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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number: 0-29042
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1707115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
As of October 31, 2002, there were 10,385,399 shares of Registrant's no par
value common stock issued and outstanding.
FORM 10-Q INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1. . . Financial Statements
Consolidated Balance Sheets at September 30, 2002
(unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Operations
for the Three Months Ended
September 30, 2002 and 2001 4
Unaudited Consolidated Statements of Operations
for the Nine Months Ended
September 30, 2002 and 2001 5
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 6
Condensed Notes to Unaudited Consolidated Financial
Statements. . . 7
Item 2. . . Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. . . Quantitative and Qualitative Disclosures about Market Risk 22
Item 4 Controls and Procedures 22
PART II . . OTHER INFORMATION 22
Item 1. . . Legal Proceedings 22
Item 2. . . Changes in Securities and Use of Proceeds 23
Item 3. . . Defaults Upon Senior Securities 23
Item 4. . . Submission of Matters to a Vote of Security Holders 23
Item 5. . . Other Information 23
Item 6. . . Exhibits and Reports on Form 8-K 23
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . 25
ERTIFICATIONS . . . . . . . . . 26
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30,
2002 December 31,
(Unaudited) 2001
---------- ----------
ASSETS
Investments available for sale:
Fixed maturities, at market . . . . . . . . . . . . . . . . . . . . .$ 66,147 $ 77,896
Equity securities, at market. . . . . . . . . . . . . . . . . . . . . 5,671 14,396
Short-term investments, at amortized cost, which approximates market. 7,420 13,266
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . 573 1,469
---------- ----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . 79,811 107,027
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 764 3,385
Receivables, net of allowance of $240 and $1,526, respectively. . . 26,786 44,688
Reinsurance recoverable on paid and unpaid losses . . . . . . . . . . 28,621 31,546
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . 26,675 40,039
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . - 763
Property and equipment, net of accumulated depreciation . . . . . . 7,646 9,890
Preferred securities issuance costs, net of amortization. . . . . . 4,248 4,376
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,934 2,418
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179,485 $ 244,132
========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Liabilities:
Loss and loss adjustment expense reserves . . . . . . . . . . . . . $ 65,634 $ 81,142
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . 37,992 59,216
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . 42,394 58,226
Distributions payable on preferred securities . . . . . . . . . . . 45,100 33,203
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 3,625
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . 1,370 596
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 17,282 17,136
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 212,272 253,144
---------- ----------
Minority interest:
Company-obligated mandatorily redeemable preferred stock of trust
Subsidiary holding solely parent debentures .. . . . . . . . . . . 135,000 135,000
---------- ----------
Shareholders' (Deficit):
Common stock, no par value, 100,000,000 shares authorized,
10,385,399 shares issued and outstanding in both 2002 and 2001.. . 38,136 38,136
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 5,851 5,851
Unrealized loss on investments available for sale . . . . . . . . . (4,654) (2,613)
Retained (deficit). . . . . . . . . . . . . . . . . . . . . . . . . (207,120) (185,386)
---------- ----------
Total Shareholders' (Deficit) . . . . . . . . . . . . . . . . . . . . (167,787) (144,012)
---------- ----------
Total Liabilities and Shareholders' (Deficit) . . . . . . . . . . . . $ 179,485 $ 244,132
========== ==========
See condensed notes to consolidated financial statements.
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended
September 30
------------------
2002 2001
--------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,449 $ 27,268
Less ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,280) (12,664)
--------- ---------
Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,169 $ 14,604
========= =========
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,721 $ 22,839
Fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,237 3,799
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 -
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 1,014 1,443
Net realized capital gain . . . . . . . . . . . . . . . . . . . . . . . . 611 793
--------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,958 28,874
--------- ---------
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . 8,431 19,072
Policy acquisition and general and administrative expenses. . . . . . 3,929 13,038
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 -
Amortization of preferred securities issuance cost. . . . . . . . . . . 42 43
--------- ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,465 32,153
--------- ---------
Loss from continuing operations before income taxes and minority interest (507) (3,279)
--------- ---------
Total income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------- ---------
Loss from continuing operations before minority interest. . . . . . . . . (507) (3,279)
Minority interest:
Distributions on preferred securities, net of tax of nil in both 2002 and
2001 4,077 3,545
--------- --------
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . (4,584) (6,824)
Discontinued operations:
Loss from operations of discontinued segment, less applicable income
Taxes of nil in both 2002 and 2001 . . . . . . . . . . . . . . . . . . -
--------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,584) $ (6,824)
========= ========
Weighted average shares outstanding - basic and fully diluted . . . . . . 10,385 10,385
========= ========
Net loss from continuing operations per share - basic and fully diluted . $ (0.44) $ (0.66)
========= ========
Net loss of discontinued operations per share-basic and fully diluted . . $ - $ -
========= ========
Net loss per share - basic and fully diluted. . . . . . . . . . . . . . . $ (0.44) $ (0.66)
========= ========
See condensed notes to consolidated financial statements.
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Nine Months Ended
September 30
-----------------
2002 2001
--------- ---------
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,703 $122,358
Less ceded premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,112) (66,305)
--------- -------
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,591 $ 56,053
========= ========
Net premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,363 $ 64,598
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,066 10,265
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125 -
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,633 4,615
Net realized capital (loss). . . . . . . . . . . . . . . . . . . . . . . . (489) (263)
--------- ---------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,698 79,215
--------- ---------
Expenses:
Losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . 32,660 57,097
Policy acquisition and general and administrative expenses . . . . . . 17,609 34,269
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 -
Amortization of preferred securities issuance costs. . . . . . . . . . . 128 128
--------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,535 91,494
--------- ---------
Loss from continuing operations before income taxes and minority interest. (9,837) (12,279)
--------- ---------
Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------- ---------
Loss from continuing operations before minority interest . . . . . . . . . (9,837) (12,279)
Minority interest:
Distributions on preferred securities, net of tax of nil in both 2002 and
2001 11,897 10,986
--------- ---------
Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . (21,734) (23,265)
Discontinued operations:
Loss from operations of discontinued segment, less applicable income
taxes of nil in both 2002 and 2001 . . . . . . . . . . . . . . . . . . . - (2,156)
--------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(21,734) $(25,421)
========= =========
Weighted average shares outstanding - basic and fully diluted. . . . . . . 10,385 10,385
========= =========
Net loss from continuing operations per share - basic and fully diluted. . $ (2.09) $ (2.24)
========= =========
Net loss of discontinued operations per share-basic and fully diluted. . . $ - $ (0.21)
========= =========
Net loss per share - basic and fully diluted . . . . . . . . . . . . . . . $ (2.09) $ (2.45)
========= =========
See condensed notes to consolidated financial statements.
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30
-----------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $(21,734) $(25,421)
Adjustments to reconcile net loss to net cash provided by
(used in) operations:
Depreciation, amortization, impairment and other. . . . . . 2,755 1,987
Net realized capital loss . . . . . . . . . . . . . . . . . 489 263
Net changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . 17,903 3,482
Reinsurance recoverable on losses, net. . . . . . . . . . . 2,925 22,290
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . 13,364 (4,014)
Deferred policy acquisition costs . . . . . . . . . . . . . 763 2,918
Loss and loss adjustment expense reserves . . . . . . . . . (15,508) (21,682)
Unearned premiums . . . . . . . . . . . . . . . . . . . . . (21,224) (1,884)
Reinsurance payables. . . . . . . . . . . . . . . . . . . . (15,832) (18,991)
Distribution payable on preferred securities. . . . . . . . 11,897 10,985
Other assets and liabilities. . . . . . . . . . . . . . . . (2,371) 4,299
Deferred income . . . . . . . . . . . . . . . . . . . . . . (1,125) 4,000
Net assets from discontinued operations . . . . . . . . . . (5,633) 2,277
--------- ---------
Net cash (used in) operations . . . . . . . . . . . . . . . . (33,331) (19,491)
--------- ---------
Cash flows from investing activities, net of assets acquired:
Net proceeds from sales of short-term investments . . . . . . 5,846 2,273
Proceeds from sales, calls and maturities of fixed maturities 40,413 54,594
Purchase of fixed maturities. . . . . . . . . . . . . . . . (27,364) (12,339)
Proceeds from sales of equity securities. . . . . . . . . . 5,650 9,842
Purchase of equity securities . . . . . . . . . . . . . . . (831) (10,486)
Proceeds from repayment of mortgage loans . . . . . . . . . - 1,870
Purchase of property and equipment. . . . . . . . . . . . . (281) (1,216)
Proceeds from sales of other investments. . . . . . . . . . 870 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . - (104)
Net investing activities from discontinued operations . . . 5,081 (1,322)
--------- ---------
Net cash provided by investing activities . . . . . . . . . . 29,384 43,112
--------- ---------
Cash flows from financing activities, net of assets acquired:
Loans from and (repayment to) related parties . . . . . . . 774 187
Net financing activities from discontinued operations . . . 552 429
--------- ---------
Net cash provided by financing activities . . . . . . . . . . 1,326 616
--------- ---------
Increase (decrease) in cash and cash equivalents. . . . . . . (2,621) 24,237
Cash and cash equivalents, beginning of period. . . . . . . . 3,385 1,363
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . $ 764 $ 25,600
========= =========
See condensed notes to consolidated financial statements.
SYMONS INTERNATIONAL GROUP, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Nine Months Ended September 30, 2002
1. OVERVIEW OF THE COMPANY AND BASIS OF PRESENTATION
Symons International Group, Inc. (the "Company") owns insurance companies that
underwrite and market nonstandard private passenger automobile insurance. The
Company's principal insurance company subsidiaries are Pafco General Insurance
Company ("Pafco") and Superior Insurance Company ("Superior"). The Company is a
73.1% owned subsidiary of Goran Capital Inc. ("Goran").
The parent company of Pafco and Superior is Superior Insurance Group, Inc.
("Superior Group"). Pafco, Superior and Superior's subsidiaries, Superior
Guaranty Insurance Company ("Superior Guaranty") and Superior American Insurance
Company ("Superior American"), are engaged in the writing of insurance coverage
for automobile physical damage and liability policies for nonstandard risks.
Nonstandard risk insureds are those individuals who are unable to obtain
insurance coverage through standard market carriers due to factors such as poor
premium payment history, driving experience or violations, occupation or type of
vehicle. The Company offers several different policies that are directed towards
different classes of risk within the nonstandard market. Premium rates for
nonstandard risks are higher than for standard risks. Since it can be viewed as
a residual market, the size of the nonstandard private passenger automobile
insurance market changes with the insurance environment and grows when standard
coverage becomes more restrictive. Nonstandard policies have relatively short
policy periods and low limits of liability. Also, since the nonstandard
automobile insurance business typically experiences lower rates of retention
than standard automobile insurance, the number of new policyholders underwritten
by nonstandard automobile insurance carriers each year is substantially greater
than the number of new policyholders underwritten by standard carriers.
As previously announced, the Company sold its crop insurance operations to
Acceptance Insurance Companies Inc. ("Acceptance") on June 6, 2001. The crop
insurance business was written through the Company's wholly owned subsidiary,
IGF Insurance Company ("IGF"), which is in runoff. Accordingly, the financial
statements included in this report reflect the results of the crop insurance
segment as "discontinued operations".
The financial statements included in this report are the consolidated financial
statements of the Company and its subsidiaries. The consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). In management's opinion, these
financial statements include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the results of
operations for the interim periods presented. Pursuant to SEC rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements, unless
significant changes have taken place since the end of the most recent fiscal
year. For this reason, the accompanying consolidated financial statements and
notes thereto should be read in conjunction with the financial statements and
notes for the year ended December 31, 2001 included in the Company's 2001 Annual
Report on Form 10-K. Results for any interim period are not necessarily
indicative of results to be expected for the year.
2. PREFERRED SECURITIES
On August 12, 1997, the Company's trust subsidiary issued $135 million in
preferred securities (the "Preferred Securities") bearing interest at an annual
rate of 9.5%. The principal assets of the trust subsidiary are senior
subordinated notes of the Company in the principal amount of $135 million with
an interest rate and maturity date substantially identical to those of the
Preferred Securities. Expenses of the issue aggregated $5.1 million and are
being amortized over the term of the Preferred Securities.
The Preferred Securities represent Company-obligated mandatorily redeemable
securities of a trust subsidiary holding solely parent debentures and have a
term of 30 years with semi-annual interest payments that commenced February 15,
1998. The Company may redeem the Preferred Securities in whole or in part after
10 years. The annual Preferred Security obligations of approximately $13 million
must be funded from the Company's nonstandard automobile management company,
which receives management and billing fees from Pafco and IGF and management
fees from Superior. In the event the Company's insurance company subsidiaries
continue to reduce premium volume, reduced management and billing fees will be
payable to Superior Group, which would result in less funds from which to fund
the obligations of the Preferred Securities. Under the terms of the indenture,
the Company is permitted to defer semi-annual interest payments for up to five
years. The Company elected to defer the interest payments due in February and
August 2000, 2001, and 2002 and may continue this practice through January 2005.
The Company plans to defer the interest payments due in February 2003.
The trust indenture for the Preferred Securities contains certain restrictive
covenants including covenants based on the Company's consolidated coverage ratio
of earnings before interest, taxes, depreciation and amortization ("EBITDA"). If
the Company's EBITDA falls below 2.5 times consolidated interest expense
(including Preferred Security distributions) for the most recent four quarters,
the following restrictions become effective:
- - The Company may not incur additional indebtedness or guarantee additional
indebtedness.
- - The Company may not make certain restricted payments including making
loans or advances to affiliates, repurchasing common stock or paying
dividends in excess of a stated limitation.
- - The Company may not increase its level of non-investment grade securities
defined as equities, mortgage loans, real estate, real estate
loans and non-investment grade, fixed income securities.
These restrictions currently apply, as the Company's consolidated coverage ratio
was (0.70) at September 30, 2002, and will continue to apply until the Company's
consolidated coverage ratio complies with the terms of the trust indenture. The
Company was in compliance with these additional restrictions as of September 30,
2002.
3. REGULATORY AFFAIRS
Two of the Company's insurance company subsidiaries, Pafco and IGF, are
domiciled in Indiana and prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Indiana
Department of Insurance ("IDOI"). While neither Pafco nor IGF currently has
surplus from which to pay dividends, statutory requirements place limitations on
the amount of funds that can be remitted to the Company from Pafco and IGF. The
Indiana statute allows 10% of surplus in regard to policyholders or 100% of net
income, whichever is greater, to be paid as dividends only from earned surplus;
however, the consent orders with the IDOI, described below, prohibit the payment
of any dividends by Pafco and IGF. Another insurance company subsidiary,
Superior and Superior's insurance company subsidiaries, Superior American and
Superior Guaranty, are domiciled in Florida and prepare their statutory
financial statements in accordance with accounting practices prescribed or
permitted by the Florida Department of Insurance ("FDOI"). The Florida statute
also contains limitations with regard to the payment of dividends. Superior may
pay dividends of up to 10% of surplus or 100% of net income, whichever is
greater, from earned surplus. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations, and general administrative rules.
The NAIC adopted the Codification of Statutory Accounting Principles guidance
("Codification"), as the NAIC's primary guidance on statutory accounting
effective January 1, 2001. The IDOI and FDOI have adopted Codification.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.
On June 6, 2001, IGF sold substantially all of its crop insurance assets to
Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets
and as a result of losses experienced by IGF in its crop insurance operations,
the IDOI and IGF entered into a consent order (the "Consent Order") relating to
IGF. IGF has discontinued writing new business and its operations are presently
in run off. The IDOI has continued to monitor the status of IGF. The Consent
Order prohibits IGF from taking any of the following actions without prior
written consent of the IDOI:
- - Sell or encumber any of its assets, property, or business in force;
- - Disburse funds, except to pay direct unaffiliated policyholder claims and
normal operating expenses in the ordinary course of business (which
does not include payment to affiliates except for the reimbursement of
costs for running IGF by the Company, and does not include payments
in excess of $10,000);
- - Lend its funds or make investments, except in specified types of
investments;
- - Incur debts or obligations, except in the ordinary course of business to
unaffiliated parties;
- - Merge or consolidate with another company;
- - Enter into new, or amend existing, reinsurance agreements;
- - Complete, enter into or amend any transaction or arrangement with an
affiliate, and
- - Disburse funds or assets to any affiliate.
The Consent Order also requires IGF to provide the IDOI with monthly written
updates and immediate notice of any material change regarding the status of
litigation with Continental Casualty Company, statutory reserves, number of
non-standard automobile insurance policies in-force by state, and reports of all
non-claims related disbursements. IGF's failure to comply with the Consent Order
could cause the IDOI to begin proceedings to have a rehabilitator or liquidator
appointed for IGF or to extend the provisions of the Consent Order.
Pafco has been subject to an agreed to order of the IDOI since February 17, 2000
that requires Pafco, among other matters, to:
- - Refrain from doing any of the following without the IDOI's prior written
consent:
- - Selling assets or business in force or transferring property, except in
the ordinary course of business;
- - Disbursing funds, other than for specified purposes or for normal
operating expenses and in the ordinary course of business (which does not
include payments to affiliates, other than under written contracts
previously approved by the IDOI, and does not include payments in excess of
$10,000);
- - Lending funds;
- - Making investments, except in specified types of investments;
- - Incurring debt, except in the ordinary course of business and to
unaffiliated parties;
- - Merging or consolidating with another company; or
- - Entering into new, or modifying existing, reinsurance contracts.
- - Reduce its monthly auto premium writings, or obtain additional
statutory capital or surplus, such that the ratio of gross written premium
to surplus and net written premium to surplus does not exceed 4.0 and 2.4,
respectively; and provide the IDOI with regular reports demonstrating
compliance with these monthly writings limitations.
- - Continue to comply with prior IDOI agreements and orders to correct
business practices under which Pafco must provide monthly financial
statements to the IDOI, obtain prior IDOI approval of reinsurance
arrangements and affiliated party transactions, submit business plans to
the IDOI that address levels of surplus and net premiums written, and
consult with the IDOI on a monthly basis.
Pafco's inability or failure to comply with any of the above conditions could
result in the IDOI requiring further reductions in Pafco's permitted premium
writings or in the IDOI instituting future proceedings against Pafco.
Restrictions on premium writings result in lower premium volume. Management fees
payable to Superior Group are based on gross written premium; therefore lower
premium volume results in reduced management fees paid by Pafco to Superior
Group. Pafco has agreed to obtain IDOI prior approval of any new affiliated
party transactions.
Pafco has agreed with the Iowa Department of Insurance ("IADOI") that it will
not write any new non-standard business in Iowa, until such time as Pafco has
reduced its overall non-standard automobile policy counts in the state or:
- - Has increased surplus, or
- - Has achieved a net written premium to surplus ratio of less than three to
one, or
- - Has surplus reasonable to its risk.
Pafco has continued to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance with
IADOI requirements.
Superior and Pafco provide monthly financial information to the departments of
insurance in certain states in which they write business at the states request.
On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the
Notice and a determination that the order contemplated by the Notice not be
issued was held in February 2001. The administrative law judge entered a
recommended order on June 1, 2001 that was acceptable to the Company. On August
30, 2001, the FDOI rejected the recommended order and issued its final order
which the Company believes improperly characterized billing and policy fees paid
by Superior to Superior Group. On September 28, 2001, Superior filed an appeal
of the final order to the Florida District Court of Appeal. On March 4, 2002,
the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in
and for Leon County, Florida seeking court enforcement of the FDOI's final
order. Superior filed a motion with the FDOI for stay of the FDOI's final order.
Superior also filed a motion for stay with the District Court of Appeal, which
was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a
stay of the final order that was conditional upon the cessation of the payment
of billing fees by Superior to Superior Group and the posting of a $15 million
appeal bond. Superior did not agree to the conditions imposed by the FDOI's
conditional stay. On May 6, 2002 Superior filed a motion with the District
Court of Appeal seeking a stay of the final order pending Superior's appeal or,
in the alternative, a consolidation of the FDOI's enforcement action with the
pending appeal. On June 19, 2002, the District Court of Appeal entered an order
which struck the FDOI's conditional requirement for the stay that Superior post
a $15 million appeal bond. However, the order denied Superior's request to
consolidate the appeal with the enforcement action. On September 26, 2002, the
District Court of Appeal affirmed the final order of the FDOI. On October 31,
2002 the Circuit Court entered a final order which granted the FDOI's petition
for enforcement of the FDOI's final order and which requires Superior comply
with the FDOI final order. In accordance with such order, Superior ceased
payment of finance and service fees as of October 1, 2002 and has requested
repayment from Superior Group of $15 million of finance and service fees paid
from 1997 through 1999 and additional finance and service fees paid thereafter
in the approximate amount of $20 million. Without the payment of finance and
service fee income to Superior Group or an amendment to the management agreement
or reallocation of operational responsibilities, Superior Group can not operate
profitably. Superior Group therefore would be unable to continue to provide the
same types of services to Superior or to repay the finance and service fees.
Some of the alternatives being considered would require the approval of FDOI.
Superior and Superior Group are seeking to identify operational alternatives and
a repayment plan that would be acceptable to the FDOI.
On September 10, 2002, the FDOI filed a petition in the Circuit Court of the
Second Judicial Circuit in and for Leon County, Florida for an order to show
cause and notice of automatic stay which sought the appointment of a receiver
for the purpose of rehabilitation of Superior. The court entered an order to
show cause, temporary injunction and notice of automatic stay on September 13,
2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court
entered an order that denied the FDOI's petition for appointment of a receiver.
On November 8, 2002, the FDOI filed a motion for rehearing. Superior believes
the FDOI's motion lacks merit and has filed a motion in opposition to the motion
for rehearing.
In 1999, Superior ceased writing business in Illinois and agreed to obtain the
approval of the Illinois Department of Insurance prior to writing any new
business in Illinois. In July 2001, Superior agreed with the Department of
Insurance in Texas to obtain its prior approval before writing any new business
in that state.
On October 9, 2001, the State Corporation Commission of Virginia ("Virginia
Commission") issued an order to take notice regarding an order suspending
Superior's license to write business in that state. An administrative hearing
for a determination that the suspension order not be issued was held March 5,
2002. On May 3, 2002, the hearing examiner issued his report and recommended
that Superior's license not be suspended and that Superior file its risk based
capital plans and monthly and quarterly financial information with the Virginia
Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission
entered an order which adopted the findings of the hearing examiner, continued
the matter until such time as the Bureau requests further action and requires
the continued monitoring of the financial condition of Superior by the Bureau.
On October 11, 2002, the Virginia Commission filed an administrative Rule to
Show Cause. A hearing was scheduled for November 18, 2002 to determine whether
Superior's license to transact insurance business in Virginia should be
suspended. Because of Superior's improved financial conditions, the Virginia
Commission has continued the hearing indefinitely. The nonstandard automobile
insurance policies written in Virginia by Superior accounted for approximately
13.1% and 17.2% of the total gross written premiums of the Company in 2001 and
through September 30, 2002, respectively.
The Company's operating subsidiaries, their business operations, and their
transactions with affiliates, including the Company, are subject to regulation
and oversight by the IDOI, the FDOI and the insurance regulators of other states
in which the subsidiaries write business. The Company is a holding company and
all of its operations are conducted by its subsidiaries. Regulation and
oversight of insurance companies and their transactions with affiliates is
conducted by state insurance regulators primarily for the protection of
policyholders and not for the protection of other creditors or of shareholders.
Failure to resolve issues with the IDOI and the FDOI or other state insurance
regulators in a mutually satisfactory manner could result in future regulatory
actions or proceedings that materially and adversely affect the Company.
4. Commitments and Contingencies
As previously reported, IGF, which is a wholly owned subsidiary of the Company,
had been a party to a number of pending legal proceedings and claims relating to
agricultural production interruption insurance policies (the "AgPI Program")
which were sold during 1998. All of the policies of insurance which were issued
in the AgPI Program were issued by and under the name of Mutual Service Casualty
Insurance Company ("MSI"), a Minnesota corporation with its principal place of
business located in Arden Hills, Minnesota. Sales of this product resulted in
large underwriting losses by IGF.
Approximately $29 million was paid through June 30, 2002 in settlement of legal
proceedings and policyholder claims related to the AgPI Program. All AgPI
policyholder claims were settled during 2000. However, on January 12, 2001 a
case was filed in the Superior Court of California, County of Fresno, entitled
S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by
four AgPI policyholders who had previously settled their AgPI claims pursuant to
binding settlement agreements who now seek additional compensation by asserting
through litigation that IGF and the third party carrier paid less than the
policy limits they were promised when they purchased the policy and that each
settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any recovery
payable to plaintiff would be limited to their actual economic losses regardless
of how much plaintiffs thought they had been promised (i.e. plaintiffs cannot be
paid policy limits without regard to actual losses incurred). The plaintiffs
then filed their third amended complaint to which MSI filed a demurrer
challenging the insurance contract allegations, as the issuer of the AgPI
policies, contending that plaintiffs failed to make the amendments to show an
insurable interest as required by the court's earlier ruling. This demurrer was
granted, without leave to amend, based on the court's analysis that plaintiffs
claims continued to reveal they did not have an insurable interest, rendering
the contract they alleged an unenforceable wager agreement, not insurance.
Thereafter, the court vacated its "without leave to amend" ruling in response to
a motion for reconsideration filed by the plaintiffs who contended they could
cure the fatal defect if they were allowed to file a fourth amended complaint.
However, the new version of the complaint still claims coverage amount based on
a formula which is not tied to plaintiffs' economic losses. Accordingly, a
demurrer to the fourth amended complaint was filed by MSI and a motion to strike
was filed by IGF. A hearing on these issues was held on November 8, 2002, and
the court has not yet issued its ruling.
As previously reported, the Company and two of its subsidiaries, IGFH and IGF,
are parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the
"SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired
certain crop insurance operations of CNA. The obligations of the Company, IGFH,
IGF and CNA under the SAA are the subject of an action pending in United States
District Court for the Southern District of Indiana, Indianapolis Division.
Claims have also been asserted in the action against Goran, Granite Re, Pafco,
Superior and certain members of the Symons family. Although the Company
continues to believe that it has claims against CNA and defenses to CNA's claims
which may offset or reduce amounts owing by the Company or its affiliates to
CNA, there can be no assurance that the ultimate resolution of the claims
asserted by CNA against the Company and its affiliates will not have a material
adverse effect upon the Company's and its affiliates' financial condition or
results of operations. There have been no material developments since last
reported in the Company's June 30, 2002 Form 10-Q.
As previously reported, the Company is a defendant in a case filed on February
23, 2000, in the United States District Court for the Southern District of
Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et
al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are Goran,
three individuals who were or are officers or directors of the Company or of
Goran, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case
purports to be brought on behalf of a class consisting of purchasers of the
Company's stock or Goran's stock during the period February 27, 1998, through
and including November 18, 1999. Plaintiffs allege, among other things, that
defendants misrepresented the reliability of the Company's reported financial
statements, data processing and financial reporting systems, internal controls
and loss reserves in violation of Section 10(b) of the Securities Exchange Act
of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The
individual defendants are also alleged to be liable as "controlling persons"
under Sec.20 (a) of the 1934 Act. During the third quarter of 2002, the
Company, Goran and the individual defendants entered into an agreement with the
plaintiffs for settlement. The settlement is subject to certain terms and
conditions and court approval.
As previously reported, an action was brought in Florida against Superior which
purported to be brought on behalf of a class consisting of healthcare providers
improperly paid discounted rates on services to patients based upon a preferred
provider contract with a third party. The plaintiff alleged that Superior
breached a third party beneficiary contract, committed fraud and engaged in
racketeering activity in violation of federal and Florida law by obtaining
discounted rates offered by a third party with whom the plaintiff contracted
directly. Superior believes that the allegations of wrongdoing as alleged in
the complaint are without merit and intends to vigorously defend the claims
brought against it. There have been no material developments since last
reported in the Company's June 30, 2002 Form 10-Q.
As previously reported, an action was brought in Florida against Superior which
purported to be brought on behalf of a class consisting of healthcare providers
that rendered treatment to and obtained a valid assignment of benefits from
Superior. The plaintiff alleged that Superior reduced or denied claims for
medical expenses payable to the plaintiff without first obtaining a written
report in violation of Florida law and that Superior inappropriately reduced the
amount of benefits payable to the plaintiff in breach of Superior's contractual
obligations to the plaintiff. The case was dismissed on August 13, 2002 pursuant
to a settlement between the parties.
As previously reported, an action was brought against Superior in Florida by a
purported class consisting of (i) healthcare providers that rendered treatment
to Superior insureds and claimants of Superior insureds and (ii) such insureds
and claimants. The plaintiff alleged that Superior improperly reduced medical
benefits payable and improperly calculated interest in violation of Florida law.
The case was dismissed on September 3, 2002 pursuant to a settlement between the
parties.
As previously reported, actions have been brought in Florida against Superior
Guaranty purporting to be on behalf of a class of purchasers of insurance from
Superior Guaranty allegedly charged service or finance charges in violation of
Florida law. Superior Guaranty believes that the allegations of wrongdoing as
alleged in the complaints are without merit and intends to vigorously defend the
claims brought against it. There have been no material developments since last
reported in the Company's June 30, 2002 Form 10-Q.
The Company is a 50% owner in a limited liability corporation ("LLC")
established to provide business services to the Company and an unrelated third
party. The fair market value of the LLC's operating assets approximated its
outstanding debt at September 30, 2002.
The Company's insurance subsidiaries are involved in a number of pending
regulatory matters (see Note 3, " Regulatory Affairs" in the Condensed Notes to
the Consolidated Financial Statements). The Company and its subsidiaries are
named as defendants in various other lawsuits relating to their business. Legal
actions arise from claims made under insurance policies issued by the Company's
subsidiaries. The Company, in establishing its loss reserves, has considered
these actions. There can be no assurance that the ultimate disposition of these
regulatory actions and lawsuits will not have an adverse material affect the
Company's operations or financial position.
5. Loss Development on Prior Accident Years
During the third quarter of 2002 the Company experienced unfavorable development
on its year-end 2001 loss and LAE reserves in the amount of $1.4 million. This
was the result of unfavorable settlement of outstanding claims which increased
the loss and loss adjustment expense ratio for the quarter by 17.8 percentage
points.
6. Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year presentation.
7. Loss Per Share
Basic and diluted net loss per share are computed by dividing net loss as
reported by the average number of shares outstanding as follows:
Three Months Ended
September 30
--------------------
(in thousands) 2002 2001
--------- --------
Basic:
Weighted-average common shares outstanding. 10,385 10,385
Diluted:
Weighted-average common shares outstanding. 10,385 10,385
The Company has 858,732 stock options outstanding as of October 31, 2002.
Common stock equivalents are anti-dilutive; therefore, fully diluted loss
per share is the same as basic loss per share.
8. Discontinued Operations
In December 2000, the Company initiated the divestiture of its crop insurance
segment. This business was predominantly written through IGF. The transaction
was completed in June 2001 and transferred ownership of substantially all of the
crop insurance assets of the Company and IGF, effective with the 2001 crop
cycle, to Acceptance. Upon completion of the sale, the net assets of the
discontinued operations were reduced to zero. IGF and its affiliates received
approximately $27.4 million at closing and Acceptance assumed all of the crop
insurance in-force policies for the 2001 crop year. For agreeing not to compete
in the crop insurance industry for a period of three years from the date of
sale, the Company received $4.5 million at closing that is being amortized to
income on a straight-line basis over three years. An additional $9.0 million in
reinsurance premium is payable by Acceptance to Granite Re under a multi-year
reinsurance treaty whereby Granite Re has agreed to reinsure a portion of the
crop insurance business of Acceptance and provide an indemnity on behalf of IGF.
The results of the crop insurance segment have been reflected as "Discontinued
Operations" in the accompanying unaudited consolidated financial statements in
accordance with Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations --- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
Summarized results of operations for discontinued operations were as follows:
Statements of Operations:
(in thousands)
Three Months Ended
September 30
-------------------
2002 2001
---------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . . $ (101) $56,236
========= ========
Net premiums written. . . . . . . . . . . . . . . . . . . . $ - $ 154
========= ========
Net premiums earned . . . . . . . . . . . . . . . . . . . $ - $ 154
Net investment and fee income . . . . . . . . . . . . . . . 519 (26)
Net realized capital gain (loss). . . . . . . . . . . . . . (470) (6)
-------- --------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 49 122
-------- --------
Loss and loss adjustment expenses . . . . . . . . . . . . . (507) 1,546
Policy acquisition and general and administrative expenses. 556 (1,424)
Interest and amortization expense . . . . . . . . . . . . . - -
-------- --------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . 49 122
-------- --------
Earnings before income taxes. . . . . . . . . . . . . . . . - -
Income tax expense. . . . . . . . . . . . . . . . . . . . . - -
-------- --------
Net earnings from discontinued operations . . . . . . . . . $ - $ -
========= ========
Statements of Operations:
(in thousands)
Nine Months Ended
September 30
-------------------
2002 2001
----------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . $ (293) $239,195
=========== =========
Net premiums written. . . . . . . . . . . . . . . . . . $ - $ (172)
=========== =========
Net premiums earned . . . . . . . . . . . . . . . . . $ - $ (172)
Net investment and fee income . . . . . . . . . . . . 1,002 961
Net realized capital gain (loss). . . . . . . . . . . (548) 636
----------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . 454 1,425
----------- ---------
Loss and loss adjustment expenses . . . . . . . . . . (700) 5,238
Policy acquisition and general and administrative expense 1,154 (300)
Interest and amortization expense . . . . . . . . . . . - (1,357)
----------- ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . 454 3,581
----------- ---------
Earnings before income taxes. . . . . . . . . . . . . - (2,156)
Income tax expense. . . . . . . . . . . . . . . . . . - -
----------- ---------
Net earnings from discontinued operations . . . . . . $ - $ (2,156)
=========== =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS
All statements, trend analyses, and other information contained in this report
relative to markets for the Company's products and/or trends in the Company's
operations or financial results, as well as other statements which include words
such as "anticipate," "could," "feel(s)," "believes," "plan," "estimate,"
"expect," "should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) the effect on customers, agents,
employees and others due to the Company's receipt of a going concern opinion
from its accountants; (ii) general economic conditions, including prevailing
interest rate levels and stock market performance; (iii) factors affecting the
Company's nonstandard automobile operations such as rate increase approval,
policy renewals, new business written, and premium volume; (iv) the factors
described in this section and elsewhere in this report; and (v) adverse actions
by insurance regulatory officials.
OVERVIEW OF THE COMPANY
Symons International Group, Inc. (the "Company") owns insurance companies that
underwrite and market nonstandard private passenger automobile insurance. The
Company's principal insurance company subsidiaries are Pafco General Insurance
Company ("Pafco") and Superior Insurance Company ("Superior"). The Company is a
73.1% owned subsidiary of Goran Capital Inc. ("Goran").
Pafco, Superior and Superior's subsidiaries, Superior Guaranty Insurance Company
("Superior Guaranty") and Superior American Insurance Company ("Superior
American"), are engaged in the writing of insurance coverage for automobile
physical damage and liability policies for nonstandard risks. Nonstandard risk
insureds are those individuals who are unable to obtain insurance coverage
through standard market carriers due to factors such as poor premium payment
history, driving experience or violations, particular occupation or type of
vehicle. The Company offers several different policies that are directed
towards different classes of risk within the nonstandard market. Premium rates
for nonstandard risks are higher than for standard risks. Since it can be
viewed as a residual market, the size of the nonstandard private passenger
automobile insurance market changes with the insurance environment and grows
when the standard coverage becomes more restrictive. Nonstandard policies have
relatively short policy periods and low limits of liability. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
As previously announced, the Company sold its crop insurance operations to
Acceptance Insurance Companies Inc. ("Acceptance") on June 6, 2001. The crop
insurance business was written through the Company's subsidiary, IGF Insurance
Company ("IGF"), which is in runoff. Accordingly, the financial statements
included in this report reflect the results of the crop insurance segment as
"discontinued operations".
SIGNIFICANT LOSSES HAVE BEEN REPORTED AND ARE LIKELY TO CONTINUE
For the three months ended September 30, 2002, losses from continuing operations
totaled $(4,584,000) compared to losses of $(6,824,000) in the same comparable
period of 2001. For the nine months ended September 30, 2002, losses from
continuing operations were $(21,734,000) compared to losses of $(23,265,000) for
the same period of 2001. The Company previously reported losses from continuing
operations of $(30,736,000) for the year 2001, $(71,384,000) for 2000 and
$(65,443,000) for 1999. Results from continuing operations before the effects
of income taxes and minority interest were losses of $(15,930,000) and
$(59,946,000) for 2001 and 2000, respectively. Losses from continuing operations
for the nine months ended September 30, 2002 decreased over the same period in
2001 largely due to lower volume and corresponding actions taken to reduce
operating expenses. Although the Company has taken a number of actions to
address factors contributing to these past losses, there can be no assurance
that operating losses will not continue.
RECENT AND FURTHER REGULATORY ACTIONS MAY ADVERSELY AFFECT THE COMPANY'S FUTURE
OPERATIONS
The Company's insurance company subsidiaries, their business operations, and
their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the Indiana Department of Insurance
("IDOI"), the Florida Department of Insurance ("FDOI") and the insurance
regulators of other states in which the insurance company subsidiaries write
business. Moreover, the insurance company subsidiaries' losses, adverse trends
and uncertainties discussed in this report have been and continue to be matters
of concern to the domiciliary and other insurance regulators of the Company's
insurance company subsidiaries and have resulted in enhanced scrutiny and
regulatory action by several regulators (see Note 3, "Regulatory Affairs" in the
Condensed Notes to the Consolidated Financial Statements). The primary purpose
of insurance regulation is the protection of policyholders rather than
shareholders. Failure to resolve issues with the IDOI and the FDOI, and with
other regulators, in a manner satisfactory to the Company could impair the
Company's ability to execute its business strategy or result in future
regulatory actions or proceedings that could otherwise materially and adversely
affect the Company's operations.
THE COMPANY IS SUBJECT TO A NUMBER OF PENDING LEGAL PROCEEDINGS
As discussed elsewhere in this report, the Company is involved in a number of
pending legal proceedings (see Part II - Item 1, "Legal Proceedings"). Although
the Company believes that many of the allegations of wrongdoing are without
merit and intends to vigorously defend the claims brought against it, there can
be no assurance that such proceedings will not have a material adverse effect on
the Company's financial position or results of operations. Furthermore, the
existence of these lawsuits diverts the time and attention of management and
results in continued expense irrespective of the ultimate outcome.
THE TERMS OF THE TRUST PREFERRED SECURITIES MAY RESTRICT THE COMPANY'S ABILITY
TO ACT
The Company has issued through a wholly owned trust subsidiary $135 million
aggregate principal amount in trust originated preferred securities (the
"Preferred Securities"). The Preferred Securities have a term of 30 years with
annual interest at 9.5% payable semi-annually. The obligations of the Preferred
Securities were expected to be funded from the Company's nonstandard automobile
insurance management company. The Company elected to defer the semi-annual
interest payments due in February and August 2000, 2001, and 2002 and may
continue to defer such payments for up to an aggregate of five years as
permitted by the indenture for the Preferred Securities. All of the deferred
interest (if all payments due in 2003 and 2004 are deferred) of approximately
$96.8 million will become due and payable in February 2005 (see details,
"Liquidity and Capital Resources" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations). The indenture contains a number
of covenants that may restrict the Company's ability to act in the future. These
covenants include restrictions on the Company's ability to incur or guarantee
debt, make payments to affiliates, repurchase its common stock, pay dividends on
common stock or increase its level of certain investments other than
investment-grade, fixed-income securities. There can be no assurance that
compliance with these restrictions and other provisions of the indenture for the
Preferred Securities will not adversely affect the cash flow of the Company.
CASH FLOW CONSTRAINTS TO SUPERIOR GROUP MAY ADVERSELY AFFECT THE COMPANY'S
ABILITY TO FUND OPERATIONS AND TO SERVICE THE OBLIGATIONS OF THE TRUST PREFERRED
SECURITIES
Under the present structure, claims, agent commissions and premium taxes are
paid directly by the insurance company subsidiaries. However, pursuant to the
terms of the management agreement, Superior Group is responsible for payroll,
facilities, data processing, computer systems and other functions necessary for
the operations of the Company and its subsidiaries. The insurance companies pay
for such services through management fees that are calculated as a percentage of
gross written premiums. Therefore, declines in written premiums result in
reduced cash flow to Superior Group.
As discussed in "Business - Recent Developments" in the annual report on Form
10-K for 2001, the Company projected a material decrease in gross written
premiums for 2002 from 2001 levels with a corresponding decrease in management
fees payable to Superior Group. However, the decrease in written premiums for
the three months ended September 30, 2002 was higher than the Company had
originally anticipated. Unless the Company is able to increase written premiums
or reduce expenses to correspond with the reduced level of written premiums,
cash flow will be inadequate to fund operations, including servicing of the
Preferred Securities. See, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
There can be no assurance that current levels of reduced cash flows will not
have a material adverse effect on the Company's financial position, results of
operations and its ability to meet short and long-term obligations.
REVIEW OF CONSOLIDATED OPERATIONS
NET LOSS
The net loss for the three months ended September 30, 2002 totaled $(4,584,000)
or $(.44) per share (basic and diluted). This is an improvement of $ 2,240,000
or $0.22 per share from the net loss for the same period in 2001. Policy
acquisition and general and administrative expenses, net of fee income,
decreased to 21.9% from 40.5% of earned premiums in the three months ended
September 30, 2002 and 2001, respectively. The net loss for the nine months
ended September 30, 2002 decreased by $3,687,000 or $0.36 per share from the net
loss for the same period of 2001 due primarily to the loss from discontinued
operations in 2001. Refer to Note 8 "Discontinued Operations" of the Condensed
Notes to Consolidated Financial Statements for additional information.
GROSS PREMIUMS WRITTEN
Gross premiums written decreased 36.0% and 32.4% for the three and nine months
ended September 30, 2002, respectively, as compared to the same periods in 2001.
The primary reasons for this decline are the Company's withdrawal from certain
highly competitive markets, additional strict underwriting initiatives intended
to increase profitability, and the aforementioned regulatory and strategic
actions accompanied with reduction in policies in force. Refer to "Liquidity and
Capital Resources" for additional volume related disclosure.
NET PREMIUMS WRITTEN
Net premiums written represent the portion of premiums retained by the Company
after consideration for risk sharing through reinsurance contracts. As a result
of declines in surplus in the Company's insurance subsidiaries and to manage
overall risk retention, in 2000 the Company entered into a reinsurance agreement
to cede a portion of its gross written premiums to National Union Fire Insurance
Company of Pittsburgh, PA, an unrelated third party. Additional premiums ceded
in the third quarter, less than 2%, are attributed to auto excess losses. The
Company ceded 76.1% and 72.7% of its gross written premiums under the quota
share reinsurance contract for the three and nine months ended September 30,
2002, respectively.
NET PREMIUMS EARNED
Net premiums earned decreased 66.2% and 54.5% for the three and nine months
ended September 30, 2002, respectively, as compared to the same periods in 2001.
Premiums are earned ratably over the term of the underlying insurance contracts
and the reduction in net premiums earned is a result of the decreases in written
premium and policies in force.
FEE INCOME
Fee income is derived from installment billings and other services provided to
policyholders. Fee income decreased 41.1% and 31.2% for the three and nine
months ended September 30, 2002, respectively as compared to the same periods in
2001. The reduction in fee income is attributable to the reduction in policies
in force and the overall decline in written premium in 2002.
NET INVESTMENT INCOME
Net investment income decreased 29.7% and 21.3% for the three and nine months
ended September 30, 2002, respectively, as compared to the same periods in 2001.
This decrease is reflective of the decline in invested assets during a period of
declining premiums and the liquidation of investments to pay prior year losses
settled in 2002.
NET REALIZED CAPITAL GAINS (LOSSES)
Net realized capital gain (losses) were $611,000 and $(489,000) for the three
and nine months ended September 30, 2002, respectively, as compared to net
realized capital gain (losses) of $793,000 and $(263,000) in the comparable
periods of 2001. Capital losses resulted primarily from the continued
liquidation of investments to fund operation expenses and claim payments under
unfavorable market conditions.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The loss and loss adjustment expense ("LAE") ratio for the Company for the three
and nine months ended September 30, 2002, was 109.2% and 111.2%, respectively,
of net premiums earned as compared to 83.5% and 88.4% for the similar periods of
2001 and 91.5% for the entire year of 2001. During the third quarter of 2002 the
Company experienced unfavorable development on its loss and loss adjustment
expense reserves for accidents occurring in 2001 and prior. This raised the loss
and loss adjustment expense ratio for the three months ended September 30, 2002,
by 17.8 percentage points.
POLICY ACQUISITION AND GENERAL AND ADMINISTRATIVE EXPENSES
Policy acquisition and general and administrative expenses for the three and
nine months ended September 30, 2002 declined to $3,929,000 and $17,609,000,
respectively, from $13,038,000 and $34,269,000 in the comparable periods of
2001, a reduction for the third quarter and first nine months of 2002 of 69.9%
and 48.6%, respectively. This reduction is reflective of the decline in gross
written premiums and overall operating expense reduction initiatives. As a
percentage of gross premiums earned, the Company experienced a decrease in its
operating expense ratio, net of fee income, from 40.5% for the third quarter of
2001 to 21.9% for 2002.
INCOME TAXES
At September 30, 2002, the Company's net deferred tax assets are fully offset by
a 100% valuation allowance that resulted in no tax benefit in the third quarters
of both 2002 and 2001.
REVIEW OF CONSOLIDATED FINANCIAL POSITION
CASH AND INVESTMENTS
Total cash and investments at September 30, 2002 and December 31, 2001 was $80.6
million and $110.4 million, respectively. The decline in invested assets
resulted from continued liquidations to fund claim payments and operating
expenses in a period of declining premium volume.
REINSURANCE RECEIVABLES AND PAYABLES
The Company negotiated a third-party quota share reinsurance agreement that
became effective January 1, 2000. Under an annual renewal addendum to the
agreement, the Company may cede a portion of its nonstandard automobile
insurance premiums and related losses based on a variable percentage of up to
75% of Superior's and Pafco's earned premiums. The Company's ceding percentage
for the third quarter of 2002 totaled 72.7%. The decrease in the amount of
premiums and losses ceded under this contract directly affect reinsurance
balances due and payable as reported in the financial statements.
RECEIVABLES
Receivables, exclusive of the allowance for doubtful accounts, have decreased by
approximately $17.9 million, or 40.1%, from December 31, 2001. This decrease is
primarily attributable to a reduction in billable premiums due to lower written
premiums in the first nine months of 2002 compared to the fourth quarter of
2001. The allowance for doubtful accounts was reduced in 2002 by approximately
$1.3 million, or 84.3%, from December 31, 2001, primarily due to the final
reconciliation of receivables previously maintained on a legacy policy
administration system that is no longer in service.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Total loss and loss adjustment expense reserves decreased from $81,142,000 as of
December 31, 2001 to $65,634,000 as of September 30, 2002, a reduction of
approximately $15.5 million. This decrease is consistent with the Company's
declining volume of business.
UNEARNED PREMIUMS
At September 30, 2002, unearned premiums were $37,992,000, a decrease of
$21,224,000 from December 31, 2001. This is consistent with the decrease in
receivables discussed above.
DEFERRED INCOME
In connection with the sale of the crop insurance book of business to Acceptance
on June 6, 2001, the Company received a payment of $4.5 million for agreeing not
to engage in the crop insurance business for three years from the sale date. The
payment is being amortized to income on a straight-line basis over a three-year
period.
PAYABLE TO AFFILIATES
At September 30, 2002, the Company owed a total of $1,370,000 to Goran Capital
Inc. ("Goran") and its affiliates. This balance is comprised primarily of
$2,500,000 line of credit due to Granite Reinsurance Company Ltd. ("Granite Re")
reduced by a $700,000 receivable from Goran's subsidiary, Granite Insurance
Company, and held by IGF. The remaining balance is attributable to other
receivables for expenses paid by the Company on behalf of Goran or its
subsidiaries. The net increase of $774,000 from December 31, 2001 is due
primarily to an additional $1,200,000 draw on the line of credit and reduced by
the receivable discussed above. The Company obtained an additional $1,000,000
loan from Granite Reinsurance Company Ltd. on October 31, 2002.
SHAREHOLDERS' (DEFICIT)
Shareholders' (deficit) has increased by $(23,775,000) from December 31, 2001.
This increase is primarily the result of the net loss of $(21,734,000) for the
nine months ended September 30, 2002 along with the increase of $(2,041,000) in
unrealized losses on investments available for sale.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of funds available to the management and holding companies
are fees from policyholders, management fees and dividends from its insurance
company subsidiaries.
Superior Group and Superior collect billing fees charged to policyholders who
elect to make their premium payments in installments. Superior Group also
receives management fees under its management agreement with its insurance
subsidiaries. When the FDOI approved the acquisition of Superior by Superior
Group, it prohibited Superior from paying any dividends (whether extraordinary
or not) for four years from the date of acquisition (May 1, 1996) without the
prior written approval of the FDOI, which restriction expired in April 2000. As
a result of regulatory actions taken by the IDOI with respect to Pafco and IGF,
those subsidiaries may not pay dividends without prior approval by the IDOI.
Pafco cannot pay extraordinary dividends, within the meaning of the Indiana
Insurance Code, without the prior approval of the Indiana Insurance
Commissioner. The management fees charged to the insurance companies are
subject to review by the IDOI and FDOI.
The nonstandard automobile insurance subsidiaries' primary sources of funds are
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, payment of
claims settlement costs, operating expenses (primarily management fees),
commissions to independent agents, premium taxes, dividends and the purchase of
investments. There is variability in cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, the
Company maintains investment programs intended to provide adequate funds to pay
claims. During the third quarter of 2002 and during 2001 and 2000, due to
reduced premium volume, the Company has liquidated investments to pay claims.
The Company historically has tried to maintain duration averages of 3.5 years.
However, the reduction in new funds due to lower premium volume has and will
continue to cause the Company to shorten the duration of its investments. The
Company may incur additional costs in selling longer bonds to pay claims, as
claim payments tend to lag premium receipts. Due to the decline in premium
volume, the Company has experienced a reduction in its investment portfolio, but
to date has not experienced any problems meeting its obligations for claims
payments.
As of October 31, 2002, the Company has borrowed $3.5 million from Granite Re.,
a related party. Under terms of the loans monthly interest is payable at the
prime rate (as printed in the Wall Street Journal on the first business day of
each month) plus 5.25% (the total rate was 10.0% at November 1, 2002) computed
on an annual basis and not to exceed 18% per annum calculated on the average
principal outstanding each month. All principal borrowed under the loans is due
on December 20, 2004.
On August 12, 1997, the Company issued through a wholly owned trust subsidiary
$135 million aggregate principal amount in trust originated preferred securities
(the "Preferred Securities"). The Preferred Securities have a term of 30 years
with semi-annual interest payments of $6.4 million that commenced February 15,
1998. The Company may redeem the Preferred Securities in whole or in part after
10 years. The Company may defer interest payments in accordance with the terms
of the trust indenture for a period of up to five years. The unpaid interest
installment amounts accrue interest at 9.5%. The Company deferred the
semi-annual interest payments due in February and August 2000, 2001 and 2002 and
may continue this deferral practice for all remaining payments due in 2003 and
2004.
The following table sets forth the minimum required obligations of the Company
under the Preferred Securities for interest and principal payments for each of
the next four years and thereafter assuming all semi-annual interest payments
due in 2002, 2003 and 2004 are deferred (in thousands):
2003 2004 2005 Thereafter Total
----- ----- ------- ----------- --------
Interest payments. $ - $ - $96,779 $ 282,150 $378,929
Principal payments - - - 135,000 135,000
----- ----- ------- ----------- --------
Total due. . . . . $ - $ - $96,779 $ 417,150 $513,929
===== ===== ======= =========== ========
26
The trust indenture contains certain restrictive covenants including those based
upon the Company's consolidated coverage ratio of earnings before interest,
taxes, depreciation and amortization (EBITDA). If the Company's EBITDA falls
below 2.5 times consolidated interest expense (including Preferred Securities
distributions) for the most recent four quarters, the following restrictions
become effective:
- - The Company may not incur additional indebtedness or guarantee
additional indebtedness.
- - The Company may not make certain restricted payments including
making loans or advances to affiliates, repurchasing common stock or paying
dividends in excess of a stated limitation.
- - The Company may not increase its level of non-investment grade
securities defined as equities, mortgage loans, real estate, real estate
loans and non-investment grade fixed income securities.
These restrictions currently apply, as the Company's consolidated coverage ratio
was (0.70) at September 30, 2002, and will continue to apply until the Company's
consolidated coverage ratio complies with the terms of the trust indenture. The
Company was in compliance with these additional restrictions as of September 30,
2002.
Beginning in the fourth quarter of 2001 and continuing through the third quarter
of 2002, the Company experienced adverse loss experience on a substantial
portion of its new business written in certain markets. In late February and
early March 2002, the Company commenced further analysis of loss ratios by
individual agency and a review of claim settlement procedures. Based on this and
other analysis, the Company has taken the following actions to improve the
financial position and operating results of the Company:
- - Eliminated reinstatements in all markets, i.e., upon policy
cancellation, the insured must obtain a new policy at prevailing rates and
current underwriting guidelines;
- - Terminated or placed on new business moratorium several hundred
agents whose loss ratios were abnormally high when compared to the average
for the remaining agents (these agents accounted for approximately 16% of
the total gross written premium in 2001);
- - Increased underwriting requirements in certain markets including:
higher down payments, new policy fees, and shorter policy terms;
- - Hired a consultant with significant auto claims experience to review
processes and suggest modifications to the claims function.
- - Consolidated the majority of operations, except claims, to the
Indianapolis office.
As previously reported in the Company's December 31, 2001 Annual Report on Form
10-K, the Company expected the above actions to result in a decline of
approximately 10 to 15% in gross written premiums from 2001 levels. Based on
actual results through September 2002, the Company now expects a decline of 25%
to 30% in gross written premiums for calendar year 2002 from 2001 levels with a
corresponding decrease in management fees payable to Superior Group. Since April
2002, the Company has eliminated approximately 100 full-time positions,
primarily in its claims and underwriting departments, representing approximately
29% of the Company's employees before the layoffs. In addition, the Company has
undertaken other cost savings initiatives and process changes in order to reduce
operating expenses.
Net cash used by operating activities in the first nine months of 2002
aggregated $(33,331,000) compared to $(19,491,000) for the same period in 2001.
The increase is primarily due to the lower premium volume in the first half of
2002 and the receipt in 2001 of $4.5 million for the non-compete agreement with
Acceptance. See Note 8 "Discontinued Operations" in the Condensed Notes to the
Financial Statements.
The present projected level of cash flow from premium volume, investment income
and billing fees will be insufficient to fund operating expenses at their
present levels through the end of 2002. The Company is considering alternative
sources of working capital which may be available in order to fund operations.
Among the alternate sources availed by the Company are capital contributions and
loans from the Company's parent, Goran Capital Inc. and its affiliates. In
addition, the Company continues to reduce operating expenses commensurate with
cash inflows and has decreased premium volume in the third and fourth quarters
in certain states to assure new business written generates an underwriting
profit. In the event the Company's insurance company subsidiaries continue to
reduce premium volume, the result will be continued reductions in management
fees paid to Superior Group and billing fees paid to Superior Group and Superior
which will reduce cash flow and sources of funds available to fund operating
expenses and other obligations, including the Preferred Securities.
In addition, in accordance with the final order of the FDOI, Superior Group is
unable to continue to collect finance and service fees from Superior. Superior
must also seek repayment from Superior Group of prior years finance and service
fees in the approximate amount of $15 million. The operating expenses of
Superior Group attributable to the business of Superior exceed the management
fees payable by Superior under the management agreement. Superior and Superior
Group are reviewing alternatives including an amendment to the agreement to
provide for a management fee commensurate with the expenses associated with
Superior's business or reallocation of operational responsibilities. Any
amendment of the management agreement would require prior approval of the FDOI.
See Note 3, "Regulatory Affairs" in the Consolidated Notes to the Financial
Statements.
Shareholders' equity reflected a deficit of $(168) million at September 30,
2002, which does not reflect the statutory surplus upon which the Company
conducts its various insurance operations. The Company's insurance
subsidiaries, not including IGF, after the effects of Codification, had
statutory surplus of approximately $14.6 million at September 30, 2002.
Given the financial position and loss experience of the Company over the past
several years as described above, the Company's accountants issued an opinion
based on their audit of the December 31, 2001 Consolidated Financial Statements
which includes an emphasis paragraph that raises the question of whether or not
the Company can continue as a going concern. The Company's plans to improve
financial results are described above.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to Qualitative and Quantitative Disclosures about Market
Risk was included under Item 1. Business in the December 31, 2001 Form 10-K. No
material changes have occurred in market risk since this information was
disclosed in the December 31, 2001 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Symons International Group, Inc, maintains disclosure controls and procedures
designed to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the specified time periods. Within 90 days prior
to the date of this report, the Company's Chief Executive Officer and the
Company's Chief Financial Officer evaluated, with the participation of the
Company's management, the effectiveness of the Company's disclosure controls and
procedures. Based on the evaluation which disclosed no significant deficiencies
or material weaknesses, the Company's Chief Executive Officer and the Company's
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, IGF, which is a wholly owned subsidiary of the Company,
had been a party to a number of pending legal proceedings and claims relating to
agricultural production interruption insurance policies (the "AgPI Program")
which were sold during 1998. All of the policies of insurance which were issued
in the AgPI Program were issued by and under the name of Mutual Service Casualty
Insurance Company ("MSI"), a Minnesota corporation with its principal place of
business located in Arden Hills, Minnesota. Sales of this product resulted in
large underwriting losses by IGF.
Approximately $29 million was paid through June 30, 2002 in settlement of legal
proceedings and policyholder claims related to the AgPI Program. All AgPI
policyholder claims were settled during 2000. However, on January 12, 2001 a
case was filed in the Superior Court of California, County of Fresno, entitled
S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by
four AgPI policyholders who had previously settled their AgPI claims pursuant to
binding settlement agreements who now seek additional compensation by asserting
through litigation that IGF and the third party carrier paid less than the
policy limits they were promised when they purchased the policy and that each
settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any recovery
payable to plaintiff would be limited to their actual economic losses regardless
of how much plaintiffs thought they had been promised (i.e. plaintiffs cannot be
paid policy limits without regard to actual losses incurred). The plaintiffs
then filed their third amended complaint to which MSI filed a demurrer
challenging the insurance contract allegations, as the issuer of the AgPI
policies, contending that plaintiffs failed to make the amendments to show an
insurable interest as required by the court's earlier ruling. This demurrer was
granted, without leave to amend, based on the court's analysis that plaintiffs
claims continued to reveal they did not have an insurable interest, rendering
the contract they alleged an unenforceable wager agreement, not insurance.
Thereafter, the court vacated its "without leave to amend" ruling in response to
a motion for reconsideration filed by the plaintiffs who contended they could
cure the fatal defect if they were allowed to file a fourth amended complaint.
However, the new version of the complaint still claims coverage amount based on
a formula which is not tied to plaintiffs' economic losses. Accordingly, a
demurrer to the fourth amended complaint was filed by MSI and a motion to strike
was filed by IGF. A hearing on these issues was held on November 8, 2002, and
the court has not yet issued its ruling.
As previously reported, the Company is a defendant in a case filed on February
23, 2000, in the United States District Court for the Southern District of
Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et
al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are Goran,
three individuals who were or are officers or directors of the Company or of
Goran, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case
purports to be brought on behalf of a class consisting of purchasers of the
Company's stock or Goran's stock during the period February 27, 1998, through
and including November 18, 1999. Plaintiffs allege, among other things, that
defendants misrepresented the reliability of the Company's reported financial
statements, data processing and financial reporting systems, internal controls
and loss reserves in violation of Section 10(b) of the Securities Exchange Act
of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The
individual defendants are also alleged to be liable as "controlling persons"
under Sec.20 (a) of the 1934 Act. During the third quarter of 2002, the
Company, Goran and the individual defendants entered into an agreement with the
plaintiffs for settlement. The settlement is subject to certain terms and
conditions and court approval.
As previously reported, Superior was a defendant in a case filed September 15,
2000 in the Circuit Court for Lee County, Florida entitled Charles L. Fulton,
D.C. v. Superior Insurance Company. The case was purported to be brought on
behalf of a class consisting of healthcare providers that rendered treatment to
and obtained a valid assignment of benefits from persons insured by Superior.
The case was settled and the action was dismissed on August 13, 2002.
As previously reported, Superior was a defendant in a case entitled Oviedo
Family Chiropractic Center, P.A. v. Superior Insurance Company originally filed
February 4, 2000 in the Circuit Court for Dade County, Florida, formerly
entitled Medical Re-Hab Center v. Superior Insurance Company. The case was
settled and the action was dismissed on September 3, 2002.
The Company's insurance subsidiaries are involved in a number of pending
regulatory actions (see Note 3, "Regulatory Affairs" in the Condensed Notes to
the Consolidated Financial Statements). The Company and its subsidiaries are
named as defendants in various other lawsuits relating to their business. Legal
actions arise from claims made under insurance policies issued by the Company's
subsidiaries. The Company, in establishing its loss reserves, has considered
these actions. There can be no assurance that the ultimate disposition of these
regulatory actions and lawsuits will not have an adverse material affect the
Company's operations or financial position.
Except as set forth above, there have been no other material developments in any
of the pending legal proceedings previously reported by the Company in the June
30, 2002 Form 10-Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
10.26 Promissory Note dated December 28, 2001 by Superior
Insurance Group, Inc. to Granite Reinsurance
Company, Ltd.
10.27 Promissory Note dated October 23, 2002 made by Superior
Insurance Group, Inc. to Granite Reinsurance
Company, Ltd.
Reports on Form 8-K Filed September 18, 2002
---------------------------------------------------
Mark A. Paul resigned his position as Vice President, Chief Financial Officer,
Treasurer and Director of the Company on September 13, 2002. The Board of
Directors of the Company has elected Bruce K. Dwyer as its interim Chief
Financial Officer while the Company searches for a permanent replacement. Mr.
Dwyer previously served as Chief Financial Officer of the Company from October
1999 to September 2000 and has been a consultant to the Company since his
departure.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on November 14, 2002.
By: /s/ Douglas H. Symons
------------------------
President, Chief Executive Officer and Secretary
(principal executive officer)
By: /s/ Bruce K. Dwyer
---------------------
Chief Financial Officer
EXHIBIT 99.2
CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER OF
SYMONS INTERNATIONAL GROUP, INC.
--------------------------------
I, Douglas H. Symons, certify that:
-------------------
1. I have reviewed this quarterly report on Form 10-Q of Symons
International Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a014 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
-------------------
By: /s/ Douglas H. Symons
------------------------
Douglas H. Symons
Chief Executive Officer
EXHIBIT 99.2
CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER OF
SYMONS INTERNATIONAL GROUP, INC.
--------------------------------
I, Bruce K. Dwyer, certify that:
----------------
1. I have reviewed this quarterly report on Form 10-Q of Symons
International Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a014 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
-------------------
By: /s/Bruce K. Dwyer
-------------------
Bruce K. Dwyer
Chief Financial Officer
27
EXHIBIT INDEX
REFERENCE TO
REGULATION S-K
EXHIBIT NO. DOCUMENT
10.26 Promissory Note dated December 28, 2001 by Superior Insurance Group,
Inc. to Granite Reinsurance Company, Ltd.
10.27 Promissory Note dated October 23, 2002 made by Superior Insurance
Group, Inc. to Granite Reinsurance Company, Ltd.
EXHIBIT NO. 10.26
PROMISSORY NOTE - $2,500,000
FOR VALUE RECEIVED, the undersigned, Superior Insurance Group, Inc., a
Delaware corporation (hereinafter called the "Maker"), promises to pay to the
order of Granite Reinsurance Company, Ltd., a Barbados corporation (hereinafter
referred to as "Payee"), or order, the principal sum of Two Million Five Hundred
Thousand Dollars ($2,500,000) (or such amount as Maker shall borrow hereunder)
with interest at the annualized rate (adjusted monthly) equal to the sum of the
following (the "Effective Rate"): (i) the prime rate of interest (the "Prime
Rate", as determined below), plus (ii) five and one-quarter percent (5 1/4%);
provided, however, that the Effective Rate shall not exceed eighteen percent
(18%) per annum. This Note shall be paid as follows:
(1) Payments of interest accrued on this Note shall be paid on the first
business day of the month following any month during which any principal or
interest on this Note is outstanding. Interest for any one month period shall
be calculated by applying the Effective Rate (as of the 1st day of the month) on
the principal amount outstanding during such month. The first payment of
interest under this Note shall be February 1, 2002.
(2) All principal and interest under this Note, if not sooner paid, shall be
due and payable on December 20, 2004.
(3) In the event any installment of principal or interest is not paid when
due, interest shall be paid on the amount in default at a rate equal to eighteen
percent (18%) per annum (but in no event to exceed the maximum rate of interest
permitted by law).
The Effective Rate for each month shall be determined on the first day of
such month. The Prime Rate shall be determined on the first day of each month
and shall be the prime rate as quoted in the Wall Street Journal on the first
day of such month or the first day of such month for which the prime rate is
published in the Wall Street Journal. Maker shall have the right to borrow from
Payee under this Note, from time to time prior to December 20, 2003, an amount
equal to a maximum of Two Million Five Hundred Thousand Dollars ($2,500,000).
If any check tendered to the Payee by Maker for payment of any sum due
hereunder is not honored and is returned to the Payee by the Maker's bank, for
insufficient funds or otherwise, Payee may, at its option and upon written
notice to Maker, require that all future payments by Maker be made by wire
transfer, cashier's check or other certified funds acceptable to the Payee. If
Payee elects to require payment by wire transfer, cashier's check or other
certified funds, Payee shall have the right to return any subsequent payments
that are not made by such wire transfer, cashier's check or other certified
funds, and, in such case, such payment shall be deemed not to have been made by
Maker. Acceptance of any payment not made by wire transfer, cashier's check or
certified funds shall not constitute a waiver of Payee's continuing right to
require further payments by wire transfer, cashier's check or certified funds.
In the event any installment of principal or interest or any part thereof is not
paid within ten (10) days of the due date thereof, such event shall constitute a
default hereunder and, irrespective of whether Payee issues or records a notice
of default, Maker agrees to pay a "late charge" in an amount equal to five
percent (5%) of such unpaid payment, together with interest on such payment and
late charge at the same rate of interest as provided in this Note. Maker
acknowledges that in addition to lost interest, the late payment by Maker to
Payee of amounts due as set forth above will cause Maker to incur costs not
contemplated under this Note, including processing, administrative, accounting
and other charges and costs, the exact amount of which will be impractical or
extremely difficult to ascertain. Accordingly, the parties hereto agree that
the foregoing late charge represents a fair and reasonable estimate of the costs
that Payee will incur by reason of any late payment by Maker and shall be paid
to Payee as liquidated damages related to such processing and administrative
costs. The parties addition-ally acknowledge and agree that late charges are
distinct and separate from the payment of interest on amounts in default as
addressed above.
The installments due hereunder are to be paid at the office of Payee or at
such other place as Payee or the holder hereof may from time to time designate.
Nothing herein contained shall be so construed or operate as to require the
Maker to pay interest on this Note at a rate greater than that allowed by the
laws of the State of Indiana, and if any provisions herein contained do, or
would presently or prospectively operate to make this Note or any part thereof
void, voidable, or ineffective, then those provisions only shall be held for
naught and as though not herein contained and shall be without effect upon or
prejudice to the remaining provisions, which shall nevertheless remain
operative.
Time is of the essence of this Note. In the event of default in payment of
any installment when due, the Payee may at its option declare the unpaid balance
of said debt due, payable and collectible. Failure to exercise this option
shall not constitute a waiver of the right to exercise it at any other time when
a default shall exist or continue.
Maker, as well as any sureties and guarantors, severally waive notice of
default, demand for payment and diligence in filing suit, and agree that time
for payment of any installment may be extended from time to time without notice
at the option of the holder hereof.
In the event of default in payment of this Note or of default in any
document given as security for this Note, and if the same is placed in the hands
of an attorney for collection or foreclosure, the undersigned agrees to pay the
holder's attorneys' fee and all costs of collection.
In the event of default in the performance of any covenant, condition, or
agreement contained in any document or agreement securing the payment of this
Note, or in the event of a default by Maker or any affiliate of Maker on any
indebtedness for which the assets of Maker may be applied in satisfaction of
such indebtedness, then the holder of this Note shall have the unconditional
right, without demand, notice, or other action, to declare the unpaid principal
balance of this Note, together with interest accrued thereon, at once due and
payable and to foreclose each lien securing the payment hereof, either under any
power of sale contained in such documents or agreements or by court proceedings,
as such holder elects.
In addition, a default under this Note shall include, but not be limited
to, the sale, transfer, assignment, mortgage, pledge, hypothecation or
encumbrance (whether volun-tary or involuntary) of, or the execution of any
agree-ment to sell, transfer, assign, mortgage, pledge, hypothe-cate or
encum-ber of the whole or any portion of maker's right, title or interest in and
to the collateral -without the prior written consent of the Payee unless
otherwise permitted herein.
If Maker shall sell, convey, transfer, assign or further encumber any
collateral or any part thereof or any interest therein, whether legal or
equita-ble, in any manner (whether voluntarily or involuntarily), without the
written consent of Payee, which consent Payee shall have no obligation to give,
Payee shall have the right, at its option, to declare the indebtedness and
obligations represented hereby immedi-ately due and payable irrespective of the
maturity date specified in this Note. Any consent by Payee to the trans-fer may
be predicated upon any terms, conditions and covenants deemed advisable or
necessary in the sole option of Payee, including, but not limited to, the right
to require of the transferee assumption of personal liability on the debt
represented by this Note, to approve the form and substance of all transfer and
assumption documents, and to change the interest rate, date of maturity and
monthly payments of the debt represented by this Note, and may be conditioned on
the receipt of a fee based on a percentage of the original sum of this Note.
The granting of permission for a transferee to assume the existing loan
agreement, security agreement and other related documents shall not in any
manner be deemed a consent to any subsequent transfer, and Payee shall retain
the right of consent to such transfer or transfers on the terms and conditions
stated above. Consent, whether expressed or implied, to one such transaction
shall not be deemed to be a waiver of the right of such consent to further or
successive transactions. Any por-tion of this covenant which may be held by any
court of competent jurisdiction to be un-enforceable shall be deemed severable
and the balance of this covenant shall be fully enforceable. Consent to such
sale or transfer or to any subsequent sale or trans-fer shall not be deemed to
constitute consent to any subse-quent sale or transfer or a waiver of any rights
of Payee not to so consent.
DATED: December 28, 2001
Superior Insurance Group, Inc.
By:____________________________
Gene S. Yerant, President
EXHIBIT NO. 10.27
PROMISSORY NOTE - $1,000,000
FOR VALUE RECEIVED, the undersigned, Superior Insurance Group, Inc., a
Delaware corporation (hereinafter called the "Maker"), promises to pay to the
order of Granite Reinsurance Company, Ltd., a Barbados corporation (hereinafter
referred to as "Payee"), or order, the principal sum of One Million Dollars
($1,000,000) (or such lesser amount as Maker shall borrow hereunder) with
interest at the annualized rate (adjusted monthly) equal to the sum of the
following (the "Effective Rate"): (i) the prime rate of interest (the "Prime
Rate", as determined below), plus (ii) five and one-quarter percent (5 1/4%);
provided, however, that the Effective Rate shall not exceed eighteen percent
(18%) per annum. This Note shall be paid as follows:
(4) Payments of interest accrued on this Note shall be paid on the first
business day of the month following any month during which any principal or
interest on this Note is outstanding. Interest for any one month period shall
be calculated by applying the Effective Rate (as of the 1st day of the month) on
the principal amount outstanding during such month. The first payment of
interest under this Note shall be December 1, 2002.
(5) All principal and interest under this Note, if not sooner paid, shall be
due and payable on November 30, 2004.
(6) In the event any installment of principal or interest is not paid when
due, interest shall be paid on the amount in default at a rate equal to eighteen
percent (18%) per annum (but in no event to exceed the maximum rate of interest
permitted by law).
The Effective Rate for each month shall be determined on the first day of
such month. The Prime Rate shall be determined on the first day of each month
and shall be the prime rate as quoted in the Wall Street Journal on the first
day of such month or the first day of such month for which the prime rate is
published in the Wall Street Journal. Maker shall have the right to borrow from
Payee under this Note, from time to time prior to December 20, 2002, an amount
equal to a maximum of One Million Dollars ($1,000,000).
If any check tendered to the Payee by Maker for payment of any sum due
hereunder is not honored and is returned to the Payee by the Maker's bank, for
insufficient funds or otherwise, Payee may, at its option and upon written
notice to Maker, require that all future payments by Maker be made by wire
transfer, cashier's check or other certified funds acceptable to the Payee. If
Payee elects to require payment by wire transfer, cashier's check or other
certified funds, Payee shall have the right to return any subsequent payments
that are not made by such wire transfer, cashier's check or other certified
funds, and, in such case, such payment shall be deemed not to have been made by
Maker. Acceptance of any payment not made by wire transfer, cashier's check or
certified funds shall not constitute a waiver of Payee's continuing right to
require further payments by wire transfer, cashier's check or certified funds.
In the event any installment of principal or interest or any part thereof is not
paid within ten (10) days of the due date thereof, such event shall constitute a
default hereunder and, irrespective of whether Payee issues or records a notice
of default, Maker agrees to pay a "late charge" in an amount equal to five
percent (5%) of such unpaid payment, together with interest on such payment and
late charge at the same rate of interest as provided in this Note. Maker
acknowledges that in addition to lost interest, the late payment by Maker to
Payee of amounts due as set forth above will cause Maker to incur costs not
contemplated under this Note, including processing, administrative, accounting
and other charges and costs, the exact amount of which will be impractical or
extremely difficult to ascertain. Accordingly, the parties hereto agree that
the foregoing late charge represents a fair and reasonable estimate of the costs
that Payee will incur by reason of any late payment by Maker and shall be paid
to Payee as liquidated damages related to such processing and administrative
costs. The parties addition-ally acknowledge and agree that late charges are
distinct and separate from the payment of interest on amounts in default as
addressed above.
The installments due hereunder are to be paid at the office of Payee or at
such other place as Payee or the holder hereof may from time to time designate.
Nothing herein contained shall be so construed or operate as to require the
Maker to pay interest on this Note at a rate greater than that allowed by the
laws of the State of Indiana, and if any provisions herein contained do, or
would presently or prospectively operate to make this Note or any part thereof
void, voidable, or ineffective, then those provisions only shall be held for
naught and as though not herein contained and shall be without effect upon or
prejudice to the remaining provisions, which shall nevertheless remain
operative.
Time is of the essence of this Note. In the event of default in payment of
any installment when due, the Payee may at its option declare the unpaid balance
of said debt due, payable and collectible. Failure to exercise this option
shall not constitute a waiver of the right to exercise it at any other time when
a default shall exist or continue.
Maker, as well as any sureties and guarantors, severally waive notice of
default, demand for payment and diligence in filing suit, and agree that time
for payment of any installment may be extended from time to time without notice
at the option of the holder hereof.
In the event of default in payment of this Note or of default in any
document given as security for this Note, and if the same is placed in the hands
of an attorney for collection or foreclosure, the undersigned agrees to pay the
holder's attorneys' fee and all costs of collection.
In the event of default in the performance of any covenant, condition, or
agreement contained in any document or agreement securing the payment of this
Note, or in the event of a default by Maker or any affiliate of Maker on any
indebtedness for which the assets of Maker may be applied in satisfaction of
such indebtedness, then the holder of this Note shall have the unconditional
right, without demand, notice, or other action, to declare the unpaid principal
balance of this Note, together with interest accrued thereon, at once due and
payable and to foreclose each lien securing the payment hereof, either under any
power of sale contained in such documents or agreements or by court proceedings,
as such holder elects.
In addition, a default under this Note shall include, but not be limited
to, the sale, transfer, assignment, mortgage, pledge, hypothecation or
encumbrance (whether volun-tary or involuntary) of, or the execution of any
agree-ment to sell, transfer, assign, mortgage, pledge, hypothe-cate or
encum-ber of the whole or any portion of maker's right, title or interest in and
to the collateral -without the prior written consent of the Payee unless
otherwise permitted herein.
If Maker shall sell, convey, transfer, assign or further encumber any
collateral or any part thereof or any interest therein, whether legal or
equita-ble, in any manner (whether voluntarily or involuntarily), without the
written consent of Payee, which consent Payee shall have no obligation to give,
Payee shall have the right, at its option, to declare the indebtedness and
obligations represented hereby immedi-ately due and payable irrespective of the
maturity date specified in this Note. Any consent by Payee to the trans-fer may
be predicated upon any terms, conditions and covenants deemed advisable or
necessary in the sole option of Payee, including, but not limited to, the right
to require of the transferee assumption of personal liability on the debt
represented by this Note, to approve the form and substance of all transfer and
assumption documents, and to change the interest rate, date of maturity and
monthly payments of the debt represented by this Note, and may be conditioned on
the receipt of a fee based on a percentage of the original sum of this Note.
The granting of permission for a transferee to assume the existing loan
agreement, security agreement and other related documents shall not in any
manner be deemed a consent to any subsequent transfer, and Payee shall retain
the right of consent to such transfer or transfers on the terms and conditions
stated above. Consent, whether expressed or implied, to one such transaction
shall not be deemed to be a waiver of the right of such consent to further or
successive transactions. Any por-tion of this covenant which may be held by any
court of competent jurisdiction to be un-enforceable shall be deemed severable
and the balance of this covenant shall be fully enforceable. Consent to such
sale or transfer or to any subsequent sale or trans-fer shall not be deemed to
constitute consent to any subse-quent sale or transfer or a waiver of any rights
of Payee not to so consent.
DATED: October 23, 2002
Superior Insurance Group, Inc.
By:_______________________________
Douglas H. Symons, President