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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 1997.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________.
Commission File Number: 000-24366
GORAN CAPITAL INC.
(Exact name of registrant as specified in its charter)
CANADA Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
181 University Avenue, Suite 1101 M5H 3M7
Toronto, Ontario Canada
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including
area code: (416) 594-1155 (Canada)
(317) 259-6400 (U.S.A.)
Securities registered pursuant to
Section 12(b) of the Act: Common Shares
Securities registered pursuant to
Section 12(g) of the Act: (Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the Issuer's Common Stock held by nonaffiliates,
as of March 20, 1998 was $28.50 (US).
The number of shares of Common Stock of the Registrant, without par value,
outstanding as of March 20, 1998 was 10,419,332.
Documents Incorporated By Reference:
Portions of the Annual Report to Shareholders and the Proxy Statement for the
1998 Annual Meeting of Shareholders are incorporated into Parts II and III.
Exhibit Index on Page 46. Page 1 of 55
Exchange Rate Information
The Company's accounts and financial statements are maintained in U.S. Dollars.
In this Report all dollar amounts are expressed in U.S. Dollars except where
otherwise indicated.
The following table sets forth, for each period indicated, the average exchange
rates for U.S. Dollars expressed in Canadian Dollars on the last day of each
month during such period, the high and the low exchange rate during that period
and the exchange rate at the end of such period, based upon the noon buying rate
in New York City for cable transfers in foreign currencies, as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate").
Foreign Exchange Rates
U.S. to Canadian Dollars
For The Years Ended December 31,
1993 1994 1995 1996 1997
Average .7733 .7322 .7287 .7339 .7222
Period End .7544 .7129 .7325 .7301 .6995
High .8046 .7642 .7465 .7472 .7351
Low .7439 .7097 .7099 .7270 .6938
Accounting Principles
The financial information contained in this document is stated in U.S. Dollars
and is expressed in accordance with Canadian Generally Accepted Accounting
Principles unless otherwise stated.
GORAN CAPITAL INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1997
Page
PART I
ITEM 1. Business ....................................................... 4
Forward Looking Statements - Safe Harbor Provisions............. 35
ITEM 2. Properties...................................................... 41
ITEM 3. Legal Proceedings............................................... 42
ITEM 4. Submission of Matters to a Vote of Security Holders............. 42
PART II
ITEM 5. Market For Registrant's Common Equity And Related
Shareholder Matters............................................. 43
ITEM 6. Selected Consolidated Financial Data............................ 44
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 45
ITEM 8. Financial Statements and Supplementary Data..................... 45
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 45
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............. 45
ITEM 11. Executive Compensation.......................................... 45
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.. 45
ITEM 13. Certain Relationships and Related Transactions.................. 45
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports Form 8-K... 46
SIGNATURES ................................................................ 55
ITEM 1 - BUSINESS
(figures stated in U.S. dollars)
General
Goran Capital Inc. ("Goran" or the "Company") is a Canadian federally
incorporated holding company principally engaged in the business of underwriting
property and casualty insurance through its insurance subsidiaries Pafco General
Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF
Insurance Company ("IGF"), which maintain their headquarters in Indianapolis,
Indiana, Atlanta, Georgia and Des Moines, Iowa, respectively. Goran owns 67% of
a U.S. holding company, Symons International Group, Inc. ("SIG"). SIG owns IGF
and GGS Management Holdings, Inc. ("GGS Holdings") and GGS Management, Inc.
("GGS") which are the holding company and management company for Pafco and
Superior. Goran sold 33% of SIG in an Initial Public Offering in November, 1996.
The Company's other subsidiaries include Granite Reinsurance Company Ltd.
("Granite Re"), Granite Insurance Company ("Granite"), a Canadian federally
licensed insurance company and Symons International Group, Inc. - Florida
("SIGF"), a surplus lines underwriter located in Florida. In 1997, the Company
discontinued the operations of SIGF with a sale of such operations expected in
early 1998.
Granite Re is a specialized reinsurance company that underwrites niche products
such as nonstandard automobile, crop, property casualty reinsurance and offers
(on a non-risk bearing, fee basis), rent-a-captive facilities for Bermudian,
Canadian and U.S. reinsurance companies.
Through a rent-a-captive program, Granite Re offers the use of its capital and
its underwriting facilities to write specific programs on behalf of its clients,
including certain programs ceded from IGF and Pafco. Granite Re alleviates the
need for its clients to establish their own insurance company and also offers
this facility in an offshore environment.
Granite sold its book of business in January 1990 to an affiliate which
subsequently sold to third parties in June 1990. Granite currently has
approximately 40 outstanding claims and maintains an investment portfolio
sufficient to support those claim liabilities which will likely be settled
between now and the year 2000.
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Goran Capital, Inc., a specialty property and casualty insurer,
underwrites and markets nonstandard private passenger automobile insurance and
crop insurance. Through its Subsidiaries, the Company writes business in the
United States exclusively through independent agencies and seeks to distinguish
itself by offering high quality, technology based services for its agents and
policyholders. The Company had consolidated Gross Premiums Written of
approximately $449 million for the twelve months ended December 31, 1997. Based
on the Company's Gross Premiums Written in 1997, the Company believes that it is
the tenth largest underwriter of nonstandard automobile insurance in the United
States. Based on premium information compiled in 1996 by the NCIS, the Company
believes that IGF is the fourth largest underwriter of MPCI in the United
States.
The following table sets forth the premiums written by line of business for the
periods indicated (amounts exclude commercial premiums from discontinued
operations):
GORAN CAPITAL INC.
For The Years Ended December 31,
(In Thousands) 1995 1996 1997
Nonstandard Automobile (1)
Gross Premiums Written $49,005 $187,176 $323,915
Net Premiums Written 37,302 186,579 256,745
Crop Hail
Gross Premiums Written $16,966 $27,957 $38,349
Net Premiums Written 11,608 23,013 20,796
MPCI (2)
Gross Premiums Written $53,408 $82,102 $88,052
Net Premiums Written --- --- --
Finite Reinsurance
Gross Premiums Written $27,224 $2,141 $(1,334)
Net Premiums Written 32,912 4,186 4,355
Total (3)
Gross Premiums Written $146,603 $299,376 $448,982
Net Premiums Written $81,822 $213,778 $281,896
(1) Does not reflect net premiums written for Superior for the year ended
December 31, 1995 and for the four months ended April 30, 1996. For the year
ended December 31,1995, Superior and its subsidiaries had gross premiums written
of $94.8 million and net premiums written of $94.1 million. For the four months
ended April 30, 1996, Superior and its subsidiaries had gross premiums written
of $44.0 million and net premiums written of $43.6 million.
(2) For a discussion of the accounting treatment of MPCI premiums, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company".
(3) For additional financial segment information concerning the Company's
nonstandard automobile and crop insurance operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company".
-5-
Nonstandard Automobile Insurance
Industry Background
The Company, through its Subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile physical damage and liability
policies for "nonstandard risks." The Company believes that the voluntary
nonstandard market has accounted for approximately 15% of total private
passenger automobile insurance premiums written in recent years. According to
statistical information derived from insurer annual statements compiled by A.M.
Best, the nonstandard automobile market accounted for $19 billion in annual
premium volume for 1997.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
o The Company seeks to achieve profitability through a
combination of internal growth and the acquisition of other
insurers and blocks of business. The Company regularly
evaluates acquisition opportunities.
o The Company will seek to expand the multi-tiered marketing
approach currently employed in certain states in order to
offer to its independent agency network a broader range of
products with different premium and commission structures.
o The Company is committed to the use of integrated technologies
which permit it to rate, issue, bill and service policies in
an efficient and cost effective manner.
o The Company competes primarily on the basis of underwriting
criteria and service to agents and insureds and generally does
not match price decreases implemented by competitors which are
directed towards obtaining market share.
o The Company encourages agencies to place a large share of
their profitable business with its subsidiaries by offering,
in addition to fixed commissions, a contingent commission
based on a combination of volume and profitability.
o The Company responds to claims in a manner designed to reduce
the costs of claims settlements by reducing the number of
pending claims and uses computer databases to verify repair
and vehicle replacement costs and to increase subrogation and
salvage recoveries.
Products
The Company offers both liability and physical damage coverage in the
insurance marketplace, with policies having terms of three to twelve months,
with the majority of policies having a term of six months. Most nonstandard
automobile insurance policyholders choose the basic limits of liability coverage
which, though varying from state to state, generally are $25,000 per person and
$50,000 per accident for bodily injury and in the range of $10,000 to $20,000
for property damage. Of the approximately 300,218 combined policies of Pafco and
Superior in force on December 31, 1997, fewer than approximately 10% had policy
limits in excess of these basic limits of coverage. Of the 72,626 policies of
Pafco in force on December 31, 1997, approximately 81.9% had policy periods of
six months or less. Of the approximately 227,592 policies of Superior in force
as of December 31, 1997, approximately 62.5% had policy periods of six months
and approximately 37.5% had policy periods of twelve months.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Choice
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard marketplace. The Superior
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Standard policy is intended for risks which do not qualify for Superior Choice
but which nevertheless present a more favorable risk profile than many other
nonstandard risks. The Superior Specialty policies cover risks which do not
qualify for either the Superior Choice or the Superior Standard. Pafco offers a
product similar to the Superior product.
Marketing
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Virginia, Indiana and Georgia and also
writes nonstandard automobile insurance in 14 additional states, with plans to
continue to expand selectively into additional states. The Company will select
states for expansion based on a number of criteria, including the size of the
nonstandard automobile insurance market, state-wide loss results, competition
and the regulatory climate. The following table sets forth the geographic
distribution of Gross Premiums Written for the Company for the periods indicated
including Gross Premiums Written for Superior prior to its acquisition by the
Company on April 30, 1996.
-7-
Goran Capital, Inc. and Superior Insurance Company (Combined)
Year Ended December 31,
(in thousands)
State 1995 1996 1997
- ----- ---- ---- ----
Arkansas $1,796 $2,004 $1,539
California 15,350 25,131 59,819
Colorado 9,257 10,262 9,865
Florida 54,535 97,659 141,907
Georgia 5,927 7,398 11,858
Illinois 2,483 2,994 3,541
Indiana 13,842 16,599 17,227
Iowa 3,832 5,818 7,079
Kentucky 7,840 11,065 9,538
Mississippi 2,721 2,250 2,830
Missouri 8,513 13,423 9,705
Nebraska 3,660 5,390 6,613
Nevada --- --- 4,273
Ohio 3,164 3,643 3,731
Oklahoma 317 2,559 3,418
Oregon --- --- 2,302
Tennessee 332 (2) ---
Texas 3,464 10,122 7,192
Virginia 5,035 14,733 21,446
Washington 1,693 106 32
------- ------- -------
Total $143,761 $231,154 $323,915
======= ======= =======
The Company markets its nonstandard products exclusively through
approximately 6,000 independent agencies and focuses its marketing efforts in
rural areas and the peripheral areas of metropolitan centers. As part of its
strategy, management is continuing its efforts to establish the Company as a low
cost provider of nonstandard automobile insurance while maintaining a commitment
to provide quality service to both agents and insureds. This element of the
Company's strategy is being accomplished primarily through the automation of
certain marketing, underwriting and administrative functions. In order to
maintain and enhance its relationship with its agency base, the Company has 27
territorial managers, each of whom resides in a specific marketing region and
has access to the technology and software necessary to provide marketing, rating
and administrative support to the agencies in his or her region.
The Company attempts to foster strong service relationships with its
agencies and customers. The Company is currently completing its development of
computer software that will provide on-line communication with its agency force.
In addition, to deliver prompt service while ensuring consistent underwriting,
the Company offers rating software to its agents in some states which permits
them to evaluate risks in their offices. The agent has the authority to sell and
bind insurance coverages in accordance with procedures established by the
Company, which is a common practice in the nonstandard automobile insurance
business. The Company reviews all coverages bound by the agents promptly and
generally accepts all coverages which fall within its stated underwriting
criteria. In most jurisdictions, the Company has the right within a specified
time period to cancel any policy even if the risk falls within its underwriting
criteria. See "Business -- Nonstandard Automobile Insurance -- Underwriting."
-8-
The Company compensates its agents by paying a commission based on a
percentage of premiums produced. The Company also offers its agents a contingent
commission based on volume and profitability, thereby encouraging the agents to
enhance the placement of profitable business with the Company.
The Company believes that the combination of Pafco with Superior and
its two Florida-domiciled insurance subsidiaries allows the Company the
flexibility to engage in multi-tiered marketing efforts in which specialized
automobile insurance products are directed toward specific segments of the
market. Since certain state insurance laws prohibit a single insurer from
offering similar products with different commission structures or, in some
cases, premium rates, it is necessary to have multiple licenses in certain
states in order to obtain the benefits of market segmentation. The Company is
currently offering multi-tiered products in its major states. The Company
intends to continue the expansion of the marketing of its multi-tiered products
into other states and to obtain multiple licenses for its subsidiaries in these
states to permit maximum flexibility in designing commission structures.
Underwriting
The Company underwrites its nonstandard automobile business with the
goal of achieving adequate pricing. The Company seeks to classify risks into
narrowly defined segments through the utilization of all available underwriting
criteria. The Company maintains an extensive, proprietary database which
contains statistical records with respect to its insureds on driving and repair
experience by location, class of driver and type of automobile. Management
believes this database gives the Company the ability to be more precise in the
underwriting and pricing of its products. Further, the Company uses motor
vehicle accident reporting agencies to verify accident history information
included in applications.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and
use of rates, while others, such as Florida, Arkansas and California, require
approval of the insurance department prior to the use of the rates.
The Company has integrated its automated underwriting process with the
functions performed by its agency force. For example, the Company has a rating
software package for use by agents in some states. In many instances, this
software package, combined with agent access to the automated retrieval of motor
vehicle reports, ensures accurate underwriting and pricing at the point of sale.
The Company believes the automated rating and underwriting system provides a
significant competitive advantage because it (i) improves efficiencies for the
agent and the Company, thereby reenforcing the agents' commitment to the
Company, (ii) makes more accurate and consistent underwriting decisions possible
and (iii) can be changed easily to reflect new rates and underwriting
guidelines.
Underwriting results of insurance companies are frequently measured by
their Combined Ratios. However, investment income, federal income taxes and
other non-underwriting income or expense are not reflected in the Combined
Ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are generally considered profitable when the Combined Ratio is under
100% and unprofitable when the Combined Ratio is over 100%. The following table
sets forth Loss and LAE Ratios, Expense Ratios and Combined Ratios for the
periods indicated for the nonstandard automobile insurance business of the
Company. The ratios exclude the effects of Superior prior to the acquisition by
the Company on April 30, 1996. The Ratios shown in the table below are computed
based upon GAAP.
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Years Ended December 31,
----------------------------
1995 1996 1997
Loss and LAE Ratio 73.8% 73.7% 78.0%
Underwriting Expense Ratio, net of
billing fees 32.3% 23.2% 22.7%
----- ----- -----
Combined Ratio 106.1% 96.9% 100.7%
====== ===== ======
In an effort to maintain and improve underwriting profits, the
territorial managers regularly monitor loss ratios of the agencies in their
regions and meet periodically with the agencies in order to address any adverse
trends in Loss Ratios.
Claims
The Company's nonstandard automobile claims department handles claims
on a regional basis from its Indianapolis, Indiana; Atlanta, Georgia; Tampa,
Florida and Anaheim, California locations. Management believes that the
employment of salaried claims personnel, as opposed to independent adjusters,
results in reduced ultimate loss payments, lower LAE and improved customer
service. The Company generally retains independent appraisers and adjusters on
an as needed basis for estimation of physical damage claims and limited elements
of investigation. The Company uses the Audapoint, Audatex and Certified
Collateral Corporation computer programs to verify, through a central database,
the cost to repair a vehicle and to eliminate duplicate or "overlap" costs from
body shops. Autotrak, which is a national database of vehicles, allows the
Company to locate vehicles nearly identical in model, color and mileage to the
vehicle damaged in an accident, thereby reducing the frequency of disagreements
with claimants as to the replacement value of damaged vehicles.
Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claim-related litigation is monitored by a home
office supervisor or litigation manager. The claims policy of the Company
emphasizes prompt and fair settlement of meritorious claims, appropriate
reserving for claims and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a
portion of its risks and paying for that protection based upon premiums received
on all policies subject to such Reinsurance. Insurance is ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large losses, including catastrophic losses. Although
Reinsurance does not legally discharge the ceding insurer from its primary
obligation to pay the full amount of losses incurred under policies reinsured,
it does render the reinsurer liable to the insurer to the extent provided by the
terms of the Reinsurance treaty. As part of its internal procedures, the Company
evaluates the financial condition of each prospective reinsurer before it cedes
business to that carrier. Based on the Company's review of its reinsurers'
financial health and reputation in the insurance marketplace, the Company
believes its reinsurers are financially sound and that they therefore can meet
their obligations to the Company under the terms of the Reinsurance treaties.
-10-
Effective January 1, 1997, Pafco and Superior ceded 20% of its
nonstandard automobile business written during the first three quarters of 1997
and 25% during the fourth quarter in accordance with a quota share Reinsurance
agreement. 90% of the cession was with Vesta Fire Insurance Company (rated "A"
by A.M. Best) and 10% was with Granite Re. Effective January 1, 1998, the
cession rate was changed to a minimum of 10% and includes the same reinsurers.
In 1997, Pafco and Superior maintained casualty excess of loss
reinsurance on its nonstandard automobile insurance business covering 100% of
losses on an individual occurrence basis in excess of $200,000 up to a maximum
of $5,000,000.
Amounts recoverable from reinsurers relating to nonstandard automobile
operations as of December 31, 1997 follows:
Reinsurance
Recoverables as of
A.M. Best December 31, 1997 (1)
Reinsurers Rating (in thousands)
Everest Reinsurance Company A (2) 1,880
Federal Government A+ (3) 1,248
Sentinel Reinsurance Company, Ltd. 345
Vesta Fire Insurance Company A 12,939
(1) Only recoverable greater than $200,000 are shown. Total third party
nonstandard automobile reinsurance recoverables as of December 31, 1997 were
approximately $31,932,000.
(2) An A.M. Best Rating of "A" is the third highest of 15 ratings.
(3) An A.M. Best Rating of "A+" is the second highest of 15 ratings.
On April 29, 1996, Pafco retroactively ceded all of its commercial
business relating to 1995 and previous years to Granite Re, with an effective
date of January 1, 1996. Approximately $3,519,000 and $2,380,000 of loss and
loss adjustment expense reserves and unearned premium reserves, respectively,
were ceded and no gain or loss recognized. Effective January 1, 1998, Granite Re
ceded the 1995 and prior commercial business back to Pafco. Approximately
$1,803,000 in loss and loss adjustment expense reserves were ceded back to Pafco
and no gain or loss was recognized.
On April 29, 1996, Pafco also entered into a 100% quota share
reinsurance agreement with Granite Re, whereby all of Pafco's commercial
business from 1996 and thereafter was ceded effective January 1, 1996.
Neither Pafco nor Superior has any facultative Reinsurance with respect
to its nonstandard automobile insurance business.
Competition
The Company competes with both large national and smaller regional
companies in each state in which it operates. The Company's competitors include
other companies which, like the Company, serve the agency market, as well as
companies which sell insurance directly to customers. Direct writers may have
certain competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and, potentially, reduced
acquisition costs. The Company's primary competitors are Progressive Casualty
Insurance Company, Guaranty National Insurance Company, Integon Corporation
Group, Deerbrook Insurance Company (a member of the Allstate
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Insurance Group) and the companies of the American Financial Group. Generally,
these competitors are larger and have greater financial resources than the
Company. The nonstandard automobile insurance business is price sensitive and
certain competitors of the Company have, from time to time, decreased their
prices in an apparent attempt to gain market share. Although the Company's
pricing is inevitably influenced to some degree by that of its competitors,
management of the Company believes that it is generally not in the Company's
best interest to match such price decreases, choosing instead to compete on the
basis of underwriting criteria and superior service to its agents and insureds.
Crop Insurance
Industry Background
The two principal components of the Company's crop insurance business
are MPCI and private named peril, primarily crop hail insurance. Crop insurance
is purchased by farmers to reduce the risk of crop loss from adverse weather and
other uncontrollable events. Farms are subject to drought, floods and other
natural disasters that can cause widespread crop losses and, in severe cases,
force farmers out of business. Because many farmers rely on credit to finance
their purchases of such agricultural inputs as seed, fertilizer, machinery and
fuel, the loss of a crop to a natural disaster can reduce their ability to repay
these loans and to find sources of funding for the following year's operating
expenses.
MPCI was initiated by the federal government in the 1930s to help
protect farmers against loss of their crops as a result of drought, floods and
other natural disasters. In addition to MPCI, farmers whose crops are lost as a
result of natural disasters have, in the past, occasionally been supported by
the federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available only
on major crops in major producing areas. In 1980, Congress expanded the scope
and coverage of the MPCI program. In addition, the delivery system for MPCI was
expanded to permit private insurance companies and licensed agents and brokers
to sell MPCI policies and the FCIC was authorized to reimburse participating
companies for their administrative expenses and to provide federal Reinsurance
for the majority of the risk assumed by such private companies.
Although expansion of the federal crop insurance program in 1980 was
expected to make crop insurance the farmer's primary risk management tool,
participation in the MPCI program was only 32% of eligible acreage in the 1993
crop year. Due in part to low participation in the MPCI program, Congress
provided an average of $1.5 billion per year in ad hoc disaster payments over
the six years prior to 1994. In view of the combination of low participation
rates in the MPCI program and large federal payments on both crop insurance
(with an average loss ratio of 147%) and ad hoc disaster payments since 1980,
Congress has, since 1990, considered major reform of its crop insurance and
disaster assistance policies. The 1994 Reform Act was enacted in order to
increase participation in the MPCI program and eliminate the need for ad hoc
federal disaster relief payments to farmers.
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage (i.e., the minimum available level of MPCI providing coverage
for 50% of farmers' historic yield at 60% of the price per unit for such crop
set by the FCIC) in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of CAT
Coverage by the local USDA offices which has been eliminated for the 1998 crop
year.
The Federal Agriculture Improvement and Reform Act of 1996 ("the 1996
Reform Act"), signed into law by President Clinton in April 1996, limited the
role of the USDA offices in the delivery of MPCI coverage beginning in July
1996, which was the commencement of the 1997 crop year, and also eliminated the
linkage between CAT Coverage and qualification for certain federal farm program
benefits. This limitation should provide the Company with the opportunity to
realize increased revenues from the distribution and servicing of its MPCI
product. In accordance with the 1996 Reform Act, the USDA announced in July
1996, the following 14 states in which CAT Coverage will no longer be available
through USDA offices but rather will be solely available through private
companies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota,
Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and
Wyoming. Through June 1996, the FCIC transferred to the Company approximately
8,900 insureds for CAT Coverage who previously purchased such coverage from USDA
field offices. The Company believes that any
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future potential negative impact of the delinkage mandated by the 1996 Reform
Act will be mitigated by, among other factors, the likelihood that farmers will
continue to purchase MPCI to provide basic protection against natural disasters
since ad hoc federal disaster relief programs have been reduced or eliminated.
In addition, the Company believes that (i) lending institutions will likely
continue to require this coverage as a condition to crop lending and (ii) many
of the farmers who entered the MPCI program as a result of the 1994 Reform Act
have come to appreciate the reasonable price of the protection afforded by CAT
Coverage and will remain with the program regardless of delinkage. There can,
however, be no assurance as to the ultimate effect which the 1996 Reform Act may
have on the business or operations of the Company.
On June 9, 1997, the Secretary of Agriculture announced that the USDA
would no longer provide CAT Coverage through USDA offices in any state effective
for the 1998 crop year. This is to be implemented by a transferring of CAT
policies to the various members of the crop insurance industry. At this time,
the Company has been preliminarily informed that it will receive approximately
17,000 policies that were formerly written by USDA offices, although there can
be no assurance that the Company will receive this number of policies. Based on
historical, per-policy averages, the Company has preliminarily estimated that it
will receive an additional approximate $2 to $3 million in premium from such
transferred policies, however, there can be no assurance that this number will
be realized.
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Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
o The Company seeks to enhance underwriting profits and reduce
the volatility of its crop insurance business through
geographic diversification and the appropriate allocation of
risks among the federal reinsurance pools and the effective
use of federal and third-party catastrophic Reinsurance
arrangements.
o The Company also limits the risks associated with crop
insurance through selective underwriting of crop risks based
on its historical loss experience data base.
o The Company continues to develop and maintain a proprietary
knowledge-based underwriting system which utilizes a database
of Company-specific underwriting rules.
o The Company has further strengthened its independent agency
network by using technology to provide fast, efficient service
to its agencies and providing application documentation
designed for simplicity and convenience.
o Unlike many of its competitors, the Company employs
approximately 89 full-time claims adjusters, most of whom are
agronomy-trained, to reduce the cost of losses experienced by
IGF.
o The Company stops selling its crop hail policies after certain
selected dates to prevent farmers from adversely selecting
against IGF when a storm is forecast or hail damage has
already occurred.
o The Company continues to explore growth opportunities and
product diversification through new specialty coverages,
including Crop Revenue Coverage (CRC) and specific named peril
crop insurance. Further, IGF is in the initial stages of
opening new markets and attracting new customers by developing
timber, crop completion and agricultural production
interruption coverages.
o The Company continues to explore new opportunities in
administrative efficiencies and product underwriting made
possible by advances in Precision Farming software, Global
Positioning System (GPS) software and Geographical Information
System (GIS) technology, all of which continue to be adopted
by insureds in their farming practices.
Products
MPCI is a federally subsidized program which is designed to provide
participating farmers who suffer insured crop damage with funds needed to
continue operating and plant crops for the next growing season. All of the
material terms of the MPCI program and of the participation of private insurers,
such as the Company, in the program are set by the FCIC under applicable law.
MPCI provides coverage for insured crops against substantially all natural
perils. Purchasing an MPCI policy permits a farmer to insure against the risk
that his crop yield for any growing season will be less than 50% to 75% (as
selected by the farmer at the time of policy application or renewal) of his
historic crop yield. If a farmer's crop yield for the year is greater than the
yield coverage he selected, no payment is made to the farmer under the MPCI
program. However, if a farmer's crop yield for the year is less than the yield
coverage selected, MPCI entitles the farmer to a payment equal to the yield
shortfall multiplied by 60% to 100% of the price for such crop (as selected by
the farmer at the time of policy application or renewal) for that season as set
by the FCIC.
In order to encourage farmers to participate in the MPCI program and
thereby reduce dependence on traditional disaster relief measures, the 1994
Reform Act established CAT Coverage as a new minimum level of MPCI coverage,
which farmers may purchase upon payment of a fixed administrative fee of $50 per
policy instead of any premium. CAT Coverage insures 50% of historic crop yield
at 60% of the FCIC-set crop price for the applicable commodities standard unit
of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private
insurers such as the
-14-
Company.
In addition to CAT Coverage, MPCI policies that provide a greater level
of protection than the CAT Coverage level are also offered ("Buy-up Coverage").
Most farmers purchasing MPCI have historically purchased at Buy-up Coverage
levels, with the most frequently sold policy providing coverage for 65% of
historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up
Coverages require payment of a premium in an amount determined by a formula set
by the FCIC. Buy-up Coverage can only be purchased from private insurers. The
Company focuses its marketing efforts on Buy-up Coverages, which have higher
premiums and which the Company believes will continue to appeal to farmers who
desire, or whose lenders encourage or require, revenue protection.
The number of MPCI Buy-up policies written has historically tended to
increase after a year in which a major natural disaster adversely affecting
crops occurs and to decrease following a year in which favorable weather
conditions prevail.
The Company, like other private insurers participating in the MPCI
program, generates revenues from the MPCI program in two ways. First, it
markets, issues and administers policies, for which it receives administrative
fees; and second, it participates in a profit-sharing arrangement in which it
receives from the government a portion of the aggregate profit, or pays a
portion of the aggregate loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex profit sharing formula established by the FCIC. Under
this formula, the primary factors that determine the Company's MPCI profit or
loss share are (i) the gross premiums the Company is credited with having
written, (ii) the amount of such credited premiums retained by the Company after
ceding premiums to certain federal reinsurance pools and (iii) the loss
experience of the Company's insureds. The following discussion provides more
detail about the implementation of this profit sharing formula.
The Company recently began offering a new product in its crop insurance
business called Crop Revenue Coverage ("CRC"). In contrast to standard MPCI
coverage, which features a yield guarantee or coverage for the loss of
production, CRC provides the insured with a guaranteed revenue stream by
combining both yield and price variability protection. CRC protects against a
grower's loss of revenue resulting from fluctuating crop prices and/or low
yields by providing coverage when any combination of crop yield and price
results in revenue that is less than the revenue guarantee provided by the
policy. CRC was approved by the FCIC as a pilot program for revenue insurance
coverage plans for the 1996 Crop Year and has been available for corn and
soybeans in all counties in Iowa and Nebraska since 1996. CRC policies
represented approximately 30% of the combined corn policies written by IGF in
Iowa and Nebraska since 1996. Since July 1996, CRC was made available for winter
wheat in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas
and Washington and in parts of Montana. In May 1997, the FCIC announced that CRC
will be expanded to include wheat in twenty-five additional states. Currently,
CRC represents approximately 7% of all of the Company's wheat policies.
Revenue insurance coverage plans such as CRC are the result of the 1994
Reform Act, which directed the FCIC to develop a pilot crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company other than the
Company under the auspices of this pilot program, which authorizes private
companies to design alternative revenue coverage plans and to submit them for
review, approval and endorsement by the FCIC. As a result, although CRC is
administered and reinsured by the FCIC and risks are allocated to the federal
reinsurance pools, CRC remains partially influenced by the private sector,
particularly with respect to changes in its rating structure.
CRC plans to use the policy terms and conditions of the Actual
Production History ("APH") plan of MPCI as the basic provisions for coverage.
The APH provides the yield component by utilizing the insured's historic yield
records. The CRC revenue guarantee is the producer's approved APH times the
coverage level, times the higher of the spring futures price or harvest futures
price (in each case, for post-harvest delivery) of the insured crop for each
unit of farmland. The coverage levels and exclusions in a CRC policy are similar
to those in a standard MPCI policy. For the 1997 Crop Year, the Company received
from the FCIC an expense reimbursement payment equal to 25% of Gross
-15-
Premiums Written in respect of each CRC policy it writes. The MPCI Buy-up
Expense Reimbursement Payment is currently administratively established by FCIC
in the absence of a applicable legislation. This expense reimbursement payment
was reduced from 27% in 1996 to 23.25% in 1998.
CRC protects revenues by extending crop insurance protection based on
APH to include price as well as yield variability. Unlike MPCI, in which the
crop price component of the coverage is set by the FCIC prior to the growing
season and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice in
the CRC plan. The spring futures price is used to establish the initial policy
revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to recompute
the revenue guarantee (and resulting indemnity payments) when the harvest price
is higher than the spring price.
In addition to MPCI, the Company offers stand alone crop hail
insurance, which insures growing crops against damage resulting from hail storms
and which involves no federal participation, as well as its proprietary
HAILPLUS(R) product which combines the application and underwriting process for
MPCI and hail coverages. The HAILPLUS(R) product tends to produce less volatile
loss ratios than the stand alone product since the combined product generally
insures a greater number of acres, thereby spreading the risk of damage over a
larger insured area. Approximately 50% of IGF's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide insurance
against hail damage, under crop hail coverages farmers can receive payments for
hail damage which would not be severe enough to require a payment under an MPCI
policy. The Company believes that offering crop hail insurance enables it to
sell more MPCI policies than it otherwise would.
In addition to crop hail insurance, the Company also sells a small
volume of insurance against crop damage from other specific named perils. These
products cover specific crops, including hybrid seed corn, cranberries, cotton,
sugar cane, sugar beets, citrus, tomatoes and onions and are generally written
on terms that are specific to the kind of crops and farming practices involved
and the amount of actuarial data available. The Company plans to seek potential
growth opportunities in this niche market by developing basic policies on a
diverse number of named crops grown in a variety of geographic areas and to
offer these polices primarily to large producers through certain select agents.
The Company's experienced product development team will develop the underwriting
criteria and actuarial rates for the named peril coverages. As with the
Company's other crop insurance products, loss adjustment procedures for named
peril policies are handled by full-time professional claims adjusters who have
specific agronomy training with respect to the crop and farming practice
involved in the coverage. IGF is currently in the initial stages of opening new
markets and attracting new customers by developing timber, crop completion and
agricultural production interruption coverages.
Gross Premiums
For each year, the FCIC sets the formulas for determining premiums for
different levels of Buy-up Coverage. Premiums are based on the type of crop,
acreage planted, farm location, price per bushel for the insured crop as set by
the FCIC for that year and other factors. The federal government will generally
subsidize a portion of the total premium set by the FCIC and require farmers to
pay the remainder. Cash premiums are received by the Company from farmers only
after the end of a growing season and are then promptly remitted to the federal
government. Although applicable federal subsidies change from year to year, such
subsidies will range up to approximately 40% of the Buy-up Coverage premium
depending on the crop insured and the level of Buy-up Coverage purchased, if
any. Federal premium subsidies are recorded on the Company's behalf by the
government. For purposes of the profit sharing formula, the Company is credited
with having written the full amount of premiums paid by farmers for Buy-up
Coverages, plus the amount of any related federal premium subsidies (such total
amount, its "MPCI Premium").
As previously noted, farmers pay an administrative fee of $50 per
policy but are not required to pay any premium for CAT Coverage. However, for
purposes of the profit sharing formula, the Company is credited with an imputed
premium (its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount
of such MPCI Imputed Premium credited is determined by formula. In general, such
MPCI Imputed Premium will be less than 50% of the premium that would be payable
for a Buy-up Coverage policy that insured 65% of historic crop yield at 100% of
the FCIC-set crop price per standard unit of measure for the commodity,
historically the most frequently sold Buy-up
-16-
Coverage. For income statement purposes under GAAP, the Company's Gross Premiums
Written for MPCI consist only of its MPCI Premiums and do not include MPCI
Imputed Premiums.
Reinsurance Pools
Under the MPCI program, the Company must allocate its MPCI Premium or
MPCI Imputed Premium in respect of a farm to one of three federal reinsurance
pools, at its discretion. These pools provide private insurers with different
levels of Reinsurance protection from the FCIC on the business they have
written. For insured farms allocated to the "Commercial Pool," the Company, at
its election, generally retains 50% to 100% of the risk and the FCIC assumes 0%
- - 50% of the risk; for those allocated to the "Developmental Pool," the Company
generally retains 35% of the risk and the FCIC assumes 65%; and for those
allocated to the "Assigned Risk Pool," the Company retains 20% of the risk and
the FCIC assumes 80%. The MPCI Retention is protected by private third-party
stop-loss treaties.
Although the Company in general must agree to insure any eligible farm,
it is not restricted in its decision to allocate a risk to any of the three
pools, subject to a minimum aggregate retention of 35% of its MPCI Premiums and
MPCI Imputed Premiums written. The Company uses a sophisticated methodology
derived from a comprehensive historical data base to allocate MPCI risks to the
federal reinsurance pools in an effort to enhance the underwriting profits
realized from this business. The Company has crop yield history information with
respect to over 100,000 farms in the United States. Generally, farms or crops
which, based on historical experience, location and other factors, appear to
have a favorable net loss ratio and to be less likely to suffer an insured loss,
are placed in the Commercial Pool. Farms or crops which appear to be more likely
to suffer a loss are placed in the Developmental Pool or Assigned Risk Pool. The
Company has historically allocated the bulk of its insured risks to the
Commercial Pool.
The Company's share of profit or loss depends on the aggregate amount
of MPCI Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention"). As previously
described, the Company purchases Reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds
Under the MPCI program the Company pays losses to farmers through a
federally funded escrow account as they are incurred during the growing season.
The Company requests funding of the escrow account when a claim is settled and
the escrow account is funded by the federal government within three business
days. After a growing season ends, the aggregate loss experience of the
Company's insureds in each state for risks allocated to each of the three
Reinsurance pools is determined. If, for all risks allocated to a particular
pool in a particular state, the Company's share of losses incurred is less than
its aggregate MPCI Retention, the Company shares in the gross amount of such
profit according to a schedule set by the FCIC for each year. The profit and
loss sharing percentages are different for risks allocated to each of the three
Reinsurance pools and private insurers will receive or pay the greatest
percentage of profit or loss for risks allocated to the Commercial Pool.
The percentage split between private insurers and the federal
government of any profit or loss that emerges from an MPCI Retention is set by
the FCIC and generally is adjusted from year to year. For 1995, 1996 and 1997
crop years, the FCIC increased the maximum potential profit share of private
insurers for risks allocated to the Commercial Pool above the maximum potential
profit share set for 1994, without increasing the maximum potential share of
loss for risks allocated to that pool for 1995. This change increased the
potential profitability of risks allocated to the Commercial Pool by private
insurers.
-17-
The following table presents MPCI Premiums, MPCI Imputed Premiums and
underwriting gains or losses of IGF for the periods indicated:
(in thousands) Years Ended December 31,
---------------------------
1995 1996 1997
MPCI premiums $53,408 $82,102 $88,052
MPCI imputed premiums $19,552 $38,944 $33,294
Gross underwriting gain $10,870 $15,801 $30,325
Net private third party reinsurance
expense and other (1,217) (3,524) (3,736)
------ ------ ------
Net underwriting gain $9,653 $12,277 $26,589
===== ====== ======
MPCI Fees and Reimbursement Payments
The Company receives Buy-up Expense Reimbursement Payments from the
FCIC for writing and administering Buy-up Coverage policies. These payments
provide funds to compensate the Company for its expenses, including agents'
commissions and the costs of administering policies and adjusting claims. For
1995, 1996 and 1997, the maximum Buy-up Expense Reimbursement Payment was set at
31%, 31% and 29%, respectively, of the MPCI Premium. Historically, the FCIC has
paid the maximum MPCI Buy-up Expense Reimbursement Payment rate allowable under
law, although no assurance can be given that this practice will continue.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced in
an amount that corresponds to the reduction in the expense reimbursement rate,
there can be no assurance that the Company's actual costs will not exceed the
expense reimbursement rate. For the 1998 crop year, the Buy-up Expense
Reimbursement payment has been set at 27%.
Farmers are required to pay a fixed administrative fee of $50 per
policy (maximum of $100 per county) in order to obtain CAT Coverage. This fee is
retained by the Company to defray the cost of administration and policy
acquisition. The Company also receives from the FCIC a separate CAT LAE
Reimbursement Payment equal to approximately 13.0% of MPCI Imputed Premiums in
respect of each CAT Coverage policy it writes and a small MPCI Excess LAE
Reimbursement Payment. In general, fees and payments received by the Company in
respect of CAT Coverage are significantly lower than those received for Buy-up
Coverage.
In addition to premium revenues, the Company received the following
fees and commissions from its crop insurance segment for the periods indicated:
(in thousands) Years Ended December 31,
-------------------------
1995 1996 1997
CAT Coverage Fees (1) $1,298 $1,181 $1,191
Buy-up Expense Reimbursement Payments 16,366 24,971 24,788
CAT LAE Reimbursement Payments and
MPCI Excess LAE Reimbursement Payments 3,427 5,753 4,565
----- ----- -----
Total $21,091 $31,905 $30,544
====== ====== ======
-18-
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company" for a discussion of the
accounting treatment accorded to the crop insurance business.
Third-Party Reinsurance In Effect for 1997
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss Reinsurance from other private
reinsurers in addition to Reinsurance obtained from the FCIC. In addition, since
the FCIC and state regulatory authorities require IGF to limit its aggregate
writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of
capital, and retain a net loss exposure of not in excess of 50% of capital, IGF
may also obtain Reinsurance from private reinsurers in order to permit it to
increase its premium writings. Such private Reinsurance would not eliminate the
Company's potential liability in the event a reinsurer was unable to pay or
losses exceeded the limits of the stop loss coverage. For crop hail insurance,
the Company has in effect quota share Reinsurance of 40% of business, although
the reinsurer is only liable to participate in losses of the Company up to a
150% pure loss ratio. The Company also has stop loss treaties for its crop hail
business which reinsure net losses in excess of an 80% pure Loss Ratio to 130%
at 95% coverage with IGF retaining the remaining 5%. With respect to its MPCI
business, the Company has stop loss treaties which reinsure 93.75% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 100% of the Company's MPCI
Retention up to 125% of MPCI Retention. The Company also has an additional layer
of MPCI stop loss Reinsurance which covers 95% of the underwriting losses
experienced by the Company to the extent that aggregate losses of its insureds
nationwide are in excess of 125% of MPCI Retention up to 160% of MPCI Retention.
Based on a review of the reinsurers' financial health and reputation in
the insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they therefor can meet their
obligations to the Company under the terms of the Reinsurance treaties. Reserves
for uncollectible Reinsurance are provided as deemed necessary. The following
table provides information with respect to ceded premiums in excess of $250,000
on crop hail and named perils and for any affiliates.
-19-
Year Ended December 31, 1997 (1)
(in thousands, except footnotes)
A.M. Best Ceded
Reinsurers Rating Premiums
Folksam International Insurance Co. Ltd. (2) A- $746
Frankona Ruckversicherungs AG (3) A $415
Insurance Corporation of Hannover A- $268
Liberty Mutual Insurance Co. (UK) Ltd. A $433
Monde Re (4) Not Rated $4,213
Munich Re (5) A+ $3,004
National Grange A- $736
Partner Reinsurance Company Ltd. A $1,112
R & V Versicherung AG (4) Not Rated $1,286
Reinsurance Australia Corporation, Ltd. (REAC) (4) Not Rated $4,956
Scandinavian Reinsurance Company Ltd. A+ ---
- --------
(1) For the twelve months ended December 31, 1997, total ceded premiums were
$17,169.
(2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
(3) An A.M. Best rating of "A" is the third highest of 15 ratings.
(4) Monde Re is owned by REAC.
(5) An A.M. Best rating of "A+" is the second highest of 15 ratings.
As of December 31, 1997, IGF's Reinsurance recoverables aggregated
approximately $268,766 excluding recoverables from the FCIC.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 42
states through approximately 2,400 agents associated with approximately 925
independent insurance agencies, with its primary geographic concentration in the
states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has, however,
diversified outside of the Midwest and Texas in order to reduce the risk
associated with geographic concentration. IGF is licensed in 23 states and
markets its products in additional states through a fronting agreement with a
third-party insurance company. IGF has a stable agency base and it experienced
negligible turnover in its agencies in 1997. Through its agencies, IGF targets
farmers with an acreage base of at least 1,000 acres. Such larger farms
typically have a lower risk exposure since they tend to utilize better farming
practices and to have noncontiguous acreage, thereby making it less likely that
the entire farm will be affected by a particular occurrence. Many farmers with
large farms tend to buy or rent acreage which is increasingly distant from the
central farm location. Accordingly, the likelihood of a major storm (wind, rain
or hail) or a freeze affecting all of a particular farmer's acreage decreases.
-20-
The following table presents MPCI and crop hail premiums written by IGF
by state for the periods indicated.
(in thousands)
-----------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1997
-------------------------------- ---------------------------------
State Crop Hail MPCI Total Crop Hail MPCI Total
- ----- --------- ---- ----- --------- ---- -----
Alabama $97 $2,951 $3,048 $144 $1,707 $1,851
Arkansas 314 1,784 2,098 652 2,270 2,922
California 1,164 1,992 3,156 1,062 4,418 5,480
Colorado 1,651 3,334 4,985 1,309 3,183 4,492
Florida --- 1,738 1,738 19 1,809 1,828
Illinois 526 11,228 11,754 655 12,221 12,876
Indiana 115 3,870 3,985 92 4,540 4,632
Iowa 6,590 15,205 21,795 7,628 12,949 20,577
Kansas 662 5,249 5,911 832 6,278 7,110
Louisiana 28 1,674 1,702 41 856 897
Minnesota 2,300 2,244 4,544 4,405 3,469 7,874
Mississippi 482 2,222 2,704 509 2,711 3,220
Missouri 556 2,427 2,983 383 1,711 2,094
Montana 5,632 1,554 7,186 2,879 1,854 4,733
Nebraska 1,567 3,206 4,773 1,597 3,160 4,757
North Dakota 2,294 2,796 5,090 787 3,014 3,801
Oklahoma 403 1,436 1,839 451 1,127 1,578
South Dakota 1,457 1,106 2,563 932 1,541 2,473
Texas 1,262 12,361 13,623 3,211 1,593 4,804
Wisconsin 370 2,187 2,557 407 1,479 1,886
All Other 487 1,538 2,025 10,354 16,162 26,516
----- ----- ----- ------ ------ ------
Total $27,957 $82,102 $110,059 $38,349 $88,052 $126,401
====== ====== ======= ====== ====== =======
-21-
The Company seeks to maintain and develop its agency relationships by
providing agencies with faster, more efficient service as well as marketing
support. IGF owns an IBM AS400 along with all peripheral and networking
equipment and has developed its own proprietary software package, APlus, which
allows agencies to quote and examine various levels of coverage on their own
personal computers. The Company's regional managers are responsible for the
Company's field operations within an assigned geographic territory, including
maintaining and enhancing relationships with agencies in those territories. IGF
also uses application documentation which is designed for simplicity and
convenience. The Company believes that IGF is the only crop insurer which has
created a single application for MPCI, crop hail and named peril coverage.
IGF generally compensates its agents based on a percentage of premiums
produced and, in the case of CAT Coverage and crop hail insurance, a percentage
of underwriting gain realized with respect to business produced. This
compensation structure is designed to encourage agents to place profitable
business with IGF (which tends to be insurance coverages for larger farms with
respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact
that rates are established by the FCIC, the primary underwriting functions
performed by the Company's personnel with respect to MPCI coverage are (i)
selecting of marketing territories for MPCI based on the type of crops being
grown in the area, typical weather patterns and loss experience of both agencies
and farmers within a particular area, (ii) recruiting agencies within those
marketing territories which service larger farms and other more desirable risks
and (iii) ensuring that policies are underwritten in accordance with the FCIC
rules.
With respect to its hail coverage, IGF seeks to minimize its
underwriting losses by maintaining an adequate geographic spread of risk by rate
group. In addition, IGF establishes sales closing dates after which hail
policies will not be sold. These dates are dependent on planting schedules, vary
by geographic location and range from May 15 in Texas to July 15 in North
Dakota. Prior to these dates, crops are either seeds in the ground or young
growth newly emerged from the ground and hail damage to crops in either of these
stages of growth is minimal. The cut-off dates prevent farmers from adversely
selecting against IGF by waiting to purchase hail coverage until a storm is
forecast or damage has occurred. For its hail coverage, IGF also sets limits by
policy ($400,000 each) and by township ($2.0 million per township). The Company
also uses a daily report entitled "Severe Weather Digest" which shows the time
and geographic location of all extraordinary weather events to check incoming
policy applications against possible previous damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters
on a part-time basis for loss adjusting services, IGF employs full-time
professional claims adjusters, most of whom are agronomy trained, as well as
part-time adjusters. Management believes that the professionalism of the IGF
full-time claims staff coupled with their exclusive commitment to IGF helps to
ensure that claims are handled in a manner designed to reduce overpayment of
losses experienced by IGF. The adjusters are located throughout IGF's marketing
territories. In order to promote a rapid claims response, the Company has
available several small four wheel drive vehicles for use by its adjusters. The
adjusters report to a field service representative in their territory who
manages adjusters' assignments, assures that all preliminary estimates for loss
reserves are accurately reported and assists in loss adjustment. Within 72 hours
of reported damage, a loss notice is reviewed by an IGF service office claims
manager and a preliminary loss reserve is determined which is based on the
representative's and/or adjuster's knowledge of the area or the particular storm
which caused the loss. Generally, within approximately two weeks, hail and MPCI
claims are examined and reviewed on site by an adjuster and the insured signs a
proof of loss form containing a final release. As part of the adjustment
process, IGF's adjusters use Global Positioning System Units, which are hand
held devices using navigation satellites to determine the precise location where
a claimed loss has occurred. IGF has a team of catastrophic claims specialists
who are available on 48 hours notice to travel to any of IGF's six regional
service offices to assist in heavy claim work load situations.
-22-
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies for MPCI, crop hail and named peril coverage.
Many of the Company's competitors have substantially greater financial and other
resources than the Company and there can be no assurance that the Company will
be able to compete effectively against such competitors in the future. The
Company competes on the basis of the commissions paid to agents, the speed with
which claims are paid, the quality and extent of services offered, the
reputation and experience of its agency network and, in the case of private
insurance, policy rates. Because the FCIC establishes the rates that may be
offered for MPCI policies, the Company believes that quality of service and
level of commissions offered to agents are the principal factors on which it
competes in the area of MPCI. The Company believes that the crop hail and other
named peril crop insurance industry is extremely rate-sensitive and the ability
to offer competitive rate structures to agents is a critical factor in the
agent's ability to write crop hail and other named peril premiums. Because of
the varying state laws regarding the ability of agents to write crop hail and
other named peril premiums prior to completion of rate and form filings (and, in
some cases, state approval of such filings), a company may not be able to write
its expected premium volume if its rates are not competitive.
The crop insurance industry has become increasingly consolidated. From
the 1985 crop year to the 1997 crop year, the number of insurance companies
having agreements with the FCIC to sell and service MPCI policies has declined
from fifty to thirty-six. The Company believes that IGF is the fourth largest
MPCI crop insurer in the United States based on premium information compiled in
1996 by the FCIC and NCIS. The Company's primary competitors are Rain & Hail
Insurance Service, Inc. (affiliated with Cigna Insurance Company), Rural
Community Insurance Services, Inc. (which is owned by Norwest Corporation),
American Growers Insurance Company (Redland), Crop Growers Insurance, Inc.,
Great American Insurance Company, Blakely Crop Hail (an affiliate of Farmers
Alliance Mutual Insurance Company) and North Central Crop Insurance, Inc. The
Company believes that in order to compete successfully in the crop insurance
business it will have to market and service a volume of premiums sufficiently
large to enable the Company to continue to realize operating efficiencies in
conducting its business. No assurance can be given that the Company will be able
to compete successfully if this market further consolidates.
Reserves for Losses and Loss Adjustment Expenses
Loss Reserves are estimates, established at a given point in time based
on facts then known, of what an insurer predicts its exposure to be in
connection with incurred losses. LAE Reserves are estimates of the ultimate
liability associated with the expense of settling all claims, including
investigation and litigation costs resulting from such claims. The actual
liability of an insurer for its Losses and LAE Reserves at any point in time
will be greater or less than these estimates.
The Company maintains reserves for the eventual payment of Losses and
LAE with respect to both reported and unreported claims. Nonstandard automobile
reserves for reported claims are established on a case-by-case basis. The
reserving process takes into account the type of claim, policy provisions
relating to the type of loss and historical paid Loss and LAE for similar
claims. Reported crop insurance claims are reserved based upon preliminary
notice to the Company and investigation of the loss in the field. The ultimate
settlement of a crop loss is based upon either the value or the yield of the
crop.
Loss and LAE Reserves for claims that have been incurred but not
reported are estimated based on many variables including historical and
statistical information, inflation, legal developments, economic conditions,
trends in claim severity and frequency and other factors that could affect the
adequacy of loss reserves.
The Company's reserves are reviewed by independent actuaries on a
semi-annual basis. The Company's recorded Loss Reserves are certified by an
independent actuary for each calendar year.
The following loss reserve development table illustrates the change
over time of reserves established for loss and loss expenses as of the end of
the various calendar years for the nonstandard automobile segment of the
Company. The table includes the loss reserves acquired from the acquisition of
Superior in 1996 and the related loss reserve
-23-
development thereafter. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down, shows
the cumulative amounts paid as of the end of successive years with respect to
the reserve liability. The third section, reading down, shows the re-estimates
of the original recorded reserve as of the end of each successive year which is
a result of sound insurance reserving practices of addressing new emerging facts
and circumstances which indicate that a modification of the prior estimate is
necessary. The last section compares the latest re-estimated reserve to the
reserve originally established, and indicates whether or not the original
reserve was adequate or inadequate to cover the estimated costs of unsettled
claims.
The loss reserve development table is cumulative and, therefore, ending
balances should not be added since the amount at the end of each calendar year
includes activity for both the current and prior years.
The reserve for losses and loss expenses is an accumulation of the
estimated amounts necessary to settle all outstanding claims as of the date for
which the reserve is stated. The reserve and payment data shown below have been
reduced for estimated subrogation and salvage recoveries. The Company does not
discount its reserves for unpaid losses and loss expenses. No attempt is made to
isolate explicitly the impact of inflation from the multitude of factors
influencing the reserve estimates though inflation is implicitly included in the
estimates. The Company regularly updates its reserve forecasts by type of claim
as new facts become known and events occur which affect unsettled claims.
During 1997, the Company, as part of its efforts to reduce costs and
combine the operations of the two nonstandard automobile insurance companies,
emphasized a unified claim settlement practice as well as reserving philosophy
for Superior and Pafco. Superior had historically provided strengthened case
reserves and a level of IBNR which reflected the strength of the case reserves.
Pafco had historically carried case reserves which generally did not reflect the
level of future payments but yet a higher IBNR reserve. This change in claims
management philosophy during 1997 coupled with the growth in premium volume
produced sufficient volatility in prior year loss patterns to warrant the
Company to re-estimate its 1996 reserve for losses and loss expenses and record
an additional reserve during 1997. The effects of changes in settlement
patterns, costs, inflation, growth and other factors have all been considered in
establishing the current year reserve for unpaid losses and loss expenses.
-24-
Symons International Group, Inc.
Nonstandard Automobile Insurance Only
For The Years Ended December 31, (in thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995(A) 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ------- ---- ----
Gross reserves for unpaid
losses and LAE $25,248 $71,748 $79,551 $101,185
Deduct reinsurance
recoverable 10,927 9,921 8,124 16,378
Reserve for unpaid losses and
LAE, net of reinsurance $4,687 $10,747 $13,518 $15,923 $15,682 $17,055 $14,822 14,321 61,827 71,427 84,807
Paid cumulative as of:
One Year Later 2,708 5,947 7,754 7,695 7,519 10,868 8,875 7,455 42,183 59,410
Two Years Later 4,448 7,207 10,530 10,479 12,358 15,121 11,114 10,375 53,350 --
Three Years Later 4,570 7,635 11,875 12,389 13,937 16,855 13,024 12,040 -- --
Four Years Later 4,310 7,824 12,733 13,094 14,572 17,744 13,886 -- -- --
Five Years Later 4,331 8,009 12,998 13,331 14,841 18,195 -- -- -- --
Six Years Later 4,447 8,135 13,095 13,507 14,992 -- -- -- -- --
Seven Years Later 4,448 8,154 13,202 13,486 -- -- -- -- -- --
Eight Years Later 4,447 8,173 13,216 -- -- -- -- -- -- --
Nine Years Later 4,447 8,174 -- -- -- -- -- -- -- --
Ten Years Later 4,447 -- -- -- -- -- -- -- -- --
Liabilities re-estimated as of:
One Year Later 5,352 8,474 13,984 13,888 14,453 17,442 14,788 13,365 59,626 82,011
Two Years Later 4,726 8,647 13,083 13,343 14,949 18,103 13,815 12,696 60,600 --
Three Years Later 4,841 8,166 13,057 13,445 15,139 18,300 14,051 13,080 -- --
Four Years Later 4,474 8,108 13,152 13,514 15,218 18,313 14,290 -- -- --
Five Years Later 4,412 8,179 13,170 13,589 15,198 18,419 -- -- -- --
Six Years Later 4,471 8,165 13,246 13,612 15,114 -- -- -- -- --
Seven Years Later 4,448 8,196 13,260 13,529 -- -- -- -- -- --
Eight Years Later 4,462 8,198 13,248 -- -- -- -- -- -- --
Nine Years Later 4,447 8,199 -- -- -- -- -- -- -- --
Ten Years Later 4,447 -- -- -- -- -- -- -- -- --
Net cumulative (deficiency)
or redundancy 240 2,548 270 2,394 568 (1,364) 532 1,241 1,227 (10,584)
Expressed as a percentage of
unpaid losses and LAE 5.1% 23.7% 2.0% 15.0% 3.6% (8.0%) 3.6% 8.7% 2.0% (14.8%)
(A) Includes Superior loss and loss expense reserves of $44,423 acquired on
April 29, 1996 and subsequent development thereon.
-25-
Investments
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate. The Company's investment policies are determined by
the Company's Board of Directors and are reviewed on a regular basis. The
Company's investment strategy is to maximize the after-tax yield of the
portfolio while emphasizing the stability and preservation of the Company's
capital base. Further, the portfolio is invested in types of securities and in
an aggregate duration which reflect the nature of the Company's liabilities and
expected liquidity needs, and the Company's fixed maturity and common equity
investments are substantially all in public companies. The Company's investments
in real estate and mortgage loans represent 1.1% of the Company's aggregate
investments. The investment portfolios of the Company are managed by third-party
professional administrators, in accordance with pre-established investment
policy guidelines established by the Company. The investment portfolios of the
Company at December 31, 1997, consisted of the following:
(in thousands)
Cost or
Amortized Market
Type of Investment Cost Value
Fixed maturities:
U.S. and Canadian Treasury securities and
obligations of U.S. and Canadian government
corporation and agencies $84,371 $84,801
Obligations of states, provinces and political
subdivisions 1,082 1,082
Corporate securities 86,948 88,332
------ ------
Total Fixed Maturities 172,401 174,215
Equity Securities:
Common stocks 35,446 36,631
Short-term investments 23,233 23,233
Real estate 450 450
Mortgage loans 2,220 2,220
Other loans 50 50
------ ------
Total Investments $233,800 $236,799
======= =======
- ---------------
-26-
The following table sets forth the composition of the fixed maturity
securities portfolio of the Company by time to maturity as of December 31:
(in thousands) 1996 1997
-------------------- --------------------
Market Percent Market Percent
Time To Maturity Value Market Value Market
1 year or less $9,169 6.6% $3,678 2.1%
More than 1 year through 5 years 79,042 57.1% 60,008 34.4%
More than 5 years through 10 years 43,404 31.4% 31,599 18.1%
More than 10 years 6,768 4.9% 8,390 4.8%
------- ----- ----- ----
138,383 100.0% 103,675 59.4%
Mortgage-backed securities --- --- 70,540 40.6%
------- ----- ------ -----
Total $138,383 100.0% $174,215 100.0%
======= ====== ======= ======
The following table sets forth the ratings assigned to the fixed
maturity securities of the Company as of December 31:
(in thousands) 1996 1997
-------------------- -------------------
Market Percent Market Percent
Rating (1) Value Value Value Value
Aaa or AAA $50,444 36.5% $112,920 64.8%
Aa or AA 2,976 2.1% 4,145 2.4%
A 50,365 36.4% 20,679 11.9%
Baa or BBB 11,671 8.4% 19,116 11.0%
Ba or BB 2,840 2.1% 16,519 9.5%
Other below investment grade 2,091 1.5% 82 0.1%
Not rated (2) 17,996 13.0% 754 0.3%
------ ----- --- ----
Total $138,383 100.0% $174,215 100.0%
======= ====== ======= ======
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available, are based on ratings assigned by Standard & Poor's Corporation.
(2) These securities were not rated by the rating agencies. However, these
securities are designated as Category 1 securities by the NAIC, which is the
equivalent rating of "A" or better.
-27-
The investment results of the Company for the periods indicated are set
forth below:
(in thousands) Years Ended December 31,
------------------------
1995 1996 1997
Net investment income (1) $3,868 $7,745 $12,777
Average investment portfolio (2) $45,101 $122,363 $215,694
Pre-tax return on average investment portfolio 8.6% 6.3% 5.9%
Net realized gains (losses) ($198) ($637) $9,393
- ---------------
(1) Includes dividend income received in respect of holdings of common stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio and excludes
cash. For 1996, the average investment portfolio was adjusted for the
effect of the Acquisition.
Ratings
A.M. Best has currently assigned a "B+" rating to Superior and a "B-"
rating to Pafco.
A.M. Best's ratings are based upon a comprehensive review of a
company's financial performance, which is supplemented by certain data,
including responses to A.M. Best's questionnaires, phone calls and other
correspondence between A.M. Best analysts and company management, quarterly NAIC
filings, state insurance department examination reports, loss reserve reports,
annual reports, company business plans and other reports filed with state
insurance departments. A.M. Best undertakes a quantitative evaluation, based
upon profitability, leverage and liquidity, and a qualitative evaluation, based
upon the composition of a company's book of business or spread of risk, the
amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus, the soundness of a company's capital
structure, the extent of a company's market presence and the experience and
competence of its management. A.M. Best's ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations to
policyholders. A.M. Best's ratings are not a measure of protection afforded
investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest rating
classifications, respectively, out of 15 ratings. A "B+" rating is awarded to
insurers which, in A.M. Best's opinion, "have demonstrated very good overall
performance when compared to the standards established by the A.M. Best Company"
and "have a good ability to meet their obligations to policyholders over a long
period of time." A "B-" rating is awarded to insurers which, in A.M. Best's
opinion, "have demonstrated adequate overall performance when compared to the
standards established by the A.M. Best Company" and "have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions." There
can be no assurance that such ratings or changes therein will not in the future
adversely affect the Company's competitive position.
Recent Acquisitions
On January 31, 1996, Goran, SIG, Fortis, Inc. and its wholly-owned
subsidiary, Interfinancial, Inc., a holding company for Superior, entered into a
Stock Purchase Agreement (the "Superior Purchase Agreement") pursuant to which
SIG agreed to purchase Superior from Interfinancial, Inc. for a purchase price
of approximately $66.6 million. Simultaneously with the execution of the
Superior Purchase Agreement, Goran, SIG, GGS Holdings and the GS Funds, a
Delaware limited partnership, entered into an agreement (the "GGS Agreement") to
capitalize GGS Holdings and to cause GGS Holdings to issue its capital stock to
SIG and to the GS Funds, so as to give SIG a 52% ownership interest and the GS
Funds a 48% ownership interest (the "Formation Transaction"). Pursuant to the
GGS Agreement (a) SIG contributed to GGS Holdings (i) all the outstanding common
stock of Pafco, with a book value of $16.9 million, (ii) its right to acquire
Superior pursuant to the Superior Purchase Agreement and (iii) certain fixed
assets, including office
-28-
furniture and equipment, having a value of approximately $350,000 and (b) the GS
Funds contributed to GGS Holdings $21.2 million in cash. The Formation
Transaction and the Acquisition were completed on April 30, 1996. On August 12,
1997, SIG acquired the remaining 48% interest in GGS Holdings that had been
owned by the GS funds for $61 million with a portion of the proceeds from the
sale of the Preferred Securities.
On August 12, 1997, SIG issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities"). These Preferred Securities were
offered through a wholly-owned trust subsidiary of SIG and are backed by Senior
Subordinated Notes to the Trust from SIG. These Preferred Securities were
offered under Rule 144A of the SEC ("Offering") and, pursuant to the
Registration Rights Agreement executed at closing, SIG 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 SIG 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 will be amortized over the term of the Preferred Securities (30
years). In the third quarter SIG wrote off the remaining unamortized costs of
the term debt of approximately $1.1 million pre-tax or approximately $0.09 per
share to Goran after income taxes and minority interest.
The Preferred Securities have a term of 30 years with semi-annual
distribution payments at 9.5% per annum commencing February 15, 1998. The
Preferred Securities may be redeemed in whole or in part after 10 years.
SIG shall not, and shall not permit any subsidiary, to incur directly
or indirectly, any indebtedness unless, on the date of such incurrence (and
after giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1.
The Coverage Ratio is the aggregate of net earnings, plus interest expense,
income taxes, depreciation, and amortization divided by interest expense for the
same period.
Regulation
General
The Company's insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition,
(ii) periodic financial examination, (iii) approval of rates and policy
forms,(iv) loss reserve adequacy, (v) insurer solvency, (vi) the licensing of
insurers and their agents, (vii) restrictions on the payment of dividends and
other distributions, (viii) approval of changes in control and (ix) the type and
amount of permitted investments.
Pafco, IGF and Superior and its insurance subsidiaries are subject to
triennial examinations by state insurance regulators. All of these Companies
have been examined through December 31, 1996 and each of the final reports are
pending. The Company does not expect any material findings from the examinations
of its insurance subsidiaries.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding
companies in Florida and Indiana, where the insurers are domiciled. These laws,
among other things, (i) require the Company to file periodic information with
state regulatory authorities including information concerning its capital
structure, ownership, financial condition and general business operations, (ii)
regulate certain transactions between the Company, its affiliates and IGF, Pafco
and Superior (the "Insurers"), including the amount of dividends and other
distributions , SIG and (iii) restrict the ability of any one person to acquire
certain levels of the Company's voting securities without prior regulatory
approval.
-29-
Any purchaser of 10% or more of the outstanding shares of Common Stock
of SIG would be presumed to have acquired control of Pafco and IGF unless the
Indiana Commissioner, upon application, has determined otherwise. In addition,
any purchaser of 5% or more of the outstanding shares of Common Stock of SIG
will be presumed to have acquired control of Superior unless the Florida
Commissioner, upon application, has determined otherwise.
Indiana law defines as "extraordinary" any dividend or distribution
which, together with all other dividends and distributions to shareholders
within the preceding twelve months, exceeds the greater of: (i) 10% of statutory
surplus as regards policyholders as of the end of the preceding year or (ii) the
prior year's net income. Dividends which are not "extraordinary" may be paid ten
days after the Indiana Department receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without prior
approval of the Indiana Commissioner or until the Indiana Commissioner has been
given thirty days prior notice and has not disapproved within that period. The
Indiana Department must receive notice of all dividends, whether "extraordinary"
or not, within five business days after they are declared. Notwithstanding the
foregoing limit, a domestic insurer may not declare or pay a dividend of funds
other than earned surplus without the prior approval of the Indiana Department.
"Earned surplus" is defined as the amount of unassigned funds set forth in the
insurer's most recent annual statement, less surplus attributable to unrealized
capital gains or reevaluation of assets. As of December 31, 1997, IGF and Pafco
had earned surplus of $27,952,000 and $(4,713,000), respectively. Further, no
Indiana domiciled insurer may make payments in the form of dividends or
otherwise to shareholders as such unless it possesses assets in the amount of
such payment in excess of the sum of its liabilities and the aggregate amount of
the par value of all shares of its capital stock; provided, that in no instance
shall such dividend reduce the total of (i) gross paid-in and contributed
surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus
(iv) treasury stock at cost, below an amount equal to 50% of the aggregate
amount of the par value of all shares of the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to stockholders
without prior approval of the Florida Department if the dividend or distribution
would exceed the larger of (i) the lesser of (a) 10% of surplus or (b) net
income, not including realized capital gains, plus a two-year carryforward, (ii)
10% of surplus with dividends payable constrained to unassigned funds minus 25%
of unrealized capital gains or (iii) the lesser of (a) 10% of surplus or (b) net
investment income plus a three-year carryforward with dividends payable
constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department if the dividend is
equal to or less than the greater of (i) 10% of the insurer's surplus as regards
policyholders derived from realized net operating profits on its business and
net realized capital gains or (ii) the insurer's entire net operating profits
and realized net capital gains derived during the immediately preceding calendar
year; (2) the insurer will have policyholder surplus equal to or exceeding 115%
of the minimum required statutory surplus after the dividend or distribution,
(3) the insurer files a notice of the dividend or distribution with the
department at least ten business days prior to the dividend payment or
distribution and (4) the notice includes a certification by an officer of the
insurer attesting that, after the payment of the dividend or distribution, the
insurer will have at least 115% of required statutory surplus as to
policyholders. Except as provided above, a Florida domiciled insurer may only
pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department or (ii) thirty days after the Florida Department has received
notice of such dividend or distribution and has not disapproved it within such
time. In the consent order approving the Acquisition, the Florida Department has
prohibited Superior from paying any dividends (whether extraordinary or not) for
four years from the date of acquisition without the prior written approval of
the Florida Department.
Under these laws, the maximum aggregate amounts of dividends permitted
to be paid to the Company in 1998 by IGF and Pafco without prior regulatory
approval are $13,404,000 and $0, respectively, none of which have been paid.
Although the Company believes that amounts required for it to meet its financial
and operating obligations will be available, there can be no assurance in this
regard. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Liquidity and Capital Resources."
Further, there can be no assurance that, if requested, the Indiana Department
will approve any request for extraordinary dividends from Pafco or IGF or that
the Florida Department will allow any dividends to be paid by Superior during
the four year period
-30-
described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written and the ability to pay future dividends. Further, state insurance
laws and regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly
to the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to GGS Management. The management agreement
between the Company and Pafco has been assigned to GGS Management, Inc. ("GGS
Management") and provides for an annual management fee equal to 15% of gross
premiums. A similar management agreement with a management fee of 17% of gross
premiums has been entered into between GGS Management and Superior. Employees of
SIG relating to the nonstandard automobile insurance business and all Superior
employees became employees of GGS Management effective April 30, 1996. In the
consent order approving the Acquisition, the Florida Department has reserved,
for three years, the right to reevaluate the reasonableness of fees provided for
in the Superior management agreement at the end of each calendar year and to
require Superior to make adjustments in the management fees based on the Florida
Department's consideration of the performance and operating percentages of
Superior and other pertinent data. There can be no assurance that either the
Indiana Department or the Florida Department will not in the future require a
reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the
federal government by means of premium subsidies to farmers, expense
reimbursement and federal reinsurance pools for private insurers. Consequently,
the MPCI program is subject to oversight by the legislative and executive
branches of the federal government, including the FCIC. The MPCI program
regulations generally require compliance with federal guidelines with respect to
underwriting, rating and claims administration. The Company is required to
perform continuous internal audit procedures and is subject to audit by several
federal government agencies. No material compliance issues were noted during
IGF's most recent FCIC compliance review.
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. The most recent significant changes to the MPCI
program came as a result of the passage by Congress of the 1994 Reform Act and
the 1996 Reform Act.
Certain provisions of the 1994 Reform Act, when implemented by the
FCIC, may increase competition among private insurers in the pricing of Buy-up
Coverage. The 1994 Reform Act authorizes the FCIC to implement regulations
permitting insurance companies to pass on to farmers in the form of reduced
premiums certain cost efficiencies related to any excess expense reimbursement
over the insurer's actual cost to administer the program, which could result in
increased price competition. To date, the FCIC has not enacted regulations
implementing these provisions but is currently collecting information from the
private sector regarding how to implement these provisions.
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including but not limited to low interest loans and crop price
supports. The 1994 Reform Act also authorized for the first time the marketing
and selling of CAT Coverage by the local USDA offices. Partly as a result of the
increase in the size of the MPCI market resulting from the 1994 Reform Act, the
Company's MPCI Premium increased to $53.4 million in 1995 from $44.3 million in
1994. However, the 1996 Reform Act, signed into law by President Clinton in
April 1996, eliminated the linkage between CAT Coverage and qualification for
certain federal farm program benefits and also limited the role of the USDA
offices in the delivery of MPCI coverage. In accordance with the 1996 Reform
Act, the USDA announced in July 1996 the following 14
-31-
states where CAT Coverage will no longer be available through USDA offices but
rather would solely be available through private agencies: Arizona, Colorado,
Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina,
North Dakota, South Dakota, Washington and Wyoming. The limitation of the USDA's
role in the delivery system for MPCI should provide the Company with the
opportunity to realize increased revenues from the distribution and servicing of
its MPCI product. The Company has not experienced any material negative impact
in 1996 from the delinkage mandated by the 1996 Reform Act. In addition, through
June 30, 1996, the FCIC transferred to the Company approximately 8,900 insureds
for CAT Coverage who previously purchased such coverage from USDA field offices.
The Company believes that any future potential negative impact of the delinkage
mandated by the 1996 Reform Act will be mitigated by, among other factors, the
likelihood that farmers will continue to purchase MPCI to provide basic
protection against natural disasters since ad hoc federal disaster relief
programs have been reduced or eliminated. In addition, the Company believes that
(i) lending institutions will likely continue to require this coverage as a
condition to crop lending and (ii) many of the farmers who entered the MPCI
program as a result of the 1994 Reform Act have come to appreciate the
reasonable price of the protection afforded by CAT Coverage and will remain with
the program regardless of delinkage. There can, however, be no assurance as to
the ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to deal with the
cyclical nature of the insurance industry, catastrophic events and insurance
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to rescind or otherwise cancel
certain policies in mid-term, (iii) advance notice requirements or limitations
imposed for certain policy non-renewals and (iv) limitations upon or decreases
in rates permitted to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of twelve ratios with defined acceptable ranges. They are used as an
initial screening process for identifying companies that may be in need of
special attention. Companies that have several ratios that fall outside of the
acceptable range are selected for closer review by the NAIC. If the NAIC
determines that more attention may be warranted, one of five priority
designations is assigned and the insurance department of the state of domicile
is then responsible for follow-up action.
During 1997, Pafco had unusual values for three IRIS tests. These
included two-year overall operating ratio where Pafco's ratio was 107 compared
to the IRIS upper limit of 100, change in surplus where Pafco's ratio was
(26.7%) compared to the IRIS lower limit of (10%) and one year reserve
development to surplus where Pafco's ratio was 31.2 compared to the IRIS upper
limit of 20. Pafco failed these tests due to the additional reserves of $7.5
million booked in 1997 on accident years 1996 and prior due to deficient reserve
development. Pafco does not expect such results to continue. However, reserves
are subjective and based on estimates and there is no guarantee such results
will not continue.
During 1997 IGF had unusual values for three IRIS tests. IGF continued
to have unusual values in the liabilities to liquid assets and agents balances
to surplus tests. IGF generally has an unusual value in these tests due to the
reinsurance program mandated by the FCIC for the distribution of the MPCI
program and the fact that agents' balances at December 31 are usually not
settled until late February. IGF's investment yield exceeded the upper end of
the IRIS range due to the fact the calculation is based on a simple average of
beginning and ending investment balances.
During 1997, the IRIS ratios for Superior were within the acceptable
range.
-32-
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement risk-based capital ("RBC")
requirements for property and casualty insurance companies designed to assess
minimum capital requirements and to raise the level of protection that statutory
surplus provides for policyholder obligations. Indiana and Florida have
substantially adopted the NAIC model law, and Indiana directly, and Florida
indirectly, have adopted the NAIC model formula. The RBC formula for property
and casualty insurance companies measures four major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses the risk of
adverse loss developments and inadequate pricing, (ii) declines in asset values
arising from credit risk, (iii) declines in asset values arising from investment
risks and (iv) off-balance sheet risk arising from adverse experience from
non-controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The
extent of regulatory intervention and action increases as the level of surplus
to RBC falls. The first level, the Company Action Level (as defined by the
NAIC), requires an insurer to submit a plan of corrective actions to the
regulator if surplus falls below 200% of the RBC amount. The Regulatory Action
Level (as defined by the NAIC) requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below 70%
of the RBC amount. Based on the foregoing formulae, as of December 31, 1997, the
RBC ratios of the Insurers were in excess of the Company Action Level, the first
trigger level that would require regulatory action.
Guaranty Funds; Residual Markets
The Insurers also may be required under the solvency or guaranty laws
of most states in which they do business to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would not
ordinarily accept. The Company recognizes its obligations for guaranty fund
assessments when it receives notice that an amount is payable to the fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.
Canadian Federal Income Tax Considerations
This summary is based upon the current provisions of the Income Tax Act
(Canada) (the "Canadian Tax Act"), the regulations thereunder, proposed
amendments thereto publicly announced by the Department of Finance, Canada prior
to the date hereof and the provisions of the Canada-U.S. Income Tax Convention
(1980) (the "Convention") as amended by the Third Protocol (1995).
Amounts in respect of common shares paid or credited or deemed to be
paid or credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a shareholder who is not a resident in Canada within the meaning of
the Canadian Tax Act will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a basic rate of 25% which may
be reduced pursuant to the terms of an applicable tax treaty between Canada
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and the country of resident of the non-resident.
Currently, under the Convention, the rate of Canadian non-resident
withholding tax on the gross amount of dividends beneficially owned by a person
who is a resident of the United States for the purpose of the Convention and who
does not have a "permanent establishment" or "fixed base" in Canada is 15%.
However, where such beneficial owner is a company which owns at least 10% of the
voting stock of the company, the rate of such withholding is 5%.
A purchase for cancellation of common shares by the Company (other than
a purchase of common shares by the Company on the open market) will give rise to
a deemed dividend under the Canadian Tax Act equal to the amount paid by the
Company on the purchase in excess of the paid-up capital of such shares
determined in accordance with the Canadian Tax Act. Any such dividend deemed to
have been received by a person not resident in Canada will be subject to
nonresident withholding tax as described above. The amount of any such deemed
dividend will reduce the proceeds of disposition to a holder of common shares
for purposes of computing the amount of his capital gain or loss under the
Canadian Tax Act.
A holder of common shares who is not a resident of Canada within the
meaning of the Canadian Tax Act will not be subject to tax under the Canadian
Tax Act in respect of any capital gain on a disposition of common shares
(including on a purchase by the Company) unless such shares constitute taxable
Canadian property of the shareholder for purposes of the Canadian Tax Act and
such shareholder is not entitled to relief under an applicable tax treaty.
Common shares will generally not constitute taxable Canadian property of a
shareholder who is not a resident of Canada for purposes of the Canadian Tax Act
in any taxation year in which such shareholder owned common shares unless such
shareholder uses or holds or is deemed to use or hold such shares in or in the
course of carrying on business in Canada or, a share of the capital stock of a
corporation resident in Canada, that is not listed on a prescribed stock
exchange or a share that is listed on prescribed stock exchange, if at any time
during the five year period immediately preceding the disposition of the common
shares owned, either alone or together with persons with whom he does not deal
at arm's length, not less than 25% of the issued shares of any class of the
capital stock of the Company. In any event, under the Convention, gains derived
by a resident of the United States from the disposition of common shares will
generally not be taxable in Canada unless 50% or more of the value of the common
shares is derived principally from real property situated in Canada.
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U.S. Federal Income Tax Considerations
The following is a general summary of certain U.S. federal income tax
consequence to U.S. Holders of the purchase, ownership and disposition of common
shares. This summary is based on the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder, and judicial
and administrative interpretations thereof, all as in effect on the date hereof
and all of which are subject to change. This summary does not address all
aspects of U.S. federal income taxation that may be relevant to a particular
U.S. Holder based on such U.S. Holder's particular circumstances. In particular,
the following summary does not address the tax treatment of U.S. Holders who are
broker dealers or who own, actually or constructively, 10% or more of the
Company's outstanding voting stock, and certain U.S. Holders (including, but not
limited to, insurance companies, tax-exempt organizations, financial
institutions and persons subject to the alternative minimum tax) may be subject
to special rules not discussed below.
For U.S. federal income tax purposes, a U.S. Holder of common shares
generally will realize, to the extent of the Company's current and accumulated
earnings and profits, ordinary income on the receipt of cash dividends on the
common shares equal to the U.S. dollar value of such dividends on the date of
receipt (based on the exchange rate on such date) without reduction for any
Canadian withholding tax. Dividends paid on the common shares will not be
eligible for the dividends received deduction available in certain cases to U.S.
corporations. In the case of foreign currency received as a dividend that is not
converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollars
value on the date of receipt. Any gain or loss recognized upon a subsequent sale
or other disposition of the foreign currency, including an exchange for U.S.
dollars, will be ordinary income or loss. Subject to certain requirements and
limitations imposed by the Code, a U.S. Holder may elect to claim the Canadian
tax withheld or paid with respect to dividends on the common shares either as a
deduction or as a foreign tax credit against the U.S. federal income tax
liability of such U.S. Holder. The requirements and limitations imposed by the
Code with respect to the foreign tax credit are complex and beyond the scope of
this summary, and consequently, prospective purchasers of common shares should
consult with their own tax advisors to determine whether and to what extent they
would be entitled to such credit.
For U.S. federal income tax purposes, upon a sale or exchange of a
common share, a U.S. Holder will recognize gain or loss equal to the difference
between the amount realized on such sale or exchange and the tax basis of such
common share. If a common share is held as a capital asset, any such gain or
loss will be capital gain or loss, and will be long-term capital gain or loss if
the U.S. Holder has held such common share for more than one year.
Under current Treasury regulations, dividends paid on the common share
to U.S. Holders will not be subject to the 31% U.S. backup withholding tax.
Proposed Treasury regulations which are not yet in effect and which will only
apply prospectively, however, would subject dividends paid on the common shares
through a U.S. or U.S. related broker to the 31% U.S. backup withholding tax
unless certain information reporting requirements are satisfied. Whether and
when such proposed Treasury regulations will become effective cannot be
determined at this time. The payment of proceeds of a sale or other disposition
of common shares in the U.S. through a U.S. or U.S. related broker generally
will be subject to U.S. information reporting requirements and may also be
subject to the 31% U.S. backup withholding tax, unless the U.S. Holder furnishes
the broker with a duly completed and signed Form W-9. Any amounts withheld under
the U.S. backup withholding tax rules may be refunded or credited against the
U.S. Holder's U.S. federal income tax liability, if any, provided that the
required information is furnished to the U.S. Internal Revenue Service.
Employees
At December 31, 1997 the Company and its subsidiaries employed
approximately 950 persons. The Company believes that relations with its
employees are excellent.
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
The statements contained in this Annual Report which are not historical
facts, including but not limited to,
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statements concerning (i) the impact of federal and state laws and regulations,
including but not limited to, the 1994 Reform Act and 1996 Reform Act, on the
Company's business and results of operations, (ii) the competitive advantage
afforded to IGF by approaches adopted by management in the areas of information,
technology, claims handling and underwriting, (iii) the sufficiency of the
Company's cash flow to meet the operating expenses, debt service obligations and
capital needs of the Company and its subsidiaries, and (iv) the impact of
declining MPCI Buy-up Expense Reimbursements on the Company's results of
operations, are forward-looking statements within the meanings of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. From time to time the Company may also issue
other statements either orally or in writing, which are forward looking within
the meaning of these statutory provisions. Forward looking statements are
typically identified by the words "believe", "expect", "anticipate", "intend",
"estimate", "plan" and similar expressions. These statements involve a number of
risks and uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially from the forward looking statements in
this Form 10-K or from other forward looking statements made by the Company. In
addition to the risks and uncertainties of ordinary business operations, some of
the facts that could cause actual results to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements are the risks and uncertainties (i) discussed herein,
(ii) contained in the Company's other filings with the Securities and Exchange
Commission and public statements from time to time, and (iii) set forth below.
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty
industry is that its products generally are priced, before its costs are known,
because premium rates usually are determined before losses are reported. Premium
rate levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in surplus
have generally been accompanied by increased price competition among property
and casualty insurers. The nonstandard automobile insurance business in recent
years has experienced very competitive pricing conditions and there can be no
assurance as to the Company's ability to achieve adequate pricing. Changes in
case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. New products also present special issues in
establishing appropriate premium levels in the absence of a base of experience
with such products' performance.
The number of competitors and the similarity of products offered, as
well as regulatory constraints, limit the ability of property and casualty
insurers to increase prices in response to declines in profitability. In states
which require prior approval of rates, it may be more difficult for the Company
to achieve premium rates which are commensurate with the Company's underwriting
experience with respect to risks located in those states. In addition, the
Company does not control rates on its MPCI business, which are instead set by
the FCIC. Accordingly, there can be no assurance that these rates will be
sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance
company are also determined, in part, by the establishment of, and adjustments
to, reserves reflecting estimates made by management as to the amount of losses
and loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses and
LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material adverse
effect on the insurer's financial position or results of operations in future
periods.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many
factors which can cause fluctuation in the results of operations of this
business. Many of these factors are not subject to the control of the Company.
The size of the nonstandard market can be significantly affected by, among other
factors, the underwriting capacity and underwriting criteria of standard
automobile insurance carriers. In addition, an economic downturn in the states
in which the Company writes business could result in fewer new car sales and
less demand for automobile insurance. Severe weather conditions could also
adversely affect the Company's business through higher losses and LAE. These
factors, together with competitive pricing and other considerations, could
result in fluctuations in the Company's
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underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can
vary substantially from period to period as a result of various factors,
including timing and severity of losses from storms, drought, floods, freezes
and other natural perils and crop production cycles. Therefore, the results for
any quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insurance business are recognized
throughout the year with a reconciliation for the current crop year in the
fourth quarter.
The Company expects that for the foreseeable future a majority of its
crop insurance will continue to be derived from MPCI business. The MPCI program
is federally regulated and supported by the federal government by means of
premium subsidies to farmers, expense reimbursement and federal reinsurance
pools for private insurers. As such, legislative or other changes affecting the
MPCI program could impact the Company's business prospects. The MPCI program has
historically been subject to modification at least annually since its
establishment in 1980, and some of these modifications have been significant. No
assurance can be given that future changes will not significantly affect the
MPCI program and the Company's crop insurance business.
The 1994 Reform Act also reduced the expense reimbursement rate payable
to the Company for its costs of servicing MPCI policies that exceed the basic
CAT Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and
1999 crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium
serviced, a decrease from the 31% level established for the 1994, 1995 and 1996
crop years. Although the 1994 Reform Act directs the FCIC to alter program
procedures and administrative requirements so that the administrative and
operating costs of private insurance companies participating in the MPCI program
will be reduced in an amount that corresponds to the reduction in the expense
reimbursement rate, there can be no assurance that the Company's actual costs
will not exceed the expense reimbursement rate. The FCIC has appointed several
committees comprised of members of the insurance industry to make
recommendations concerning this matter. The 1994 Reform Act also directs the
FCIC to establish adequate premiums for all MPCI coverages at such rates as the
FCIC determines are actuarially sufficient to attain a targeted loss ratio.
Since 1980, the average MPCI loss ratio has exceeded this target ratio. There
can be no assurance that the FCIC will not increase rates to farmers in order to
achieve the targeted loss ratio in a manner that could adversely affect
participation by farmers in the MPCI program above the CAT Coverage level.
The 1996 Reform Act, signed into law by President Clinton in April,
1996, provides that, MPCI coverage is not required for federal farm program
benefits if producers sign a written waiver that waives eligibility for
emergency crop loss assistance. The 1996 Reform Act also provides that,
effective for the 1997 crop year, the Secretary of Agriculture may continue to
offer CAT Coverage through USDA offices if the Secretary of Agriculture
determines that the number of approved insurance providers operating in a state
is insufficient to adequately provide catastrophic risk protection coverage to
producers. There can be no assurance as to the ultimate effect which the 1996
Reform Act may have on the business or operations of the Company.
Total MPCI Premium for each farmer depends upon the kinds of crops
grown, acreage planted and other factors determined by the FCIC. Each year, the
FCIC sets, by crop, the maximum per unit commodity price ("Price Election") to
be used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The Company's crop insurance business is also affected by market
conditions in the agricultural industry which vary depending on such factors as
federal legislation and administration policies, foreign country policies
relating to agricultural products and producers, demand for agricultural
products, weather, natural disasters, technologic advances in agricultural
practices, international agricultural markets and general economic conditions
both in the United States and abroad. For example, the number of MPCI Buy-up
Coverage policies written has historically tended to increase after a year in
which a major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
-37-
Highly Competitive Businesses
Both the nonstandard automobile insurance and crop insurance businesses
are highly competitive. Many of the Company's competitors in both the
nonstandard automobile insurance and crop insurance business segments have
substantially greater financial and other resources than the Company, and there
can be no assurance that the Company will be able to compete effectively against
such competitors in the future.
In its nonstandard automobile business, the Company competes with both
large national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers. Direct
writers may have certain competitive advantages over agency writers, including
increased name recognition, loyalty of the customer base to the insurer rather
than an independent agency and, potentially, reduced acquisition costs. In
addition, certain competitors of the Company have from time to time decreased
their prices in an apparent attempt to gain market share. Also, in certain
states, state assigned risk plans may provide nonstandard automobile insurance
products at a lower price than private insurers.
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1996 crop year, the
number of insurance companies that have entered into agreements with the FCIC to
sell and service MPCI policies has declined from 50 to 16. The Company believes
that to compete successfully in the crop insurance business it will have to
market and service a volume of premiums sufficiently large to enable the Company
to continue to realize operating efficiencies in conducting its business. No
assurance can be given that the Company will be able to compete successfully if
this market consolidates further.
Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and
Pafco a B- (Adequate) rating. Subsequent to the Acquisition, the rating of
Superior was reduced from A- to B+ as a result of the leverage of GGS Holdings
resulting from indebtedness in connection with the Acquisition. A "B+" and a
"B-" rating are A.M. Best's sixth and eighth highest rating classifications,
respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in
A.M. Best's opinion, "have demonstrated very good overall performance when
compared to the standards established by the A.M. Best Company" and "have a good
ability to meet their obligations to policyholders over long period of time". A
"B-" rating is awarded to insurers which, in A.M. Best's opinion, "have
demonstrated adequate overall performance when compared to the standards
established by the A.M. Best Company" and "generally have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions." IGF
recently received an "NA-2" rating (a "rating not assigned" category for
companies that do not meet A.M. Best's minimum size requirement) from A.M. Best.
IGF intends to seek a revised rating in 1998, although there can be no assurance
that a revised rating will be obtained or as to the level of any such rating.
A.M. Best bases its ratings on factors that concern policyholders and agents and
not upon factors concerning investor protection. Such ratings are subject to
change and are not recommendations to buy, sell or hold securities. One factor
in an insurer's ability to compete effectively is its A.M. Best rating. The A.M.
Best ratings for the Company's rated Insurers are lower than for many of the
Company's competitors. There can be no assurance that such ratings or future
changes therein will not affect the Company's competitive position.
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated
in the states of Florida, California, Indiana, Missouri and Virginia;
consequently the Company will be significantly affected by changes in the
regulatory and business climate in those states. The Company's crop insurance
business is concentrated in the states of Iowa, Texas, Illinois, Kansas and
Minnesota and the Company will be significantly affected by weather conditions,
natural perils and other factors affecting the crop insurance business in those
states.
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Future Growth and Continued Operations Dependent on Access to Capital
Property and casualty insurance is a capital intensive business. The
Company must maintain minimum levels of surplus in the Insurers in order to
continue to write business, meet the other related standards established by
insurance regulatory authorities and insurance rating bureaus and satisfy
financial ratio covenants in loan agreements.
Historically, the Company has achieved premium growth as a result of
both acquisitions and internal growth. It intends to continue to pursue
acquisition and new internal growth opportunities. Among the factors which may
restrict the Company's future growth is the availability of capital. Such
capital will likely have to be obtained through debt or equity financing or
retained earnings. There can be no assurance that the Company's insurance
subsidiaries will have access to sufficient capital to support future growth and
also satisfy the capital requirements of rating agencies, regulators and
creditors. In addition, the Company will require additional capital to finance
future acquisitions.
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves for unpaid losses and LAE established by the Company are
estimates of amounts needed to pay reported and unreported claims and related
LAE based on facts and circumstances then known. These reserves are based on
estimates of trends in claims severity, judicial theories of liability and other
factors.
Although the nature of the Company's insurance business is primarily
short-tail, the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating these amounts, it has been
necessary, and may over time continue to be necessary, to revise estimates of
the Company's reserves for losses and LAE. The historic development of reserves
for losses and LAE may not necessarily reflect future trends in the development
of these amounts. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on historical information.
Reliance Upon Reinsurance
In order to reduce risk and to increase its underwriting capacity, the
Company purchases reinsurance. Reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers, including the FCIC,
which the Company generally believes to be financially stable, a significant
reinsurer's insolvency or inability to make payments under the terms of a
reinsurance treaty could have a material adverse effect on the Company's
financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing
in property and casualty insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity,
no assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may need
to reduce the levels of its underwriting commitments.
Risks Associated with Investments
The Company's results of operations depend in part on the performance
of its invested assets. Certain risks are inherent in connection with fixed
maturity securities including loss upon default and price volatility in reaction
to changes in interest rates and general market factors. Equity securities
involve risks arising from the financial performance of, or other developments
affecting, particular issuers as well as price volatility arising from general
stock
-39-
market conditions.
Comprehensive State Regulation
The Company's insurance subsidiaries are subject to comprehensive
regulation by government agencies in the states in which they operate. The
nature and extent of that regulation vary from jurisdiction to jurisdiction but
typically involve prior approval of the acquisition of control of an insurance
company or of any company controlling an insurance company, regulation of
certain transactions entered into by an insurance company with any of its
affiliates, limitations on dividends, approval or filing of premium rates and
policy forms for many lines of insurance, solvency standards, minimum amounts of
capital and surplus which must be maintained, limitations on types and amounts
of investments, restrictions on the size of risks which may be insured by a
single company, limitation of the right to cancel or non-renew policies in ome
lines, regulation of the right to withdraw from markets or agencies,
requirements to participate in residual markets, licensing of insurers and
agents, deposits of securities for the benefit of policyholders, reporting with
respect to financial condition, and other matters. In addition, state insurance
department examiners perform periodic financial and market conduct examinations
of insurance companies. Such regulation is generally intended for the protection
of policyholders rather than security holders. No assurance can be given that
future legislative or regulatory changes will not adversely affect the Company.
Holding Company Structure; Dividend And Other Restrictions; Management Fees
Holding Company Structure. The Company is a holding company whose
principal asset is the capital stock of the subsidiaries. The Company relies
primarily on dividends and other payments from its subsidiaries, including its
insurance subsidiaries, to meet its obligations to creditors and to pay
corporate expenses. The Insurers are domiciled in the states of Indiana and
Florida and each of these states limits the payment of dividends and other
distributions by insurance companies. The Company's reinsurance subsidiary,
Granite Re is also limited in its ability to make payments to the Company as a
result of restrictions imposed by the regulatory bodies that govern the
companies the ceded business to it.
Dividend and Other Restrictions. Indiana law defines as "extraordinary"
any dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the end
of the preceding year, or (ii) the prior year's net income. Dividends which are
not "extraordinary" may be paid ten days after the Indiana Department of
Insurance ("Indiana Department") receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without the prior
approval of the Indiana Commissioner of Insurance (the "Indiana Commissioner")
or until the Indiana Commissioner has been given thirty days' prior notice and
has not disapproved within that period. The Indiana Department must receive
notice of all dividends, whether "extraordinary" or not, within five business
days after they are declared. Notwithstanding the foregoing limit, a domestic
insurer may not declare or pay a dividend from any source of funds other than
"Earned Surplus" without the prior approval of the Indiana Department. "Earned
Surplus" is defined as the amount of unassigned funds set forth in the insurer's
most recent annual statement, less surplus attributable to unrealized capital
gain or re-evaluation of assets. Further, no Indiana domiciled insurer may make
payments in the form of dividends or otherwise to its shareholders unless it
possesses assets in the amount of such payments in excess of the sum of its
liabilities and the aggregate amount of the par value of all shares of capital
stock; provided, that in no instance shall such dividend reduce the total of (I)
gross paid-in and contributed surplus, plus (ii) special surplus funds, plus
(iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal
to 50% of the aggregate amount of the par value of all shares of the insurer's
capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department of Insurance ("Florida
Department") if the dividend or distribution does not exceed the larger of: (i)
the lesser of (a) 10% of surplus or (b) net investment income, not including
realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with
dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains, or (iii) the lesser of (a) 10% of surplus
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or (b) net investment income plus a 3-year carryforward with dividends payable
constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department if (1) the dividend
is equal to or less than the greater of (i) 10% of the insurer's surplus as
regards policyholders derived from net operating profits on its business and net
realized capital gains, or (ii) the insurer's entire net operating profits
(including unrealized gains or losses) and realized net capital gains derived
during the immediately preceding calendar year; (2) the insurer will have
policyholder surplus equal to or exceeding 115% of the minimum required
statutory surplus after the dividend or distribution; (3) the insurer files a
notice of the dividend or distribution with the Florida Department at least ten
business days prior to the dividend payment or distribution; and (4) the notice
includes a certification by an officer of the insurer attesting that, after the
payment of the dividend or distribution, the insurer will have at least 115% of
required statutory surplus as to policyholders. Except as provided above, a
Florida domiciled insurer may only pay a dividend or make a distribution (i)
subject to prior approval by the Florida Department, or (ii) thirty days after
the Florida Department has received notice of such dividend or distribution and
has not disapproved it within such time. In the consent order approving the
Acquisition (the "Consent Order"), the Florida Department has prohibited
Superior from paying any dividends (whether extraordinary or not) for four years
from date of acquisition without the prior written approval of the Florida
Department.
Although the Company believes that funds required for it to meet its
financial and operating obligations will be available, there can be no assurance
in this regard. Further, there can be no assurance that, if requested, the
Indiana Department will approve any request for extraordinary dividends from
Pafco or IGF or that the Florida Department will allow any dividends to be paid
by Superior during the four year period described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written and the ability to pay future dividends. Further, state insurance
laws and regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
Management Fees. The management agreement originally entered into
between SIG and Pafco was assigned as of April 30, 1996 by SIG to GGS
Management, a wholly-owned subsidiary of GGS Holdings. This agreement provides
for an annual management fee equal to 15% of gross premiums written. A similar
management agreement with a management fee of 17% of gross premiums written has
been entered into between GGS Management and Superior. Employees of SIG relating
to the nonstandard automobile insurance business and all Superior employees
became employees of GGS Management effective April 30, 1996. In the Consent
Order approving the Acquisition, the Florida Department has reserved, for a
period of three years, the right to re-evaluate the reasonableness of fees
provided for in the Superior management agreement at the end of each calendar
year and to require Superior to make adjustments in the management fees based on
the Florida Department's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees.
ITEM 2 - PROPERTIES
The headquarters for the Company, SIG, GGS Holdings and Pafco are
located at 4720 Kingsway Drive, Indianapolis, Indiana. The building is an 80,000
square foot multilevel structure approximately 50% of which is utilized by
Pafco. The remaining space is leased to third parties at a price of
approximately $10 per square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel building
leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in
Atlanta, Georgia; Tampa, Florida; and Orange, California. Under a lease term
which extends through February 2003, Superior leases office space at 280
Interstate North Circle, N.W., Suite 500, Atlanta, Georgia. Superior occupies
43,448 square feet at this location and
-41-
subleases an additional 3,303 square feet to third-party tenants. Superior also
has an office located at 3030 W. Rocky Pointe Drive, Suite 770, Tampa, Florida
consisting of 18,477 square feet of space leased for a term extending through
February, 2000. In addition, Superior occupies an office at 1745 West
Orangewood, Orange, California consisting of 3,264 square feet under a lease
extending through June 2000.
IGF owns a 17,500 square foot office building located at 2882 106th
Street, Des Moines, Iowa which serves as its corporate headquarters. The
building is fully occupied by IGF. IGF also owns certain improved commercial
property which is adjacent to its corporate headquarters.
IGF bought an office building in Des Moines, Iowa, as its crop
insurance division home office. The purchase price was $2.6 million. The sale of
the old building is expected to close on April 1, 1998 for $1.35 million.
ITEM 3 - LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to 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 estimated costs of litigation.
IGF instituted litigation against the FCIC on March 23, 1995 in the
United States District Court for the Southern District of Iowa seeking $4.3
Million as reimbursement for certain expenses. IGF alleges the FCIC wrongfully
sought to hold IGF responsible for those expenses. The FCIC counterclaimed for
approximately $1.2 Million in claims payments for which the FCIC contends IGF is
responsible for as successor to the run-off book of business. On October 27,
1997, IGF reached an agreement with the FCIC to settle the case, with both
parties dismissing all claims against one another which were subject to the
litigation. The FCIC has agreed to pay IGF a lump sum payment of $60,000.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during 1997 to a vote of security holders of
the Registrant, through the solicitation of proxies or otherwise.
-42-
SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officers
of the Company who are not also directors. Their respective ages and their
respective positions with the Company are listed as follows:
Name Age Position
David L. Bates 39 Vice President, General Counsel and Secretary of
the Company
Gary P. Hutchcraft 36 Vice President, Chief Financial Officer and Treasurer
of the Company
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel
and Secretary of SIG since November, 1995 after having been named Vice President
and General Counsel of the Company in April, 1995. Mr. Bates served as a member
of the Fort Howard Corporation Legal Department from September, 1988 through
March, 1995. Prior to that time, Mr. Bates served as a Tax Manager with Deloitte
& Touche.
Mr. Hutchcraft, C.P.A., has served as Vice President, Chief Financial
Officer and Treasurer of SIG and the Company since July, 1996. Prior to that
time, Mr. Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP
from July, 1988 to July, 1996.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's Common
Shares, the range of selling prices for each quarterly period for the years
ended December 31, 1997 and 1996 with respect to the Common Shares and the
approximate number of holders of Common Shares as of December 31, 1997 the
Common Shares and other matters is included under the caption Market Information
on Page 35 of the 1997 Annual Report, included as Exhibit 13, which information
is incorporated herein by reference.
The Company currently intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon earnings, capital requirements, any financing agreement
covenants and the financial condition of the Company. In addition, regulatory
restrictions and provisions of the Preferred Securities limit distributions to
shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
Selected Financial Data of the Company follows:
-43-
GORAN CAPITAL INC.
Selected Financial Data
As of the Year Ended December 31,
(In Thousands of U.S. Dollars)
1993 1994 1995 1996 1997
Gross Premium Revenue $114,135 $126,978 $146,603 $299,376 $448,982
Reported Net Earnings-Continuing Operations 1,397 3,940 7,171 14,127 15,983
Reported Net Earnings 1,397 3,940 7,171 31,296 12,438
U.S./Canada GAAP Differences:
Discounting on Outstanding Claims 49 88 (161) 62 (504)
Deferred Income Taxes 562 1,180 (344) (64) 177
Minority Interest --- --- --- (177) 107
Revised Net Earnings-Continuing Operations 2,008 5,208 6,666 14,125 15,763
Revised Net Earnings 2,008 5,208 6,666 31,117 12,218
Basic Earnings Per Share-Continuing Operations $0.38 $0.96 $1.33 $2.67 $2.82
Basic Earnings Per Share $0.38 $0.96 $1.33 $5.87 $2.19
EPS Continuing Operations-Fully Diluted $0.38 $0.96 $1.20 $2.47 $2.68
EPS-Fully Diluted $0.38 $0.96 $1.20 $5.44 $2.08
Dividends Per Share $0.00 $0.00 $0.00 $0.00 $0.00
Reported Total Assets 128,690 115,240 160,816 381,342 560,848
U.S./Canada GAAP Differences:
Loans to Purchase Shares (741) (593) (563) (595) (346)
Deferred Income Taxes 548 1,742 1,466 1,798 1,975
Outstanding Claims Ceded --- --- --- --- ---
Unearned Premiums Ceded --- --- --- --- ---
Unrealized Gain (Loss) on Investments --- (1,383) (221) 820 1,336
Revised Total Assets 128,497 115,006 161,498 383,365 563,813
Long Term Bonds and Debentures 12,936 10,787 9,237 --- ---
Reported Shareholders' Equity 1,088 5,067 12,622 47,258 60,332
U.S./Canada GAAP Differences:
Deferred Income Taxes 548 1,742 1,466 1,798 1,975
Discounting on Claims (1,292) (1,134) (1,327) (1,260) (1,765)
Unrealized Gain (Loss) on Investments --- (1,383) (221) 820 1,336
Minority Interest Portion --- --- --- (177) (70)
Loans to Purchase Shares (741) (593) (563) (595) (346)
Revised Shareholders' Equity (397) 3,699 11,977 47,843 61,462
Shares Outstanding-Fully Diluted 5,242,101 5,399,463 5,567,644 5,724,476 5,886,211
-44-
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
The discussion entitled "Management Discussion and Analysis of
Financial Condition and Results of Operations" in the 1997 Annual Report on
pages 5 through 14 included as Exhibit 13 is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included in the 1997 Annual
Report, included as Exhibit 13, and listed in Item 14 of this Report are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors of the
Company is incorporated herein by reference to the Company's definitive proxy
statement for its 1997 annual meeting of common stockholders filed with the
Commission pursuant to Regulation 14A (the "1997 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Company's 1997 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the Company's 1997 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the Company's 1997 Proxy Statement.
-45-
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report except as
otherwise indicated:
1. Financial Statements. The following described consolidated financial
statements found on the pages of the 1997 Annual Report indicated below
are incorporated into Item 8 of this Report by reference.
Description of Financial Statement Item Page
Report of Independent Auditors.........................................34-35
Consolidated Balance Sheets, December 31, 1997 and 1996...................15
Consolidated Statements of Earnings,
Years Ended December 31, 1997, 1996 and 1995..............................16
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1997, 1996 and 1995..............................17
Consolidated Statements of Changes in Cash Resources,
Years Ended December 31, 1997, 1996 and 1995..............................18
Notes to Consolidated Financial Statements,
Years Ended December 31, 1997, 1996 and 1995...........................19-23
2. Financial Statement Schedules.
The following financial statement schedules are included herein.
Description of Financial Statement Item Page
Report of Independent Accountant On Differences
Between Canadian and United States Generally
Accepted Accounting Principles and
Supplementary Schedules...................................................
Exhibit 2 - Amounts Due From Insurance Companies
In Excess of 10% of Shareholders' Equity..................................48
Description of Financial Statement Item Page
Schedule II - Condensed Financial Information Of Registrant............49-52
Schedule IV - Reinsurance.................................................52
Schedule V - Valuation And Qualifyi53 Accounts............................53
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations....................................54
Schedules other than those listed above have been omitted because the
required information is contained in the financial statements and notes thereto
or because such schedules are not required or applicable.
-46-
3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated
herein by reference.
4. Reports on Form 8-K. None
-47-
Exhibit 2
GORAN CAPITAL INC.
CONCENTRATION OF CREDIT RISK AMOUNTS DUE FROM
OTHER INSURANCE COMPANIES PAID AND UNPAID CLAIMS
As At December 31, 1996
(In Thousands of U.S. Dollars)
Company Name Amount
Vesta Fire Insurance Company $12,939
Notes: Accounts listed above are amounts greater than $6,146 (U.S.) which is
approximately 10% of Shareholders' Equity at December 31, 1997. Amounts are net
of trust accounts posted as collateral with original cedents, with respect to
certain retrocession agreements in which the Company is a retrocessionnaire.
-48-
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
BALANCE SHEET
As At December 31,
(In Thousands U.S. Dollars)
(Unaudited)
1996 1997
Assets
Cash $319 $1,166
Accounts Receivable 420 334
Capital and Other Assets 543 597
Investment in Subsidiaries 10,772 10,321
------ ------
Total Assets $12,054 $12,418
====== ======
Liabilities and Shareholders' Equity
Accounts Payable 9,758 9,324
Other Payables 973 540
Subordinated Debenture --- ---
------ -------
Total Liabilities 10,731 9,864
------ -------
Shareholders' Equity
Common Shares 18,473 19,067
Deficit (17,150) (16,513)
------ ------
Total Shareholders' Equity 1,323 2,554
------ ------
Total Liabilities and Shareholders' Equity $12,054 $12,418
====== ======
-49-
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENT OF EARNINGS (LOSS)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
(Unaudited)
1995 1996 1997
Revenues
Management Fees $796 $352 $336
Royalty Income --- --- ---
Dividend Income --- 3,500 ---
Other Income --- --- 52
Net Investment Income 448 264 15
----- ----- ---
Total Revenues 1,244 4,116 403
----- ----- ---
Expenses
Debenture Interest Expense 998 868 ---
Amortization 114 199 ---
General, Administrative and Acquisition Expenses 1,338 1,879 (234)
----- ----- ---
Total Expenses 2,450 2,946 (234)
----- ----- ---
Net Income (Loss) (1,206) 1,170 637
Deficit, Beginning of Year (17,114) (18,320) (17,150)
------ ------ ------
Deficit, End of Year $(18,320) $(17,150) $(16,513)
====== ====== ======
-50-
GORAN CAPITAL INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENT OF CHANGES IN CASH RESOURCES
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
(Unaudited)
1995 1996 1997
Cash Flows from Operations
Net Income (Loss) $(1,206) $1,170 $637
Items Not Involving Cash:
Amortization and Depreciation 114 199 ---
Gain on Sale of Capital Assets (7) (4) ---
Decrease (Increase) in Accounts Receivable 1,822 (40) 86
Decrease (Increase) in Other Assets (29) (3) (54)
Increase (Decrease) in Accounts Payable 1,227 8,749 (434)
Increase (Decrease) in Other Payables (141) --- (433)
----- ------ -----
Net Cash Provided (Used) by Operations 1,780 10,071 (198)
----- ------ -----
Cash Flows From Financing Activities:
Redemption of Share Capital by Subsidiary --- --- ---
Proceeds on Sale of Capital Assets 11 14 ---
Issue of Common Shares 305 599 594
----- ----- -----
Net Cash Provided by Financing Activities 316 613 594
----- ----- -----
Cash Flows From Investing Activities:
Purchase of Fixed Assets (3) --- ---
Other, net 3 (93) 451
Reduction of Debentures (1,454) (11,084) ---
----- ------ -----
Net Cash Used by Investing Activities (1,454) (11,177) 451
----- ------ -----
Net Increase (Decrease) in Cash 642 (493) 847
Cash at Beginning of Year 170 812 319
----- ----- -----
Cash at End of Year $812 $319 $1,166
===== ===== =====
Cash Resources are Comprised of:
Cash 109 187 78
Short-Term Investments 703 132 1,088
----- ----- -----
$812 $319 $1,166
===== ===== =====
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GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1997, 1996 and 1995
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Goran Capital Inc. The condensed financial
information includes the accounts and activities of the Parent Company which
acts as the holding company for the insurance subsidiaries.
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
Premiums Written (1) 1995 1996 1997
Direct Amount $116,202 $290,355 $420,443
Assumed from Other Companies $30,401 $9,021 $28,539
Ceded to Other Companies $(64,781) $(85,598) $(167,086)
Net Amount $81,822 $213,778 $281,896
Percentage of Amount Assumed to Net 37.2% 4.2% 10.1%
(1) Excludes premiums written with respect to discontinued operations.
-52-
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND
QUALIFYING ACCOUNTS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1995 1996 1997
Allowance for Allowance for Allowance for
Doubtful Doubtful Doubtful
Accounts Accounts Accounts
Additions:
Balance at Beginning of Period $1,209 $927 $1,480
Reserves Acquired in the Superior Acquisition --- 500 ---
Charged to Costs and Expenses (1) 2,523 5,034 9,519
Charged to Other Accounts --- --- ---
Deductions from Reserves (2,805) (2) (4,981) (2) (9,006)
----- ----- -----
Balance at End of Period $927 $1,480 $1,993
=== ===== =====
(1) In 1993, the Company began to direct bill policyholders rather than agents
for premiums. During late 1994 and into 1995, the Company experienced an
increase in premiums written. During 1995, the Company experienced an increase
in premiums written and further evaluated the collectibility of this business
and incurred a bad debt expense of approximately $2.5 million. The Company
continually monitors the adequacy of its allowance for doubtful accounts and
believes the balance of such allowance at December 31, 1997, 1996 and 1995 was
adequate.
(2) Uncollectible accounts written off, net of recoveries.
-53-
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL
INFORMATION CONCERNING PROPERTY -
CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1995 1996 1997
Deferred Policy Acquisition Costs $7,641 $13,860 $11,849
Reserves for Losses and Loss Adjustment Expenses 87,655 127,045 152,871
Unearned Premiums 33,159 91,207 118,616
Earned Premiums 72,530 208,883 276,540
Net Investment Income 3,868 7,745 12,777
Losses and Loss Adjustment Expenses
Incurred Related to:
Current Years 50,666 146,844 201,118
Prior Years 787 (570) 9,516
Paid Losses and Loss Adjustment Expenses 44,749 139,441 203,012
Amortization of Deferred Policy Acquisition Costs 7,150 27,657 19,356
Premiums Written 146,603 299,376 448,982
Note: All amounts in the above table are net of the effects of
reinsurance and related commission income, except for net investment income
regarding which reinsurance is not applicable, premiums written, liabilities for
losses and loss adjustment expenses, and unearned premiums which are stated on a
gross basis. The amounts in the above table exclude amounts with respect to
discontinued operations.
-54-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
GORAN CAPITAL INC.
March 23, 1998 By: /s/ Alan G. Symons
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on March 23, 1998, on
behalf of the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial/Accounting Officer:
/s/Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/G. Gordon Symons /s/David B. Shapira
Chairman of the Board Director
/s/John K. McKeating /s/James G. Torrance
Director Director
/s/J. Ross Schofield /s/Douglas H. Symons
Director Director
/s/Alan G. Symons
Director
-55-
EXHIBIT INDEX
Reference to
Regulation S-K
Exhibit No. Document
1 Final Draft of the Underwriting Agreement dated November 4, 1996 among
Registrant, Symons International Group, Inc., Advest, Inc. and Mesirow
Financial, Inc. is incorporated by reference in the Registrant's 1996
Form 10-K.
2.1 The Strategic Alliance Agreement by and between Continental Casualty
Company and IGF Insurance Company, IGF Holdings, Inc. and Symons
International Group, Inc. dated February 28, 1998.
2.2 The MPCI Quota Share Reinsurance Contract by and between Continental
Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and
Symons International Group, Inc. dated February 28, 1998.
2.3 The MPCI Quota Share Reinsurance Agreement by and between Continental
Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and
Symons International Group, Inc. dated February 28, 1998.
2.4 The Crop Hail Insurance Quota Share Contract by and between
Continental Casualty Company and IGF Insurance Company, IGF Holdings,
Inc. and Symons International Group, Inc. dated February 28, 1998.
2.5 The Crop Hail Insurance Quota Share Agreement by and between
Continental Casualty Company and IGF Insurance Company, IGF Holdings,
Inc. and Symons International Group, Inc. dated February 28, 1998.
2.6 The Crop Hail Insurance Service and Indemnity Agreement by and between
Continental Casualty Company and IGF Insurance Company, IGF Holdings,
Inc. and Symons International Group, Inc. dated February 28, 1998.
2.7 The Multiple Peril Crop Insurance Service and Indemnity Agreement by
and between Continental Casualty Company and IGF Insurance Company,
IGF Holdings, Inc. and Symons International Group, Inc. dated
February 28, 1998.
2.8 The Stock Purchase Agreement between Symons International Group, Inc.
and GS Capital Partners II, L.P. dated July 23, 1998.
3.1 The Registrant's Articles of Incorporation are incorporated by
reference to Exhibit 1 of the Registrant's Form 20-F, filed
October 31, 1994.
3.2 Registrant's Restated Bylaw 1 is incorporated by reference in the
Registrant's 1996 Form 10-K.
4.1 Sample Share Certificate and Articles of Amalgamation defining rights
attaching to common shares are incorporated by reference to Exhibit 2
of Registrant's Form 20-F filed October 31, 1994.
4.2(1) The Senior Subordinated Indenture between Symons International Group,
Inc. as issuer and Wilmington Trust Company as trustee for SIG Capital
Trust I dated August 12, 1997 is incorporated by reference in the
Registrant's Registration Statement on Form S-4, Reg. No. 33-35713.
-56-
4.2(2) First Supplemental Senior Subordinated Indenture between Symons
International Group, Inc. and Wilmington Trust Company Related to SIG
Capital Trust I dated January 15, 1998.
10.1 The Stock Purchase Agreement among Registrant, Symons International
Group, Inc., Fortis, Inc. and Interfinancial, Inc. dated January 31,
1996 is incorporated by reference to Exhibit 10.1 of Symons
International Group, Inc.'s Registration Statement on Form S-1,
Reg. No. 333-9129.
10.2 The Management Agreement among Superior Insurance Company, Superior
American Insurance Company, Superior Guaranty Insurance Company and
GGS Management, Inc. dated April 30, 1996 is incorporated by
reference to Exhibit 10.5 of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.3 The Management Agreement between Pafco General Insurance Company and
Symons International Group, Inc. dated May 1, 1987, as assigned to GGS
Management, Inc. effective April 30, 1996, is incorporated by
reference to Exhibit 10.6 of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.4 The Administration Agreement between IGF Insurance Company and Symons
International Group, Inc. dated February 26, 1990, as amended, is
incorporated by reference to Exhibit 10.7 of the Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.5 The Agreement between IGF Insurance Company and Symons International
Group, Inc. dated November 1, 1990 is incorporated by reference to
Exhibit 10.8 of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.6 The Registration Rights Agreement between Registrant and Symons
International Group, Inc. dated May 29, 1996 is incorporated by
reference to Exhibit 10.13 of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.7(1) The Employment Agreement between GGS Management Holdings, Inc. and
Alan G. Symons dated January 31, 1996 is incorporated by reference to
Exhibit 10.16(1) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.7(2) The Employment Agreement between GGS Management Holdings, Inc. and
Douglas H. Symons dated January 31, 1996 is incorporated by reference
to Exhibit 10.16(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.8(1) The Employment Agreement between IGF Insurance Company and Dennis G.
Daggett effective February 1, 1996 is incorporated by reference to
Exhibit 10.17(1) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.8(2) The Employment Agreement between IGF Insurance Company and Thomas F.
Gowdy effective February 1, 1996 is incorporated by reference to
Exhibit 10.17(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.9 The Employment Agreement between Superior Insurance Company and Roger
C. Sullivan, Jr. effective April 23, 1997.
10.10 The Employment Agreement between Registrant and Gary P. Hutchcraft
effective May 1, 1997.
-57-
10.11 The Employment Agreement between Registrant and David L. Bates
effective April 1, 1997.
10.12 The Goran Capital Inc. Stock Option Plan is incorporated by reference
to Exhibit 10.20 of Symons International Group, Inc.'s Registration
Statement of Form S-1, Reg. No. 333-9129.
10.13 The GGS Management Holdings, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.21 of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.14 The Symons International Group, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.22 of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.15 The Symons International Group, Inc. Retirement Savings Plan is
incorporated by reference to Exhibit 10.24 of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.16 The Insurance Service Agreement between Mutual Service Casualty
Company and IGF Insurance Company dated May 20, 1996 is incorporated
by reference to Exhibit 10.25 of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.17(1) The Automobile Third Party Liability and Physical Damage Quota Share
Reinsurance. Contract between Pafco General Insurance Company and
Superior Insurance Company is incorporated by reference to Exhibit
10.27(1) of Symons International Group, Inc.'s Registration Statement
on Form S-1, Reg. No. 333-9129.
10.17(2) The Crop Hail Quota Share Reinsurance Contract and Crop Insurance
Service Agreement between Pafco General Insurance Company and IGF
Insurance Company is incorporated by reference to Exhibit 10.27(2) of
Symons International Group, Inc.'s Registration Statement on Form S-1,
Reg. No. 333-9129.
10.17(3) The Automobile Third Party Liability and Physical Damage Quota Share
Reinsurance Contract between IGF Insurance Company and Pafco General
Insurance Company is incorporated by reference to Exhibit 10.27(3) of
Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.17(4) The Multiple Line Quota Share Reinsurance Contract between IGF
Insurance Company and Pafco General Insurance Company is incorporated
by reference to Exhibit 10.27(4) of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.17(5) The Standard Revenue Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company is incorporated by reference to
Exhibit 10.27(5) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.18 The Commitment Letter, effective October 24, 1996, between Fifth Third
Bank of Central Indiana and Symons International Group, Inc. is
incorporated by reference to Exhibit 10.28 of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.19 The Reinsurance Agreement No. 1000-91 (Quota Share Agreement) and
Reinsurance agreement No. 1000-90 (Stop Loss Reinsurance and Reserves
Administration Agreement) are incorporated by reference to
Exhibit 3(c) of Registrant's Form 20-F filed October 31, 1994.
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10.20 The Form of Share Option Agreement is incorporated by reference to
Exhibit 10.05 of Registrant's Form 10-K for the year ended
December 31, 1994.
10.21 The Share Pledge Agreement between Symons International Group, Ltd and
Registrant is incorporated by reference to Exhibit 10.06 of
Registrant's Form 10-K for the year ended December 31, 1994.
10.22(1) The SIG Capital Trust I 91/2% Trust Preferred Securities Purchase
Agreement dated August 7, 1997 is incorporated by reference in the
Registrant's Registration Statement on Form S-4, Reg. No. 333-35713.
10.19(2) The Registration Rights Agreement among Symons International Group,
Inc., SIG Capital Trust I and Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp.
and Mesirow Financial, Inc. dated August 12, 1997 is incorporated by
reference in the Registrant's Registration Statement on Form S-4,
Reg. No. 333-35713.
10.19(3) The Declaration of Trust of SIG Capital Trust 1 dated August 4, 1997
is incorporated by reference in the Registrant's Registration
Statement on Form S-4, Reg. No. 333-35713.
10.19(4) The Amended and Restated Declaration of Trust of SIG Capital Trust I
dated August 12, 1997 is incorporated by reference in the Registrant's
Registration Statement on Form S-4, Reg. No. 333-35713.
11 Statement re Computation of Per Share Earnings
13 Annual Report to Security Holders, 1997, 1996 and 1995
21 The Subsidiaries of the Registrant are incorporated by reference to
Footnote 1 of the Registrant's consolidated financial statements
contained in its Annual Report to Security Holders filed hereunder as
Exhibit 13.
99 Management Proxy Circular with respect to 1998 Annual Meeting of
Shareholders of Registrant.
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