UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q/A
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File Number: 0-29042
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1707115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
As of August 1, 2001, there were 10,385,399 shares of Registrant's no par value
common stock issued and outstanding.
1
FORM 10-Q/A INDEX
FOR THE QUARTER ENDED JUNE 30, 2001
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2001
(unaudited) and December 31, 2000....................................................... 3
Unaudited Consolidated Statements of Earnings
for the Three Months Ended
June 30, 2001 and 2000.................................................................. 4
Unaudited Consolidated Statements of Earnings
for the Six Months ended
June 30, 2001 and 2000.................................................................. 5
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 ................................................ 6
Condensed Notes to Unaudited Consolidated Financial
Statements.............................................................................. 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk.............................. 20
PART II OTHER INFORMATION....................................................................... 20
SIGNATURES......................................................................................... 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30,
2001 December 31,
(Unaudited) 2000
--------------- ---------------
ASSETS
Investments:
Available for sale:
Fixed maturities, at market $87,485 $99,506
Equity securities, at market 16,066 16,561
Short-term investments, at amortized cost, which approximates market 15,863 14,872
Mortgage loans, at cost - 1,870
Other invested assets 1,438 1,331
-------- ----------
Total Investments 120,852 134,140
Investments in and advances to related parties 27 680
Cash and cash equivalents 1,050 1,363
Receivables, net of allowance of $2,218 and $1,940 in 2001 and 2000,
respectively 64,554 50,364
Reinsurance recoverable on paid and unpaid losses 43,304 48,315
Prepaid reinsurance premiums 36,203 24,773
Deferred policy acquisition costs 6,195 6,454
Property and equipment, net of accumulated depreciation 11,029 12,392
Intangible assets 4,462 4,547
Other assets 2,239 3,545
Net assets of discontinued operations - 1,384
-------- --------
Total Assets $289,915 $287,957
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Loss and loss adjustment expense reserves $92,490 $108,117
Unearned premiums 73,506 62,386
Reinsurance payables 67,086 62,059
Distributions payable on preferred securities 25,837 18,397
Deferred income 4,375 -
Other liabilities 21,131 14,443
-------- --------
Total Liabilities 284,425 265,402
Minority interest: -------- --------
Company-obligated mandatory redeemable preferred stock of trust subsidiary
holding solely parent debentures 135,000 135,000
------- -------
Stockholders' Equity (Deficit):
Common stock, no par value, 100,000,000 shares authorized, 10,385,000 shares
issued and outstanding in both 2001 and 2000 38,136 38,136
Additional paid-in capital 5,851 5,851
Unrealized loss on investments available for sale (2,405) (3,938)
Retained (deficit) (171,092) (152,494)
--------- ---------
Total Stockholders' (Deficit) (129,510) (112,445)
--------- ---------
Total Liabilities and Stockholders' (Deficit) $289,915 $287,957
======== ========
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Three Months Ended
June 30
------------------------------
2001 2000
------------- ------------
Gross premiums written $46,868 $30,032
Less ceded premiums (22,248) (10,686)
-------- --------
Net premiums written $24,620 $19,346
======= =======
Net premiums earned $23,031 $37,376
Fee income 3,540 3,631
Net investment income 1,574 2,496
Net realized capital loss (287) (1,681)
-------- ---------
Total revenues 27,858 41,822
-------- --------
Expenses:
Losses and loss adjustment expenses 20,280 29,184
Policy acquisition and general and administrative expenses 10,713 19,155
Amortization of intangibles 42 490
---------- --------
Total expenses 31,035 48,829
------ ------
Loss from continuing operations before income taxes and minority interest (3,177) (7,007)
------- -------
Total income taxes - -
----------- ---------
Loss from continuing operations before minority interest (3,177) (7,007)
-------- -------
Minority interest:
Distributions on preferred securities, net of tax of $0 in both 2001 and 3,832 3,357
2000 ------- -------
Loss from continuing operations (7,009) (10,364)
Discontinued operations:
Income (loss) from operations of discontinued segment, less applicable
income taxes of $0 in both 2001 and 2000 (2,156) 3,146
--------- -------
Net loss $(9,165) $(7,218)
======== ========
Weighted average shares outstanding - basic and fully diluted 10,385 10,385
====== ======
Net loss from continuing operations per share - basic and fully diluted $(0.67) $(1.00)
======= =======
Net income (loss)of discontinued operations per share - basic and fully diluted $(0.21) $0.30
======= =====
Net loss per share - basic and fully diluted $(0.88) $(0.70)
======= =======
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Six Months Ended
June 30
------------------------------
2001 2000
Gross premiums written $95,090 $89,891
Less ceded premiums (53,641) (40,076)
-------- --------
Net premiums written $41,449 $49,815
======= =======
Net premiums earned $41,759 $80,418
Fee income 6,466 7,565
Net investment income 3,172 5,410
Net realized capital loss (1,056) (1,317)
------- -------
Total revenues 50,341 92,076
------ ------
Expenses:
Losses and loss adjustment expenses 38,025 66,403
Policy acquisition and general and administrative expenses 21,231 37,337
Amortization of intangibles 85 980
--------- ----------
Total expenses 59,341 104,720
------ -------
Loss from continuing operations before income taxes and minority interest (9,000) (12,644)
------- --------
Total income taxes - 487
----------- ---------
Loss from continuing operations before minority interest (9,000) (13,131)
Minority interest:
Distributions on preferred securities, net of tax of $0 in both 2001 and
2000 7,441 6,621
----- -----
Loss from continuing operations (16,441) (19,752)
Discontinued operations:
Income (loss) from operations of discontinued segment, less applicable
income taxes of $0 in both 2001 and 2000 (2,156) 7,156
------- -----
Net loss $(18,597) $(12,596)
========= =========
Weighted average shares outstanding - basic and fully diluted 10,385 10,385
====== ======
Net loss from continuing operations per share - basic and fully diluted $(1.58) $(1.90)
======= =======
Net income (loss) of discontinued operations per share - basic and fully diluted $(0.21) $0.69
======= =====
Net loss per share - basic and fully diluted $(1.79) $(1.21)
======= =======
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months
Ended June 30
---------------------------------------
2001 2000
---------------- ------------------
Cash flows from operating activities:
Net loss for the period $(18,597) $(12,596)
Adjustments to reconcile net earnings to net cash provided by (used in)
operations:
Depreciation and amortization 2,274 3,322
Net realized capital loss 1,056 1,317
Net changes in operating assets and liabilities:
Receivables (14,190) 12,913
Reinsurance recoverable on paid and unpaid losses 5,011 (13,193)
Prepaid reinsurance premiums (11,430) (16,150)
Deferred policy acquisition costs 259 5,473
Other assets and liabilities 7,994 (8,922)
Loss and loss adjustment expense reserves (15,627) (23,327)
Unearned premiums 11,120 (14,455)
Reinsurance payables 5,027 26,566
Distribution payable on preferred securities 7,440 6,622
Deferred income 4,375 -
Net assets from discontinued operations 2,302 10,117
------- -------
Net cash used in operations (12,986) (22,313)
-------- --------
Cash flows from investing activities, net of assets acquired:
Net (purchase) sale of short-term investments (990) 6,517
Proceeds from sales, calls and maturities of fixed maturities 22,409 35,907
Purchase of fixed maturities (7,961) (2,409)
Proceeds from sale of equity securities 9,508 6,296
Purchase of equity securities (10,277) (12,170)
Proceeds from repayment of mortgage loans 1,870 60
Purchase of property and equipment (1,577) (751)
Net investing activities from discontinued operations (263) (459)
Other (44) (148)
--------- --------
Net cash provided by investing activities 12,675 32,843
------ ------
Cash flows from financing activities, net of assets acquired:
Net financing activities from discontinued operations (655) (13,173)
Repayment of related party loans 653 504
------- ---------
Net cash used in financing activities (2) (12,669)
---------- --------
Decrease in cash and cash equivalents (313) (2,139)
Cash and cash equivalents, beginning of period 1,363 2,139
----- ---------
Cash and cash equivalents, end of period $1,050 $ -
====== ============
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
SYMONS INTERNATIONAL GROUP, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months Ended June 30, 2001
1. BASIS OF PRESENTATION
The financial statements included in this report are the consolidated
financial statements of Symons International Group, Inc. and its
subsidiaries (the "Company"). The consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In management's opinion, these financial
statements include all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the results of operations
for the interim periods presented. Pursuant to SEC rules and regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements, unless
significant changes have taken place since the end of the most recent
fiscal year. For this reason, the accompanying consolidated financial
statements and notes thereto should be read in conjunction with the
financial statements and notes for the year ended December 31, 2000
included in the Company's 2000 Annual Report on Form 10-K. Results for any
interim period are not necessarily indicative of results to be expected for
the year.
2. PREFERRED SECURITIES
The preferred securities represent company-obligated mandatorily redeemable
preferred securities of a trust subsidiary holding solely parent debentures
which have a term of 30 years with semi-annual interest payments commencing
February 15, 1998 (the "Preferred Securities"). The holder may redeem the
Preferred Securities in whole or in part after 10 years. Under the terms of
the indenture, the Company is permitted to defer the semi-annual interest
payments for up to five years. The Company began deferring the semi-annual
interest payments in February 2000.
The trust indenture for the Preferred Securities contains certain
restrictive covenants. Some of 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 making
loans or advances to affiliates, repurchasing common stock and the
payment of dividends in excess of a stated limitation.
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 (1.05) as of June 30, 2001, and will continue to apply until the
Company's consolidated coverage ratio exceeds the amount set forth in the
indenture. The Company is in compliance with these additional restrictions.
3. REGULATORY AFFAIRS
Two of the Company's insurance company subsidiaries, Pafco General
Insurance Company ("Pafco") and IGF Insurance Company ("IGF") are domiciled
in Indiana and prepare their statutory financial statements in accordance
with accounting practices prescribed or permitted by the Indiana Department
of Insurance ("IDOI"). While neither Pafco nor IGF have surplus from which
to pay dividends, statutory requirements place limitations on the amount of
funds that can be remitted to the Company from Pafco and IGF. While neither
Pafco nor IGF have surplus from which to pay dividends, the Indiana statute
allows 10% of surplus in regard to policyholders or 100% of net income,
whichever is greater, to be paid as dividends only from earned surplus;
however, the consent orders would presently restrict such payments in any
event. Further, Consent Orders with the IDOI described below prohibit the
payment of dividends by Pafco and another insurance company subsidiary.
Superior Insurance Company ("Superior"), and related entities are domiciled
in Florida and prepare their statutory financial statements in accordance
with accounting practices prescribed or permitted by the Florida Department
of Insurance ("FDOI"). Florida statute contains limitations with regard to
payment of dividends. Superior may pay dividends of up to 10% of surplus or
100% of net income; whichever is greater, from earned surplus. Prescribed
statutory accounting practices include a variety of publications of the
National Association of
7
Insurance Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed.
As previously reported, on June 29, 2001, IDOI and IGF entered into a
Consent Order (the "Consent Order") relating to the continuing operations
of IGF. The entry of the Consent Order was as a result of losses
experienced by IGF in its crop insurance operations and followed the sale
of substantially all of the crop insurance assets of IGF to Acceptance
Insurance Companies Inc. ("Acceptance").
Among other matters, the Consent Order prohibits IGF from taking any of the
following actions, without prior written consent of the IDOI: (i) sell or
encumber any of its assets, property, or business in force; (ii) disburse
funds, except to pay direct unaffiliated policyholder claims and normal
operating expenses in the ordinary course of business (which does not
include payment to affiliates except for the reimbursement of costs for
running IGF by SIG, and does not include payments in excess of $10,000);
(iii) lend its funds; (iv) make investments except in specified types of
investments; (v) incur debts or obligations, except in the ordinary course
of business to unaffiliated parties; (vi) merge or consolidate with another
company; (vii) enter into new, or amend existing, reinsurance agreements;
(viii) complete, enter into or amend any transaction or arrangement with an
affiliate; or (ix) disburse funds or assets to any affiliate. The Consent
Order requires IGF to provide the IDOI with monthly written updates and
immediate notices of any material change regarding the status of litigation
with Mutual Service Casualty Insurance Company and with Continental
Casualty Company, statutory reserves, number of non-standard automobile
insurance policies in-force by state, and reports of all non-claims related
disbursements. IGF is required to cease writing new business and, in
Pennsylvania, cease renewing existing business after July 30, 2001. During
the first half of 2001, the non-standard automobile insurance policies
written in Pennsylvania by IGF accounted for approximately 10% of the total
gross written premiums of the Company. The Company expects to obtain
authority from the Pennsylvania Department of Insurance to write business
in Pennsylvania through another of its insurance company subsidiaries.
IGF's failure to comply with the Consent Order could cause the IDOI to
begin proceedings to have a rehabilitator or liquidator appointed for IGF
to extend the provisions of the Consent Order. In the event Pennsylvania
does not permit another of the Company's insurance subsidiaries to write
policies in that state, the Company's written premiums for 2001 could be
less than anticipated.
The Illinois, Missouri and Minnesota Departments of Insurance have taken
action to suspend IGF's and/or Superior's authority to write business in
those states. IGF is otherwise prohibited from writing any new business
pursuant to the Consent Order and the amount of business written by IGF and
Superior in those states is not material. IGF and Superior have also ceased
writing business in Texas and IGF has ceased writing new business in
Washington. IGF and Superior will not begin writing business in those
states without the prior approval of their respective departments of
insurance. Pafco, IGF and Superior also provide monthly financial
information to the departments of insurance in certain states in which they
write business, and Pafco and IGF have agreed to obtain IDOI prior approval
of any new affiliated party transactions.
On February 17, 2000, Pafco agreed to an order under which the IDOI may
monitor more closely the ongoing operations of Pafco. Among other matters,
Pafco must:
o Refrain from doing any of the following without the IDOI's prior
written consent: selling assets or business in force or transferring
property, except in the ordinary course of business; disbursing funds,
other than for specified purposes or for normal operating expenses and
in the ordinary course of business (which does not include payments to
affiliates, other than under written contracts previously approved by
the IDOI, and does not include payments in excess of $10,000); lending
funds; making investments, except in specified types of investments;
incurring debt, except in the ordinary course of business and to
unaffiliated parties; merging or consolidating with another company;
or entering into new, or modifying existing, reinsurance contracts.
o Reduce its monthly auto premium writings, or obtain additional
statutory capital or surplus, such that the ratio of gross written
premium to surplus and net written premium to surplus does not exceed
4.0 and 2.4, respectively; and provide the IDOI with regular reports
demonstrating compliance with these monthly writings limitations.
Restrictions on premium writings result in lower premium volume.
Management fees payable to Superior Insurance Group, Inc. ("Superior
Group") are based on gross written premium; therefore lower premium
volume results in reduced management fees paid by Pafco.
8
o Continue to comply with prior IDOI agreements and orders to correct
business practices under which Pafco must provide monthly financial
statements to the IDOI, obtain prior IDOI approval of reinsurance
arrangements and affiliated party transactions, submit business plans
to the IDOI that address levels of surplus and net premiums written,
and consult with the IDOI on a monthly basis.
Pafco's inability or failure to comply with any of the above could result
in the IDOI requiring further reductions in Pafco's permitted premium
writings or in the IDOI instituting future proceedings against Pafco.
Pafco informed the Iowa Department of Insurance ("IADOI") of its decision
to stop writing new automobile business in Iowa while Pafco reviews and
revises its program in the state. Pafco has agreed with the IADOI that it
will not write any new non-standard business, until such time as Pafco has
reduced its overall non-standard automobile policy counts in the state or
has: (i) increased surplus; or (ii) achieved a net written premium to
surplus ratio of less than three to one; and (iii) surplus reasonable to
its risk. Pafco has continued to service existing policyholders and renew
policies in Iowa and provide policy count information on a monthly basis in
conformance with IADOI requirements.
The financial review of Superior for the year ended December 31, 1999 by
the FDOI has been completed and the FDOI issued its draft report on July
19, 2001. Superior intends to dispute certain allegations in the draft
report with regard to the characterization of payments made by Superior to
its parent and Superior and has requested a hearing to resolve the disputed
issues of fact and law. A hearing has not yet been scheduled.
As previously reported, the FDOI issued a notice of its intent to issue an
order (the "Notice") which principally addressed certain policy and finance
fee payments by Superior to Superior Group. A formal administrative hearing
to review the Notice and a determination that the order contemplated by the
Notice not be issued was held February 2001. The administrative law judge
entered a recommended order on June 1, 2001, and the Company would accept
the recommendations of such order. The FDOI could reject findings in the
recommended order and issue its order by August 31, 2001 which could
restrict Superior from paying certain billing and policy fees to Superior
Group and include a requirement that Superior Group repay to its
subsidiary, Superior, billing and policy fees from prior years in an amount
of approximately $35.2 million. A restriction on the ability of Superior to
pay future billing and policy fees to Superior Group may necessitate that
the Company take certain actions, which may be subject to regulatory
approvals, to reallocate operating revenues and expenses between its
subsidiaries.
The Company's operating subsidiaries, their business operations, and their
transactions with affiliates, including the Company, are subject to
regulation and oversight by the IDOI, the FDOI, and the insurance
regulators of other states in which the subsidiaries write business. The
Company is a holding company and all of its operations are conducted by its
subsidiaries. Regulation and oversight of insurance companies and their
transactions with affiliates is conducted by state insurance regulators
primarily for the protection of policyholders and not for the protection of
other creditors or of shareholders. Failure to resolve issues with the IDOI
and the FDOI or other state insurance regulators in a manner satisfactory
to the Company could result in future regulatory actions or proceedings
that materially and adversely affect the Company.
The NAIC adopted the Codification of Statutory Accounting Principles
guidance ("Codification"), which replaces the Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting
effective January 1, 2001. The IDOI and FDOI have adopted Codification.
The changes in statutory accounting principles resulting from Codification
which impact the Company's insurance subsidiaries, among other things,
limit the statutory carrying value of electronic data processing equipment
and deferred tax assets in determining statutory surplus. The consolidated
statutory surplus of the Company's insurance subsidiaries as of December
31, 2000 was $39.4 million. Effective January 1, 2001, the consolidated
statutory surplus was reduced by $11.4 million to $28.0 million, giving
recognition to the new accounting principles.
4. COMMITMENTS AND CONTINGENCIES
As previously reported, IGF had been a party to a number of pending legal
proceedings and claims relating to agricultural production interruption
insurance policies (the "AgPI Program") which were sold by IGF during 1998.
Sales of this product resulted in large underwriting losses for IGF.
9
Approximately $29,047,653 was paid through June 30, 2001 in settlement of
legal proceedings and claims related to the AgPI Program, with payments
totaling approximately $259,489 in the first half of 2001. A reserve of
approximately $10,652,347 remains to pay future claims. All of the policies
of insurance, which were issued in the AgPI Program, were issued by and
under the name of Mutual Service Casualty Insurance Company ("MSI"), a
Minnesota Corporation with its principal place of business located in Arden
Hills, Minnesota.
A dispute arose between MSI and IGF with respect to the funding of the
settlements of claims made on the AgPI Program. MSI and IGF currently are
arbitrating their dispute over responsibility for over $60 million in
claims paid by both companies to MSI's insureds. IGF is seeking a recovery
of the $30 million in claims which it paid, and MSI is seeking a similar
recovery of the claims which it paid. The arbitration commenced December
20, 2000. The parties subsequently selected an arbitration panel and had
their first organizational meeting with the panel on May 22, 2001. At that
meeting, MSI moved for an order requiring IGF to post pre-hearing security
through the issuance of a letter of credit in the amount of $39 million.
Over IGF's objection, in a two to one vote, the panel on June 9, 2001,
ordered IGF to post the $39 million in security, which IGF was to have done
by June 19, 2001.
On or about June 11, 2001, IGF filed a motion in the United States District
Court for the District of New Jersey seeking to vacate the arbitration
panel's order requiring security. On June 19, 2001, MSI filed a motion in
the same court for a ruling confirming that order. On July 26, 2001, the
parties presented oral arguments on their cross-motions for vacation and
confirmation of the order. On August 6, 2001 the court denied IGF's motion
to vacate the arbitration panel's order. As of this date, IGF has not
posted the required letter of credit, and it is financially incapable of
satisfying that requirement.
On June 25, 2001, MSI filed a complaint for preliminary and permanent
injunctive relief and damages (the "MSI Complaint") against the Company,
IGF, IGF Holdings, Inc. ("IGFH"), Granite Reinsurance Company Ltd.
("Granite Re"), Goran Capital Inc. ("Goran") and certain affiliates of
those companies, as well as certain members of the Symons family, and
Acceptance in the United States District Court for the Southern District of
Indiana, Indianapolis Division. The MSI Complaint alleges that the
previously reported June 6, 2001 transfer of IGF's assets to Acceptance and
the payments by Acceptance to the Company, Goran and Granite Re violated
Indiana law and are voidable. In addition, the MSI Complaint alleges that
Acceptance, the Company, Goran, IGFH and the Symons family are liable to
MSI for the entire $39 million claim which MSI is asserting against IGF in
arbitration proceedings on theories of successor liability and "piercing
the corporate veil." The MSI Complaint seeks preliminary and permanent
injunctive relief against the defendants, an order voiding the various
transactions between and among the defendants and an order determining that
the defendants are directly responsible to MSI for MSI's $39 million claim
against IGF.
On July 26, 2001, the Company, IGF, IGFH, Goran, Granite Re and their
affiliates filed answers to the MSI Complaint. In those answers, each of
the defendants denied the material allegations contained in the MSI
Complaint and asserted certain affirmative defenses to that complaint. Each
of those defendants also filed briefs in opposition to MSI's Motion for
Preliminary Injunctive Relief. A hearing on MSI's Motion for Preliminary
Injunctive Relief was held Thursday, August 2, 2001. On August 3, 2001, the
court denied MSI preliminary injunctive relief.
In the event MSI is successful in obtaining permanent injunctive relief
against the Company and its affiliates, any such relief would have an
adverse impact upon the Company and its affiliates and their respective
assets and operations. Further, in the event MSI is successful in obtaining
court orders voiding the various transactions between the defendants and
determining that the defendants are directly responsible to MSI for MSI's
$39 million claim against IGF, those orders and determinations could also
have an adverse effect upon the Company and its affiliates and their
respective assets and operations.
As previously reported, the Company and two of its subsidiaries, IGFH and
IGF, are parties to a "Strategic Alliance Agreement" dated February 28,
1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to
which IGF acquired certain crop insurance operations of CNA. Through
reinsurance agreements, CNA was to share in IGF's profits or losses on
IGF's total crop insurance business. By letter dated January 3, 2001, CNA
gave notice pursuant to the SAA of its exercise of the "Put Mechanism"
under the SAA effective February 19, 2001. According to the SAA, upon
exercise of the Put Mechanism, IGFH is obligated to pay CNA an amount equal
to 5.85 times "Average Pre-Tax Income", an amount based in part upon
payments made to CNA under the SAA. The SAA further provided that 30 days
after exercise of the Put, IGF will execute a promissory note payable six
months after the
10
exercise of the Put in the principal amount equal to the amount owed, as
specified by the SAA. In a letter dated March 20, 2001, CNA advised the
Company that it calculated the principal amount due CNA to be in excess of
$26 million. CNA also asserted a claim for amounts allegedly due under
reinsurance agreements for the 2000 crop year.
As previously reported, the Company believes it has claims against CNA and
defenses to CNA's claim that may ultimately offset or reduce amounts owed
to CNA. The Company and CNA have engaged in discussions regarding possible
alternatives for the resolution of their respective claims against each
other; however, those discussions ultimately proved unsuccessful.
Following the failure of settlement discussions, on June 4, 2001, IGF, IGFH
and the Company filed a complaint against CNA (the "IGF Complaint") in the
United States District Court for the Southern District of Indiana,
Indianapolis Division. The IGF Complaint asserts claims against CNA for
fraud and constructive fraud in connection with the SAA and breach of
contract and seeks relief against CNA for compensatory and punitive
damages. On June 27, 2001, CNA filed its "Answer, Separate Defenses and
Counterclaim", in which CNA generally denied the material allegations of
the IGF Complaint and asserted various defenses to those claims.
On June 6, 2001, CNA filed a complaint against IGF, IGFH and the Company
(the "CNA Complaint") asserting claims based on the SAA and related
agreements for approximately $25 million allegedly owed CNA by virtue of
its exercise of the Put Mechanism, $3 million for amounts allegedly due
under reinsurance agreements for the 2000 crop year, $1 million for certain
"fronting costs," and $1 million pursuant to a note executed by IGFH to
CNA's affiliate in connection with the acquisition by IGFH of North
American Crop Underwriters, Inc. in 1998. CNA also asserts claims to the
effect that the June 6, 2001 sale of IGF assets to Acceptance resulted in
payments of funds to Goran, the Company and Granite Re, which funds
allegedly should have been paid to IGF instead. On June 6, 2001, CNA asked
the district court to enter a temporary restraining order preventing IGF,
IGFH and the Company from disposing of the proceeds received by them in
connection with the sale of IGF assets to Acceptance. In an emergency
hearing, the court denied CNA the relief it requested, without prejudice to
reconsideration of those issues at a future time. CNA has since amended the
CNA Complaint to add Goran and Granite Re as defendants. CNA's counterclaim
in response to the IGF Complaint asserts essentially the same claims
against the same parties as the amended CNA Complaint.
An initial pretrial conference is scheduled for the CNA cases in September
2001. Although the Company continues to believe that it has claims against
CNA and defenses to CNA's claims which may offset or reduce amounts owing
by the Company or its affiliates to CNA, there can be no assurance that the
ultimate resolution of the claims asserted by CNA against the Company and
its affiliates will not have a material adverse effect upon the Company and
its affiliates financial condition or results of operations.
During 2000, the discontinued crop operations sold a product that insured
potato producers against lost revenue caused by depressed commodity prices
for potatoes. The commodity price of potatoes at December 31, 2000 was
lower than the expected price; therefore, the Company established a
$4,500,000 gross loss reserve for its unpaid loss obligations on this
product. Although the Company believes the loss reserve is reasonable, the
commodity price for potatoes could fluctuate, and the ultimate liability
may vary from this estimate. There can be no assurance that the ultimate
losses will not exceed the reserves established to date. The Company
intends to reevaluate the reserves and make any necessary adjustments in
the third quarter of 2001.
As previously reported, a complaint for a class action alleging violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 was
filed against the Company and certain of its officers and directors in the
United States District Court for the Southern District of Indiana. The
Company intends to vigorously defend the claims brought against it. No
material developments have occurred since last reported.
On June 29, 2001, the California Department of Insurance ("CDOI") filed a
Notice of Non-Compliance against Superior, which alleges that broker fees
were charged by independent brokers in violation of California law. The
Notice of Non-Compliance seeks repayment to policyholders of amounts
collected by the brokers and the possible imposition of fines against
Superior. Superior has filed a response to the notice and intends to
vigorously defend the action. The Company did not receive any of the fees
at issue and has not accrued any amount in its consolidated financial
statements for this claim.
11
As previously reported, actions have been brought in Florida against
Superior Guaranty Insurance Company (a subsidiary of Superior) purporting
to be brought on behalf of a class of persons allegedly charged service
charges or finance charges in violation of Florida law. No material
developments have occurred since last reported.
As previously reported, an action has been brought in Florida alleging that
Superior improperly reduced medical benefits payable and improperly
calculated interest in violation of Florida law. The case was brought on
behalf of a purported class consisting of (i) healthcare providers that
rendered treatment to Superior insureds and claimants of Superior insureds
and (ii) such insureds and claimants. The Company believes the claim is
without merit and intends to vigorously defend the charges brought against
it. No material developments have occurred since last reported.
As previously reported, an action has been brought in Florida against
Superior on behalf of a purported class consisting of healthcare providers
that rendered treatment to Superior insureds and obtained a valid
assignment of benefits from Superior. The plaintiff alleges that Superior
reduced or denied claims for medical expenses payable to the plaintiff
without first obtaining a written report in violation of Florida law. The
plaintiff also alleges that Superior inappropriately reduced the amount of
benefits payable to the plaintiff in breach of Superior's contractual
obligations to the plaintiff. Superior believes the allegations of
wrongdoing in violation of law are without merit and intends to vigorously
defend the claims brought against it. No material developments have
occurred since last reported.
The Company is a joint and several guarantor in a $7,250,000 debt
collateralized by operating assets held in an entity in which the Company
is a 50% owner. The estimated fair market value of the assets approximates
the debt.
The Company and its subsidiaries are named as defendants in various other
lawsuits relating to their business. Legal actions arise from claims made
under insurance policies issued by the Company's subsidiaries. The Company
in establishing its loss reserves has considered these actions. The Company
believes that the ultimate disposition of these lawsuits will not
materially affect the Company's operations or financial position.
5. LOSS DEVELOPMENT ON PRIOR ACCIDENT YEARS
During the second quarter of 2001, the Company experienced favorable
development on its year-end 2000 loss and LAE reserves in the amount of
$0.8 million. This was the result of favorable settlement of outstanding
claims and reduced the loss and loss adjustment expense ratio for the
quarter by 3.5 percentage points.
6. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
7. EARNINGS PER SHARE
Basic and diluted net earnings (loss) per share are computed by dividing
net earnings (loss) as reported by the average number of shares outstanding
as follows:
Three Months Ended
June 30
----------------------------
(in thousands) 2001 2000
------------ ------------
Basic:
Weighted-average common shares outstanding 10,385 10,385
====== ======
Diluted:
Weighted-average common shares outstanding 10,385 10,385
====== ======
The Company has 1,074,000 stock options outstanding as of June 30, 2001.
Common stock equivalents are anti-dilutive; therefore, fully diluted
earnings per share are the same as basic earnings per share.
12
8. DISCONTINUED OPERATIONS
In December 2000, the Company initiated the divestiture of its crop
insurance segment. This business was predominantly written through IGF. The
transaction was completed in June 2001 and transferred ownership of
substantially all of the crop insurance assets of the Company and IGF,
effective with the 2001 crop cycle to Acceptance. Upon completion of the
sale, the net assets of the discontinued operations were reduced to zero.
IGF and its affiliates received approximately $27.4 million at closing, and
Acceptance assumed all of the crop insurance in-force policies for the 2001
crop year. For agreeing not to compete in the crop insurance industry for a
period of three years from the date of sale, the Company received $4.5
million at closing that is being amortized to income on a straight-line
basis over three years. An additional $9.0 million in reinsurance premium
is payable to Granite Re under a multi-year reinsurance treaty whereby
Granite Re has agreed to reinsure a portion of the crop insurance business
of Acceptance and provide an indemnity on behalf of IGF. The results of the
crop insurance segment have been reflected as "Discontinued Operations" in
the accompanying unaudited consolidated financial statements in accordance
with Accounting Principles, Board Opinion No. 30 "Reporting the Results of
Operations --- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
Summarized results of operations and financial position for discontinued
operations were as follows:
STATEMENTS OF EARNINGS (LOSSES):
(in thousands)
Three Months Ended
June 30
---------------------------------
2001 2000
--------------- -------------
Gross premiums written $88,569 $101,108
======= ========
Net premiums written $(7,906) $10,379
======== =======
Net premiums earned $(2,816) $6,501
Net investment and fee income 1,251 154
Net realized capital gain 629 -
--- ---------
Total revenues (936) 6,655
----- -----
Loss and loss adjustment expenses 913 7,894
Policy acquisition and general and administrative expenses 1,901 (4,654)
Interest and amortization expense (1,594) 269
------- ---
Total expenses 1,220 3,509
----- -----
Income before income taxes (2,156) 3,146
Income tax expense - -
---------- ---------
Net income from discontinued operations $(2,156) $3,146
======== ======
13
STATEMENTS OF EARNINGS (LOSSES):
(in thousands)
Six Months Ended
June 30
----------------------------------
2001 2000
--------------- -------------
Gross premiums written $182,959 $185,468
======== ========
Net premiums written $(18) $17,949
===== =======
Net premiums earned $(18) $9,434
Net investment and fee income 935 121
Net realized capital gain 631 1
------ -------
Total revenues 1,548 9556
----- ----
Loss and loss adjustment expenses 6,783 10,334
Policy acquisition and general and administrative expenses (1,722) (8,446)
Interest and amortization expense (1,357) 512
------- ------
Total expenses 3,704 2,400
----- -----
Income before income taxes (2,156) 7,156
Income tax expense - -
---------- ---------
Net income from discontinued operations $(2,156) $7,156
======== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW OF THE COMPANY Symons International Group, Inc. (the "Company") owns
insurance companies that underwrite and market non-standard private passenger
automobile insurance. The Company's principal insurance company subsidiaries are
Pafco General Insurance Company ("Pafco"), Superior Insurance Company
("Superior") and IGF Insurance Company ("IGF"). The Company is a 73% owned
subsidiary of Goran Capital Inc. ("Goran").
As previously announced, the Company completed the sale of its crop insurance
operations in June 2001.
Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty"),
Superior American Insurance Company ("Superior American") and IGF, are engaged
in the writing of insurance coverage for automobile physical damage and
liability policies for non-standard risks. Non-standard risk insureds are those
individuals who are unable to obtain insurance coverage through standard market
carriers due to factors such as poor premium payment history, driving experience
or violations, particular occupation or type of vehicle. The Company offers
several different policies that are directed towards different classes of risk
within the non-standard market. Premium rates for non-standard risks are higher
than for standard risks. Since it can be viewed as a residual market, the size
of the non-standard private passenger automobile insurance market changes with
the insurance environment and grows when the standard carriers become more
restrictive. Non-standard 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 non-standard
policies is shorter than many other types of insurance. Also, since the
non-standard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by non-standard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
14
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS
All statements, trend analyses, and other information herein contained, 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," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks;
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) general economic conditions, including
prevailing interest rate levels and stock market performance; (ii) factors
affecting the Company's non-standard automobile operations such as rate increase
approval, policy renewals, new business written, and premium volume; and (iii)
the factors described in this section and elsewhere in this report.
SIGNIFICANT LOSSES HAVE BEEN REPORTED AND ARE LIKELY TO CONTINUE
For the three months ended June 30, 2001, losses from continuing operations were
$(7,009,000) compared to losses of $(10,364,000) in the comparable period of
2000. For the six months ended June 30, 2001, losses from continuing operations
were $(16,441,000) compared to losses of $(19,752,000) for the same period of
2000. The Company previously reported losses from continuing operations of
$(71,384,000) for the entire year 2000 compared to losses from continuing
operations of $(65,443,000) for 1999. The 2000 loss includes a one-time charge
for the write-off of goodwill of $33.5 million. The non-standard automobile
operations results prior to this write-off improved over 1999; however, results
continue to be unprofitable. The Company is continuing to seek and implement
rate increases and other underwriting actions to achieve profitability. A number
of systems have been automated and service problems have been eliminated or
significantly reduced. Although the Company has taken a number of actions to
address factors contributing to these past losses, there can be no assurance
that operating losses will not continue.
RECENT AND FURTHER REGULATORY ACTIONS MAY ADVERSELY AFFECT THE COMPANY'S
FUTURE OPERATIONS
The Company's insurance company subsidiaries, their business operations, and
their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the Indiana Department of Insurance
("IDOI"), the Florida Department of Insurance ("FDOI"), and the insurance
regulators of other states in which the insurance company subsidiaries write
business. Moreover, the insurance company subsidiaries' losses, adverse trends
and uncertainties discussed in this report have been and continue to be matters
of concern to the domiciliary and other insurance regulators of the Company's
insurance company subsidiaries and have resulted in enhanced scrutiny,
suspensions, orders and other regulatory actions by several regulators. The
primary purpose of insurance regulation is the protection of policyholders
rather than stockholders. Failure to resolve issues with the IDOI and the FDOI,
and with other regulators, in a manner satisfactory to the Company could impair
the Company's ability to execute its business strategies or result in future
regulatory actions or proceedings that could have a material adverse effect on
the Company's operations.
THE COMPANY IS SUBJECT TO A NUMBER OF PENDING LEGAL PROCEEDINGS
The Company is involved in a number of pending legal proceedings. The Company
intends to vigorously defend all of the claims brought against it. Although the
Company believes that it has claims and defenses that may offset or reduce
potential liability and that many of these actions are without merit, there can
be no assurance that such proceedings will not have a material adverse effect on
the Company's operations.
THE TERMS OF THE TRUST PREFERRED SECURITIES MAY RESTRICT THE COMPANY'S ABILITY
TO ACT
The Company has issued, through a wholly owned trust subsidiary, $135 million
aggregate principal amount in Trust Originated Preferred Securities (the
"Preferred Securities"). The Preferred Securities have a term of 30 years with
annual interest payments of 9.5% paid semi-annually. The obligations of the
Preferred Securities are funded from the Company's non-standard automobile
management company. The Company began deferring the semi-annual interest
payments in February 2000 and may continue to defer such payments for up to five
years as permitted by the indenture for the Preferred Securities. Although there
is no present event of default under the indenture that would accelerate the
payment of the Preferred Securities, the indenture contains a number of
covenants that may restrict the Company's ability to act in the future. These
covenants include restrictions on the Company's ability to: incur or guarantee
debt; make payments to affiliates; repurchase its common stock; pay dividends on
common stock; and increase its level of certain investments in other than
investment grade, fixed income securities. There can be no assurance that
compliance with
15
these restrictions and other provisions of the indenture for the Preferred
Securities will not adversely affect the cash flow of the Company.
REVIEW OF CONSOLIDATED OPERATIONS
NET LOSS
The net loss for the three months ended June 30, 2001 was $(9,165,000) or
$(0.88) per share (basic and diluted). This is an increase of $(1,947,000) or
$(0.19) per share from the net loss for the same period of 2000. The increased
net loss is due primarily to the loss from operations of the discontinued crop
insurance segment of $(2,156,000) realized in the second quarter. This loss also
increased the net loss for the six months ended June 30, 2001 over the same
period in 2000 by $(6,001,000) or $(0.58) per share. Refer to Note 8.
"Discontinued Operations" of the Condensed Notes to Consolidated Financial
Statements for additional information.
The loss from continuing operations before taxes and distributions on preferred
securities was $(3,177,000) for the three months ended June 30, 2001 compared to
a loss of $(7,007,000) for the comparable period in 2000, an improvement of
$3,830,000. For the six months ended June 30, 2001, the loss from continuing
operations before taxes and distributions on preferred securities improved by
$3,644,000 to $(9,000,000).
GROSS PREMIUMS WRITTEN
Gross premiums written increased 56% for the second quarter of 2001 as compared
to the second quarter of 2000, due primarily to rate increases implemented in
2000 and 2001. Gross premiums written in the second quarter of 2000 declined 55%
from the second quarter of 1999 due to the Company exiting certain highly
competitive markets and instituting other underwriting initiatives intended to
increase profitability. These and other subsequent actions have allowed the
Company to increase premiums in the second quarter of 2001 to levels comparable
to the second quarter of 1999. For the first half of 2001, gross premium written
increased 6% over the same period in 2000, due primarily to the aforementioned
rate increases and a 24% reduction in policies in force.
NET PREMIUMS WRITTEN
Net premiums written represent the portion of premiums that are being retained
by the Company after consideration for risk sharing through reinsurance
contracts. As a result of losses in the Company's insurance subsidiaries and to
manage overall risk retention, the Company entered into a reinsurance agreement
to cede a portion of the gross written premiums to a third party. In the second
quarter of 2001, the Company ceded approximately 47% of its gross written
premiums under a quota share reinsurance contract that was effective January 1,
2000. For the first half of 2001, approximately 56% of gross premiums written
were ceded to the reinsurer.
NET PREMIUMS EARNED
Net premiums earned have decreased 38% and 48% for the three and six months
ended June 30, 2001, respectively, as compared to the same periods in 2000.
Premiums are earned ratably over the term of the underlying insurance contracts
and the reduction in net premiums earned is a result of the increase in ceded
premiums.
FEE INCOME
Fee income is derived from installment billings and other services provided to
policyholders. The reductions in fee income for both the three and six months
ended June 30, 2001 as compared to the comparable period in 2000 is attributable
to the reduction in policies in force.
NET INVESTMENT INCOME
Net investment income decreased 37% and 41% for the three and six months ended
June 30, 2001 compared to the same periods in 2000. This decrease is reflective
of the decline in invested assets during a period of declining premiums and the
payout of prior year losses settled in 2001.
16
NET REALIZED CAPITAL LOSSES
Net realized capital losses were $(287,000) and $(1,056,000) for the second
quarter and first half of 2001, respectively, as compared to net realized
capital losses of $(1,681,000) and $(1,317,000) in the comparable periods of
2000. Capital losses were realized due to the continued liquidation of
investments to fund operations and claim payments under unfavorable market
conditions.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The loss and loss adjustment expense (LAE) ratio for the Company for the three
and six months ended June 30, 2001, was 88.1% and 91.1%, respectively, of net
premiums earned as compared to 94.8% for the first quarter of 2001 and to 82.3%
for the entire year 2000.
During the second quarter of 2001, the Company experienced favorable development
on its year-end 2000 loss and LAE reserves for accidents occurring in 2000 and
prior in the amount of $0.8 million resulting from favorable settlement of
outstanding claims. This development reduced the loss and LAE ratio for the
second quarter by 3.5 percentage points.
The loss and allocated loss adjustment expense ratio for the Company for the
three months ended June 30, 2001 was 71.2% compared to 70.2% for the same period
in 2000. The unallocated loss adjustment expense (ULAE) ratio for the quarter
was 16.8% compared to 7.9% for the second quarter of 2000. ULAE is not ceded
under the Company's quota share reinsurance agreement; therefore, such expense
represents a higher percentage of net earned premiums when compared to the same
period last year. ULAE as a percentage of gross written premiums was 8.3% for
the second quarter in 2001 as compared to 9.8% in 2000.
POLICY ACQUISITION AND GENERAL AND ADMINISTRATIVE EXPENSE
Policy acquisition and general and administrative expenses for the three and six
months ended June 30, 2001 declined to $10,713,000 and $21,231,000,
respectively, from the comparable periods of 2000. A reduction for the second
quarter and first half of 2001 of 44% and 43%, respectively, over the same
periods in 2000. This reflects an increase in ceding commissions associated with
the quota share reinsurance contract and overall operating expense reductions.
As a percentage of gross premiums written, the Company experienced a reduction
in its 2001 expense ratio from 64% in 2000 to 23% and from 42% in 2000 to 22%
for the three and six months ended June 30, 2001, respectively. These decreases
are the result of the Company continuing to reduce operating expenses, the
effect of increased operating expenses allocated to LAE, and an increase in
ceding commissions earned under the quota share reinsurance contract.
PROVISION (BENEFIT) FOR INCOME TAXES
At June 30, 2001 the Company's net tax assets are fully offset by a 100%
valuation allowance that resulted in no tax benefit for either the three or six
months ended June 30, 2001.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
INVESTMENTS
Total investments at June 30, 2001 and December 31, 2000 were $120.9 million and
$134.1million, respectively. The decline in invested assets results from
continued liquidations to fund claim payments and operating expenses.
Composition of investments is comparable between these periods and the Company's
market risk exposure has not changed materially since December 31, 2000.
REINSURANCE RECEIVABLES AND PAYABLES
The Company negotiated a third-party quota share reinsurance agreement that
became effective January 1, 2000. Under the quota share agreement, the Company
may cede a portion of its non-standard automobile insurance premiums and related
losses based on a variable percentage of up to 75% of Superior's and up to 90%
of Pafco's earned premiums in 2001. The average ceding percentage over the year
2000 was 33%, with 41% being ceded in the fourth quarter of 2000. In aggregate,
the Company's ceding percentage for the first quarter of 2001 was increased to
approximately 55% and remained unchanged in the second quarter. The increase in
the amount of premiums and losses ceded under this contract directly affect
reinsurance balances due and payable on the face of the financial statements.
17
RECEIVABLES
The receivables have increased by $14,190,000, or 28% from December 31, 2000.
This increase is attributable to an increase in billable premiums due to a shift
in product mix to twelve-month policies from six-month policies.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Total loss and loss adjustment expense reserves decreased from $108,117,000 as
of December 31, 2000 to $92,490,000 as of June 30, 2001, a reduction of
approximately $15.6 million. This decrease is consistent with the Company's
declining volume of business.
UNEARNED PREMIUMS
At June 30, 2001, unearned premiums were $73,506,000, an increase of $11,120,000
from December 31, 2000, consistent with the increase in receivables discussed
above.
DEFERRED INCOME
In connection with the sale of the crop insurance book of business to Acceptance
on June 6, 2001, the Company received a payment of $4.5 million for agreeing not
to engage in the crop insurance business for three years from the sale date. The
payment is being amortized to income on a straight-line basis over the
three-year period with one month of amortization taken in the second quarter.
OTHER LIABILITIES
Other liabilities increased by $6,688,000 from December 31, 2000 to June 30,
2001. However, payables as of June 30, 2001 of $21,131,000 are more comparable
to payables of $19,700,000 as of June 30, 2000.
STOCKHOLDERS' (DEFICIT)
Stockholders' (deficit) has increased by $(17,065,000) from December 31, 2000.
This increase is the result of the net loss of $(18,597,000) for the six months
ended June 30, 2001, offset by a reduction in unrealized loss on investments of
$1,533,000.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds available to the management and holding companies
are fees from policyholders, management fees and dividends from its primary
subsidiaries.
The Company collects billing fees charged to policyholders that elect to make
their premium payments in installments. Superior Insurance Group, Inc.
("Superior Group") also receives management fees under its management agreement
with its insurance subsidiaries. Superior Insurance Company ("Superior") may pay
dividends of up to 10% of surplus or 100% of net income, whichever is greater,
from earned surplus as permitted by Florida statute. During 2000 and 2001
Superior has not had net income from which to pay dividends. As a result of
regulatory actions taken by the Indiana Department of Insurance ("IDOI") with
respect to Pafco and IGF, those subsidiaries may not pay dividends without prior
approval by the IDOI. 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, IGF and
Superior are subject to review by the IDOI and FDOI.
The non-standard automobile insurance subsidiaries' primary sources 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, payment of
claims settlement costs, operating expenses (primarily management fees),
commissions to independent agents, premium taxes, dividends and the purchase of
investments. There is variability 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. During the second quarter of both 2001 and 2000, due to reduced premium
volume, the Company has liquidated investments to pay claims. The Company
historically has tried to maintain duration averages of 3.5 years. However, the
reduction in new funds due to lower premium volume has and will cause the
Company to shorten duration. The Company may incur the cost of selling longer
bonds to pay claims as claim payments tend to lag premium receipts. Due to the
decline in premium volume, the Company has experienced a
18
reduction in its investment portfolio, but to date has not experienced any
problems meeting its obligations for claims payments.
On August 12, 1997, the Company issued through a wholly owned trust subsidiary
$135 million aggregate principal amount in Trust Originated Preferred Securities
("Preferred Securities"). The Preferred Securities have a term of 30 years with
annual interest payments of $6.5 million, which commenced February 15, 1998. The
Preferred Securities may be redeemed in whole or in part after 10 years.
The Company began deferring the semi annual interest payments in February 2000.
The Company may continue to defer interest payments in accordance with the terms
of the trust indenture for up to five years. The unpaid interest installment
amounts accrue interest at 9.5%. The Company will defer the interest payment due
in August 2001.
The trust indenture contains certain restrictive 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 making loans
or advances to affiliates, repurchasing common stock and the payment of
dividends in excess of a stated limitation.
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 (1.05) at June 30, 2001, and will continue to apply until the Company's
consolidated coverage ratio is in compliance with the terms of the trust
indenture. The Company is in compliance with these additional restrictions.
Net cash used in operating activities in the first half of 2001 aggregated
$(13.0) million compared to cash used of $(22.3) million in the comparable
period of 2000.
The seasonality of the discontinued crop operations and the resultant cash flows
have been historically insufficient to fund crop insurance operations during
certain periods of the crop cycle. As previously reported, during 2000, IGF's
working capital line of credit expired and the Company sought to obtain a
replacement credit facility or other alternative financing. The Company was not
able to secure a third-party credit arrangement; however, intercompany loans
approved by regulators were made to IGF to fund short-term cash flow needs
during the first quarter of 2001. These loans were paid in full as of June 30,
2001. As previously reported, the discontinued crop operations were sold to a
third party in June 2001.
Management believes cash flows from premiums, investment income and billing fees
in the non-standard automobile operations will be sufficient to meet obligations
to policyholders and operating expenses for the foreseeable future. This is due
primarily to the lag time between receipt of premiums and claims payments.
Accordingly, while there can be no assurance as to the sufficiency of the
Company's cash flow in future periods, the Company believes that its cash flow
will be sufficient to meet all of the Company's operating expenses and operating
debt service (not including the Preferred Securities) for the foreseeable
future.
GAAP stockholders' equity reflected a deficit of $(129,510,000) at June 30,
2001, which does not reflect the statutory equity upon which the Company
conducts its various insurance operations. The Company's insurance subsidiaries,
after the effects of Codification (See Note 3 to the consolidated financial
statements), had statutory surplus of approximately $27.6 million at June 30,
2001.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to Qualitative and Quantitative Disclosures about Market
Risk was included under Item 1. Business in the December 31, 2000 Form 10-K. No
material changes have occurred in market risk since this information was
disclosed in the December 31, 2000 Form 10-K.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, IGF, which is a wholly owned subsidiary of the company,
had been a party to a number of pending legal proceedings and claims relating to
agricultural production interruption insurance policies (the "AgPI Program")
which were during 1998. Sales of this product resulted in large underwriting
losses by IGF.
Approximately $29,047,653 was paid through June 30, 2001 in settlement of legal
proceedings and claims related to the AgPI Program, with payments totaling
approximately $259,489 in the first half of 2001. A reserve of approximately
$10,652,347 remains to pay future claims. All of the policies of insurance,
which were issued in the AgPI Program, were issued by and under the name of
Mutual Service Casualty Insurance Company ("MSI"), a Minnesota Corporation with
its principal place of business located in Arden Hills, Minnesota.
A dispute arose between MSI and IGF with respect to the funding of the
settlements of claims made on the AgPI Program. MSI and IGF currently are
arbitrating their dispute over responsibility for over $60 million in claims
paid by both companies to MSI's insureds. IGF is seeking a recovery of the $30
million in claims which it paid, and MSI is seeking a similar recovery of the
claims which it paid. The arbitration commenced on December 20, 2000. The
parties subsequently selected an arbitration panel and had their first,
organizational meeting with the panel on May 22, 2001. At that meeting, MSI
moved for an order requiring IGF to post pre-hearing security through the
issuance of a letter of credit in the amount of $39 million. Over IGF's
objection, in a two to one vote, the panel on June 9, 2001, ordered IGF to post
the $39 million in security, which IGF was to have done by June 19, 2001.
On or about June 11, 2001, IGF filed a motion in the United States District
Court for the District of New Jersey seeking to vacate the arbitration panel's
order requiring security. On June 19, 2001, MSI filed a motion in the same court
for a ruling confirming that order. On July 26, 2001, the parties presented oral
arguments on their cross-motions for vacation and confirmation of the order. On
August 6, 2001 the court denied IGF's motion to vacate the arbitration panel's
order. As of this date, IGF has not posted the required letter of credit, and it
is financially incapable of satisfying that requirement.
On June 25, 2001, MSI filed a complaint for preliminary and permanent injunctive
relief and damage (the "MSI Complaint") against the Company, IGF, IGFH, Granite
Re, Goran and certain affiliates of those companies, as well as certain members
of the Symons family, and Acceptance in the United States District Court for the
Southern District of Indiana, Indianapolis Division. The MSI Complaint alleges
that the previously reported June 6, 2001 transfer of IGF's assets to Acceptance
and the payments by Acceptance to the Company, Goran and Granite Re violated
Indiana law and are avoidable. In addition, the MSI Complaint alleges that
Acceptance, the Company, Goran, IGFH and the Symons Family are liable to MSI for
the entire $39 million claim which MSI is asserting against IGF in arbitration
proceedings on theories of successor liability and "piercing the corporate
veil." The MSI Complaint seeks preliminary and permanent injunctive relief
against the defendants, an order voiding the various transactions between and
among the defendants and an order determining that the defendants are directly
responsible to MSI for MSI's $39 million claim against IGF.
On July 26, 2001, the Company, IGF, IGFH, Goran, Granite Re and their affiliates
filed answers to the MSI Complaint. In those answers, each of the defendants
denied the material allegations contained in the MSI Complaint and asserted
certain affirmative defenses to that complaint. Each of those defendants also
filed briefs in opposition to MSI's Motion for Preliminary Injunctive Relief. A
hearing on MSI's Motion for Preliminary Injunctive Relief was held Thursday,
August 2, 2001. On August 3, 2001, the court denied MSI preliminary injunctive
relief.
In the event MSI is successful in obtaining permanent injunctive relief against
the Company and its affiliates, any such relief would have an adverse impact
upon the Company and its affiliates and their respective assets and operations.
Further, in the event MSI is successful in obtaining court orders voiding the
various transactions between the defendants and determining that the defendants
are directly responsible to MSI for MSI's $39 million claim against IGF, those
orders and determinations also could have an adverse effect upon the Company and
its affiliates and their respective assets and operations.
20
As previously reported, the Company and two of its subsidiaries, IGFH and IGF,
are parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the
"SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired
certain crop insurance operations of CNA. Through reinsurance agreements, CNA
was to share in IGF's profits or losses on IGF's total crop insurance business.
By letter dated January 3, 2001, CNA gave notice pursuant to the SAA of its
exercise of the "Put Mechanism" under the SAA effective February 19, 2001.
According to the SAA, upon exercise of the Put Mechanism, IGFH is obligated to
pay CNA an amount equal to 5.85 times "Average Pre-Tax Income", an amount based
in part upon payments made to CNA under the SAA. The SAA further provided that
30 days after exercise of the Put, IGF will execute a promissory note payable
six months after the exercise of the Put in the principal amount equal to the
amount owed, as specified by the SAA. In a letter dated March 20, 2001CNA also
asserted a claim for amounts allegedly due under reinsurance agreements for the
2000 crop year.
Also, as previously reported, the Company believes it has claims against CNA and
defenses to CNA's claim that may ultimately offset or reduce amounts owed to
CNA. The Company and CNA engaged in discussions regarding possible alternatives
for the resolution of their respective claims against each other. However, those
discussions ultimately proved to be unsuccessful.
Following the failure of settlement discussions, on June 4, 2001, IGF, IGFH and
the Company filed a complaint against CNA (the "IGF Complaint") in the United
States District Court for the Southern District of Indiana, Indianapolis
Division. The IGF Complaint asserts claims against CNA for fraud and
constructive fraud in connection with the SAA and breach of contract and seeks
relief against CNA for compensatory and punitive damages. On June 27, 2001, CNA
filed its "Answer, Separate Defenses and Counterclaim", in which CNA generally
denied the material allegations of the IGF Complaint and asserted various
defenses to those claims.
On June 6, 2001, CNA filed a complaint against IGF, IGFH and the Company (the
"CNA complaint") asserting claims based on the SAA and related agreements for
approximately $25 million allegedly owed CNA by virtue of its exercise of the
Put Mechanism, $3 million for amounts allegedly due under reinsurance agreements
for the 2000 crop year, $1 million for certain "fronting costs," and $1 million
pursuant to a note executed by IGFH to CNA's affiliate in connection with the
acquisition by IGFH of North American Crop Underwriters, Inc. in 1998. CNA also
asserts claims to the effect that the June 6, 2001 sale of IGF assets to
Acceptance resulted in payments of funds to Goran, the Company and Granite Re,
which funds allegedly should have been paid to IGF instead. On June 6, 2001, CNA
asked the district court to enter a temporary restraining order preventing IGF,
IGFH and the Company from disposing of the proceeds received by them in
connection with the sale of IGF assets to Acceptance. In an emergency hearing,
the court denied CNA the relief it requested, without prejudice to
reconsideration of those issues at a future time. CNA has since amended the CNA
Complaint to add Goran and Granite Re as defendants. CNA's counterclaim in
response to the IGF Complaint asserts essentially the same claims against the
same parties as the amended CNA Complaint.
An initial pretrial conference is scheduled in these cases for September.
Although the Company continues to believe that it has claims against CNA and
defenses to CNA's claims which may offset or reduce amounts owing by the Company
of its affiliates to CNA, there can be no assurance that the ultimate resolution
of the claims asserted by CNA against the Company and its affiliates will not
have a material adverse effect upon the Company and its affiliates financial
condition or results of operations.
As previously reported, the California Department of Insurance ("CDOI") has
advised the Company that it is reviewing a possible assessment which could total
$3,000,000. On June 29, 2001, the CDOI filed a Notice of Non-Compliance against
Superior, which alleges that broker fees were charged by independent brokers in
violation of California law. The Notice of Non-Compliance seeks repayment to
policyholders of amounts collected by the brokers and the possible imposition of
fines against Superior. Superior has filed a response to the notice and intends
to vigorously defend the action. As the ultimate outcome of this potential
assessment is not deemed probable, the Company has not accrued any amount in its
consolidated financial statements. No assessment has been made by the CDOI and
the Company will vigorously defend any potential assessment and believes it will
prevail.
Except as set forth above, there have been no other material developments in any
of the pending legal proceedings previously reported by the Company in the March
31, 2001 Form 10-Q.
21
The Company's insurance subsidiaries are parties to other litigation arising in
the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimate costs of litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The company held its annual meeting of shareholders on May 30, 2001. The
following is a summary of the matters voted on at the meeting:
(a) The two nominees for director were elected to serve three-year terms ending in 2003, as follows:
NOMINEE FOR AGAINST WITHHOLD
------------------- --------- ------------- -----------
VOTE
-------
Douglas H. Symons 7,341,819 1,633 3,041,947
Gene S. Yerant 7,340,669 1,633 3,043,097
The terms of the following directors continued after the meeting: G.
Gordon Symons, Alan G. Symons, John K. McKeating, Robert C. Whiting,
and Larry S. Wechter.
(b) The appointment of BDO Seidman, LLP as the Company's independent
auditors was ratified by the following shareholder vote:
For 7,371,309
Against: 2,633
Abstain: 3,022,457
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(10) 10.9 Asset Purchase Agreement by and among Acceptance Insurance
Companies Inc., American Growers Insurance Company, American
Agrisurance, Inc., Goran Capital Inc., Symons International
Group, Inc., IGF Holdings, Inc. and IGF Insurance Company
dated May 23, 2001.
10.10 First Amendment to Asset Purchase Agreement by and among
Acceptance Insurance Companies, Inc., American Growers
Insurance Company, American Agrisurance, Inc., Goran Capital
Inc., Symons International Group, Inc., IGF Holdings, Inc.,
and IGF Insurance Company dated June 5, 2001.
10.11 Assignment and Assumption Agreement by IGF Holdings, Inc.
and IGF Insurance Company and Acceptance Insurance Companies
Inc. dated May 23, 2001.
22
10.12 Granite Reinsurance Company Limited / Acceptance Crop Hail
Retrocession Agreement by and between Acceptance Insurance
Company and Granite Reinsurance Company Limited dated May
23, 2001.
10.13 IGF/Acceptance Retrocession Agreement by and between
Acceptance Insurance Company and IGF Insurance Company dated
May 23, 2001.
10.14 MPCI Stop Loss Reinsurance Contract between Granite
Reinsurance Company, Ltd. and Acceptance Insurance Companies
Inc. effective as of July 1, 2000.
10.15 Consulting and Non-competition Agreement by and between
Symons International Group, Inc. and Acceptance Insurance
Companies Inc. dated May 23, 2001.
Reports on Form 8-K:
On June 12, 2001 the Company filed a Form 8-K describing the
completion of the sale of substantially all of the crop insurance
assets of IGF Insurance Company (a wholly owned subsidiary of the
Registrant) to Acceptance Insurance Companies Inc.
On August 2, 2001 the Company filed a Form 8-K describing recent legal
proceedings and regulatory actions regarding the Registrant and its
affiliates as discussed above under "Legal Proceedings," "Commitments
and Contingencies," and "Regulatory Affairs."
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on August 14, 2001.
By: /s/ Douglas H. Symons
------------------------
Douglas H. Symons
Chief Executive Officer
By: /s/ Mark A. Paul
-------------------------
Mark A. Paul
Vice President, Chief Financial Officer,
and Treasurer
23