proving costly
and non-compatible to our increased needs.
I anticipate that I will have a happier time writing the next Chairman's Report,
probably my last, but I must not forget to thank those ladies and gentlemen who
have helped our companies through the rough passage of 1998, our Board members
and our loyal staff.
Ladies and gentlemen, my heartfelt thanks to all of you.
4
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.
Consolidated Statement of Operations Data:
(in thousands, except per share amounts and ratios)
1998 1997 1996 1995 1994
Gross Premiums Written $553,190 $460,600 $305,499 $124,634 $103,134
Net Premiums Earned 324,923 271,814 191,759 49,641 32,126
Fee Income 20,203 17,821 9,286 2,170 1,632
Net Investment Income 12,373 11,447 6,733 1,173 1,241
NET EARNINGS (LOSS) $(14,417) $16,305 $13,256 $4,821 $2,117
====== ====== ====== ===== =====
Per Common Share Data:
Basic Earnings (Loss) Before
Extraordinary Item $(1.39) $1.63 $1.76 $0.69 $0.30
BASIC NET EARNINGS (LOSS) $(1.39) $1.56 $1.76 $0.69 $0.30
==== ==== ==== ==== ====
Basic Weighted Average Shares Outstanding 10,402 10,450 7,537 7,000 7,000
====== ====== ===== ===== =====
GAAP Ratios:
Loss and LAE Ratio 83.2% 78.2% 71.5% 72.5% 82.4%
Expense Ratio 29.8% 22.0% 24.0% 18.6% 21.7%
----- ----- ----- ---- -----
COMBINED RATIO 113.0% 100.2% 95.5% 91.1% 104.1%
===== ===== ===== ==== =====
Consolidated Balance Sheet Data:
Investments $222,853 $216,518 $168,137 $25,902 $18,572
Total Assets 569,437 526,293 344,679 110,516 66,628
Losses and Loss Adjustment Expenses 200,972 136,772 101,719 59,421 29,269
Total Long-term Debt or Preferred
Securities 135,000 135,000 48,000 11,776 10,683
Total Shareholders Equity 61,995 78,363 60,900 9,535 4,255
Book Value Per Share $5.97 $7.50 $5.83 $1.36 $0.61
Statutory Capital and Surplus:
Pafco $16,275 $19,924 $18,112 $11,875 $7,848
IGF $31,234 $42,809 $29,412 $9,219 $4,512
Superior $57,571 $65,146 $57,121
5
[photograph of crop field and automobiles down left side]
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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.
Acquisitions and Public Offerings
On April 30, 1996, the Company purchased the operations of Superior Insurance
Company for $66.6 million in cash (the
"Acquisition"). Funds for the Acquisition were provided from funds affiliated
with Goldman Sachs and a bank term loan of $48 million. Goldman Sachs was bought
out and the bank term loan was repaid in August 1997.
On November 5, 1996, the Company issued 3,450,000 shares in an initial public
offering of 33% of its stock at $12.50 per share.
On November 12, 1997, the Company issued $135 million of Trust Preferred
Securities at 9.50%. The proceeds of this offering were used to purchase Goldman
Sachs minority interest share of the nonstandard
automobile operations, repay the term loan used to acquire Superior and provide
capital to the nonstandard automobile division for future growth.
On March 2, 1998, the Company announced that it had signed an agreement with CNA
to assume its multi-peril and crop hail
operations. CNA wrote approximately $80 million of multi-peril and crop hail
insurance business in 1997. The Company will reinsure a small portion of the
Company's total crop book of business (approximately 22% MPCI and 15% crop hail)
to CNA. Starting in the year 2000, assuming no event of change in control as
defined in the agreement, the Company can purchase this reinsurance from CNA
through a call provision or CNA can require the Company to buy the premiums
reinsured to CNA. Regardless of the method of takeout of CNA, CNA must not
compete in MPCI or crop hail for a period of time. There was no purchase price.
The formula for the buyout in the year 2000 is based on a multiple of average
pre-tax earnings that CNA received from reinsuring the Company's book of
business.
Nonstandard Automobile Insurance Operations
The Company, through its wholly-owned subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks". Nonstandard insureds are those
individuals who are unable to obtain insurance coverage through standard market
carriers due to factors such as poor premium payment history, driving
experience, record of prior accidents or driving violations, particular
occupation or type of vehicle. The Company offers several different policies
which are directed towards different classes of risk within the nonstandard
market. Premium rates for nonstandard risks are higher than for standard risks.
Since it can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when the standard coverage becomes more restrictive. Nonstandard policies
have relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers.
6
Crop Insurance Operations
General
The two principal components of the Company's crop insurance business are
Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop hail
insurance. Crop insurance is purchased by farmers to reduce the risk of crop
loss from adverse weather and other uncontrollable events. Farms are subject to
drought, floods and other natural disasters that can cause widespread crop
losses and, in severe cases, force farmers out of business. Historically, one
out of every twelve acres planted by farmers has not been harvested because of
adverse weather or other natural disasters. Because many farmers rely on credit
to finance their purchases of such agricultural inputs as seed, fertilizer,
machinery and fuel, the loss of a crop to a natural disaster can reduce their
ability to repay these loans and to find sources of funding for the following
year's operating expenses.
The Company, like other private insurers participating in the MPCI program,
generates revenues from the MPCI program in two ways. First, it markets, issues
and administers policies, for which it receives administrative fees; and second,
it participates in a profit-sharing arrangement in which it receives from the
government a portion of the aggregate profit, or pays a portion of the aggregate
loss, in respect of the business it writes. The Company writes MPCI and crop
hail insurance through 2,007 independent agencies in 43 states.
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary product which
combines the application and underwriting process for MPCI and hail coverages.
This product tends to produce less volatile loss ratios than the stand alone
product since the combined product generally insures a greater number of acres,
thereby spreading the risk of damage over a larger insured area. Approximately
half of the Company's hail policies are written in combination with MPCI.
Although both crop hail and MPCI provide coverage against hail damage, under
crop hail coverages farmers can receive payments for hail damage which would not
be severe enough to require a payment under an MPCI policy. The Company believes
that offering crop hail insurance enables it to sell more policies than it
otherwise would.
In addition to crop hail insurance, the Company also sells insurance against
crop damage from other specific named perils. These products cover specific
crops and are generally written on terms that are specific to the kind of crop
and farming practice involved and the amount of actuarial data available. The
Company plans to seek potential growth opportunities in this niche market by
developing basic policies on a diverse number of named crops grown in a variety
of geographic areas and to offer these policies primarily to large producers
through certain select agents.
AgPI(R) is business interruption insurance that protects businesses that depend
upon a steady flow of a crop (or crops) to stay in business. This protection is
available to those involved in agribusiness who are a step beyond the farm gate,
such as elevator operators, custom harvesters, cotton gins and other processing
businesses that are dependent upon a single supplier of products, (i.e., popping
corn).
These businesses have been able to buy normal business interruption insurance to
protect against on-site calamities such as a fire, wind storm or tornado. But
until now, they have been totally unprotected by the insurance industry if they
encounter a production shortfall in their trade area which limited their ability
to bring raw materials to their operation. AgPI(R) allows the agricultural
business to protect against a disruption in the flow of the raw materials it
depends on. AgPI(R) was formally introduced at the beginning of the 1998 crop
year.
Geo AgPLUS(TM) provides to the farmer measuring, gridding and soil sampling
services combined with fertility maps and the software that is necessary to run
their precision farming program. Grid soil sampling, when combined with
precision farming technology, allows the farmer to apply just the right amount
of fertilization, thus balancing soil nutrients for a maximum crop yield.
Precision farming technology increases the yield to the farmer, reduces the cost
of unnecessary fertilization and enhances the environment by reducing overflows
of fertilization into the ecosystem. Geo AgPLUS(TM) is an IGF Insurance Company
trademarked precision farming division that is now marketing its fee based
services to the farmer.
Certain Accounting Policies for Crop Insurance Operations
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from the more traditional property and casualty insurance
lines. For income statement purposes under generally accepted accounting
principles, gross premiums written consist of the aggregate amount of MPCI
premiums paid by farmers for buy-up coverage (MPCI coverage in excess of CAT
7
Coverage - the minimum available level of MPCI Coverage), and any related
federal premium subsidies, but do not include MPCI premium on CAT Coverage. By
contrast, net premiums written do not include any MPCI premiums or subsidies,
all of which are deemed to be ceded to the Federal Crop Insurance Corporation
(FCIC) as a 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 law and the FCIC. For generally accepted accounting
principles 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.
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 ("Buy-Up Expense Reimbursement Payment") and (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"). For 1998 and 1997, the Buy-Up
Expense Reimbursement Payment has been set at 27% and 29%, respectively, of the
MPCI Premium. For generally accepted accounting principles income statement
purposes, the Buy-Up Expense Reimbursement Payment is treated as a contribution
to income and reflected as an offset against policy acquisition and general and
administrative expenses. The CAT LAE Reimbursement Payment is, 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 June 1998, the United States Congress passed legislation which provided
permanent funding for the crop insurance industry. However, beginning with the
1999 crop year, the Buy-Up Expense Reimbursement Payment was reduced to 24.5%,
the CAT LAE Reimbursement Payment was reduced to 11% and the $60 CAT coverage
fee will no longer go to the insurance companies.
The Company expects to more than offset these reductions through growth in fee
income from non-federally subsidized programs such as AgPI(R) and Geo AgPLUS(TM)
initiated in 1998. The Company has also been working to reduce its costs. While
the Company fully believes it can more than offset these reductions, there is no
assurance the Company will be successful in its efforts or that further
reductions in federal reimbursements will not continue to occur.
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, 20% for
the third quarter and 10% for the fourth quarter, (ii) commission expense at the
applicable rate of MPCI gross premiums written recognized and (iii) Buy-Up
Expense Reimbursement at the applicable rate 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 which takes into account actual gross premiums processed.
If an insufficient volume of policies has been processed, the Company'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. The Company also recognizes the MPCI
underwriting gain or loss during each 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 third and fourth quarters, a reconciliation amount is
recognized for the underwriting gain or loss based on final premium and latest
available loss information.
8
Selected Segment Data of the Company
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate overhead, interest costs and
amortization of intangibles nor does it include the results of operations of
Superior prior to May 1, 1996.
Nonstandard - Automobile Insurance Operations: Year ended December 31,
(in thousands, except ratios) 1998 1997 1996
Gross premiums written $303,737 $323,915 $187,176
======= ======= =======
Net premiums written $269,741 $256,745 $186,579
======= ======= =======
Net premiums earned $264,022 $251,020 $168,746
Fee income 16,431 15,515 7,578
Net investment income 11,958 10,969 6,489
Net realized capital gain (loss) 4,124 9,462 (1,014)
------- ------- -------
Total Revenues 296,535 286,966 181,799
------- ------- -------
Losses and loss adjustment expenses 217,916 195,900 124,385
Policy acquisition and general and administrative expenses 73,346 72,463 46,796
------- ------- -------
Total Expenses 291,262 268,363 171,181
------- ------- -------
Earnings before income taxes $5,273 $18,603 $10,618
======= ======= =======
GAAP RATIOS (Nonstandard Automobile Only)
Loss and LAE ratio 82.5% 78.0% 73.7%
Expense ratio, net of billing fees 21.6% 22.7% 23.2%
----- ----- -----
Combined ratio 104.1% 100.7% 96.9%
===== ===== =====
Crop Insurance Operations:
Gross premiums written $243,026 $126,401 $110,059
======= ======= =======
Net premiums written $62,467 $20,796 $23,013
======= ======= =======
Net premiums earned $60,901 $20,794 $23,013
Fee income 3,772 2,276 1,672
Net investment income 275 191 181
Net realized capital gain (loss) 217 (18) (1)
------- ------- ------
Total Revenues 65,165 23,243 24,865
------- ------- ------
Losses and loss adjustment expenses 52,550 16,550 12,724
Policy acquisition and general and administrative expenses (1) 21,906 (14,404) (6,095)
Interest and amortization of intangibles 502 235 551
------- ------- ------
Total Expenses 74,958 2,381 7,180
------- ------- ------
Earnings (loss) before income taxes $(9,793) $20,862 $17,685
======= ======= =======
Statutory Capital and Surplus:
Pafco $16,275 $19,924 $18,112
IGF $31,234 $42,809 $29,412
Superior $57,571 $65,146 $57,121
(1) Negative crop expenses are caused by inclusion of MPCI expense
reimbursements and underwriting gain.
9
[photograph of automobiles and crop field down left side]
Results of Operations
Overview
1998 Compared To 1997
The Company recorded a net loss of $(14,417,000) or $(1.39) per share (basic)
compared to net earnings of $16,305,000 or $1.56 per share in 1997. The loss in
1998 was due to reduced earnings in both crop and nonstandard automobile
operations. Results for 1998 for the crop operations were significantly impacted
by catastrophic crop hail losses primarily from Hurricane Bonnie and other
weather related events of approximately $14 million pre-tax. Contributing to the
lower results were higher than expected commission and integration costs related
to the CNA transaction of approximately $3.0 million pre-tax and a lower
underwriting gain on MPCI (11.2% in 1998 versus 25.0% in 1997) due primarily to
severe drought conditions in certain parts of the country, overly wet conditions
in other parts of the country and higher frequency of Crop Revenue Coverage
("CRC") claims due to extremely low commodity prices. Results for 1998 for the
nonstandard automobile operations were impacted by a higher loss ratio and lower
premium volume. These were the result of problems encountered with timely rate
filings, implementation of the Company's new operating system and competitive
pressure. The Company also increased loss reserves for prior accident years by
approximately $13.0 million in 1998 due to adverse loss development.
1997 Compared To 1996
The Company recorded net earnings of $16,305,000 or $1.56 per share (basic),
respectively in 1997. This is approximately a 23.0% increase in net earnings
from 1996 comparable amounts of $13,256,000 or $1.76 per share (basic). The
reduction in earnings per share reflects the increase in the weighted average
shares outstanding from the Company's IPO in November 1996. The nonstandard
automobile insurance segment demonstrated improved earnings due to continued
premium growth, improved expense ratios and higher realized gains from
investment sales. Premium growth in nonstandard automobile was generated from
increased pressure on uninsured motorists to obtain insurance, expansion into
new states and increased market share penetration. During 1997, the Company
increased nonstandard auto reserves for prior accident years by approximately
$10 million due to adverse loss development. The improvement in crop insurance
earnings relates to growth in market share and favorable underwriting results.
Growth in market share occurred in all product lines for crop and is the result
of improved marketing and agent service efforts. Record underwriting results
were due to favorable crop conditions and continued improvement in risk
selection.
Years Ended December 31, 1998 and 1997
Gross Premiums Written
Consolidated Gross Premiums Written increased 20.1% in 1998 due to growth in the
crop operations from the integration of CNA, internal growth and introduction of
a new product line, AgPI(R). Crop Gross Premiums Written increased 92.3% in 1998
from 1997.
The following represents the breakdown of crop Gross Premiums Written by line:
1998 1997
CAT imputed $50,127 $33,294
MPCI 157,225 88,052
Crop hail 76,198 38,349
Named perils 2,074 -
AgPI(R) 7,529 -
------- -------
293,153 159,695
Less CAT imputed (50,127) (33,294)
------- -------
Total $243,026 $126,401
======= =======
Nonstandard automobile Gross Premiums Written decreased 6.2% in 1998 as compared
to 1997 due primarily to reduced volume in the states of Florida and California
for the reasons previously cited. Remaining Gross Premiums Written represent
commercial business which is ceded 100% to an affiliate, Granite Re.
10
Net Premiums Written
Net Premiums Written increased in 1998 as compared to 1997 due to the growth in
Gross Premiums Written offset by quota share reinsurance.
In 1998, the Company ceded 10% of its nonstandard automobile premiums as part of
a quota share treaty. This treaty and all previous quota share treaties for 1997
and 1998 were commuted effective October 1, 1998 with the Company receiving back
the unearned premiums on those treaties as of that date and their respective
loss reserves. For the first three quarters of 1997, the Company ceded 20% of
nonstandard automobile premiums and ceded 25% of such premiums in the fourth
quarter of 1997. In 1998, the Company ceded 25% of its crop hail premiums as
part of a quota share treaty as compared to 40% in 1997. Named peril premiums
were ceded at a 50% rate in both 1998 and 1997 under a quota share treaty.
Net Premiums Earned
Net Premiums Earned increased in 1998 as compared to the prior year reflecting
growth in Gross and Net Premiums Written. The ratio of Net Premiums Earned to
Net Premiums Written for the nonstandard automobile segment was 97.9% in 1998 as
compared to 97.8% in 1997.
Fee Income
Fee income increased 13.4% in 1998 compared to 1997. Fee income on nonstandard
automobile operations increased as a result of higher fees as a percentage of
gross premiums written, 5.41% in 1998 and 4.79% in 1997, offset by lower premium
volume. Crop fees primarily include CAT fees. CAT fees increased in 1998 as
compared to 1997 due to growth in premium volume. Fees in 1998 also increased
due to introduction of Geo AgPLUS(TM) and other processing fees.
Net Investment Income
Net investment income increased 8.1% in 1998 compared to 1997. Such increase was
due to greater invested assets offset somewhat by declining yields due to market
conditions.
Net Realized Capital Gains
Capital transaction activity primarily reflects activity in the Company's equity
portfolio. The higher level of gains in 1997 reflects the strong market
conditions during that year. Gains decreased in 1998 as a result of market
conditions. In the fourth quarter of 1998, the Company significantly reduced its
exposure to equities reflecting the Company's concern with the market and its
desire to increase investment income.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was 82.5% for 1998
as compared to 78.0% for 1997. The Crop Hail Loss and LAE Ratio was 79.4% in
1998 compared to 75.1% in 1997. The increase in the Loss and LAE Ratio for the
nonstandard automobile segment reflects adverse development on prior years of
approximately 5.0%. The Company estimates its nonstandard automobile 1998
accident year loss ratio was 77.5% as compared to 76.1% in accident year 1997.
The increase in the accident year loss ratio results from product and pricing
decisions and increases in frequency in certain product lines. The increase in
the Crop Hail Loss and LAE Ratio includes $10.7 million for the effects of
catastrophic events net of reinsurance recoveries. The Crop Hail Loss and LAE
Ratio prior to reinsurance recoveries was 100.6%. The named perils loss ratio
was 100% and the AgPI(R) loss ratio was 100% in 1998 due to losses on certain
coverages due to unusual weather related events estimated to be $3.3 million.
11
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $96,876,000 or 29.8%
of Net Premiums Earned in 1998 compared to $59,778,000 or 22.0% of Net Premiums
Earned for 1997. The increase in the Company's overall expense ratio reflects
certain changes in the Company's crop operations as follows:
1998 1997
MPCI expense reimbursements $(37,982) $(24,788)
MPCI underwriting gain, net of stop loss
and CNA reinsurance in 1998 (14,902) (26,589)
Commissions 50,089 25,713
Ceding commission income (6,899) (5,030)
Operating expenses 31,600 16,290
------ ------
$21,906 $(14,404)
====== ======
MPCI expense reimbursements declined to 24.2% of MPCI premiums for 1998 as
compared to 28.2% in 1997 due to federally mandated reductions. The MPCI
underwriting gain, net of stop loss costs, decreased to 9.5% of CAT and MPCI
premiums in 1998 (after adding back CNA share of $4,861,000 in 1998) compared to
21.9% in 1997 due to severe drought in certain sections of the country and
overly wet conditions in other sections of the country. The Company considers
the 1998 underwriting gain to be well below average while the 1997 gain was well
above average. Commission expense as a percentage of gross written premiums
(including CAT) increased in 1998 to 17.1% of gross written premiums compared to
16.1% in 1997 due to the integration of CNA and competitive industry pressure.
Ceding commission income increased in 1998 compared to 1997 due to a increase in
ceded premiums. Operating expenses as a percentage of gross written premiums
(including CAT) increased in 1998 to 10.8% compared to 10.2% 1997. Operating
expenses in 1998 include $3 million, or 1.0% of gross written premiums
(including CAT), of one time costs primarily related to the integration of CNA.
Operating expenses in 1998 also include a $3.2 million reserve, or 1.1% of gross
written premiums (including CAT), for potential processing errors during 1998 on
assumed premiums from CNA.
Nonstandard automobile expenses net of fee income were 21.6% of earned premiums
in 1998 compared to 22.7% in 1997.
Amortization of Intangibles
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest portion of
GGSH and the acquisition of NACU, debt or preferred security issuance costs and
organizational costs. The increase in 1998 over 1997 reflects a full year's
impact of amortization of goodwill associated with the purchase of the minority
interest position in GGSH and a full year's amortization of deferred issuance
costs on the Preferred Securities.
Interest Expense
Interest expense in 1998 represents the crop segment's borrowings on its
seasonal line of credit. Interest expense for 1997 includes both interest for
the crop segment and interest on the GGSH Senior Credit Facility which was
repaid in 1997 from the proceeds of the Preferred Securities Offering.
Income Tax Expense (Benefit)
The variance in the rate from the federal statutory rate of 35% is primarily due
to nondeductible goodwill amortization.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at 9.5% net of federal
income taxes from the offering date of August 12, 1997.
12
Years Ended December 31, 1997 and 1996
Gross Premiums Written
Consolidated Gross Premiums Written increased 50.8% in 1997 due to
growth in both the nonstandard auto and crop segments. Gross Premiums Written
for the nonstandard auto segment increased 73.1% in 1997. While a portion of
this increase relates to four additional months of premium in 1997 of Superior,
additional premium growth relates to internal growth due to improved service,
certain product improvements, tougher uninsured motorist laws in states such as
California and Florida and entrance into new states such as Nevada and Oregon.
Such increase was primarily due to volume rather than rate increases, although
the Company adjusts rates on an ongoing basis. Gross Premiums Written for the
crop segment increased 14.8% in 1997. Such increase was due to continued
industry privatization and aggressive marketing efforts, resulting in continued
increase in market share. Remaining gross written premiums represent commercial
business which is ceded 100% to an affiliate.
Net Premiums Written
Net Premiums Written increased in 1997 as compared to 1996 due to
the growth in Gross Premiums Written offset by quota share reinsurance.
For the first three quarters of 1997 the Company ceded 20% of
nonstandard automobile premiums and ceded 25% of such premiums in the fourth
quarter. No such treaty was in effect during 1996. In 1997, the Company ceded
40% of crop hail premiums as part of a quota share treaty. In 1996, crop hail
premiums were ceded at a rate of 10%.
Net Premiums Earned
Net Premiums Earned increased in 1997 as compared to the prior
year, reflecting the strong growth in Gross Written Premiums offset by the
effects of the nonstandard automobile and crop hail quota share treaties. The
ratio of Net premiums earned to Net premiums written for the nonstandard
automobile segment was 97.8% in 1997 as compared to 90.4% in 1996. The increase
in the earned ratio is due to higher premium growth earlier in 1997.
Fee Income
Fee income increased $8,535,000 in 1997 compared to 1996. Such
increase was due to billing fee income on nonstandard automobile business from
an increase in in-force policy count. There was also an increase in the receipt
of CAT Coverage Fees and CAT LAE Reimbursement Payments due to higher premium
volume.
Net Investment Income
Net investment income increased $4,714,000 in 1997 compared to
1996. Such increase was due partially to four additional months of investment
income from Superior, but also due to greater invested assets resulting from
premium growth and higher profitability.
Net Realized Capital Gains (Loss)
Realized gains of $9,444,000 in 1997 were due to the significant
strength of the equity markets in 1997 and the Company's position to realize
gains as securities had reached targeted pricing levels.
Losses and LAE
The Loss and LAE Ratio for the nonstandard automobile segment was
78.0% for 1997 as compared to 73.7% for 1996. The Crop Hail Loss and LAE Ratio
in 1997 was 75.1% compared to 59.2% in 1996. The increase in the Loss and LAE
Ratio for the nonstandard automobile segment reflects the growth in premium
volume in an effort to increase market share and improve economies of scale,
increased physical damage severity costs and certain pending rate increases.
Deficient reserve development was approximately $10 million in 1997. The
increase in the crop hail loss ratio was the result of storm damage in the third
quarter in certain eastern states on new business obtained in 1997.
13
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses
increased as a result of the increased volume of business produced by the
Company. Policy acquisition and general and administrative expenses rose to
$59,778,000 or 22.0% of Net Premiums Earned for 1997 compared to $42,013,000 or
21.9% of Net Premium Earned in 1996. Such increase was due to a higher mix of
nonstandard automobile premiums in 1997 as compared to 1996. The Expense Ratio,
net of billing fees, for the nonstandard automobile segment improved to 22.7%
for 1997 as compared to 23.2% for 1996.
Due to the accounting for the crop insurance segment, operating
expenses for 1997 includes a contribution to earnings of $14,404,000 as compared
to $6,095,000 for 1996. Such increase was due to greater Buy-up Expense
Reimbursement Payments and MPCI underwriting gain due to increased premium
volumes and more favorable underwriting results.
Amortization of Intangibles
The increase in 1997 over 1996 reflects the effects of the
Preferred Securities Offering and the purchase of the minority interest position
in GGSH.
Interest Expense
Interest expense primarily represents interest incurred since
April 30, 1996 on the GGS Senior Credit Facility. The GGS Senior Credit Facility
was repaid with the proceeds from the Preferred Securities Offering.
Income Tax Expense
Income tax expense was 35.3% of pre-tax income for 1997 as compared to
33.9% in 1996. The increased rate is due to the higher amount of nondeductible
goodwill amortization expense.
Distributions on Preferred Securities
Distributions on Preferred Securities are calculated at a rate of
9.5% net of federal income taxes from the offering date of August 12, 1997.
Liquidity and Capital Resources
The primary source of funds available to the Company are dividends
from its primary subsidiaries, IGF, IGF Holdings and GGS Management. The Company
also receives $150,000 quarterly pursuant to an administration agreement with
IGF to cover the costs of executive management, accounting, investing,
marketing, data processing and reinsurance.
GGS Management collects billing fees charged to policyholders of
Pafco and Superior who elect to make their premium payments in installments. GGS
Management also receives management fees under its management agreement with
Pafco and Superior. When the Florida Department of Insurance ("Florida
Department") approved the acquisition of Superior by GGS Holdings, it prohibited
Superior from paying any dividends (whether extraordinary or not) for four years
from the date of Acquisition without the prior written approval of the Florida
Department. Extraordinary dividends, within the meaning of the Indiana Insurance
Code, cannot be paid by Pafco without the prior approval of the Indiana
Insurance Commissioner. The management fees charged to Pafco and Superior by GGS
Management are subject to review by the Indiana and Florida Departments of
Insurance.
The nonstandard automobile insurance subsidiaries' primary source
of funds are premiums, investment income and proceeds from the maturity or sale
of invested assets. Such funds are used principally for the payment of claims,
operating expenses (primarily management fees), commissions, dividends and the
purchase of investments. There is variability to cash outflows because of
uncertainties regarding settlement dates for liabilities for unpaid losses.
Accordingly, the Company maintains investment programs intended to provide
adequate funds to pay claims without forced sales of investments. As claim
payments tend to lag premium receipts and due to the growth in premium volume,
the Company has experienced an increase in its investment portfolio and has not
experienced any problems with meeting its obligations for claims payments or
management fees.
As of December 31, 1998, IGF has the ability to pay $3,123,000 in
dividends without prior regulatory approval.
14
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 in full to the FCIC by the
Company, with interest, if not paid by a specified date in each crop year.
During 1998, 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 is $12,000,000. The IGF Revolver carried a weighted
average interest rate of 8.6%, 8.75% and 6.96% in 1996, 1997 and 1998,
respectively. 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 minus 1.00% in 1998 (prime rate plus
.25% in 1997), 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 (i) restricts IGF's ability to accumulate common stock, (ii) sets minimum
standards for investments and policyholder surplus and (iii) limits ratio of net
written premiums to surplus. 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, 1998, IGF had borrowed
the full amount available.
On August 12, 1997, the Company issued $135 million in Trust
Originated Preferred Securities (the "Preferred Securities Offering") at a rate
of 9.5% paid semi-annually. These Preferred Securities were offered through a
wholly-owned trust subsidiary of the Company and are backed by Senior
Subordinated Notes to the Trust from the Company. The proceeds of the Preferred
Securities Offering were used to repurchase the remaining minority interest in
GGSH for $61 million, repay the balance of the GGS Senior Credit Facility of
$44.9 million and contribute $10.5 million to the nonstandard automobile
insurers with the balance held for general corporate purposes. Expenses of the
issue aggregated $5.1 million and are amortized over the term of the Preferred
Securities (30 years). In the third quarter of 1997, the Company wrote off the
remaining unamortized costs of the GGS Senior Credit Facility of approximately
$1.1 million pre-tax or approximately $0.07 per share (basic) as an
extraordinary item.
The Preferred Securities have a term of 30 years with semi-annual
interest payments commencing February 15, 1998. The Preferred Securities may be
redeemed in whole or in part after 10 years.
The Preferred Security obligations of approximately $13 million
per year is funded from the Company's nonstandard automobile management company
and dividend capacity from the crop operations. The nonstandard auto funds are
the result of management and billing fees in excess of operating costs. For
calendar 1998 and 1997, the coverage ratio of nonstandard automobile cash flows
to Preferred Security costs was 2.1x and 2.2x, respectively. Coverage from the
Company's crop operations entailed a dividend capacity of $13.4 million in 1998
that will reduce to approximately $3.1 million in 1999 as a result of the
Company's operations and statutory limitations. The Company also has
approximately $10 million in excess funds for debt service. Surplus needs at the
insurance companies will be handled primarily by reinsurance for which the
Company believes it has good relationships and numerous alternatives. The
Company believes it can continue to meet its obligations in 1999 and that
coverage will increase through higher nonstandard automobile premium volumes and
more profitable crop operations.
The Trust Indenture for the Preferred Securities contains certain
preventative covenants. These covenants are based upon the Company's
Consolidated Coverage Ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA) whereby if the Company's EBITDA falls below 2.5 times
Consolidated Interest Expense (including Preferred Security distributions) for
the most recent four quarters the following restrictions become effective:
o The Company may not incur additional Indebtedness or guarantee additional
Indebtedness.
o The Company may not make certain Restricted Payments including loans for
advances to affiliates, stock repurchases and a limitation on the amount
of dividends is inforce.
o The Company may not increase its level of Non-Investment Grade Securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
15
These restrictions currently apply as the Company's Consolidated
Coverage Ratio was (.15x) in 1998, and will continue to apply until the
Company's Consolidated Coverage Ratio is in compliance with the terms of the
Trust Indenture. This does not represent a Default by the Company on the
Preferred Securities. The Company is in compliance with these preventative
covenants as of December 31, 1998.
Net cash provided by operating activities in 1998 aggregated
$15,328,000 compared to $15,945,000 in 1997 due to reduced cash provided by
operations as a result of the net loss offset primarily by funds provided by the
commutation of the nonstandard automobile quota share treaty.
Net cash used in investing activities decreased from $106,164,000
in 1997 to $15,650,000 in 1998. Such decrease was due to the purchase of
minority interest in 1997 and less investing activities in 1998 due to lower
earnings offset by increased fixed asset expenditures from continued
technological improvements and the purchase of a new building for the crop
operations and the purchase of NACU. In 1998, financing activities provided cash
of $3,846,000 compared to $88,400,000 in 1997. Such decrease was due to the
proceeds of the Preferred Securities Offering in 1997 net of payments on term
debt and increased borrowings on the seasonal crop line of credit due to hail
losses and use of cash for loans to affiliates and repurchase of stock.
Net cash provided by operating activities in 1997 aggregated
$15,945,000 compared to $10,003,000 in 1996. This increase in funds provided was
caused by continued premium growth which results in increased cash flows as loss
payments lag receipt of premiums. Net cash used in investing activities
increased from $92,769,000 in 1996 to $106,164,000 in 1997 reflecting investment
of remaining proceeds from the Preferred Securities Offering and cash flow from
operations. In 1997, financing activities provided cash of $88,400,000 compared
to cash provided of $93,550,000 in 1996, with funds in 1997 primarily from the
Preferred Securities Offering while funds provided in 1996 were primarily from
the financing of the acquisition of Superior.
The Company believes cash flows in the nonstandard automobile
segment from premiums, investment income and billing fees are sufficient to meet
that segment's obligations to policyholders, operating expenses and debt service
for the foreseeable future. This is due primarily to the lag time between
receipt of premiums and claims payments. Therefore, the Company does not
anticipate additional borrowings for this segment other than in the event of an
acquisition. The Company also believes cash flows in the crop segment from
premiums and expense reimbursements are sufficient to meet the segment's
obligations for the foreseeable future. Due to the more seasonal nature of the
crop segment's operations, it may be necessary to obtain short term funding at
times during a calendar year by drawing on an existing line of credit. Except
for this short term funding and normal increases therein resulting from an
increase in the business in force, the Company does not anticipate any
significant short or long term additional borrowing needs for this segment.
Accordingly, while there can be no assurance as to the sufficiency of the
Company's cash flow in future periods, the Company believes that its cash flow
will be sufficient to meet all of the Company's operating expenses and debt
service for the foreseeable future and, therefore, does not anticipate
additional borrowings except as may be necessary to finance acquisitions.
While GAAP shareholders' equity was $61,995,000 at December 31,
1998, 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, 1998 of $16,275,000, $57,571,000 and
$31,234,000, respectively.
Effects of Inflation
Due to the short term that claims are outstanding in the two
product lines the Company underwrites, inflation does not pose a significant
risk to the Company.
Primary Differences Between GAAP and SAP
The financial statements contained herein have been prepared in
conformity with Generally Accepted Accounting Principles ("GAAP") which differ
from Statutory Accounting Practices ("SAP") prescribed or permitted for
insurance companies by regulatory authorities in the following respects: (i)
certain assets are excluded as "Nonadmitted Assets" under statutory accounting;
(ii) costs incurred by the Company relating to the acquisition of new business
are expensed for statutory purposes; (iii) the investment in wholly-owned
subsidiaries is consolidated for GAAP rather than valued on the statutory equity
method. The net income or loss and changes in unassigned surplus of the
subsidiaries is reflected in net income for the period rather than recorded
directly to unassigned surplus; (iv) fixed maturity investments are reported at
amortized cost or market value based on their National Association of Insurance
Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment
expenses and unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes; (vi) deferred income taxes are not
recognized on a statutory basis; and (vii) credits for reinsurance are recorded
only to the extent considered realizable.
16
New Accounting Standards
In 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." There was no material impact on the
consolidated financial statements from adoption of these statements. Refer to
Note 1 to the Company's "Consolidated Financial Statements."
On March 4, 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position No. 98-1 (SOP 98- 1), "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 was
issued to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized. SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
The Company will adopt the new requirements of the SOP in 1999. Management has
not completed its review of SOP 98-1, but does not anticipate that the adoption
of this SOP will have significant effect on net earnings during 1999.
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 March 31, 1999, 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 consistent with this methodology for comparability. The
Company cannot predict what accounting methodology will eventually be
implemented or when the Company will be required to adopt such methodology. The
Company anticipates that any such new crop accounting methodology will not
affect GAAP net income.
In 1998, the National Association of Insurance Commissioners
("NAIC") adopted the Codification of Statutory Accounting Principles guidance,
which will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC is now considering
amendments to the Codification guidance that would also be effective upon
implementation. The NAIC has recommended an effective date of January 1, 2001.
The Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas.
It is not known whether the Indiana and Florida Insurance
Departments will adopt the Codification, and whether the Departments will make
any changes to the guidance. The Company has not estimated the potential effect
of the Codification guidance if adopted by the Departments. However, the actual
effect of adoption could differ as changes are made to the Codification
guidance, prior to its recommended effective date of January 1, 2001.
Impact of the Year 2000 Issue
The Year 2000 Project ("Project") is addressing the inability of
computer software and hardware to distinguish between the year 1900 and the year
2000. In 1996, the Company began a company-wide replacement of hardware and
software systems to address this and other issues. This replacement is using
systems from Dell, Hewlett Packard, Sun Systems, Compaq, Oracle and ZIM as well
as some software conversions using Java. The new hardware is in place and
operational at all subsidiaries. The software systems are in place in our
nonstandard auto operations and are being implemented on a state-by-state basis.
The Company began implementing the new nonstandard auto operating system in
those states in which the Company writes annual policies (annual states). 100%
of those annual states are currently in production. The remaining non-annual
states are scheduled to be completed by June 30, 1999. The Y2K issue does not
have an effect on the crop operations until October 1, 1999. The Company is
converting non-compliant crop systems, through programmatic means, into a Y2K
compliant environment. The crop operations are at 70% of completion for this
conversion and are scheduled to be completed by the end of June 1999. A number
of the Company's other IT projects are being delayed or completely eliminated
due to the implementation of the Project. Additionally, the Company continues to
experience certain processing concerns related to its nonstandard automobile
operating system. The delay and/or elimination of these projects and the current
processing concerns has caused or could cause a loss of market share in the
nonstandard auto market.
Project
The Company has divided the Project into three
sections-Infrastructure, Applications/Business Systems and Third Party
Suppliers. There are common portions of each of these divisions which are: (1)
identifying Y2K items; (2) assigning a priority for those items identified; (3)
repairing or replacing those items; (4) testing the fixes; and (5) designing a
contingency and business continuation plan for each subsidiary.
17
In February 1998, all items had been identified and the plans for
replacement or repair were proposed to management. These plans were approved and
the process began.
The infrastructure section of the Project was quickly implemented
and tested by the Company's IT staff and has been completed since May of 1998.
All desktop, mini and midrange systems as well as phone switches, phones and
building security systems have been tested for Y2K compliance. Any new systems
required by the Company are being tested and certified prior to purchase with
completion by June 30, 1999. Two mainframes being used by the Company are not
Y2K certified or compliant. These machines have been replaced by Sun and HP
compliant systems and are being kept in production until new applications are
put in place on the new machines.
The applications systems section of the Project includes: (1) the
replacement of nonstandard auto companies Policy Administration and Claims
systems; (2) the conversion of crop operations systems in total; and (3)
replacement of non-compliant business systems company-wide (this includes
wordprocessors, network operating systems, spreadsheet programs, presentation
systems, etc.).
The Company had already made the decision to transition off all of
its nonstandard auto legacy systems and this process had been in work since
1996. These systems are Y2K compliant and are scheduled for completion by the
end of June 30, 1999. The conversion of crop systems began in August 1998 and is
scheduled for completion by the end of June 1999. Business systems are being
replaced as vendors certify their compliance. The Company is at 75% compliance
in this area.
The Company relies on third party vendors for investments,
reinsurance treaties and banking. The Company began inquiring about Y2K
compliance with its third party vendors beginning in July 1998. To date, all
vendors have replied regarding their compliance efforts. Those that are not in
compliance have until the end of second quarter 1999 to do so, or they will be
replaced.
Costs
The Company considers the cost associated with the Project to be
material. The Company has estimated the total cost to be $5.7 million, the
majority of which has been capitalized as hardware or software costs. The
Company has also incurred substantial costs for carrying two systems including
personnel costs and outside service fees. The component of these costs
specifically associated with Y2K cannot be reasonably estimated. The total
amount expended through December 31, 1998 on all infrastructure and software
upgrades is approximately $4.6 million. The Company expects to spend another
$1.1 million in its efforts to complete the Project. This does not include
additional annual maintenance costs that will be incurred as we move forward.
Funding for these costs will continue to be provided by funds from operations.
The Company believes that the new nonstandard auto system will significantly
enhance service capability and reduce future operating costs.
Risks
Failure to correct the Y2K problem through efficient and timely
implementation of the Company's new operating system could cause a failure or
interruption of normal business operations. These failures could materially
affect the Company's operational results, financial condition and liquidity
through reduction of premium volume and an increase in operating costs as a
percentage of premium volume or deterioration of loss experience. Due to the
nature of the Y2K problem, the Company is uncertain whether it will have a
material affect or the potential magnitude of any financial impact. The Company
believes that the possibility of significant business interruptions should be
reduced by successful implementation of the Project.
18
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1998 and 1997
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
ASSETS 1998 1997
ASSETS:
Investments:
Available for sale:
Fixed maturities, at market $191,002 $169,385
Equity securities, at market 13,264 35,542
Short-term investments, at amortized cost, which approximates market 15,597 8,871
Mortgage loans, at cost 2,100 2,220
Other invested assets 890 500
------- -------
TOTAL INVESTMENTS 222,853 216,518
Investments in and advances to related parties 3,545 839
Cash and cash equivalents 14,800 11,276
Receivables (net of allowance for doubtful accounts of
$6,393 in 1998 and $1,993 in 1997) 120,559 91,730
Reinsurance recoverable on paid and unpaid losses, net 71,640 90,250
Prepaid reinsurance premiums 31,172 36,606
Federal income taxes recoverable 12,672 1,505
Deferred policy acquisition costs 16,332 10,740
Deferred income taxes 5,146 4,722
Property and equipment, net of accumulated depreciation 18,863 12,051
Intangible assets 45,781 43,756
Other assets 6,074 6,300
------- -------
TOTAL ASSETS $569,437 $526,293
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses $200,972 $136,772
Unearned premiums 110,664 114,635
Reinsurance payables 25,484 32,110
Notes payable 13,744 4,182
Distributions payable on preferred securities 4,809 4,801
Other 16,769 20,430
------- -------
TOTAL LIABILITIES 372,442 312,930
------- -------
Minority interest:
Preferred Securities 135,000 135,000
------- -------
Stockholders' equity:
Common stock, no par value, 100,000,000 shares authorized,
10,385,399 and 10,451,667 shares issued and outstanding
in 1998 and 1997, respectively 38,136 39,019
Additional paid-in capital 5,851 5,925
Unrealized gain on investments, net of deferred tax of
$680 in 1998 and $1,008 in 1997 1,261 1,908
Retained earnings 16,747 31,511
------- -------
TOTAL STOCKHOLDERS' EQUITY 61,995 78,363
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $569,437 $526,293
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
19
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
1998 1997 1996
Gross premiums written $553,190 $460,600 $305,499
Less ceded premiums (220,982) (183,059) (95,907)
------- ------- -------
NET PREMIUMS WRITTEN $332,208 $277,541 $209,592
======= ======= =======
NET PREMIUMS EARNED $324,923 $271,814 $191,759
Fee income 20,203 17,821 9,286
Net investment income 12,373 11,447 6,733
Net realized capital gain (loss) 4,341 9,444 (1,015)
------- ------- -------
TOTAL REVENUES 361,840 310,526 206,763
------- ------- -------
Expenses:
Losses and loss adjustment expenses 270,466 212,450 137,109
Policy acquisition and general and
administrative expenses 96,876 59,778 42,013
Interest expense 163 3,158 3,527
Amortization of intangibles 2,379 1,197 411
------- ------- -------
TOTAL EXPENSES 369,884 276,583 183,060
------- ------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST, AND EXTRAORDINARY ITEM (8,044) 33,943 23,703
Income taxes:
Current income tax expense (benefit) (1,706) 13,105 7,982
Deferred income tax expense (benefit) (332) (1,124) 64
------- ------- -------
TOTAL INCOME TAXES (2,038) 11,981 8,046
------- ------- -------
NET EARNINGS (LOSS) BEFORE MINORITY
INTEREST AND EXTRAORDINARY ITEM (6,006) 21,962 15,657
Minority interest:
Earnings in consolidated subsidiary -- (1,824) (2,401)
Distributions on preferred securities,
net of tax (8,411) (3,120) --
------- ------- -------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY
ITEM (14,417) 17,018 13,256
Extraordinary item, net of tax -- (713) --
------- ------- -------
NET EARNINGS (LOSS) $(14,417) $16,305 $13,256
======= ======= =======
Weighted average shares outstanding -
Basic 10,402 10,450 7,537
====== ====== ======
Weighted average shares outstanding -
Fully Diluted 10,708 10,699 7,537
====== ====== ======
Net earnings (loss) per share - Basic $(1.39) $1.56 $1.76
==== ==== ====
Net earnings (loss) per share - Fully
Diluted $(1.39) $1.52 $1.76
==== ==== ====
The accompanying notes are an integral part of the consolidated financial
statements.
20
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
in thousands, except number of shares)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Shares Total
Common Stockholders' Retained
Stock Equity Earnings
BALANCE AT JANUARY 1, 1996 7,000,000 $9,535 $5,450
Comprehensive income:
Net earnings - 13,256 13,256
Change in unrealized gains (losses) on securities - 865 --
------
Comprehensive income - 14,121 --
------
Sale of subsidiary stock - 2,775 -
Issuance of common stock 3,450,000 37,969 -
Dividend to parent -- (3,500) (3,500)
---------- ------ ------
BALANCE AT DECEMBER 31, 1996 10,450,000 60,900 15,206
---------- ------ ------
Comprehensive income:
Net earnings - 16,305 16,305
Change in unrealized gains (losses) on securities - 1,088 -
------
Comprehensive income - 17,393 -
------
Adjustment of offering costs - 50 -
Exercise of stock options 1,667 20 -
---------- ------ ------
BALANCE AT DECEMBER 31, 1997 10,451,667 78,363 31,511
---------- ------ ------
Comprehensive income:
Net earnings (loss) - (14,417) (14,417)
Change in unrealized gains (losses) on securities - (647) -
------
Comprehensive income (loss) - (15,064) -
------
Exercise of stock options 4,332 37 -
Shares acquired (70,600) (1,341) (347)
---------- ------ ------
BALANCE AT DECEMBER 31, 1998 10,385,399 $61,995 $16,747
========== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
21
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
Cash flows from operating activities:
Net earnings (loss) $(14,417) $16,305 $13,256
Adjustments to reconcile net earnings (loss) to net cash provided from
operations:
Minority interest -- 1,824 2,401
Depreciation, amortization and other 5,901 5,136 2,194
Deferred income tax expense (benefit) 326 (1,124) 64
Net realized capital (gain) loss (4,341) (9,444) 1,015
Net changes in operating assets and liabilities (net of assets acquired):
Receivables (8,690) (27,050) (22,673)
Reinsurance recoverable on losses, net 18,610 (41,956) 5,842
Prepaid reinsurance premiums 5,434 (21,624) (8,720)
Federal income taxes recoverable (payable) (11,167) (1,186) (1,270)
Deferred policy acquisition costs (5,592) 2,060 (2,496)
Other assets and liabilities (24,339) 4,999 (15)
Losses and loss adjustment expenses 64,200 35,053 (2,125)
Unearned premiums (3,971) 27,350 24,508
Reinsurance payables (6,626) 25,602 (1,978)
------ ------ ------
NET CASH PROVIDED FROM OPERATIONS 15,328 15,945 10,003
------ ------ ------
Cash flow from investing activities net of assets acquired:
Purchase of minority interest and subsidiaries (3,000) (61,000) (66,590)
Net sales (purchases) of short-term investments (6,726) 694 8,026
Proceeds from sales, calls and maturities of fixed maturities 127,428 224,037 56,903
Purchases of fixed maturities (147,428) (263,560) (73,503)
Proceeds from sales of equity securities 65,916 34,475 19,796
Purchase of equity securities (42,572) (35,358) (34,157)
Net proceeds from (purchases) sales of other investments (3) 210 490
Purchase of property and equipment (9,265) (5,662) (3,734)
------ ------- ------
NET CASH USED IN INVESTING ACTIVITIES (15,650) (106,164) (92,769)
------ ------- ------
Cash flow from financing activities net of assets acquired:
Proceeds from issuance of preferred securities -- 129,947 --
Proceeds from initial public offering, net of expenses -- -- 37,969
Net proceeds (payments) from line of credit 7,855 4,182 (5,811)
Proceeds from/payments made on term debt -- (48,000) 48,000
Proceeds from consolidated subsidiary minority interest owner -- 2,304 21,200
Other investing activities (1,303) 20 (3,500)
Loans from and (repayments to) related parties (2,706) (53) (4,308)
------ ------ ------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 3,846 88,400 93,550
------ ------ ------
Increase (decrease) in cash and cash equivalents 3,524 (1,819) 10,784
Cash and cash equivalents, beginning of year 11,276 13,095 2,311
------ ------ ------
Cash and cash equivalents, end of year $14,800 $11,276 $13,095
====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
22
[HEADER] (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. The Company's
products are marketed through independent agents and brokers and is licensed in
35 states, primarily in the Midwest and Southern United States.
The following is a description of the significant accounting policies and
practices employed:
a. Basis of Presentation: The consolidated financial statements include the
accounts, after intercompany eliminations, of the Company and its wholly-owned
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:
GGS Management, Inc. (GGS)-a management company for the nonstandard
automobile operations;
Superior Insurance Company (Superior)-an insurance company domiciled in
Florida;
Superior American Insurance Company (Superior American)-an insurance company
domiciled in Florida;
Superior Guaranty Insurance Company (Superior Guaranty)-an insurance company
domiciled in Florida;
Pafco General Insurance Company (Pafco)-an insurance company domiciled in
Indiana;
IGF Holdings, Inc. (IGFH)-a holding company for the crop operations which
includes IGF and Hail Plus Corp.;
IGF Insurance Company (IGF)-an insurance company domiciled in Indiana;
North American Crop Underwriters (NACU) - a managing general agency
with exclusive focus on crop insurance.
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 Pafco and the Superior
entities. (See Note 2.)
On April 30, 1996, GGSH acquired the Superior entities through a purchase
business combination. The Company's Consolidated Statement of Earnings for the
year ended December 31, 1996 includes the results of operations of the Superior
entities subsequent to April 30, 1996. (See Note 2.)
On August 12, 1997, the Company acquired the 48% minority interest in GGSH from
Goldman Funds through a purchase business combination. (See Note 2.)
On July 8, 1998, the Company acquired NACU through a purchase business
combination. The Company's Consolidated Statement of Earnings for the year ended
December 31, 1998 includes the results of operations of NACU subsequent to July
8, 1998. (See Note 2.)
b. Use of Estimates: The preparation of financial statements requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known which could impact the amounts
reported and disclosed herein.
c. 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.
23
[HEADER] (Dollars in thousands)
d. Investments: Investments are presented on the following basis:
Fixed maturities and equity 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.
e. 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.
f. 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.
g. 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 straight-line 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.
h. Intangible Assets: Intangible assets consists primarily of goodwill, debt
acquisition costs, and organization costs. Goodwill 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. Organization costs are amortized over five years.
i. 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 loss 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 $9,927 and $8,099 at December 31, 1998 and 1997,
respectively.
j. Preferred Securities: Preferred securities represent Company-obligated
mandatorily redeemable securities of subsidiary holding solely parent debentures
and are reported at their liquidation value under minority interest.
Distributions on these securities are charged against consolidated earnings.
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 basis consistent
with those used in accounting for the original policies and the terms of the
reinsurance contracts.
Premiums ceded to other companies have been reported as a reduction of premium
income.
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 the applicable rate of MPCI gross premiums
written recognized; and (iii) Buy-up Expense Reimbursement at a rate of 27%
24
[HEADER] (Dollars in thousands)
in 1998, 29% in 1997 and 31% in 1996 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. 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. IGF recognizes 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: In 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS 130 requires companies
to disclose comprehensive income in their financial statements. In addition to
items included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the change in
unrealized appreciation (depreciation) of securities. SFAS 131 established new
standards for reporting operating segments, products and services, geographic
areas and major customers. Segments are defined consistent with the basis
management used internally to assess performance and allocate resources.
On March 4, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position No. 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 was issued to address
diversity in practice regarding whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The Company will adopt
the new requirements of the SOP in 1999. Management has not completed its review
of SOP 98-1, but does not anticipate that the adoption of this SOP will have
significant effect on net earnings during 1999.
o. Earnings Per Share: The Company's basic earnings per share calculations are
based upon the weighted average number of shares of common stock outstanding
during each period, as 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 Initial Public
Offering, ("IPO") in accordance with generally accepted accounting principles.
The fully diluted earnings per share for 1997 was computed using actual weighted
average shares outstanding of 10,450,000 plus 249,000 assumed shares from stock
option proceeds based upon the treasury stock method. Due to the net loss in
1998, fully diluted earnings per share is the same as basic earnings per share.
p. Reclassifications: Amounts from prior periods have been reclassified to
conform to the 1998 presentation. Net earnings and stockholders' equity have not
been affected by these reclassifications.
2. Corporate Reorganization and Acquisitions:
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 (Pafco 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, collectively referred to as the "IGF Reorganization".
On January 31, 1996, the Company entered into an agreement (the "Agreement")
with GS Capital Partners II, L.P. to create GGSH, to be owned 52% by the Company
and 48% by the Goldman Funds. In accordance with the Agreement, on April 30,
1996, the Company contributed certain fixed assets and Pafco 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.
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.
25
[HEADER] (Dollars in thousands)
The acquisition of Superior was accounted for as a purchase and recorded as
follows:
Assets acquired $163,605
Liabilities assumed 100,566
-------
Net assets required 63,039
Purchase price 66,590
-------
Excess purchase price 3,551
Less amounts allocated to deferred income
taxes on unrealized gains on investments 1,334
-------
Goodwill $ 2,217
=======
The Company's results from operations for the year ended December 31, 1996
include the results of Superior subsequent to April 30, 1996.
On August 12, 1997, the Company purchased the remaining minority interest in
GGSH for $61 million in cash. The excess of the acquisition price over the
minority interest liability aggregated approximately $36,045 and was assigned to
goodwill as the fair market value of assets and liabilities approximated their
carrying value.
In July 1998, IGFH acquired all of the outstanding shares of common stock of
North American Crop Underwriters ("NACU"), a Henning, Minnesota based managing
general agency which focuses exclusively on crop insurance. The acquisition
price for NACU was $4,000 of which $3,000 was paid in cash and the remaining
$1,000 payable July 1, 2001 without interest.
The acquisition of NACU was accounted for as a purchase and recorded as follows:
Assets acquired $21,035
Liabilities assumed 19,705
------
Net assets acquired 1,330
Purchase price 4,000
------
Excess purchase price (goodwill) $ 2,670
======
The Company's results from operations for the year ended December 31, 1998
include the results of NACU subsequent to July 8, 1998.
3. Public Offerings:
On November 5, 1996, the Company sold 3,000,000 shares at $12.50 per share in an
initial public offering of common stock. An additional 450,000 shares were sold
in December 1996 representing the exercise of the over allotment option. The
Company generated net proceeds, after underwriter's discount and expenses, of
$37,900 from the IPO. The proceeds were used to repay the IGFH Note and Pafco
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 was used for general corporate purposes. After
completion of the IPO, Goran owned 67% of the total common stock outstanding.
Assuming that these transactions, described in Notes 2 and 3, took place
(including the IPO) at January 1, 1996, the pro forma effect of these
transactions on the Company's Consolidated Statements of Earnings is as follows:
1996
(unaudited)
Revenues $250,848
=======
Net income $15,238
======
Net income per common share $1.42
====
Assuming that these transactions took place (including the IPO) at 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
(unaudited)
Net income per common share $1.86
====
26
[HEADER] (Dollars in thousands)
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 IPO whose proceeds were used to pay external indebtedness. The latter
calculation was determined by dividing the aggregate amount of the repayment of
the $7.5 million IGFH Note and the $7.5 million repayment of parent indebtedness
by the IPO price of $12.50 per share.
4. Investments:
Investments are summarized as follows:
Cost or Estimated
Amortized Unrealized Market
December 31, 1998 Cost Gain Loss Value
Fixed Maturities:
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $71,033 $1,956 $(174) $72,815
Foreign governments -- -- -- --
Obligations of states and political subdivisions 6,765 -- (115) 6,650
Corporate securities 110,657 1,579 (699) 111,537
------- ----- ----- -------
TOTAL FIXED MATURITIES 188,455 3,535 (988) 191,002
Equity securities 13,918 755 (1,409) 13,264
Short-term investments 15,597 -- -- 15,597
Mortgage loans 2,100 -- -- 2,100
Other invested assets 890 -- -- 890
------- ----- ----- -------
TOTAL INVESTMENTS $220,960 $4,290 $(2,397) $222,853
======= ===== ===== =======
Cost or Estimated
Amortized Unrealized Market
December 31, 1997 Cost Gain Loss Value
Fixed Maturities:
U.S. Treasury securities and obligations of
of U.S. government corporations and agencies $83,661 $910 $(48) $84,523
Foreign governments 537 11 -- 548
Obligations of states and political subdivisions 1,000 -- -- 1,000
Corporate securities 82,628 746 (60) 83,314
------- ----- ----- -------
TOTAL FIXED MATURITIES 167,826 1,667 (108) 169,385
Equity securities 34,220 4,427 (3,105) 35,542
Short-term investments 8,871 -- -- 8,871
Mortgage loans 2,220 -- -- 2,220
Other invested assets 500 -- -- 500
------- ----- ----- -------
TOTAL INVESTMENTS $213,637 $6,094 $(3,213) $216,518
======= ===== ===== =======
At December 31, 1998, 92.8% 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.
27
[HEADER] (Dollars in thousands)
The amortized cost and estimated market value of fixed maturities at December
31, 1998, 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
Cost Value
Maturity:
Due in one year or less $7,872 $7,937
Due after one year through five years 49,631 50,099
Due after five years through ten years 34,013 35,215
Due after ten years 22,838 23,034
Mortgage-backed securities 74,101 74,717
------- -------
TOTAL $188,455 $191,002
======= =======
Gains and losses realized on sales of investments are as follows:
1998 1997 1996
Proceeds from sales $194,514 $254,470 $76,699
Gross gains realized 10,901 10,639 1,194
Gross losses realized 6,560 1,195 2,209
Net investment income for the years ended December 31 are as follows:
1998 1997 1996
Fixed maturities $11,034 $10,061 $5,714
Equity securities 551 305 756
Cash and short-term investments 1,245 1,385 281
Mortgage loans 173 182 207
Other 32 (39) 76
Total investment income 13,035 11,894 7,034
Investment expenses (662) (447) (301)
------ ------ -----
Net investment income $12,373 $11,447 $6,733
====== ====== =====
Investments with a market value of $14,950 and $24,067 (amortized cost of
$14,726 and $23,913) as of December 31, 1998 and 1997, respectively, were on
deposit in the United States and Canada. The deposits are required by various
insurance departments and others to support licensing requirements and certain
reinsurance contracts, respectively.
28
[HEADER] (Dollars in thousands)
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:
1998 1997 1996
Balance, beginning of year $10,740 $12,800 $2,379
Deferred policy acquisition costs
purchased in the Superior acquisition -- -- 7,925
Costs deferred during year 53,658 57,155 27,657
Amortization during year (48,066) (59,215) (25,161)
------ ------ ------
Balance, end of year $16,332 $10,740 $12,800
====== ====== ======
6. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
1998 Accumulated 1998 1997
Cost Depreciation Net Net
Land $260 $-- $260 $226
Buildings 7,397 1,049 6,348 4,098
Office furniture and equipment 6,172 3,182 2,990 1,813
Automobiles 82 27 55 7
Computer equipment 14,353 5,143 9,210 5,907
------ ----- ------ ------
Total $28,264 $9,401 $18,863 $12,051
====== ===== ====== ======
Accumulated depreciation at December 31, 1997 was $5,409. Depreciation expense
related to property and equipment for the years ended December 31, 1998, 1997
and 1996 were $3,109, $1,764 and $1,783, respectively.
7. Intangible Assets:
Intangible assets at December 31 are as follows:
1998 Accumulated 1998 1997
Cost Depreciation Net Net
Goodwill $41,853 $2,521 $39,332 $37,514
Deferred debt costs 5,131 242 4,889 5,054
Organization costs 2,494 934 1,560 1,188
------ ----- ------ ------
$49,478 $3,697 $45,781 $43,756
====== ===== ====== =====
Accumulated amortization at December 31, 1997 was $1,062. Amortization expense
related to intangible assets for the years ended December 31, 1998, 1997 and
1996 was $2,379, $1,197 and $411, respectively.
29
[HEADER] (Dollars in thousands)
8. Notes Payable:
At December 31, 1998, IGF maintained a revolving bank line of credit in the
amount of $12,000. At December 31, 1998 and 1997, the outstanding balance was
$12,000 and $4,182, respectively. Interest on this line of credit was at the New
York prime rate (7.75% at December 31, 1998) minus 1% adjusted daily. Prior to
December 31, 1997 this rate was adjusted to prime plus .25%. 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 IGF Revolver contains certain
covenants which (i) restricts IGF's ability to accumulate common stock; (ii)
sets minimum standards for investments and policyholder surplus; and (iii)
limits ratio of net written premiums to surplus. At December 31, 1998, IGF was
in compliance with all covenants associated with the line or had received proper
waivers.
The weighted average interest rate on the line of credit was 6.96%, 8.75% and
8.6% during 1998, 1997 and 1996, respectively.
Notes payable at December 31, 1998 also includes a $1,000,000 note due 2001 on
the purchase of NACU at no interest. The balance of notes payable at December
31, 1998 includes three smaller notes (less than $300,000 each) assumed in the
acquisition of NACU due 2002-2006 with periodic payments at interest rates
ranging from 7% to 9.09%.
9. Preferred Securities:
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities") at a rate of 9.5% paid
semi-annually. These Preferred Securities were offered through a wholly-owned
trust subsidiary of the Company and are backed by Senior Subordinated Notes to
the Trust from the Company. These Preferred Securities were offered under Rule
144A of the SEC ("Preferred Securities Offering") and, pursuant to the
Registration Rights Agreement executed at closing, the Company filed a Form S-4
Registration Statement with the SEC on September 16, 1997 to effect the Exchange
Offer. The S-4 Registration Statement was declared effective on September 30,
1997 and the Exchange Offer successfully closed on October 31, 1997. The
proceeds of the Preferred Securities Offering were used to repurchase the
remaining minority interest in GGSH for $61 million, repay the balance of the
term debt of $44.9 million and the Company expects to contribute the balance,
after expenses, of approximately $24 million to the nonstandard automobile
insurers of which $10.5 million was contributed in 1997. Expenses of the issue
aggregated $5.1 million and are amortized over the term of the Preferred
Securities (30 years). In the third quarter of 1997, the Company wrote off the
remaining unamortized costs of the term debt of approximately $1.1 million
pre-tax or approximately $0.07 per share which was recorded as an extraordinary
item.
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1998. The Preferred Securities may be redeemed
in whole or in part after 10 years. The Preferred Security obligations of
approximately $13 million per year is funded from the Company's nonstandard
automobile management company and dividend capacity from the crop operations.
The nonstandard auto funds are the result of management and billing fees in
excess of operating costs.
For calendar 1998 and 1997, the coverage ratio of nonstandard automobile cash
flows to Preferred Security costs was 2.1x and 2.2x, respectively. Coverage from
the Company's crop operations entailed a dividend capacity of $13.4 million in
1998 that will reduce to approximately $3.1 million in 1999 as a result of the
Company's operations and statutory limitations. The Company also has
approximately $10 million in excess funds for debt service.
The Trust Indenture for the Preferred Securities contains certain preventative
covenants. These covenants are based upon the Company's Consolidated Coverage
Ratio of earnings before interest, taxes, depreciation and amortization (EBITDA)
whereby if the Company's EBITDA falls below 2.5 times Consolidated Interest
Expense (including Preferred Security distributions) for the most recent four
quarters the following restrictions become effective:
o The Company may not incur additional Indebtedness or guarantee
additional Indebtedness.
o The Company may not make certain Restricted Payments including loans
or advances to affiliates, stock repurchases and a limitation on the
amount of dividends is inforce.
o The Company may not increase its level of Non-Investment Grade Securities
defined as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply as the Company's Consolidated Coverage Ratio
was (.15x) in 1998, and will continue to apply until the Company's Consolidated
Coverage Ratio is in compliance with the terms of the Trust Indenture. This does
not represent a Default by the Company on the Preferred Securities. The Company
is in compliance with these preventative covenants as of December 31, 1998.
30
[HEADER] (Dollars in thousands)
Assuming the Preferred Securities Offering took place at January 1, 1997, the
proforma effect of this offering on the Company's consolidated statement of
earnings from continuing operations for the year ended December 31, 1997 is as
follows:
Unaudited
(In thousands)
Revenues $313,014
Net earnings from continuing operations $15,314
Net earnings from continuing operations
per common share (fully diluted) $1.43
Proforma results for the Preferred Securities Offerings for 1996 would not be
meaningful due to the Acquisition and IPO in 1996.
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.
10. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
1998 1997 1996
Balance at January 1 $136,772 $101,719 $59,421
Less reinsurance recoverables 51,104 29,459 37,798
------- ------- -------
NET BALANCE AT JANUARY 1 85,668 72,260 21,623
------- ------- -------
Reserves acquired in connection with the
Superior Acquisition -- -- 44,423
Incurred related to:
Current year 257,470 201,118 138,618
Prior years 12,996 10,967 (1,509)
------- ------- -------
TOTAL INCURRED 270,466 212,085 137,109
------- ------- -------
Paid related to:
Current year 167,171 138,111 102,713
Prior years 62,361 60,566 28,182
------- ------- -------
TOTAL PAID 229,532 198,677 130,895
------- ------- -------
NET BALANCE AT DECEMBER 31 126,602 85,668 72,260
Plus reinsurance recoverables 74,370 51,104 29,459
------- ------- -------
BALANCE AT DECEMBER 31 $200,972 $136,772 $101,719
======= ======= =======
Reserve estimates are regularly adjusted in subsequent reporting periods,
consistent with sound insurance reserving practices, as new facts and
circumstances emerge which indicates a modification of the prior estimate is
necessary. The adjustment, referred to as "reserve development," is inevitable
given the complexities of the reserving process and is recorded in the
statements of earnings in the period the need for the adjustments becomes
apparent. The foregoing reconciliation indicates that deficient (redundant)
reserve developments of $12,996, $10,967 and $(1,509) in the December 31, 1998,
1997 and 1996 loss and loss adjustment expense reserves, respectively, emerged
in the following year. The higher than anticipated 1996 and 1997 deficient
reserve development occurred primarily due to volatility in the historical
trends for the nonstandard automobile business as a result of significant growth
during 1996 and 1997. Reserve developments also result from lower or 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
31
[HEADER] (Dollars in thousands)
exposure on both known and unasserted claims. The effects of changes in
settlement costs, inflation, growth and other factors have all been considered
in establishing the current year reserve for unpaid losses and loss adjustment
expenses.
11. Income Taxes:
The Company files a consolidated federal income tax return with its wholly-owned
subsidiaries. GGSH filed a short-period consolidated tax return with its
wholly-owned subsidiaries through July 31, 1997. In 1998, the Company shall file
a consolidated federal income tax return which includes GGSH. Intercompany tax
sharing agreements between the Company 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% to income before income taxes and the income tax
provision is as follows:
1998 1997 1996
Computed income taxes at statutory rate $(2,815) $11,880 $8,296
Dividends received deduction (130) (78) (158)
Goodwill 621 229 --
Other 286 (50) (92)
----- ------ -----
INCOME TAX EXPENSE (BENEFIT) $(2,038) $11,981 $8,046
===== ====== =====
The net deferred tax asset at December 31, 1998 and 1997 is comprised of the
following:
1998 1997
Deferred tax assets:
Unpaid losses and loss adjustment expenses $3,353 $2,974
Unearned premiums and prepaid reinsurance 5,972 5,462
Allowance for doubtful accounts 1,118 698
Net operating loss carryforwards 233 233
Other 1,468 242
------ -----
DEFERRED TAX ASSET 12,144 9,609
------ -----
Deferred tax liabilities:
Deferred policy acquisition costs (5,716) (3,759)
Unrealized gains on investments (680) (1,008)
Other (602) (120)
----- -----
DEFERRED TAX LIABILITY (6,998) (4,887)
----- -----
NET DEFERRED TAX ASSET $5,146 $4,722
===== =====
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
has been established as of December 31, 1998 and 1997 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.
32
[HEADER] (Dollars in thousands)
As of December 31, 1998, the Company has unused net operating loss carryovers
available as follows:
Years ending not later than December 31:
2000 $541
2002 126
---
TOTAL $667
===
Federal income tax filings attributed to the Company have been examined by the
Internal Revenue Service through 1996.
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 $2,939 in 1998 and $1,176 for 1997. Future minimum
lease payments required under these noncancellable operating leases are as
follows:
1999 $3,087
2000 1,522
2001 1,291
2002 1,099
2003 and thereafter 284
-----
TOTAL $7,283
=====
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.
Approximately 54.6% of amounts recoverable from reinsurers are with the FCIC, a
branch of the federal government. Another 34.8% of recoverable amounts are with
Granite Re Insurance Company Ltd. ("Granite Re"), an affiliated foreign
corporation which has not applied for an A.M. Best rating, related primarily to
commercial business which is ceded 100% to Granite Re, which are fully
collateralized. An additional 1.6% 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.
In the fourth quarter of 1998, the Company commuted its nonstandard automobile
quota share reinsurance treaties with an unrelated party at no gain or loss and
completely absolved the reinsurer of all future liabilities.
33
[HEADER] (Dollars in thousands)
On March 2, 1998, the Company announced that it had signed an agreement with CNA
to assume its multi-peril and crop hail operations. CNA wrote approximately $80
million of multi-peril and crop hail insurance business in 1997. The Company
will reinsure a small portion of the Company's total crop book of business
(approximately 22% MPCI and 15% crop hail) to CNA. Starting in the year 2000,
assuming no event of change in control as defined in the agreement, the Company
can purchase the reinsurance from CNA through a call provision or CNA can
require the Company to buy the premiums reinsured to CNA. Regardless of the
method of takeout of CNA, CNA must not compete in MPCI or crop hail for a period
of time. There was no purchase price. The formula for the buyout in the year
2000 is based on a multiple of average pre-tax earnings that CNA received from
reinsuring the Company's book of business.
Reinsurance activity for 1998, 1997 and 1996, which includes reinsurance with
related parties, is summarized as follows:
1998 Direct Assumed Ceded Net
Premiums Written $425,526 $127,664 $(220,982) $332,208
Premiums Earned 426,817 125,045 (226,938) 324,923
Incurred losses and loss adjustment expenses 402,093 127,970 (259,597) 270,466
Commission expenses (income) 65,652 28,900 (85,081) 9,471
1997
Premiums Written $430,002 $30,598 $(183,059) $277,541
Premiums Earned 400,081 33,209 (161,476) 271,814
Incurred losses and loss adjustment expenses 290,712 35,034 (113,296) 212,450
Commission expenses (income) 59,951 7,461 (77,898) (10,486)
1996
Premiums Written $298,596 $6,903 $(95,907) $209,592
Premiums Earned 279,061 6,903 (94,205) 191,759
Incurred losses and loss adjustment expenses 223,879 4,260 (91,030) 137,109
Commission expenses (income) 44,879 3,663 (46,716) 1,826
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were $74,370 and $51,104, as of December 31, 1998 and 1997,
respectively. These amounts are reported gross of the related reserves for
unpaid losses and loss adjustment expenses in the accompanying Consolidated
Balance Sheets.
14. Related Parties:
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with Goran, and its affiliates, Granite
Insurance Company (Granite) and Granite Re, Goran's subsidiaries.
The following balances were outstanding at December 31:
1998 1997
Investments in and advances to related parties:
Nonredeemable, nonvoting preferred stock of Granite $702 $702
Due from directors and officers 1,443 110
Other receivables from related parties 1,400 27
----- ---
$3,545 $839
===== ===
34
[HEADER] (Dollars in thousands)
The following transactions occurred with related parties in the years ended
December 31:
1998 1997 1996
Management fees charged by Goran $-- $-- $139
Reinsurance under various treaties, net:
Ceded premiums earned 21,439 13,537 5,463
Ceded losses and loss adjustment expenses
incurred 14,069 11,876 5,168
Ceded commissions 4,048 3,523 2,620
Consulting fees charged by various related parties 3,134 1,150 872
Interest charged by Goran -- -- 196
Interest charged by Granite Re -- -- 385
In February 1998, GGS Management loaned Granite Re $3,199 payable in February
2002 with interest due semiannually at 6.8% to be used as collateral for
reinsurance transactions. At December 31, 1998, the amount outstanding on this
loan was $1,302. The amounts due from officers and directors is composed
substantially of interest bearing loans with definitive principal repayment
schedules. The Company paid $2,832,000, $1,034,000 and $692,000 in 1998, 1997
and 1996, respectively, for consulting and other services relative to the
conversion to the Company's new non-standard automobile operating system. The
Company has capitalized these costs as part of its new non-standard automobile
operating system. Approximately 90% of these payments are for services provided
by consultants and vendors unrelated to the Company. Stargate Solutions
("Stargate") manages the work of each unrelated consultants and vendors and, as
compensation for such work, has retained approximately 10% of the payments
referred to above in return for management services provided. During 1998,
Stargate was owned generally by certain directors of the Company and a relative
of those directors. Also included in consulting fees to related parties is $270
and $86 in 1998 and 1997, respectively, for payments to Onex, Inc., an officer
of whom is on the Company's Board of Directors, for employment related matters.
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. Regulatory Matters:
Pafco 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). Statutory requirements place
limitations on the amount of funds which can be remitted to the Company from
Pafco and IGF. The Indiana statute allows 10% of surplus as regard to
policyholders or 100% of net income, whichever is greater, to be paid as
dividends only from earned surplus. 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).
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. Prescribed statutory accounting
practices include a variety of publications of the NAIC, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
IGF received written approval through March 31, 1999 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, 1998, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit results of the FCIC business, net of
reinsurance of $19,763, $26,589 and $12,277, are netted with policy acquisition
and general and administrative expenses for the years ended December 31, 1998,
1997 and 1996, respectively, in the accompanying Consolidated Statements of
Earnings.
The NAIC is considering the adoption of a recommended statutory accounting
standard for crop insurers, the impact of which
35
[HEADER] (Dollars in thousands)
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 March 31, 1999 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.
Net income (loss) of the insurance subsidiaries, as determined in accordance
with statutory accounting practices (SAP), was $(21,459), $7,702 and $19,251 for
1998, 1997 and 1996, respectively. Consolidated statutory capital and surplus
for the insurance subsidiaries was $105,080 and $127,879 at December 31, 1998
and 1997, respectively.
As of December 31, 1998, IGF and the Superior entities had risk-based capital
ratios that were in excess of the minimum requirements. Pafco's risk-based
capital ratio was 186% or $1.2 million less than the Company Active Level. Pafco
has filed its plan of corrective action with the IDOI.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance, which will replace the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to the
Codification guidance that would also be effective upon implementation. The NAIC
has recommended an effective date of January 1, 2001. The Codification provides
guidance for areas where statutory accounting has been silent and changes
current statutory accounting in some areas.
It is not known whether the Indiana and Florida Insurance Departments will adopt
the Codification, and whether the Departments will make any changes to the
guidance. The Company has not estimated the potential effect of the Codification
guidance if adopted by the Departments. However, the actual effect of adoption
could differ as changes are made to the Codification guidance, prior to its
recommended effective date of January 1, 2001.
17. 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.
As part of the agreement by the Company to assume the multi-peril and crop
operations of CNA, the Company agreed to reimburse CNA for certain direct
overhead costs incurred by CNA during the first quarter of 1998 before the
Company assumed the book of business. CNA has requested reimbursement of $2.0
million in expenses which the Company believes should only be $1.1 million.
Negotiations are in process to settle this reimbursement. The Company fully
expects the ultimate settlement will approximate $1.1 million and has therefore,
accrued this amount in its consolidated financial statements. In the unforeseen
event the ultimate settlement is greater than $1.1 million, the Company will
accrue the full additional amount at that time.
The California Department of Insurance (CDOI) has advised the Company that they
are reviewing a possible assessment which could total $3 million. The Company
does not believe it will owe anything for this possible assessment. This
possible assessment relates to the charging of brokers fees to policyholders by
independent agents who have placed business for one of the Company's nonstandard
automobile carriers, Superior Insurance Company. The CDOI has indicated that
such broker fees charged by the independent agent to the policyholder were
improper and has requested reimbursement to the policyholders by Superior
Insurance Company. The Company did not receive any of these broker fees. As the
ultimate outcome of this potential assessment is not deemed probable the Company
has not accrued any amount in its consolidated financial statements. Although
the assessment has not been formally made by the CDOI at this time, the Company
believes it will prevail and will vigorously defend any potential assessment.
The Company began writing a new crop insurance product in 1998, AgPI(R), which
provides business interruption coverage to
36
[HEADER] (Dollars in thousands)
agricultural product processors. At December 31, 1998 certain coverages exist,
the results of which will not be fully known until the second quarter of 1999.
The Company fully believes it has sufficient reserves at December 31, 1998;
however, ultimate results could vary materially.
At December 31, 1998, the Company provided an allowance of $3.2 million
associated with discrepancies identified in connection with the processing of
premiums from the assumption of the CNA business and the related premiums
receivable balance. The Company has been unable to resolve these discrepancies
and has fully provided for this amount as the Company continues its
investigation. Ultimate resolution of this matter may result in a change in the
$3.2 million allowance.
An assertion has been made in Florida alleging that service charges or finance
charges are in violation of Florida law. The plaintiff is attempting to obtain a
class certification in this action. The Company believes that it has
substantially complied with the premium financing statue and intends to
vigorously defend any potential loss. The ultimate outcome is uncertain.
18. Supplemental Cash Flow Information:
Cash paid for interest and income taxes are summarized as follows:
1998 1997 1996
Cash paid for interest $260 $3,467 $5,178
Cash paid for federal income taxes, net of refunds 5,351 11,670 9,825
During 1996, the Company contributed the stock of Pafco 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 Pafco common stock and certain
assets.
19. 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 quoted market prices.
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 $2,036 at December 31, 1998.
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 Debt: The carrying value for short-term debt approximates fair
value.
e. Preferred Securities: The December 31, 1998 market value of the Preferred
Securities was $113,400 based on quoted market prices.
37
[HEADER] (Dollars in thousands)
20. Segment Information:
In 1998, the Company adopted FAS 131, "Disclosures About Segments of an
Enterprise and Related Information." The prior year's segment data has been
restated to present the Company's operating segments in accordance with the
requirement of FAS 131.
The Company has two reportable segments based on products: Nonstandard
automobile insurance and Crop insurance. The Nonstandard automobile segment
offers personal nonstandard automobile insurance coverages through a network of
independent general agencies. The Crop segment writes MPCI and crop hail
insurance through independent agencies with its primary concentration in the
Midwest. The accounting policies of the segments are the same as those described
in "Nature of Operations and Significant Accounting Policies." There are no
significant intersegment transactions. The Company evaluates performance and
allocates resources to the segments based on profit or loss from operations
before income taxes.
The following is a summary of the Company's segment data and a reconciliation of
the segment data to the Consolidated Financial Statements. The "Corporate and
Other" includes operations not directly related to the reportable business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated overhead expenses). Segment
assets 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.
Nonstandard Segment Corporate Consolidated
Year ended December 31, 1998 Auto Crop Totals and Other Totals
---- ---- ------ --------- ------
Premiums earned $264,022 $60,901 $324,923 $- $324,923
Fee income 16,431 3,772 20,203 - 20,203
Net investment income 11,958 275 12,233 140 12,373
Net realized capital gain 4,124 217 4,341 - 4,341
------- ------ ------- ----- -------
Total revenue 296,535 65,165 361,700 140 361,840
------- ------ ------- ----- -------
Loss and loss adjustment expenses 217,916 52,550 270,466 - 270,466
Operating expenses 73,346 21,906 95,252 1,624 96,876
Amortization of intangibles - 339 339 2,040 2,379
Interest expense - 163 163 - 163
------- ------ ------- ----- -------
Total expenses 291,262 74,958 366,220 3,664 369,884
------- ------ ------- ----- -------
Earnings (loss) before income taxes, minority
interest and extraordinary item $ 5,273 $(9,793) $(4,520) $(3,524) $(8,044)
======= ======= ======= ====== =======
Segment assets $376,831 $143,434 $520,265 $49,172 $569,437
======= ======= ======= ====== =======
Nonstandard Segment Corporate Consolidated
Year ended December 31, 1997 Auto Crop Totals and Other Totals
---- ---- ------ --------- ------
Premiums earned $251,020 $20,794 $271,814 $ - $271,814
Fee income 15,515 2,276 17,791 30 17,821
Net investment income 10,969 191 11,160 287 11,447
Net realized capital gain 9,462 (18) 9,444 - 9,444
------- ------ ------- ------ -------
Total revenue 286,966 23,243 310,209 317 310,526
------- ------ ------- ------ -------
Loss and loss adjustment expenses 195,900 16,550 212,450 - 212,450
Operating expenses 72,463 (14,404) 58,059 1,719 59,778
Amortization of intangibles - 2 2 1,195 1,197
Interest expense - 233 233 2,925 3,158
------- ------ ------- ----- -------
Total expenses 268,363 2,381 270,744 5,839 276,583
------- ------ ------- ----- -------
Earnings before income taxes, minority
interest and extraordinary item $18,603 $20,862 $39,465 $(5,522) $33,943
====== ====== ====== ===== ======
Extraordinary item, net of tax (713) -- (713) -- (713)
=== ======= === ===== ===
Segment assets $363,864 $119,660 $483,524 $46,351 $529,875
======= ======= ======= ====== =======
38
[HEADER] (Dollars in thousands)
Nonstandard Segment Corporate Consolidated
Year ended December 31, 1996 Auto Crop Totals and Other Totals
---- ---- ------ --------- ------
Premiums earned $168,746 $23,013 $191,759 $ - $191,759
Fee income 7,578 1,672 9,250 36 9,286
Net investment income 6,489 181 6,670 63 6,733
Net realized capital gain (1,014) (1) (1,015) - (1,015)
------- ------ ------- ----- -------
Total revenue 181,799 24,865 206,664 99 206,763
------- ------ ------- ----- -------
Loss and loss adjustment expenses 124,385 12,724 137,109 - 137,109
Operating expenses 46,796 (6,095) 40,701 1,312 42,013
Amortization of intangibles - - - 411 411
Interest expense - 551 551 2,976 3,527
------- ------- ------- ----- -------
Total expenses 171,181 7,180 178,361 4,699 183,060
------- ------- ------- ----- -------
Earnings before income taxes, minority
interest and extraordinary item $10,618 $17,685 $28,303 $(4,600) $23,703
====== ====== ====== ===== ======
Segment assets $264,067 $73,443 $337,510 $7,169 $344,679
======= ====== ======= ===== =======
21. Stock Option Plans:
On November 1, 1996, the Company adopted the Symons International Group, Inc.
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. Options have been granted at an exercise price equal to the fair market
value of the Company's stock at date of grant. The options granted to the
Company's Chairman (633,900 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. On October 14, 1998, all
SIG options were repriced to $6.3125 per share.
Information regarding the SIG Stock Option Plan is summarized below:
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at the beginning of the year 1,000,000 $6.3125 830,000 $12.50 -- $--
Granted 478,000 6.3125 185,267 15.35 830,000 12.50
Exercised (4,332) 6.3125 (1,667) 12.50 -- --
Forfeited (15,835) 6.3125 (13,600) 12.50 -- --
--------- --------- -------
Outstanding at the end of the year 1,457,833 $6.3125 1,000,000 $13.03 830,000 $12.50
========= ========= =======
Options exercisable at year end 760,289 $6.3125 521,578 $12.50
Available for future grant 42,167 -- 170,000
The weighted average remaining life of the SIG options as of December 31, 1998
is 8.5 years.
The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. Stock
Option Plan (the "GGS Stock Option Plan"), effective April 30, 1996. The GGS
Stock Option Plan authorizes the granting of nonqualified and incentive stock
options to such officers and other key employees as may be designated by the
Board of Directors of GGSH. Options granted under the GGS Stock Option Plan have
a term of ten years and vest at a rate of 20% per year for the five years after
the date of the grant. The exercise price of any options granted under the GGS
Stock Option Plan shall be subject to the following formula: 50% of each grant
of options having an exercise price determined by the Board of Directors of GGSH
at its
39
[HEADER] (Dollars in thousands)
discretion, with the remaining 50% of each grant of options subject to a
compound annual increase in the exercise price of 10%, with a limitation on the
exercise price escalation as such options vest.
Information regarding the GGS Stock Option Plan is summarized below:
1998 1997 1996
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at the beginning of the year 54,022 $51.75 55,972 $51.75 $-- $--
Granted -- -- -- -- 55,972 51.75
Forfeited (150) 51.75 (1,950) 51.75 -- --
------ ------ ------
Outstanding at the end of the year 53,872 $51.75 54,022 $51.75 55,972 $51.75
====== ====== ======
Options exercisable at year end 21,549 10,804 --
Available for future grant 57,239 57,089 55,139
Options Options
Weighted outstanding exercisable
average weighted weighted
remaining average average
Number life (in exercise Number exercise
Range of exercise prices outstanding years price exercisable price
$44.17-$53.45 37,710 7.3 $46.13 21,549 $47.60
$58.79-$71.14 16,162 7.3 64.87 -- --
------ ------
53,872 21,549
====== ======
The Company applies Accounting Principles Board Opinion No. 25, "Accounting of
Stock Issued to Employees" and related interpretation in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
such plans. Had compensation cost been determined, based on the fair value at
the grant dates for options granted under both the SIG Stock Option Plan and the
GGS Stock Option Plan during 1998, 1997 and 1996 consistent with the method of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma
net earnings and pro forma earnings per share for the years ended December 31,
1998, 1997 and 1996 would have been as follows:
(Dollars in thousands, 1998 1998 1997 1997 1996 1996
except per share amounts) As Reported Pro Form As Reported Pro Forma As Reported Pro Forma
Net earnings (loss) $(14,417) $(16,352) $16,305 $14,927 $13,256 $13,021
Basic earnings (loss) per share $(1.39) $(1.57) $1.56 $1.43 $1.76 $1.73
Fully diluted earnings (loss) per share $(1.39) $(1.57) $1.52 $1.38 $1.76 $1.73
40
[HEADER] (Dollars in thousands)
The fair value of each option grant used for purposes of estimating the pro
forma amounts summarized above is estimated on the date of grant using the
Black-Scholes option-price model with the weighted average assumptions shown in
the following table:
SIG SIG GGSH SIG
1998 Grants 1997 Grants 1996 Grants 1996 Grants
Risk-free interest rates 5.4% 6.40% 6.41% 6.27%
Dividend yields -- -- -- --
Volatility factors 0.41 0.39 -- 0.40
Weighted average expected life 3.2 years 3.3 years 5.0 years 3.1 years
Weighted average fair value per share $5.73 $5.54 $5.90 $4.27
22. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
Quarters
1998 First Second Third Fourth Total
Gross written premiums $178,396 $173,094 $97,353 $104,347 $553,190
Net earnings (loss) 4,924 5,668 (13,326) (11,683) (14,417)
Basic earnings (loss) per share 0.47 0.55 (1.28) (1.13) (1.39)
Fully diluted earnings (loss) per
share 0.46 0.53 (1.28) (1.13) (1.39)
1997
Gross written premiums $129,890 $149,175 $103,919 $77,616 $460,600
Net earnings 5,909 3,677 6,013 706 16,305
Basic earnings per share 0.56 0.35 0.56 0.09 1.56
Fully diluted earnings per share 0.56 0.35 0.55 0.06 1.52
1996
Gross written premiums $41,422 $105,528 $71,813 $86,736 $305,499
Net earnings 1,586 2,718 4,589 4,363 13,256
Basic earnings per share 0.22 0.39 0.66 0.49 1.76
Fully diluted earnings per share 0.22 0.39 0.66 0.49 1.76
During the fourth quarters of 1998 and 1997, the Company increased reserves on
its nonstandard automobile business by $6.9 million and $3.0 million for both
current and prior accident years.
In the fourth quarter of 1998, the Company provided a $3.2 million reserve for
potential processing errors in the crop business assumed from CNA. The Company
also increased its reserves on AgPI(R) exposures by approximately $1.8 million.
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 (loss), net of reinsurance, on its FCIC business of
$(3,506), $6,979 and $5,572 during 1998, 1997 and 1996, respectively.
41
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this Annual
Report and elsewhere (such as in other filings by the Company or its affiliates
with the Securities and Exchange Commission, press releases, presentations by
the Company or its management or oral statements) relative to markets for the
Company's products and/or trends in the Company's operations or financial
results, as well as other statements including words such as "anticipate,"
"could," "feel(s)," "believe," "believes," "plan," "estimate," "expect,"
"should," "intend" and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results to be materially different from
those contemplated by the forward-looking statements. Such factors include,
among other things: (i) general economic conditions, including prevailing
interest rate levels and stock market performance; (ii) factors affecting the
Company's crop operations such as weather-related events, final harvest results,
commodity price levels, governmental program changes, new product acceptance and
commission levels paid to agents; and (iii) factors affecting the Company's
nonstandard automobile operations such as premium volume, levels of operating
expenses as compared to premium volume, ultimate development of loss reserves
and implementation of the Company's operating system. 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 are 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, 1998.
- -------------------------------------------------------------------------------
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
Company's assets. The independent accounting firm of PricewaterhouseCoopers LLP
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.
/s/ Alan G. Symons
Chief Executive Officer
April 13, 1999
42
Board of Directors And Stockholders of Symons International Group, Inc.
And Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Symons International Group, Inc. and subsidiaries (the Company) at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
April 13, 1999
43
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
PricewaterhouseCoopers LLP
Indianapolis, Indiana
Annual Meeting of Stockholders
Wednesday, June 16, 1999
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, 1998, 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.
NASDAQ
1998 1997
Quarter Ended High Low High Low
March 31 20.375 16.125 17.625 14.00
June 30 20.50 16.375 16.625 13.625
September 30 19.875 16.0 23.25 15.75
December 31 15.75 5.375 23.75 18.63
As of March 22, 1999, 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 years ended December 31, 1998 and 1997. 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.
44
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Tel: (317) 259-6302
E-mail: AGSymons@AOL.com
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
Director and Vice President, Secretary and
Treasurer of ONEX, Inc.
Executive Officers
G. Gordon Symons Roger C. Sullivan Jr.
Chairman of the Board Executive Vice President
Symons International Group, Inc. Superior Insurance Company
Alan G. Symons David L. Bates
Chief Executive Officer Vice President, General Counsel
Symons International Group, Inc. and Secretary
Symons International Group, Inc.
Douglas H. Symons Dennis G. Daggett
President and Chief Operating Officer President and Chief Operating Officer
Symons International Group, Inc. IGF Insurance Company
Gary P. Hutchcraft Thomas F. Gowdy
Vice President, Chief Financial Officer Executive Vice President
and Treasurer IGF Insurance Company
Symons International Group, Inc.
45
Carl F. Schnaufer James J. Lund
Vice President, Chief Information Vice President, Chief Accounting
Officer Officer
Symons International Group, Inc. Symons International Group, Inc.
Mark C. Gozdecki
Vice President, Marketing
GGS Management, Inc.
Company, Subsidiaries and Branch Offices
CORPORATE OFFICE
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Website: SIGINS.com
SUBSIDIARIES AND BRANCHES IGF Southwest
Pafco General Insurance Company 7914 Abbeville Avenue
4720 Kingsway Drive Lubbock, Texas 79424
Indianapolis, Indiana 46205 Tel: 806-783-3010
Tel: 317-259-6300 Fax: 806-783-3017
Fax: 317-259-6395
IGF South
Superior Insurance Company 101 Business Park Drive, Suite C
280 Interstate North Circle, N.W. Jackson, Mississippi 39213
Atlanta, Georgia 30339 Tel: 601-957-9780
Tel: 770-952-4885 Fax: 601-957-9793
Fax: 770-988-8583
IGF West
Superior Insurance Company 1750 Bullard Avenue, Suite 106
3030 N. Rocky Point Drive Fresno, California 93710
Suite 770 Tel: 209-432-0196
Tampa, Florida 33607 Fax: 209-432-0294
Tel: 813-281-2444
Fax: 813-287-8362 IGF North
161 South Main, Box 1090
Superior Insurance Company Stanley, North Dakota 58784
1745 West Orangewood Road Tel: 701-628-3536
Anaheim, California 92868 Fax: 701-628-3537
Tel: 714-978-6811
Fax: 714-978-0353 IGF Mid West
6000 Grand Avenue
IGF Insurance Company Des Moines, Iowa 50312
Corporate Office Tel: 515-633-1000
6000 Grand Avenue Fax: 515-633-1012
Des Moines, Iowa 50312
Tel: 515-633-1000 IGF - NACU
Fax: 515-633-1010 Highway 210 West, Box 375
Henning, Minnesota 56551
IGF Mid East Tel: 218-583-4800
3900 Wood Duck Drive, Suite B Fax: 218-583-4852
Springfield, Illinois 62707
Tel: 217-726-2450
Fax: 217-726-2451
46
BACK PAGE
SIG Logo
SYMONS INTERNATIONAL GROUP, INC.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
47