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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the year ended December 31, 1996.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File Number:
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 Identification No.)
Incorporation or organization)
4720 Kingsway Drive, Indianapolis Indiana 46205
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (317) 259-6300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of the 3,450,000 shares of the Issuer's Common
Stock held by non-affiliates, as of March 20, 1997 was $52,612,500.
The number of shares Common Stock of the Registrant, without par value,
outstanding as of March 31, 1997 was 10,450,000.
Documents Incorporated By Reference:
Portions of the Annual Report to the Shareholders and the Proxy Statement for
the 1997 Annual Meeting of Shareholders are incorporated into Parts II and
III.
Exhibit Index on Page 69. Page 1 of 245.
SYMONS INTERNATIONAL GROUP INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1996
PART I PAGE
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS . . . . . . . . . . . .44
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . .55
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . .56
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . .57
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . .57
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . .57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . .57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . .57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . .57
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . .58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . .58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K .58
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
ITEM 1 - BUSINESS
General
Overview
Symons International Group, Inc. (the "Company") is a 67% subsidiary of Goran
Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering
("Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran.
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Formation of GGS Management Holdings, Inc. ("GGSH"); Acquisition of Superior
Insurance Company ("Superior")
On January 31, 1996, Goran, the Company, Fortis, Inc. and its wholly-owned
subsidiary, Interfinancial, Inc., a holding company for Superior ("Superior"),
entered into a Stock Purchase Agreement (the "Superior Purchase Agreement")
pursuant to which the Company agreed to purchase Superior from Interfinancial,
Inc. (the "Acquisition") for a purchase price of approximately $66.6 Million.
Simultaneously with the execution of the Superior Purchase Agreement, Goran,
the Company, GGSH and GS Capital Partners II, L.P. ("GS Funds"), a Delaware
limited partnership, entered into an agreement (the "GGS Agreement") to
capitalize GGSH and to cause GGSH to issue its capital stock to the Company
and to the GS Funds, so as to give the Company a 52% ownership interest and
the GS Funds a 48% ownership interest (the "Formation Transaction"). Pursuant
to the GGS Agreement (a) the Company contributed to GGSH (i) all the
outstanding common stock of Pafco General Insurance Company ("Pafco"), with
a book value of $16.9 Million, (ii) its right to acquire Superior pursuant to
the Superior Purchase Agreement, and (iii) certain fixed assets, including
office furniture and equipment, having a value of approximately $350,000, and
(b) the GS Funds contributed to GGSH $21.2 Million in cash. The Formation
Transaction and the Acquisition were completed on April 30, 1996.
Pursuant to the GGS Agreement, prior to the Company's contribution of Pafco to
GGSH, Pafco transferred all of the outstanding capital stock of IGF Insurance
Company ("IGF") (the "Transfer") in order to improve the risk-based capital
rating of Pafco and to permit GGSH to focus exclusively on the nonstandard
automobile insurance business. Pafco accomplished the Transfer by forming a
wholly-owned subsidiary, IGF Holdings, Inc. ("IGF Holdings"), to which Pafco
contributed all of the outstanding shares of capital stock of IGF. Prior to
the distribution of the IGF Holdings capital stock to the Company, IGF
Holdings paid to Pafco a dividend in the aggregate amount of approximately
$11.0 Million (the "Dividend"), consisting of $7.5 Million in cash and a
subordinated promissory note in the principal amount of approximately $3.5
Million (the "IGF Note"). Pafco then distributed the outstanding capital
stock of IGF Holdings to the Company. IGF Holdings funded the cash
portion of the Dividend with bank debt in the principal amount of $7.5
Million (the "IGFH Bank Debt"). The IGFH Bank Debt and the IGF Note
were repaid with a portion of the proceeds from the Offering.
Prior to the Offering, the Company, through Symons International Group, Inc. -
Florida ("SIGF"), its specialized surplus lines underwriting unit based in
Florida, provided certain commercial insurance products through retail
agencies, principally in the southeast United States. SIGF writes these
specialty products through a number of different insurers including Pafco,
United National Insurance Group, Munich American Reinsurance Corp. and
underwriters at Lloyd's of London. Effective January 1, 1996, the Company
transferred to Goran all of the issued and outstanding shares of capital stock
of SIGF (the "Distribution").
The Company writes business in the U.S. exclusively through independent
agencies and seeks to distinguish itself by offering high quality, technology
based services for its agents and policyholders. The Company's nonstandard
automobile insurance business, with its principal offices in Indianapolis,
Indiana, Atlanta, Georgia, and Tampa, Florida, writes insurance through
approximately 4,500 independent agencies in 18 states. IGF with its principal
office in Des Moines, Iowa and regional offices in California, Indiana,
Kansas, Mississippi and North Dakota, writes MPCI and crop hail insurance
through approximately 1,200 independent agencies in 31 states. Based on a
Company analysis of gross premiums written in 1995 as reported by A.M. Best,
the Company believes that the combination of Pafco and Superior makes the
Company's nonstandard automotive group the sixteenth largest underwriter of
nonstandard automobile insurance in the United States. Based on premium
information compiled in 1995 by the Federal Crop Insurance Corporation
("FCIC") and the National Crop Insurance Services, Inc. ("NCIS"), the
Company believes that IGF is the fifth largest underwriter of multi-peril
crop insurance ("MPCI") in the United States.
The following table sets forth the premiums written by Pafco, Superior and
IGF by line of business for the periods indicated:
Symons International Group,
Inc. For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Nonstandard Automobile (1)
Gross Premiums Written $ 45,593 $ 49,005 $187,176
Net Premiums Written 28,114 37,302 186,579
Crop Hail (2)
Gross Premiums Written $ 10,130 $ 16,966 $ 27,957
Net Premiums Written 4,565 11,608 23,013
MPCI (3)
Gross Premiums Written $ 44,325 $ 53,408 $ 82,102
Net Premiums Written 0 0 0
Commercial
Gross Premiums Written $ 3,086 $ 5,255 $ 8,264
Net Premiums Written 2,460 4,537 0
Total Gross Premiums
Written (4) $103,134 $124,634 $305,499
Total Net Premiums
Written $ 35,139 $ 53,447 $209,592
(1) Does not reflect net premiums written for Superior for the years ended
December 31, 1994 and 1995 and for the four months ended April 30, 1996. For
the years ended December 31, 1994 and 1995, Superior and its subsidiaries had
gross premiums written of $112.9 Million and $94.8 Million, respectively, and
net premiums written of $112.5 Million and $94.1 Million, respectively. For
the four months ended April 30, 1996, Superior and its subsidiaries had gross
premiums written of $44.0 Million and net premiums written of $43.6 Million.
(2) Most crop hail insurance policies are sold in the second and third
quarters of the calendar year.
(3) For a discussion of the accounting treatment of MPCI premiums, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company".
(4) For additional financial segment information concerning the Company's
nonstandard automobile and crop insurance operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company".
Nonstandard Automobile Insurance
Industry Background
The Company, through its 52% owned subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage
and liability policies for "nonstandard risks". Nonstandard risks are those
individuals who are unable to obtain insurance through standard market
carriers due to factors such as poor premium payment history, driving
experience, record of prior accidents or driving violations, particular
occupation or type of vehicle. Premium rates for nonstandard risks are
generally higher than for standard risks. Total private passenger automobile
insurance premiums written by insurance carriers in the United States in 1995
have been estimated by A.M. Best to be approximately $106 billion. 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. Although
this factor, as well as industry differences in the criteria which distinguish
standard from nonstandard insurance, make it difficult to estimate the size of
the nonstandard market, management of the Company believes that the
voluntary nonstandard market has accounted for approximately 15% of
total private passenger automobile insurance premiums written in recent
years. According to statistical information derived from insurer annual
statements compiled by A.M. Best, the nonstandard automobile market
accounted for $17.4 billion in annual premium volume for 1995.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
1. Through GGS Holdings, the Company seeks to achieve profitability
through a combination of internal growth and the acquisition of other
insurers and blocks of business. The Company regularly evaluates
acquisition opportunities. There can be no assurance, however, that
any suitable business opportunities will arise.
2. The Company is committed to the use of integrated technologies
which permit it to rate, issue, bill and service policies in an efficient
and cost effective manner.
3. The Company competes primarily on the basis of underwriting criteria
and service to agents and insureds and generally does not match price
decreases implemented by competitors which are directed towards
obtaining market share.
4. The Company encourages agencies to place a large share of their
profitable business with Pafco and Superior by offering, in addition to
fixed commissions, a contingent commission based on a combination of
volume and profitability.
5. The Company promptly responds to claims in an effort to reduce the costs
of claims settlements by reducing the number of pending claims and uses
computer databases to verify repair and vehicle replacement costs and to
increase subrogation and salvage recoveries.
6. The Company will seek to expand the multi-tiered marketing approach
currently employed by Superior and its subsidiaries in Florida and other
states in order to offer to its independent agency network a broader range of
products with different premium and commission structures.
Products
The Company offers both liability and physical damage coverage in the
insurance marketplace, with policies having terms of three to twelve months,
with the majority of policies having a term of six months. Most nonstandard
automobile insurance policyholders choose the basic limits of liability
coverage which, though varying from state to state, generally are $25,000 per
person and $50,000 per accident for bodily injury, and in the range of $10,000
to $20,000 for property damage. Of the approximately 228,000 combined policies
of Pafco and Superior in force on December 31, 1996, fewer than 9% had policy
limits in excess of these basic limits of coverage. Of the 63,000 policies of
Pafco in force on December 31, 1996, approximately 88% had policy periods of
six months or less. Of the approximately 165,000 policies of Superior in
force as of December 31, 1996, approximately 74% had policy periods of six
months and approximately 26% had policy periods of 12 months.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Choice
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard marketplace. The Superior Standard policy is intended for risks
which do not qualify for Superior Choice but which nevertheless present a more
favorable risk profile than many other nonstandard risks. The Superior
Specialty policies cover risks which do not qualify for either the Superior
Choice or the Superior Standard. Pafco offers only a single nonstandard
policy which includes multiple discounts and surcharges designed to recognize
proof of prior insurance, driving violations, accident history and other
factors relevant to the level of risk insured. Superior offers a product
similar to the Pafco product in states in which it is not offering a multi-
tiered product.
Marketing
The Company's nonstandard automobile insurance business is concentrated in
the states of Florida, California, Indiana, Missouri, Texas and Virginia,
and the Company writes nonstandard automobile insurance in 13 additional
states. Management plans to continue to expand selectively into additional
states. GGS Holdings will select states for expansion based on a number of
criteria, including the size of the nonstandard automobile insurance market,
state-wide loss results, competition and the regulatory climate.
The following tables sets forth the geographic distribution of gross premiums
written for the Company and Superior individually and for the Company and
Superior on a combined basis for the periods indicated.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
Company Superior
1994 1995 1996 1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004 $ 0 $ 0 $ 0
California 0 0 0 13,422 15,350 25,131
Colorado 5,629 9,257 10,262 0 0 0
Florida 0 0 0 55,282 54,535 97,659
Georgia 0 0 0 7,342 5,927 7,398
Illinois 0 80 1,380 3,894 2,403 1,614
Indiana 13,648 13,710 16,599 414 132 0
Iowa 3,769 3,832 5,818 0 0 0
Kentucky 9,573 7,840 11,065 0 0 0
Mississippi 0 0 0 4,411 2,721 2,250
Missouri 8,163 8,513 13,423 0 0 0
Nebraska 3,192 3,660 5,390 0 0 0
Ohio 0 0 0 4,325 3,164 3,643
Oklahoma 0 317 2,559 0 0 0
Tennessee 0 0 0 1,829 332 (2)
Texas 0 0 0 10,660 3,464 10,122
Virginia 0 0 0 7,500 5,035 14,733
Washington 0 0 0 3,827 1,693 106
Totals 45,593 49,005 68,500 112,906 94,756 162,654
Symons International Group, Inc. and
Superior Insurance Company (Combined)
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004
California 13,422 15,350 25,131
Colorado 5,629 9,257 10,262
Florida 55,282 54,535 97,659
Georgia 7,342 5,927 7,398
Illinois 3,894 2,483 2,994
Indiana 14,062 13,842 16,599
Iowa 3,769 3,832 5,818
Kentucky 9,573 7,840 11,065
Mississippi 4,411 2,721 2,250
Missouri 8,163 8,513 13,423
Nebraska 3,192 3,660 5,390
Ohio 4,325 3,164 3,643
Oklahoma 0 317 2,559
Tennessee 1,829 332 (2)
Texas 10,660 3,464 10,122
Virginia 7,500 5,035 14,733
Washington 3,827 1,693 106
Totals $158,499 $143,761 $231,154
The Company and Superior market their nonstandard products exclusively through
approximately 4,500 independent agencies and focus their marketing efforts in
rural areas and the peripheral areas of metropolitan centers. As part of its
strategy, management is continuing its efforts to establish the Company as a
low cost deliverer of nonstandard automobile insurance while maintaining a
commitment to provide quality service to both agents and insureds. This
element of the Company's strategy is being accomplished primarily through the
automation of certain marketing, underwriting and administrative functions.
In order to maintain and enhance its relationship with its agency base, the
Company has 26 territorial managers, each of whom resides in a specific
marketing region and has access to the technology and software necessary to
provide marketing, rating and administrative support to the agencies in his or
her region.
The Company attempts to foster strong service relationships with its agencies
and customers. The Company is currently developing computer software that
will provide on-line communication with its agency force. In addition, to
delivering prompt service while ensuring consistent underwriting, the Company
offers rating software to its agents in some states which permits them to
evaluate risks in their offices. The agent has the authority to sell and bind
insurance coverages in accordance with procedures established by the Company,
which is a common practice in the property and casualty insurance business.
The Company reviews all coverages bound by the agents promptly and generally
accepts all coverages which fall within its stated underwriting criteria. In
most jurisdictions, the Company has the right within a specified time period
to cancel any policy even if the risk falls within its underwriting criteria.
See "Business - Nonstandard Automobile Insurance - Underwriting".
Pafco and Superior compensate their agents on a commission basis based on a
percentage of premiums produced. Pafco also offers its agents a contingent
commission based on volume and profitability, thereby encouraging the agents
to enhance the placement of profitable business with the Company. Superior
has recently incorporated the contingent commission into the compensation
package for its agents.
The Company believes that the combination of Pafco with Superior and its two
Florida domiciled insurance subsidiaries will allow the Company the
flexibility to engage in multi-tiered marketing efforts in which specialized
automobile insurance products are directed toward specific segments of the
market. Since certain state insurance laws prohibit a single insurer from
offering similar products with different commission structures or, in some
cases, premium rates, it is necessary to have multiple licenses in certain
states in order to obtain the benefits of market segmentation. The Company is
currently offering multi-tiered products in Florida, Texas, Virginia,
California and Missouri. The Company intends to expand the marketing of its
multi-tiered products into other states and to obtain multiple licenses for
its subsidiaries in these states to permit maximum flexibility in designing
commission structures.
Underwriting
The Company underwrites its nonstandard automobile business with the goal of
achieving adequate pricing. The Company seeks to classify risks into narrowly
defined segments through the utilization of all available underwriting
criteria. The Company maintains an extensive, proprietary database which
contains statistical records with respect to its insureds on driving and
repair experience by location, class of driver and type of automobile.
Management believes this database gives the Company the ability to be more
precise in the underwriting and pricing of its products. Further, the Company
uses motor vehicle accident reporting agencies to verify accident history
information included in applications.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing
and use of rates, while others, such as Florida, Arkansas and California,
require approval of the insurance department prior to the use of the rates.
The Company has begun to integrate its automated underwriting process with
the functions performed by its agency force. For example, the Company has
recently introduced a rating software package for use by agents in some
states. In many instances, this software package, combined with agent access
to the automated retrieval of motor vehicle reports, ensures accurate
underwriting and pricing at the point of sale. The Company believes the
automated rating and underwriting system provides a significant competitive
advantage because it (i) improves efficiencies for the agent and the Company,
further linking the agent to the Company, (ii) makes more accurate and
consistent underwriting decisions possible, and (iii) can be changed easily to
reflect new rates and underwriting guidelines.
Underwriting results of insurance companies are frequently measured by their
combined ratios. However, investment income, federal income taxes and other
non-underwriting income or expense are not reflected in the combined ratio.
The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are generally considered profitable when the combined ratio is under
100% and unprofitable when the combined ratio is over 100%. The following
table sets forth loss and LAE ratios, underwriting expense ratios and combined
ratios for the periods indicated for the nonstandard automobile insurance
business of the Company and Superior individually and on a combined basis.
The ratios shown in the table below are computed based upon GAAP, not SAP.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
Company Superior
1994 1995 1996 1994 1995 1996
Loss Ratio 62.3% 65.8% 61.8% 72.3% 64.2% 66.1%
LAE Ratio 9.8% 8.0% 8.6% 9.6% 9.9% 9.5%
Underwriting
Expense Ratio 34.3% 37.5% 33.3% 34.5% 33.5% 23.9%
Combined Ratio 106.4% 111.3% 103.7% 116.4% 107.6% 99.5%
Symons International Group, Inc.
and Superior Insurance Company (Combined) (1)
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Loss Ratio 70.5% 64.6% 65.1%
LAE Ratio 9.6% 9.4% 8.6%
Underwriting Expense Ratio 34.5% 34.8% 27.7%
Combined Ratio 114.6% 108.8% 101.4%
(1) These ratios have not been computed on a pro-forma basis but rather have
been derived by adding the premiums, expenses, losses and LAE of each of the
Company and Superior after April 30, 1996.
In an effort to maintain and improve
underwriting profits, the territorialmanagers regularly monitor loss ratios of
the agencies in their regions and meet periodically with the agencies in order
to address any adverse trends in loss ratios.
Claims
The Company's nonstandard automobile claims department handles claims on
a regional basis from its Indianapolis, Indiana, Atlanta, Georgia, Tampa,
Florida and Anaheim, California locations. Management believes that the
employment of salaried claims personnel, as opposed to independent adjusters,
results in reduced ultimate loss payments, lower LAE and improved customer
service. The Company generally retains independent appraisers and adjusters
on an as needed basis for estimation of physical damage claims and limited
elements of investigation. The Company uses the Audapoint, Audatex and
Certified Collateral Corporation computer programs to verify, through a
central database, the cost to repair a vehicle and to eliminate duplicate or
"overlap" costs from body shops. Autotrak, which is a national database of
vehicles, allows the Company to locate vehicles nearly identical in model,
color and mileage to the vehicle damaged in an accident, thereby reducing the
frequency of disagreements with claimants as to the replacement value of
damaged vehicles. In 1995, the Company implemented new claims handling
procedures designed to reduce the number of pending claims.
Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon
receipt, each claim is reviewed and assigned to an adjuster based on the type
and severity of the claim. All claims-related litigation is monitored by a
home office supervisor or litigation manager. The claims policy of the
Company emphasizes prompt and fair settlement of meritorious claims,
adequate reserving for claims and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a portion of
its risks and paying for that protection based upon premiums received on all
policies subject to such reinsurance. Insurance is ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large losses, including catastrophic losses. Although
reinsurance does not legally discharge the ceding insurer from its primary
obligation to pay the full amount of losses incurred under policies reinsured,
it does render the reinsurer liable to the insurer to the extent provided by
the terms of the reinsurance treaty. As part of its internal procedures, the
Company evaluates the financial condition of each prospective reinsurer before
it cedes business to that carrier. Based on the Company's review of its
reinsurers' financial health and reputation in the insurance marketplace, the
Company believes its reinsurers are financially sound and that they therefore
can meet their obligations to the Company under the terms of the reinsurance
treaties. Reserves for uncollectible reinsurance are provided as deemed
necessary.
In 1995, Pafco maintained a 25% quota share reinsurance treaty on its
nonstandard automobile insurance business, as well as an excess of loss treaty
covering 100% of losses on an individual occurrence basis in excess of
$200,000 up to a maximum of $1,050,000. As of January 1, 1996, Pafco has
terminated all third party quota share reinsurance with respect to its
nonstandard automobile insurance business. Pafco has entered into a quota
share reinsurance agreement with Superior whereby Pafco shall cede 100% of its
gross premiums written on or after May 1, 1996 that are in excess of three
times outstanding capital and surplus. See "Certain Relationships and Related
Transactions - Reinsurance Arrangements". In 1996, Pafco continues to
maintain an excess of loss treaty on its nonstandard automobile insurance
business covering 100% of losses on an individual occurrence basis in excess
of $200,000 up to a maximum of $1,050,000. Of such reinsurers, those having
A.M. Best ratings of A or better provided 83% of such coverage. The following
table provides information with respect to material third party reinsurers on
the foregoing Pafco nonstandard automobile reinsurance treaties:
Symons International Group, Inc.
For The Year Ended December 31, 1996
(In Thousands)
Reinsurers A.M. Best Rating Reinsurance Recoverables(1)
Chartwell Reinsurance
Company A(2) $ 290
Constitution Reinsurance
Corporation A+(3) $1,210
(1) Only recoverables greater than $200,000 are shown. Total nonstandard
automobile reinsurance recoverables as of December 31, 1996 were approximately
$2,565.
(2) An A.M. Best rating of "A" is the third highest of 15 ratings.
(3) An A.M. Best rating of "A+" is the second highest of 15 ratings.
In 1995, Superior maintained both automobile casualty and property catastrophe
excess reinsurance. Superior's casualty excess of loss treaties covered
losses in excess of $100,000 up to a maximum of $2 million. Superior's first
casualty excess layer contained limits of $200,000 excess of $100,000, its
second casualty excess layer contained limits of $700,000 excess of $300,000
and its third casualty excess layer had a limit of $1 million excess of $1
million. Superior's first layer of property catastrophe excess reinsurance
covered 95% of $500,000 excess of $500,000 with an annual limit of $1 million
and its second layer of property catastrophe excess reinsurance covered 95% of
$2 million excess of $1 million with an annual limit of $4 million. In 1996,
Superior maintained the same levels of coverage, except as follows: (i) as to
its third casualty excess layer, the limit was increased to $4 million, and
(ii) Superior added a third layer of property catastrophe excess reinsurance
covering 95% of $2 million excess of $3 million with an annual limit of $4
million. Superior has had no quota share reinsurance on its nonstandard
automobile business in either 1995 or 1996.
In 1995, Superior placed all of its reinsurance with Prudential Reinsurance
Company (now Everest Reinsurance Company). In 1996, Superior placed all of
its reinsurance with Everest Reinsurance Company, except for its third layer
casualty excess of loss treaty, which was placed as follows: Zurich
Reinsurance Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%;
Transatlantic Reinsurance Company, 15%; SOREMA North American Reinsurance
Company, 10%; and Winterthur Reinsurance Corporation of America, 10%. The
foregoing reinsurers have the following A.M. Best ratings: Everest Reinsurance
Company - "A"; Skandia America Reinsurance Corporation - "A-" (the fourth
highest of 15 ratings); SOREMA North American Reinsurance Company - "A-";
Transatlantic Reinsurance Company - "A+"; Winterthur Reinsurance Company of
America - "A"; and Zurich Reinsurance Centre, Inc. - "A". For the year ended
December 31, 1996, Superior had $737,000 of ceded premiums to unaffiliated
reinsurers.
On April 29, 1996, Pafco retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Reinsurance Company Ltd.
("Granite Re"), an affiliate, with an effective date of January 1, 1996. On
this date, Pafco also entered into a 100% quota share reinsurance Agreement
with Granite Re, whereby all of Pafco's commercial business from 1996 and
forward was ceded to Granite Re effective January 1, 1996. Pafco has a
reinsurance recoverable at December 31, 1996 from Granite Re for $9,230,000,
of which $770,000 is uncollateralized.
Neither Pafco nor Superior has any facultative reinsurance with respect to its
nonstandard automobile insurance business.
Competition
The Company competes with both large national writers and smaller regional
companies in each state in which it operates. The Company's competitors
include other companies which, like the Company, serve the agency market, as
well as companies which sell insurance directly to customers. Direct writers
may have certain competitive advantages over agency writers, including
increased name recognition, increased loyalty of their customer base and,
potentially, reduced acquisition costs. The Company's primary competitors are
Progressive Casualty Insurance Company, Guaranty National Insurance Company,
Integon Corporation Group, Deerbrook Insurance Company (a member of the
Allstate Insurance Group) and the companies of the American Financial Group.
Generally, these competitors are larger and have greater financial resources
than the Company. The nonstandard automobile insurance business is price
sensitive and certain competitors of the Company have, from time to time,
decreased their prices in an apparent attempt to gain market share. Although
the Company's pricing is inevitably influenced to some degree by that of its
competitors, management of the Company believes that it is generally not in
the Company's best interest to match such price decreases, choosing instead to
compete on the basis of underwriting criteria and superior service to its
agents and insureds.
Crop Insurance
Industry Background
The two principal components of the Company's crop insurance business are
MPCI and private named peril, primarily crop hail insurance. Crop insurance is
purchased by farmers to reduce the risk of crop loss from adverse weather and
other uncontrollable events. Farms are subject to drought, floods and other
natural disasters that can cause widespread crop losses and, in severe cases,
force farmers out of business. Because many farmers rely on credit to finance
their purchases of such agricultural inputs as seed, fertilizer, machinery and
fuel, the loss of a crop to a natural disaster can reduce their ability to
repay these loans and to find sources of funding for the following year's
operating expenses.
MPCI was initiated by the federal government in the 1930s to help protect
farmers against loss of their crops as a result of drought, floods and other
natural disasters. In addition to MPCI, farmers whose crops are lost as a
result of natural disasters have, in the past, sometimes been supported by the
federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available
only on major crops in major producing areas. In 1980, Congress expanded the
scope and coverage of the MPCI program. In addition, the delivery system for
MPCI was expanded to permit private insurance companies and licensed agents
and brokers to sell MPCI policies, and the FCIC was authorized to reimburse
participating companies for their administrative expenses and to provide
federal reinsurance for the majority of the risk assumed by such private
companies.
Although expansion of the federal crop insurance program in 1980 was expected
to make crop insurance the farmer's primary risk management tool,
participation in the MPCI program was only 32% of eligible acreage in the 1993
crop year. Due in part to low participation in the MPCI program, Congress
provided an average of $1.5 billion per year in ad hoc disaster payments over
the six years prior to 1994. In view of the combination of low participation
rates in the MPCI program and large federal payments on both crop insurance
(with an average loss ratio of 147%) and ad hoc disaster payments since 1980,
Congress has, since 1990, considered major reform of its crop insurance and
disaster assistance policies. The Federal Crop Insurance Reform Act of 1994
(the "1994 Reform Act") was enacted in order to increase participation in the
MPCI program and eliminate the need for ad hoc federal disaster relief
payments to farmers.
The 1994 Reform Act required farmers for the first time to purchase at least
CAT Coverage (i.e., the minimum available level of MPCI providing coverage for
50% of farmers' historic yield at 60% of the price per unit for such crop set
by the FCIC) in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of
CAT Coverage by the local United States Department of Agriculture ("USDA")
offices.
The Federal Agriculture Improvement and Reform Act of 1996 ("the 1996 Reform
Act"), signed into law by President Clinton in April, 1996, limits the role of
the USDA offices in the delivery of MPCI coverage beginning in July, 1996,
which is the commencement of the 1997 crop year, and also eliminates the
linkage between CAT Coverage and qualification for certain federal farm
program benefits. This limitation should provide the Company with the
opportunity to realize increased revenues from the distribution and servicing
of its MPCI product. In accordance with the 1996 Reform Act, the USDA
announced in July, 1996, the following 14 states in which CAT Coverage will no
longer be available through USDA offices but rather will be solely available
through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas,
Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota,
Washington and Wyoming. The FCIC has transferred to the Company approximately
8,900 insureds for CAT Coverage who previously purchased such coverage from
USDA field offices. The Company believes that any future potential negative
impact of the delinkage mandated by the 1996 Reform Act will be mitigated by,
among other factors, the likelihood that farmers will continue to purchase
MPCI to provide basic protection against natural disasters since ad hoc
federal disaster relief programs have been reduced or eliminated. In
addition, the Company believes that (i) lending institutions will likely
continue to require this coverage as a condition to crop lending, and (ii)
many of the farmers who entered the MPCI program as a result of the 1994
Reform Act have come to appreciate the reasonable price of the protection
afforded by CAT Coverage and will remain with the program regardless of
delinkage. There can, however, be no assurance as to the ultimate effect
which the 1996 Reform Act may have on the business or operations of the
Company.
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
1. The Company will seek to enhance underwriting profits and reduce the
volatility of its crop insurance business through geographic diversification
and the appropriate allocation of risks among the federal reinsurance pools
and the effective use of federal and third-party catastrophic reinsurance
arrangements.
2. The Company also limits the risks associated with crop insurance through
selective underwriting of crops based on its historical loss experience data
base.
3. The Company continues to develop and maintain a proprietary knowledge-
based underwriting system which utilizes a database of Company-specific
underwriting rules.
4. The Company has further strengthened its independent agency network by
using technology to provide fast, efficient service to its agencies and
providing application documentation designed for simplicity and convenience.
5. Unlike many of its competitors, the Company employs a number of full time
claims adjusters in order to reduce the losses experienced by IGF.
6. The Company stops selling its crop hail policies after the date on which
the plant growth emerges from the ground in order to prevent farmers from
adversely selecting against IGF when a storm is forecast or hail damage has
already occurred.
7. The Company continues to explore growth opportunities and product
diversification through new specialty coverages, including Crop Revenue
Coverage and named peril insurance.
8. The Company continues to explore new opportunities for advances in
administrative efficiencies and product underwriting presented by advances in
Precision Farming software, Global Positioning System (GPS) software and
Geographical Information System (GIS) technology, all of which continue to be
adopted by insureds in their farming practices.
Products
Description of MPCI Insurance Program
MPCI is a federally-subsidized program which is designed to provide
participating farmers who suffer insured crop damage with funds needed to
continue operating and plant crops for the next growing season. All of the
material terms of the MPCI program and of the participation of private
insurers, such as the Company, in the program are set by the FCIC under
applicable law. MPCI provides coverage for insured crops against
substantially all natural perils. Purchasing an MPCI policy permits a farmer
to insure against the risk that his crop yield for any growing season will be
less than 50% to 75% (as selected by the farmer at the time of policy
application or renewal) of his historic crop yield. If a farmer's crop yield
for the year is greater than the yield coverage he selected, no payment is
made to the farmer under the MPCI program. However, if a farmer's crop yield
for the year is less than the yield coverage selected, MPCI entitles the
farmer to a payment equal to the yield shortfall multiplied by 60% to 100% of
the price for such crop (as selected by the farmer at the time of policy
application or renewal) for that season as set by the FCIC.
In order to encourage farmers to participate in the MPCI program and thereby
reduce dependence on traditional disaster relief measures, the 1994 Reform Act
established CAT Coverage as a new minimum level of MPCI coverage, which
farmers may purchase upon payment of a fixed administrative fee of $50 per
policy instead of any premium. CAT Coverage insures 50% of historic crop
yield at 60% of the FCIC-set crop price for the applicable commodities
standard unit of measure, i.e., bushel, pound, etc. CAT Coverage can be
obtained from private insurers such as the Company or, in certain states, from
USDA field offices.
In addition to CAT Coverage, MPCI policies that provide a greater level of
protection than the CAT Coverage level are also offered ("Buy-up Coverage").
Most farmers purchasing MPCI have historically purchased at Buy-up Coverage
levels, with the most frequently sold policy providing coverage for 65% of
historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up
Coverages require payment of a premium in an amount determined by a formula
set by the FCIC. Buy-up Coverage can only be purchased from private insurers.
The Company focuses its marketing efforts on Buy-up Coverages, which have
higher premiums and which the Company believes will continue to appeal to
farmers who desire, or whose lenders encourage or require, revenue protection.
The number of MPCI Buy-up policies written has historically tended to increase
after a year in which a major natural disaster adversely affecting crops
occurs, and to decrease following a year in which favorable weather conditions
prevail.
The Company, like other private insurers participating in the MPCI program,
generates revenues from the MPCI program in two ways. First, it markets,
issues and administers policies, for which it receives administrative fees;
and second, it participates in a profit-sharing arrangement in which it
receives from the government a portion of the aggregate profit, or pays a
portion of the aggregate loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex profit sharing formula established by the FCIC.
Under this formula, the primary factors that determine the Company's MPCI
profit or loss share are (i) the gross premiums the Company is credited with
having written; (ii) the amount of such credited premiums retained by the
Company after ceding premiums to certain federal reinsurance pools; and (iii)
the loss experience of the Company's insureds. The following discussion
provides more detail about the implementation of this profit sharing formula.
Gross Premiums
For each year, the FCIC sets the formulas for determining premiums for
different levels of Buy-up Coverage. Premiums are based on the type of crop,
acreage planted, farm location, price per bushel for the insured crop as set
by the FCIC for that year, and other factors. The federal government will
generally subsidize a portion of the total premium set by the FCIC and require
farmers to pay the remainder. Cash premiums are received by the Company from
farmers only after the end of a growing season and are then promptly remitted
to the federal government. Although applicable federal subsidies change from
year to year, such subsidies will range up to approximately 40% of the Buy-up
Coverage premium for 1996 depending on the crop insured and the level of Buy-
up Coverage purchased, if any. Federal premium subsidies are recorded on the
Company's behalf by the government. For purposes of the profit sharing
formula, the Company is credited with having written the full amount of
premiums paid by farmers for Buy-up Coverages, plus the amount of any related
federal premium subsidies (such total amount, its "MPCI Premium").
As previously noted, farmers pay an administrative fee of $50 per policy but
are not required to pay any premium for CAT Coverage. However, for purposes
of the profit sharing formula, the Company is credited with an imputed premium
(its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount of
such MPCI Imputed Premium credited is determined by formula. In general, such
MPCI Imputed Premium will be less than 50% of the premium that would be
payable for a Buy-up Coverage policy that insured 65% of historic crop yield
at 100% of the FCIC-set crop price per standard unit of measure for the
commodity, historically the most frequently sold Buy-up Coverage. For income
statement purposes under GAAP, the Company's gross premiums written for MPCI
consist only of its MPCI Premiums and do not include MPCI Imputed Premiums.
Reinsurance Pools
Under the MPCI program, the Company must allocate its MPCI Premium or
MPCI Imputed Premium in respect of a farm to one of three federal reinsurance
pools, at its discretion. These pools provide private insurers with different
levels of reinsurance protection from the FCIC on the business they have
written. For insured farms allocated to the "Commercial Pool", the Company,
at its election, generally retains 50% to 100% of the risk and the FCIC
assumes 0% - 50% of the risk; for those allocated to the "Developmental Pool",
the Company generally retains 35% of the risk and the FCIC assumes 65%; and
for those allocated to the "Assigned Risk Pool", the Company retains 20% of
the risk and the FCIC assumes 80%. The MPCI Retention is protected by private
third party stop loss treaties.
Although the Company in general must agree to insure any eligible farm, it is
not restricted in its decision to allocate a risk to any of the three pools,
subject to a minimum aggregate retention of 35% of its MPCI Premiums and MPCI
Imputed Premiums written. The Company uses a sophisticated methodology
derived from a comprehensive historical data base to allocate MPCI risks to
the federal reinsurance pools in an effort to enhance the underwriting profits
realized from this business. The Company has crop yield history information
with respect to over 100,000 farms in the United States. Generally, farms or
crops which, based on historical experience, location and other factors,
appear to have a favorable net loss ratio and to be less likely to suffer an
insured loss, are placed in the Commercial Pool. Farms or crops which appear
to be more likely to suffer a loss are placed in the Developmental Pool or
Assigned Risk Pool. The Company has historically allocated the bulk of its
insured risks to the Commercial Pool.
The Company's share of profit or loss depends on the aggregate amount of MPCI
Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention"). As previously
described, the Company purchases reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds
Under the MPCI program the Company pays losses to farmers through a federally
funded escrow account as they are incurred during the growing season. The
Company requests funding of the escrow account when a claim is settled, and
the escrow account is funded by the federal government within three business
days. After a growing season ends, the aggregate loss experience of the
Company's insureds in each state for risks allocated to each of the three
reinsurance pools is determined. If, for all risks allocated to a particular
pool in a particular state, the Company's share of losses incurred is less
than its aggregate MPCI Retention, the Company shares in the gross amount of
such profit according to a schedule set by the FCIC for each year. The profit
and loss sharing percentages are different for risks allocated to each of the
three reinsurance pools, and private insurers will receive or pay the greatest
percentage of profit or loss for risks allocated to the Commercial Pool.
The percentage split between private insurers and the federal government of
any profit or loss which emerges from an MPCI Retention is set by the FCIC and
generally is adjusted from year to year. For 1995, 1996 and 1997 crop years,
the FCIC increased the maximum potential profit share of private insurers for
risks allocated to the Commercial Pool above the maximum potential profit
share set for 1994, without increasing the maximum potential share of loss for
risks allocated to that pool for 1995. This change increased the potential
profitability of risks allocated to the Commercial Pool by private insurers.
The following table presents MPCI Premiums, MPCI Imputed Premiums, and
underwriting gains or losses of IGF for the periods indicated:
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
MPCI Premiums $44,325 $53,408 $82,102
MPCI Imputed Premiums 2,171 19,552 29,744
Gross Underwriting Gain 4,344 10,870 15,801
Net Private Third-Party
Reinsurance Expense
And Other (1,087) (1,217) (3,524)
Net Underwriting Gain 3,257 9,653 12,277
MPCI Fees and Reimbursement Payments
The Company receives Buy-up Expense Reimbursement Payments from the FCIC
for writing and administering Buy-up Coverage policies. These payments provide
funds to compensate the Company for its expenses, including agents'
commissions and the costs of administering policies and adjusting claims. In
1994, the Buy-up Expense Reimbursement Payments were set at 31% of the MPCI
Premium. In 1995 and 1996, this payment has also been set at 31% of the MPCI
Premium, but it is scheduled to be reduced to 29% in 1997, 28% in 1998, and
27.5% in 1999. Although the 1994 Reform Act directs the FCIC to alter program
procedures and administrative requirements so that the administrative and
operating costs of private insurance companies participating in the MPCI
program will be reduced in an amount that corresponds to the reduction in the
expense reimbursement rate, there can be no assurance that the Company's
actual costs will not exceed the expense reimbursement rate.
Farmers are required to pay a fixed administrative fee of $50 per policy in
order to obtain CAT Coverage. This fee is retained by the Company to defray
the cost of administration and policy acquisition. The Company also receives,
from the FCIC, a separate CAT LAE Reimbursement Payment equal to approximately
13.0% of MPCI Imputed Premiums in respect of each CAT Coverage policy it
writes and a small MPCI Excess LAE Reimbursement Payment. In general, fees
and payments received by the Company in respect of CAT Coverage are
significantly lower than those received for Buy-up Coverage.
In addition to premium revenues, the Company received the following fees and
commissions from its crop insurance segment for the periods indicated:
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
CAT Coverage Fees $ 74 $ 1,298 $ 1,181
Buy-up Expense Reimbursement
Payments 13,845 16,366 24,971
CAT LAE Reimbursement
Payments and MPCI Excess
LAE Reimbursement Payments 107 3,427 5,753
Total $14,026 $21,091 $31,905
Crop Revenue Coverage
The Company has recently introduced a new product in its crop insurance
business called Crop Revenue Coverage ("CRC"). In contrast to standard
MPCI coverage, which features a yield guarantee or coverage for the loss of
production, CRC provides the insured with a guaranteed revenue stream by
combining both yield and price variability protection. CRC protects against a
grower's loss of revenue resulting from fluctuating crop prices and/or low
yields by providing coverage when any combination of crop yield and price
results in revenue that is less than the revenue guarantee provided by the
policy. CRC was approved by the FCIC as a pilot program for revenue insurance
coverage plans for the 1996 crop year, and has been available for corn and
soybeans in all counties in Iowa and Nebraska beginning with such crop year.
CRC policies represent approximately 30% of the combined corn policies written
by IGF in Iowa and Nebraska for the 1996 crop year. In July, 1996, the FCIC
announced that CRC will be made available in the fall of 1996 for winter wheat
in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas and
Washington and in parts of Montana.
Revenue insurance coverage plans such as CRC are the result of the 1994 Reform
Act, which directed the FCIC to develop a pilot crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company other than the
Company under the auspices of this pilot program, which authorizes private
companies to design alternative revenue coverage plans and to submit them for
review, approval and endorsement by the FCIC. As a result, although CRC is
administered and reinsured by the FCIC and risks are allocated to the federal
reinsurance pools, CRC remains partially influenced by the private sector,
particularly with respect to changes in its rating structure.
CRC plans to use the policy terms and conditions of the Actual Production
History ("APH") plan of MPCI as the basic provisions for coverage. The APH
provides the yield component by utilizing the insured's historic yield
records. The CRC revenue guarantee is the producer's approved APH times the
coverage level, times the higher of the spring futures price or harvest
futures price (in each case, for post-harvest delivery) of the insured crop
for each unit of farmland. The coverage levels and exclusions in a CRC policy
are similar to those in a standard MPCI policy. As with MPCI policies, the
Company receives from the FCIC an expense reimbursement payment equal to 31%
of gross premiums written in respect of each CRC policy it writes. See " -
MPCI Fees and Reimbursement Payments". This expense reimbursement payment is
scheduled to be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999.
CRC protects revenues by extending crop insurance protection based on APH to
include price as well as yield variability. Unlike MPCI, in which the crop
price component of the coverage is set by the FCIC prior to the growing season
and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice
in the CRC plan. The spring futures price is used to establish the initial
policy revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to
recompute the revenue guarantee (and resulting indemnity payments) when the
harvest price is higher than the spring price.
The industry (including the Company) and the FCIC are reviewing the current
rating structure supporting the CRC product. The Company is studying this
issue and other factors as part of its MPCI underwriting and risk allocation
plan, although the Company currently expects to offer CRC in the regions where
it can be sold for winter wheat in 1996 because of high interest in the
product among farmers. Based on crop performance to date in the regions where
it has written CRC for spring planted crops, the Company does not believe that
any potential underpricing of CRC policies it has written for such crops will
adversely affect its results of operations.
Crop Hail
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary HAILPLUS
product which combines the application and underwriting process for MPCI and
hail coverages. The HAILPLUS product tends to produce less volatile loss
ratios than the stand alone product since the combined product generally
insures a greater number of acres, thereby spreading the risk of damage over a
larger insured area. Approximately 50% of IGF's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide insurance
against hail damage, under crop hail coverages farmers can receive payments
for hail damage which would not be severe enough to require a payment under an
MPCI policy. The Company believes that offering crop hail insurance enables
it to sell more MPCI policies than it otherwise would.
Named Peril
In addition to crop hail insurance, the Company also sells a small volume of
insurance against crop damage from other specific named perils. These
products cover specific crops, including hybrid seed corn, cranberries,
cotton, tomatoes and onions, and are generally written on terms that are
specific to the kind of crop and farming practice involved and the amount of
actuarial data available. The Company plans to seek potential growth
opportunities in this niche market by developing basic policies on a diverse
number of named crops grown in a variety of geographic areas, and to offer
these polices primarily to large producers through certain select agents. The
Company's experienced product development team will develop the underwriting
criteria and actuarial rates for the named peril coverages. As with the
Company's other crop insurance products, loss adjustment procedures for named
peril policies are handled by full-time professional claims adjusters who have
specific agronomy training with respect to the crop and farming practice
involved in the coverage.
Third Party Reinsurance In Effect For 1996
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss reinsurance from other private
insurers in addition to reinsurance obtained from the FCIC. In addition,
since the FCIC and state regulatory authorities require IGF to limit its
aggregate writings of MPCI Premiums and MPCI Imputed Premiums to no
more than 900% of capital, and retain a net loss exposure of not in excess
of 50% of capital, IGF may also obtain reinsurance from private insurers in
order to permit it to increase its premium writings. Such private reinsurance
would not eliminate the Company's potential liability in the event a reinsurer
was unable to pay or losses exceeded the limits of the stop loss coverage. For
crop hail insurance, the Company has in effect quota share reinsurance of 10%
of premiums, although the reinsurer is only liable to participate in losses of
the Company up to a 150% pure loss ratio. The Company also has stop loss
treaties for its crop hail business which reinsure approximately 45% of losses
in excess of an 80% pure loss ratio up to a 100% pure loss ratio and 95% of
losses in excess of a 100% pure loss ratio up to a 140% pure loss ratio. With
respect to its MPCI business, the Company has stop loss treaties which
reinsure 93.75% of the underwriting losses experienced by the Company to the
extent that aggregate losses of its insureds nationwide are in excess of 100%
of the Company's MPCI Retention up to 125% of MPCI Retention. The Company
also has an additional layer of MPCI stop loss reinsurance which covers 95% of
the underwriting losses experienced by the Company to the extent that
aggregate losses of its insureds nationwide are in excess of 125% of MPCI
Retention up to 150% of MPCI Retention.
Based on a review of the reinsurers' financial health and reputation in the
insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they therefore can meet
their obligations to the Company under the terms of the reinsurance treaties.
Reserves for uncollectible reinsurance are provided as deemed necessary. The
following table provides information with respect to all reinsurers on the
aforementioned IGF reinsurance agreements:
Symons International Group, Inc.
For The Year Ended December 31, 1996
(In Thousands)
Reinsurers A.M. Best Rating Ceded Premiums
Folksam International
Insurance Co. Ltd. A-(2) $ 587
Frankona
Ruckversicherungs AG A(3) $ 400
Granite Re NR(4) $1,609
Insurance Corporation
Of Hannover A- $1,159
Liberty Mutual Insurance
Co. (UK) Ltd A $ 364
Partner Reinsurance
Company Ltd. A $1,587
R & V Versicherung AG NR(5) $ 852
Scandinavian Reinsurance
Company Ltd. A+(6) $1,393
(1) For the year ended December 31, 1996, total ceded premiums were $86,393.
(2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
(3) An A.M. Best rating of "A" is the third highest of 15 ratings.
(4) Granite Re, an affiliate of the Company, is an insurer domiciled in
Barbados which has never applied for or requested such a rating.
(5) R + V Versicherung AG is an insurer domiciled outside of the United
States and, as such, does not have a rating from A.M. Best.
(6) An A.M. Best rating of "A+" is the second highest of 15 ratings.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 31 states
through approximately 2,500 agents associated with approximately 1,200
independent insurance agencies, with its primary geographic concentration in
the states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has,
however, begun to diversify outside of the Midwest and Texas in order to
reduce the risk associated with geographic concentration. IGF is licensed in
20 states and markets its products in additional states through a fronting
agreement with a third party insurance company. IGF has a stable agency base
and it experienced negligible turnover in its agencies in 1996. Through its
agencies, IGF targets farmers with an acreage base of at least 1,000 acres.
Such larger farms typically have a lower risk exposure since they tend to
utilize better farming practices and to have noncontiguous acreage, thereby
making it less likely that the entire farm will be affected by a particular
occurrence. Many farmers with large farms tend to buy or rent acreage which
is increasingly distant from the central farm location. Accordingly, the
likelihood of a major storm (wind, rain or hail) or a freeze affecting all of
a particular farmer's acreage decreases.
The following table presents MPCI Premiums written by IGF by state for the
years ended December 31, 1994, 1995 and 1996.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
State
Texas $ 6,751 $11,075 $12,361
Iowa 8,506 9,296 15,205
Illinois 7,302 7,305 11,228
Kansas 2,003 3,476 5,249
Minnesota 1,965 2,026 2,244
Nebraska 1,536 1,992 3,206
Indiana 1,486 1,875 3,870
Colorado 1,526 1,771 3,334
Missouri 1,785 1,718 2,427
North Dakota 1,153 1,638 2,796
All Other 10,312 11,236 20,182
Total $44,325 $53,408 $82,102
The following table presents gross premiums written by IGF by state for crop
hail coverages for the years ended December 31, 1994, 1995 and 1996.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
State
Iowa $ 3,954 $ 4,667 $ 6,590
Minnesota 318 2,162 2,300
Colorado 964 1,775 1,651
Nebraska 1,022 1,477 1,567
Montana 239 1,355 5,632
North Dakota 1,087 1,283 2,294
Kansas 765 846 661
South Dakota 124 756 1,457
Wisconsin 315 458 370
Mississippi 277 400 482
All Other 1,065 1,787 4,953
Total $10,130 $16,966 $27,957
The Company seeks to maintain and develop its agency relationships by
providing agencies with faster, more efficient service as well as marketing
support. IGF owns an IBM AS400 along with all peripheral and networking
equipment and has developed its own proprietary software package, Aplus, which
allows agencies to quote and examine various levels of coverage on their own
personal computers. The Company has seven regional managers who are
responsible for the Company's field operations within an assigned geographic
territory, including maintaining and enhancing relationships with agencies in
those territories. IGF also uses application documentation which is designed
for simplicity and convenience. The Company believes that IGF is the only
crop insurer which has created a single application for MPCI and hail
coverage.
IGF generally compensates its agents based on a percentage of premiums
produced and, in the case of CAT Coverage and crop hail insurance, a
percentage of underwriting gain realized with respect to business produced.
This compensation structure is designed to encourage agents to place
profitable business with IGF (which tends to be insurance coverages for larger
farms with respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact that
rates are established by the FCIC, the primary underwriting functions
performed by the Company's personnel with respect to MPCI coverage are (i)
selecting of marketing territories for MPCI based on the type of crops being
grown in the area, typical weather patterns and loss experience of both
agencies and farmers within a particular area, (ii) recruiting agencies within
those marketing territories which service larger farms and other more
desirable risks, and (iii) ensuring that policies are underwritten in
accordance with the FCIC rules.
With respect to its hail coverage, IGF seeks to minimize its underwriting
losses by maintaining an adequate geographic spread of risk by rate group.
In addition, IGF establishes sales closing dates after which hail policies will
not be sold. These dates are dependent on planting schedules, vary by
geographic location and range from May 15 in Texas to July 15 in North Dakota.
Prior to these dates, crops are either seeds in the ground or young growth
newly emerged from the ground and hail damage to crops in either of these
stages of growth is minimal. The cut-off dates prevent farmers from adversely
selecting against IGF by waiting to purchase hail coverage until a storm is
forecast or damage has occurred. For its hail coverage, IGF also sets limits
by policy ($400,000 each) and by township ($2.0 million per township). The
Company also uses a daily report entitled "Severe Weather Digest" which shows
the time and geographic location of all extraordinary weather events to check
incoming policy applications against possible previous damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters on a
part-time basis for loss adjusting services, IGF employs full-time
professional claims adjusters who are agronomy trained as well as part-time
adjusters. Management believes that the professionalism of the IGF full-time
claims staff coupled with their exclusive commitment to IGF helps to ensure
that claims are handled in a manner so as to reduce overpayment of losses
experienced by IGF. The adjusters are located throughout IGF's marketing
territories. In order to promote a rapid claims response, the Company has
deployed several small four wheel drive vehicles for use by its adjusters.
The adjusters report to a field service representative in their territory who
manages adjusters' assignments, assures that all preliminary estimates for
loss reserves are accurately reported and assists in loss adjustment. Within
72 hours of reported damage, a loss notice is reviewed by an IGF service
office claims manager and a preliminary loss reserve is determined which is
based on the representative's and/or adjuster's knowledge of the area or the
particular storm which caused the loss. Generally, within approximately two
weeks, hail and MPCI claims are examined and reviewed on site by an adjuster
and the insured signs a proof of loss form containing a final release. As
part of the adjustment process, IGF's adjusters use Global Positioning System
Units, which are hand held devices using navigation satellites to determine
the precise location where a claimed loss has occurred. IGF has a team of
catastrophic claims specialists who are available on 48 hours notice to travel
to any of IGF's six regional service offices to assist in heavy claim work
load situations.
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies and, with respect to CAT Coverage, USDA
field service offices in certain areas. However, under the 1996 Reform Act,
effective for the 1997 crop year, USDA field service offices may offer CAT
Coverage in a state only if the Secretary of Agriculture determines that there
is an insufficient number of approved insurance providers operating in the
state to provide CAT Coverage to producers adequately.
Many of the Company's competitors have substantially greater financial and
other resources than the Company, and there can be no assurance that the
Company will be able to compete effectively against such competitors in the
future. The Company competes on the basis of the commissions paid to agents,
the speed with which claims are paid, the quality and extent of services
offered, the reputation and experience of its agency network and, in the case
of private insurance, policy rates. Because the FCIC establishes the rates
that may be offered for MPCI policies, the Company believes that quality of
service and level of commissions offered to agents are the principal factors
on which it competes in the area of MPCI. The Company believes that the crop
hail and other named peril crop insurance industry is extremely rate-sensitive
and the ability to offer competitive rate structures to agents is a critical
factor in the agent's ability to write crop hail and other named peril
premiums. Because of the varying state laws regarding the ability of agents
to write crop hail and other named peril premiums prior to completion of rate
and form filings (and, in some cases, state approval of such filings), a
company may not be able to write its expected premium volume if its rates are
not competitive.
The crop insurance industry has become increasingly consolidated. From the
1985 crop year to the 1996 crop year, the number of insurance companies having
agreements with the FCIC to sell and service MPCI policies has declined from
50 to 16. The Company believes that IGF is the fifth largest MPCI crop
insurer in the U.S. based on premium information compiled in 1995 by the FCIC
and NCIS. The Company's primary competitors are Rain & Hail Insurance
Service, Inc. (affiliated with Cigna Insurance Company), Rural Community
Insurance Services, Inc. (which is owned by Norwest Corporation), American
Growers Insurance Company (Redland), Crop Growers Insurance, Inc., Great
American Insurance Company, Blakely Crop Hail (an affiliate of Farmers
Alliance Mutual Insurance Company) and North Central Crop Insurance, Inc.
The Company believes that in order to compete successfully in the crop insurance
business it will have to market and service a volume of premiums sufficiently
large to enable the Company to continue to realize operating efficiencies in
conducting its business. No assurance can be given that the Company will be
able to compete successfully if this market further consolidates.
Reserves for Losses and Loss Adjustment Expenses
Loss reserves are estimates, established at a given point in time based on
facts then known, of what an insurer predicts its exposure to be in connection
with incurred losses. LAE reserves are estimates of the ultimate liability
associated with the expense of settling all claims, including investigation
and litigation costs resulting from such claims. The actual liability of an
insurer for its losses and LAE reserves at any point in time will be greater
or less than these estimates.
The Company maintains reserves for the eventual payment of losses and LAE
with respect to both reported and unreported claims. Nonstandard automobile
reserves for reported claims are established on a case-by-case basis. The
reserving process takes into account the type of claim, policy provisions
relating to the type of loss and historical paid loss and LAE for similar
claims. Reported crop insurance claims are reserved based upon preliminary
notice to the Company and investigation of the loss in the field. The
ultimate settlement of a crop loss is based upon either the value or the yield
of the crop.
Under the second method, loss and LAE reserves for claims that have been
incurred but not reported are estimated based on many variables including
historical and statistical information, inflation, legal developments,
economic conditions, trends in claim severity and frequency and other factors
that could affect the adequacy of loss reserves.
The following loss reserve development tables illustrate the change over time
of reserves established for claims and claims expense at the end of various
calendar years for the nonstandard automobile segment of the Company (not
including Superior), and for Superior separately. The first three line items
show the reserves as originally reported at the end of the stated year. The
table also includes the cumulative amounts paid as of the end of successive
years with respect to that reserve liability. The "liabilities reestimated"
section indicates reestimates of the original recorded reserve as of the end
of each successive year based on additional information pertaining to such
liabilities. The last portion of the table compares the latest reestimated
reserve to the reserve amount as originally established and indicates whether
or not the original recorded amount was adequate or inadequate to cover the
estimated costs of unsettled claims.
The reserve for claims and claims expense is an accumulation of the estimated
amounts necessary to settle all outstanding claims as of the date for which
the reserve is stated. The reserve and payment data shown below have been
reduced for estimated subrogation and salvage recoveries. The reserve
estimates are based upon the factors in each case and experience with similar
cases. No attempt is made to isolate explicitly the impact of inflation from
the multitude of factors influencing the reserve estimates though inflation is
implicitly included in the estimates. The Company and Superior regularly
update their reserve forecasts by type of claim as new facts become known and
events occur which affect unsettled claims. The Company and Superior do not
discount their reserves for unpaid claims and claims expense.
The following loss reserve development tables are cumulative and, therefore,
ending balances should not be added since the amount at the end of each
calendar year includes activity for both the current and prior years.
Conditions and trends that have affected the development of liability in the
past may not necessarily reoccur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies from the table.
Symons International Group, Inc.
Nonstandard Automobile Insurance Only
(Not Including Superior)
For The Years Ended December 31,
(In Thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Gross Reserves For
Unpaid Losses And
LAE $26,819 $30,844 $27,145
Deduct: Reinsurance
Recoverable 10,927 9,921 8,124
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $4,748 $10,775 $14,346 $17,083 $17,449 $18,706 $16,544 $16,522 $20,923 $19,021
Paid Cumulative
As Of:
One Year Later 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059 8,082
Two Years Later 4,318 7,510 10,388 10,930 12,723 14,934 12,966 8,806
Three Years Later 4,433 7,875 12,107 12,497 14,461 16,845 13,142
Four Years Later 4,146 8,225 12,863 13,271 15,071 16,641
Five Years Later 4,154 8,513 13,147 13,503 14,903
Six Years Later 4,297 8,546 13,237 13,500
Seven Years Later 4,297 8,561 13,238
Eight Years Later 4,295 8,561
Nine Years Later 4,295
Liabilities
Reestimated As Of:
One Year Later 3,434 11,208 15,060 15,103 16,797 18,872 16,747 17,000 21,748
Two Years Later 4,588 11,413 14,178 14,745 16,943 19,599 17,023 17,443
Three Years Later 4,702 10,923 14,236 14,993 16,914 19,662 17,009
Four Years Later 4,311 10,791 14,479 14,809 16,750 19,651
Five Years Later 4,234 10,877 14,436 14,659 16,746
Six Years Later 4,320 10,825 14,468 14,659
Seven Years Later 4,278 10,922 14,468
Eight Years Later 4,309 10,921
Nine Years Later 4,309
Net Cumulative
(Deficiency) Or
Redundancy 439 (146) (22) 2,424 695 (945) (465) (921) (825)
Expressed As A
Percentage Of
Unpaid Losses And
LAE 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.8%) (5.6%) (3.9%)
Net reserves for the nonstandard automobile business of the Company increased
substantially in 1988, 1989, 1990 and 1995. Such changes were due entirely to
changes in the premium volume of the nonstandard automobile business for those
years. In general, the Company's nonstandard automobile segment has not
developed significant redundancies or deficiencies as compared to original
reserves. A deficiency of $956,000, or 5.1%, of original reserves developed
with respect to loss reserves at December 31, 1992 due to an unexpected
increase in loss severity and average claim cost.
Superior Insurance Company
For The Years Ended December 31,
(In Thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Gross Reserves For
Unpaid Losses And
LAE $52,610 $54,577 $47,112 $52,413
Deduct: Reinsurance
Recoverable 68 1,099 987 0
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125 $52,413
Paid Cumulative
As Of:
One Year Later 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227 25,454
Two Years Later 25,526 34,122 43,547 44,128 40,513 41,231 38,908 35,141
Three Years Later 29,670 39,524 48,037 47,442 44,183 43,198 41,107
Four Years Later 32,545 41,257 49,064 49,256 44,708 44,010
Five Years Later 33,242 41,492 49,522 49,365 45,196
Six Years Later 33,395 41,716 49,327 49,476
Seven Years Later 33,535 41,576 49,425
Eight Years Later 33,469 41,621
Nine Years Later 33,408
Liabilities
Reestimated As Of:
One Year Later 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564 37,933
Two Years Later 37,118 49,327 53,715 56,626 50,520 50,474 50,006 42,989
Three Years Later 37,932 49,051 53,022 55,147 51,854 46,624 46,710
Four Years Later 38,424 49,436 52,644 57,720 49,739 44,823
Five Years Later 38,580 49,297 54,030 56,824 48,592
Six Years Later 38,584 50,701 53,697 55,770
Seven Years Later 39,965 50,515 53,683
Eight Years Later 39,861 50,521
Nine Years Later 39,998
Net Cumulative
(Deficiency) Or
Redundancy (13,553) (12,670) 2,741 4,348 11,980 5,832 10,489 8,193 8,192
Expressed As A
Percentage Of
Unpaid Losses And
LAE (51.6%) (33.5%) 4.9% 7.2% 19.9% 10.3% 4.8% 9.2% 17.8%
Net reserves for Superior increased substantially through 1990 before
decreasing in 1992. Such changes were due to changes in premium volume and
reduction of reserve redundancies. The decrease in 1995 reflects the
Company's curtailment of marketing efforts and writings in Illinois,
Mississippi, Tennessee, Texas and Washington resulting from more restrictive
underwriting criteria, inadequately priced business in these states and other
unfavorable marketing conditions. Significant deficiencies developed in
reserves established as of December 31 of each of 1986 through 1988 which were
substantially offset by reserve additions in 1989 due to changes in reserve
methodology. With respect to reserves established as of December 31, 1991 and
1992, Superior developed significant redundancies due to conservative levels
of case basis and IBNR reserves. Beginning in 1993, Superior began to adjust
its reserving methodology to reduce its redundancies and to take steps to
close older claim files which still carried redundant reserves.
The Company and Superior employ an independent actuary to annually evaluate
and certify the adequacy of their loss and LAE reserves.
Investments
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate.
The Company's investment policies are determined by the Company's Board of
Directors and are reviewed on a regular basis. The Company's investment
strategy is to maximize the after-tax yield of the portfolio while emphasizing
the stability and preservation of the Company's capital base. Further, the
portfolio is invested in types of securities and in an aggregate duration
which reflect the nature of the Company's liabilities and expected liquidity
needs. The investment portfolios of the Company are managed by third party
professional administrators, including Goldman Sachs & Co., in accordance with
pre-established investment policy guidelines established by the Company. The
investment portfolios of the Company at December 31, 1996 consisted of the
following:
Symons International Group, Inc.
For The Year Ended December 31, 1996
(In Thousands)
Amortized Estimated
Type of Investment Cost Market Value
Fixed Maturities:
U.S. Treasury Securities and
Obligations of U.S. Government
Corporation and Agencies $ 55,034 $ 55,144
Foreign Governments 1,515 1,485
Obligations of States and
Political Subdivisions 2,945 2,952
Corporate Securities 67,545 68,100
Total Fixed Maturities $127,039 $127,681
Equity Securities:
Preferred stocks 0 0
Common Stocks 25,734 27,920
Short Term Investments 9,565 (1) 9,565
Real Estate 466 466
Mortgage Loans 2,430 2,430
Other Loans 75 75
Total Investments $165,309 $168,137
(1) Due to the nature of crop insurance, the Company must maintain short-term
investments to fund amounts due under the MPCI program.
The following table sets forth, as of December 31, 1995 and 1996 the
composition of the fixed maturity securities portfolio of the Company by time
to maturity.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1995 1996
Market Percent Total Market Percent Total
Time to Maturity Value Market Value Value Market Value
1 Year or Less $ 4,610 35.6% $ 6,423 5.0%
More Than 1 Year
Through 5 Years 5,051 39.1% 71,086 55.7%
More Than 5 Years
Through 10 Years 3,270 25.3% 43,404 34.0%
More Than 10 Years 0 0% 6,768 5.3%
Total $12,931 100.0% $127,681 100.0%
The following table sets forth, as of December 31, 1995 and 1996 the ratings
assigned to the fixed maturity securities of the Company.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1995 1996
Market Percent Total Market Percent Total
Rating (1) Value Market Value Value Market Value
Aaa or AAA $ 7,753 60.0% $ 50,444 39.5%
Aa or AA 680 5.2% 2,976 2.3%
A 257 2.0% 50,365 39.4%
Baa or BBB 100 0.8% 11,671 9.1%
Ba or BB 0 0% 2,840 2.3%
Other Below Investment
Grade 0 0% 2,091 1.6%
Not Rated (2) 4,141 32.0% 7,294 5.8%
Total $12,931 100.0% $127,681 100.0%
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available are based on ratings assigned by Standard & Poor's Corporation.
(2) These securities were not rated by the rating agencies. However, these
securities are designated as Category 1 securities by the NAIC, which is the
equivalent rating of A or better.
The investment results of the Company for the periods indicated are set forth
below:
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Net Investment Income (1) $ 1,241 $ 1,173 $ 6,733
Average Investment
Portfolio (2) $20,628 $22,653 $153,565
Pre-tax Return On Average
Investment Portfolio 6.0% 5.2% 5.9%
Net Realized Gains (Losses) $ (159) $ (344) $ (1,015)
(1) Includes dividend income received in respect of holdings of common stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio.
Ratings
A.M. Best has currently assigned a B+ rating to Superior and a B- rating to
Pafco. Pafco's rating has been confirmed by A.M. Best at a B- rating
subsequent to the Acquisition. Superior's rating was reduced from A- to B+ as
a result of the leverage of GGS Holdings resulting from indebtedness assumed
in connection with the Acquisition. IGF recently received an "NA-2" rating (a
"rating not assigned" category for companies that do not meet A.M. Best's
minimum size requirement) from A.M. Best but intends to seek a revised rating
after the infusion of capital from the proceeds of the Offering, although
there can be no assurance that a revised rating will be obtained or as to the
level of any such rating.
A.M. Best's ratings are based upon a comprehensive review of a company's
financial performance, which is supplemented by certain data, including
responses to A.M. Best's questionnaires, phone calls and other correspondence
between A.M. Best analysts and company management, quarterly NAIC filings,
state insurance department examination reports, loss reserve reports, annual
reports, company business plans and other reports filed with state insurance
departments. A.M. Best undertakes a quantitative evaluation, based upon
profitability, leverage and liquidity, and a qualitative evaluation, based
upon the composition of a company's book of business or spread of risk, the
amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus, the soundness of a company's capital
structure, the extent of a company's market presence, and the experience and
competence of its management. A.M. Best's ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations
to policyholders. A.M. Best's ratings are not a measure of protection
afforded investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth
highest rating classifications, respectively, out of 15 ratings. A "B+"
rating is awarded to insurers which, in A.M. Best's opinion, "have
demonstrated very good overall performance when compared to the standards
established by the A.M. Best Company" and "have a good ability to meet their
obligations to policyholders over a long period of time." A "B-" rating is
awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate
overall performance when compared to the standards established by the A.M.
Best Company" and "generally have an adequate ability to meet their
obligations to policyholders, but their financial strength is vulnerable to
unfavorable changes in underwriting or economic conditions". There can be no
assurance that such ratings or changes therein will not in the future
adversely affect the Company's competitive position.
Regulation
General
As a general rule, an insurance company must be licensed to transact insurance
business in each jurisdiction in which it operates, and almost all significant
operations of a licensed insurer are subject to regulatory scrutiny. Licensed
insurance companies are generally known as "admitted" insurers. Most states
provide a limited exemption from licensing for insurers issuing insurance
coverages that generally are not available from admitted insurers. These
coverages are referred to as "surplus lines" insurance and these insurers as
"surplus lines" or "non-admitted" companies.
The Company's admitted insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which
delegate regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the
state and whether it is an admitted or non-admitted insurer, such authority
may extend to such things as (i) periodic reporting of the insurer's financial
condition; (ii) periodic financial examination; (iii) approval of rates and
policy forms; (iv) loss reserve adequacy; (v) insurer solvency; (vi) the
licensing of insurers and their agents; (vii) restrictions on the payment of
dividends and other distributions; (viii) approval of changes in control; and
(ix) the type and amount of permitted investments.
Pafco, IGF and Superior are subject to triennial examinations by state
insurance regulators. Such examinations were last conducted for Pafco as of
June 30, 1992 (covering the period to that date from September 30, 1990), for
IGF as of March 31, 1992 (covering the period to that date from December 31,
1987), and Superior Insurance Company as of December 31, 1993 (covering the
period to that date from January 1, 1991). The two subsidiaries of Superior,
Superior American Insurance Company and Superior Guaranty Insurance
Company, had examinations conducted as of October 31, 1996 (covering the
period to that date from the subsidiaries' inception on December 9, 1994).
Pafco will have a triennial examination in 1997. Superior and IGF have not
been notified of the dates of their next examination.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding companies
in Florida and Indiana, where they are domiciled. These laws, among other
things, (i) require the Company to file periodic information with state
regulatory authorities including information concerning its capital structure,
ownership, financial condition and general business operations; (ii) regulate
certain transactions between the Company, its affiliates and IGF, Pafco and
Superior (the "Insurers"), including the amount of dividends and other
distributions and the terms of surplus notes; and (iii) restrict the ability
of any one person to acquire certain levels of the Company's voting securities
without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of Common Stock of the
Company would be presumed to have acquired control of IGF unless the Indiana
Commissioner, upon application, has determined otherwise. In addition, any
purchaser of approximately 10% or more of the outstanding shares of Common
Stock of the Company will be presumed to have acquired control of Pafco and
Superior unless the Commissioner of the Indiana Department of Insurance
("Indiana Commissioner") and the Commissioner of the Florida Department of
Insurance ("Florida Commissioner"), upon application, have determined
otherwise.
Indiana law defines as "extraordinary" any dividend or distribution which,
together with all other dividends and distributions to shareholders within the
preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus
as regards policyholders as of the end of the preceding year, or (ii) the
prior year's net income. Dividends which are not "extraordinary" may be paid
ten days after the Indiana Department of Insurance receives notice of their
declaration. "Extraordinary" dividends and distributions may not be paid
without prior approval of the Indiana Commissioner or until the Indiana
Commissioner has been given thirty days prior notice and has not disapproved
within that period. The Indiana Department of Insurance must receive notice of
all dividends, whether "extraordinary" or not, within five business days after
they are declared. Notwithstanding the foregoing limit, a domestic insurer
may not declare or pay a dividend of funds other than earned surplus without
the prior approval of the Indiana Department of Insurance. "Earned surplus"
is defined as the amount of unassigned funds set forth in the insurer's most
recent annual statement, less surplus attributable to unrealized capital gains
or reevaluation of assets. As of December 31 1996, IGF and Pafco had earned
surplus of $29,412,000 and $18,112,000, respectively. Further, no Indiana
domiciled insurer may make payments in the form of dividends or otherwise to
shareholders as such unless it possesses assets in the amount of such payment
in excess of the sum of its liabilities and the aggregate amount of the par
value of all shares of its capital stock; provided, that in no instance shall
such dividend reduce the total of (i) gross paid-in and contributed surplus,
plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv)
treasury stock at cost, below an amount equal to 50% of the aggregate amount
of the par value of all shares of the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to
stockholders without prior approval of the Florida Department of Insurance if
the dividend or distribution does not exceed the larger of (i) the lesser of
(a) 10% of surplus, or (b) net income, not including realized capital gains,
plus a 2-year carryforward, (ii) 10% of surplus with dividends payable
constrained to unassigned funds minus 25% of unrealized capital gains, or
(iii) the lesser of (a) 10% of surplus, or (b) net investment income plus a
3-year carryforward with dividends payable constrained to unassigned
funds minus 25% of unrealized capital gains. Alternatively, a Florida
domestic insurer may pay a dividend or distribution without the prior
written approval of the Florida Department of Insurance if (1) the
dividend is equal to or less than the greater of (i) 10% of the insurer's
surplus as regards policyholders derived from realized net operating
profits on its business and net realized capital gains, or (ii) the insurer's
entire net operating profits (including unrealized gains or losses) and
realized net capital gains derived during the immediately preceding
calendar year; (2) the insurer will have policyholder surplus equal to
or exceeding 115% of the minimum required statutory surplus
after the dividend or distribution; (3) the insurer files a notice of the
dividend or distribution with the department at least ten business days prior
to the dividend payment or distribution; and (4) the notice includes a
certification by an officer of the insurer attesting that, after the payment
of the dividend or distribution, the insurer will have at least 115% of
required statutory surplus as to policyholders. Except as provided above, a
Florida domiciled insurer may only pay a dividend or make a distribution (i)
subject to prior approval by the Florida Department of Insurance or (ii) 30
days after the Florida Department of Insurance has received notice of such
dividend or distribution and has not disapproved it within such time. In the
Consent Order approving the Acquisition, the Florida Department of Insurance
has prohibited Superior from paying any dividends (whether extraordinary or
not) for four years without the prior written approval of the Florida
Department of Insurance.
Under these laws, the maximum aggregate amounts of dividends to the Company
in 1997 by IGF and Pafco without prior regulatory approval is $12,122,000 and
$561,000, respectively, none of which has been paid. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company - Liquidity and Capital Resources". Further, there
can be no assurance that, if requested, the Indiana Department of Insurance
will approve any request for extraordinary dividends from Pafco or IGF or that
the Florida Department of Insurance will allow any dividends to be paid by
Superior during the four year period described above.
The maximum dividends permitted by state law are not necessarily indicative
of an insurer's actual ability to pay dividends or other distributions to a
parent company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on surplus, which could affect
an insurer's competitive position, the amount of premiums that can be written
and the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in
relation to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly to the
dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees
which may be paid by Pafco and Superior to GGS Management. See "The
Company - Formation of GGS Holdings; Acquisition of Superior". The
management agreement formerly in place between the Company and Pafco
which provides for an annual management fee equal to 15% of gross
premiums has been assigned to GGS Management, Inc. ("GGS
Management"), a wholly-owned subsidiary of GGS Holdings. A similar
management agreement with a management fee of 17% of gross premiums
has been entered into between GGS Management and Superior.
Employees of the Company relating to the nonstandard automobile insurance
business and all Superior employees became employees of GGS Management
effective April 30, 1996. As part of the approval of the Formation
Transaction, the Indiana Department of Insurance has required Pafco to
resubmit its management agreement for review by the Indiana Department of
Insurance no later than May 1, 1997 (the first anniversary of the Formation
Transaction), together with supporting evidence that management fees charged
to Pafco are fair and reasonable in comparison to fees charged between
unrelated parties for similar services. In the Consent Order approving the
Acquisition, the Florida Department of Insurance has reserved, for three
years, the right to reevaluate the reasonableness of fees provided for in the
Superior management agreement at the end of each calendar year and to require
Superior to make adjustments in the management fees based on the Florida
Department of Insurance's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance
that either the Indiana Department of Insurance or the Florida Department of
Insurance will not in the future require a reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the
federal government by means of premium subsidies to farmers, expense
reimbursement and federal reinsurance pools for private insurers.
Consequently, the MPCI program is subject to oversight by the legislative
and executive branches of the federal government, including the FCIC.
The MPCI program regulations generally require compliance with
federal guidelines with respect to underwriting, rating and claims
administration. The Company is required to perform continuous
internal audit procedures and is subject to audit by several federal
government agencies.
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. The most recent significant changes to the
MPCI program came as a result of the passage by Congress of the 1994
Reform Act and the 1996 Reform Act.
Certain provisions of the 1994 Reform Act, when implemented by the FCIC, may
increase competition among private insurers in the pricing of Buy-up Coverage.
The 1994 Reform Act authorizes the FCIC to implement regulations permitting
insurance companies to pass on to farmers in the form of reduced premiums
certain cost efficiencies related to any excess expense reimbursement over the
insurer's actual cost to administer the program, which could result in
increased price competition. To date, the FCIC has not enacted regulations
implementing these provisions but is currently collecting information from the
private sector regarding how to implement these provisions.
The 1994 Reform Act required farmers for the first time to purchase at least
CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including but not limited to low interest loans and crop price
supports. The 1994 Reform Act also authorized for the first time the
marketing and selling of CAT Coverage by the local USDA offices. Partly as a
result of the increase in the size of the MPCI market resulting from the 1994
Reform Act, the Company's MPCI Premium increased to $53.4 million in 1995
from $44.3 million in 1994. However, the 1996 Reform Act, signed into law by
President Clinton in April, 1996, eliminates the linkage between CAT Coverage
and qualification for certain federal farm program benefits and also limits
the role of the USDA offices in the delivery of MPCI coverage. In accordance
with the 1996 Reform Act, the USDA announced in July, 1996, 14 states where
CAT Coverage will no longer be available through USDA offices but rather would
solely be available through private agencies: Arizona, Colorado, Illinois,
Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North
Dakota, South Dakota, Washington and Wyoming. The limitation of the USDA's
role in the delivery system for MPCI should provide the Company with the
opportunity to realize increased revenues from the distribution and servicing
of its MPCI product. The Company has not experienced any material negative
impact in 1996 from the delinkage mandated by the 1996 Reform Act. In
addition, the FCIC has transferred to the Company approximately 8,900 insureds
for CAT Coverage who previously purchased such coverage from USDA field
offices. The Company believes that any future potential negative impact of
the delinkage mandated by the 1996 Reform Act will be mitigated by, among
other factors, the likelihood that farmers will continue to purchase MPCI to
provide basic protection against natural disasters since ad hoc federal
disaster relief programs have been reduced or eliminated. In addition, the
Company believes that (i) lending institutions will likely continue to require
this coverage as a condition to crop lending, and (ii) many of the farmers who
entered the MPCI program as a result of the 1994 Reform Act have come to
appreciate the reasonable price of the protection afforded by CAT Coverage and
will remain with the program regardless of delinkage. There can, however, be
no assurance as to the ultimate effect which the 1996 Reform Act may have on
the business or operations of the Company.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies have
adopted or proposed new laws or regulations to deal with the cyclical nature
of the insurance industry, catastrophic events and insurance capacity and
pricing. These regulations include (i) the creation of "market assistance
plans" under which insurers are induced to provide certain coverages, (ii)
restrictions on the ability of insurers to rescind or otherwise cancel certain
policies in mid-term, (iii) advance notice requirements or limitations imposed
for certain policy non-renewals, and (iv) limitations upon or decreases in
rates permitted to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of 12 ratios with defined acceptable ranges. They are used as an
initial screening process for identifying companies that may be in need of
special attention. Companies that have several ratios that fall outside of
the acceptable range are selected for closer review by the NAIC. If the NAIC
determines that more attention may be warranted, one of several priority
designations is assigned, and the insurance department of the state of
domicile is then responsible for follow-up action.
During 1996 Pafco had a net premiums to surplus ratio of 3.03 to 1 which was
in excess of the high end range of 3.0 to 1. The excess was not material and
Pafco has the ability to cede business to Superior to maintain compliance with
this ratio. Pafco's change in net writings was 61% compared to 33% at the
high end of the range. This result was expected given growth in gross
premiums and elimination of quota share reinsurance. Pafco also had positive
surplus growth of 64% outside the high end of the range at 50%. Pafco planned
for higher premium volume given the more profitable results than in prior
years. During 1996, Pafco's investment yield as calculated under the IRIS
tests was 3.8% which was below the low end of the range at 4.5%. However,
this IRIS test is a simple average of beginning and end of year investments.
Pafco's value fell below the range due to the following: (i) inclusion of
investment in IGF prior to the Transfer during the first four months of the
year when no investment income was received; (ii) growth in the portfolio in
the latter part of the year not taken into account by the IRIS test; (iii)
change during the course of the year to reduce ratio of equities to total
investments in favor of fixed income securities; (iv) contribution to surplus
of $3.7 million at the end of 1996 included in the IRIS test; and (v)
inclusion of the home office building in the investment base. If a weighted
average was calculated using monthly balances and excluding the IGF investment
and real estate was excluded from the calculation, Pafco's return would have
been 5.7%. Based on current investment levels and mix it is expected that
this test will be met in 1997. During 1996, Pafco's ratio of reserve
deficiency to surplus was 62% which exceeds the upper range of 25%. This IRIS
test calculates the average of claims liability to premiums for the preceding
two years and compares the resultant percentage to the current year's
percentage with a corresponding analysis to surplus. During 1994 and 1995,
Pafco's claims liability to premiums ratio was approximately 55% and decreased
to approximately 35% in 1996, resulting in the unusual IRIS result. This
situation was a result of commercial claims liabilities in 1994 and 1996 that
have now been ceded to an affiliate. Thus, claims liability at December 31,
1996 is entirely for nonstandard automobile. The reserves for the commercial
liability business were at a much higher ratio of premiums and are paid at a
much slower rate than nonstandard automobile claims. Thus, although premiums
grew in 1996, the increase in nonstandard automobile claims liability was
offset by ceded commercial claims. As this IRIS test uses a two year average
of claims liabilities to premiums, it is likely that Pafco may exceed the
normal ratio in 1997. It should be noted that Pafco did not have unusual IRIS
values for the one and two year reserve development to surplus tests.
During 1996 IGF had unusual values for three IRIS tests. IGF's surplus
increased by 237% which exceeded the high end of the range of 50%. However,
this is a very positive development due to growth in profits and the capital
infusion from the proceeds of the Offering. IGF continued to have unusual
values in the liabilities to liquid assets and agents balances to surplus
tests. IGF generally has an unusual value in these tests due to the
reinsurance program mandated by the FCIC for the distribution of the MPCI
program and the fact that agents' balances at December 31 are usually not
settled until late February.
During 1996 Superior had a ratio of net premiums written to surplus of 3.07 to
1 compared to the IRIS test upper limit of 3.0 to 1. During 1996, Superior's
net premium writings increased by 116% which exceeded the upper limit of the
IRIS range of 33%. Superior had a reserve deficiency to surplus ratio of 29%
which was in excess of the upper IRIS limit of 25%. All these matters were a
function of the strong growth of Superior. Such results may continue in the
future if growth continues. See Management's Discussion and Analysis for
further discussion on impact of premium writings to surplus ratio.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted a
formula and model law to implement risk-based capital ("RBC") requirements for
property and casualty insurance companies designed to assess minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. Indiana and Florida have substantially
adopted the NAIC model law, and Indiana has directly, and Florida has
indirectly, adopted the NAIC model formula. The RBC formula for property and
casualty insurance companies measures four major areas of risk facing property
and casualty insurers: (i) underwriting, which encompasses the risk of
adverse loss developments and inadequate pricing; (ii) declines in asset
values arising from credit risk; (iii) declines in asset values arising from
investment risks; and (iv) off-balance sheet risk arising from adverse
experience from non-controlled assets, guarantees for affiliates, contingent
liabilities and reserve and premium growth. Pursuant to the model law,
insurers having less statutory surplus than that required by the RBC
calculation will be subject to varying degrees of regulatory action, depending
on the level of capital inadequacy.
The RBC model law provides for four levels of regulatory action. The extent
of regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below
70% of the RBC amount. Based on the foregoing formulae, as of December 31,
1996, the RBC ratios of the Insurers were in excess of the Company Action
Level, the first trigger level that would require regulatory action.
Guaranty Funds
The Insurers also may be required under the solvency or guaranty laws of most
states in which they do business to pay assessments (up to certain prescribed
limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's
financial strength and, in certain instances, may be offset against future
premium taxes. Some state laws and regulations further require participation
by the Insurers in pools or funds to provide some types of insurance coverages
which they would not ordinarily accept. The Company recognizes its
obligations for guaranty fund assessments when it receives notice that an
amount is payable to the fund. The ultimate amount of these assessments may
differ from that which has already been assessed.
It is not possible to predict the future impact of changing state and federal
regulation on the Company's operations, and there can be no assurance that
laws and regulations enacted in the future will not be more restrictive than
existing laws.
Stockholder Agreement with GS Funds
The Stockholder Agreement among the Company, GS Funds, Goran and GGS
Holdings provides that the Board of Directors of GGS Holdings consists of five
members, of whom three shall be designated by the Company and two shall be
designated by GS Funds. However, in the event that (x) at any time the Company
and its affiliates shall own less than 25% of the issued and outstanding common
stock of GGS Holdings by reason of the issuance of shares of common stock to
GS Funds in satisfaction of the indemnification obligations of the Company or
Goran pursuant to the GGS Agreement (the "Indemnity Date") or (y) at any time
(i) the Company, Goran or GGS Holdings is in violation of any term of the
Stockholder Agreement, or (ii) GGS Holdings or GGS Management shall remain
in violation of any covenant with respect to indebtedness incurred by GGSH to
partially fund the Acquisition (the "GGS Senior Credit Facility") (whether or
not such violation is waived) after the expiration of any applicable cure
period or there shall occur an event of default under the GGS Senior Credit
Facility (whether or not waived), the size of the Board shall be reduced to
four members (a "Board Reduction"). At December 31, 1996, GS Funds waived
their right to this Board Reduction for the covenants violations of the GGSH
Senior Credit Facility. The covenants contained in the GGS Senior Credit
Facility are customary commercial loan covenants relating to the maintenance
of financial ratios and restrictions on dividends, significant corporate
transactions and other matters. In such event, so long as the Indemnity Date
has not occurred, the Company shall be entitled to designate only two
directors and GS Funds shall be entitled to designate two directors. After
the occurrence of the Indemnity Date, the Company shall be entitled to
designate one director and GS Funds shall be entitled to designate three
directors.
Prior to a Board Reduction, action may be taken by the Board only with the
approval of a majority of the members of the Board. After a Board Reduction,
prior to the Indemnity Date, action may only be taken with the approval of at
least one GS Funds designee and one Company designee. After the Indemnity
Date following a Board Reduction, action may only be taken by the Board with
the approval of a majority of the entire Board. Prior to a Board Reduction,
GGS Holdings may not take the following actions, among others, without first
obtaining approval by the Board and at least one GS Funds designee: (i)
consolidate or merge with any person, (ii) purchase the capital stock or
substantially all of the assets of any person, (iii) enter into any joint
venture or partnership or establish any non-wholly owned subsidiaries in which
the consideration paid by or invested by GGS Holdings is in excess of $1
million, (iv) voluntarily liquidate or dissolve, (v) offer any type of
insurance other than nonstandard automobile insurance (other than certain
policies issued on behalf of IGF or SIGF), (vi) sell, lease or transfer assets
for an aggregate consideration in excess of $1 million, (vii) subject to
certain exceptions, enter into any contract with a director or officer of
Goran (or any relative or affiliate of such person) or with any affiliate of
Goran, (viii) create or suffer to exist any indebtedness for borrowed money in
an aggregate amount in excess of $1 million excluding certain existing
indebtedness, (ix) mortgage or encumber its assets in an amount in excess of
$1 million, (x) make or commit to make any capital expenditure in an amount in
excess of $1 million, (xi) redeem or repurchase its outstanding capital stock,
(xii) issue or sell any shares of capital stock of GGS Holdings or its
subsidiaries, (xiii) enter into, adopt or amend any employment agreement or
benefit plan, (xiv) amend its Certificate of Incorporation or Bylaws, (xv)
amend or waive any provision of the Stockholder Agreement or the GGS
Agreement, (xvi) change its independent certified accountants or actuaries,
(xvii) register any securities under the Securities Act, (xviii) enter into
one or more agreements to reinsure a substantial portion of the liability of
GGS Holdings or any of its subsidiaries, or (xix) adopt or change the reserve
policy or the investment policy of GGS Holdings or any of its subsidiaries.
The Company's representatives on the Board of Directors of GGS Holdings are G.
Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief
Executive Officer of the Company and Douglas H. Symons, President and Chief
Operating Officer of the Company. Pursuant to their power under the
Stockholder Agreement to designate the Chairman of the Board of GGS Holdings,
GS Funds have named G. Gordon Symons as Chairman of the Board of GGS Holdings.
The Stockholder Agreement designates Alan G. Symons as the Chief Executive
Officer of GGS Holdings and gives him the right to designate and determine the
compensation for all management personnel, provided that the designation of,
removal of, and determination of compensation for, any person earning $100,000
or more per annum is subject to the prior approval of the Board. GS Funds has
the right at any time to designate a chief operating officer for GGS Holdings
but has currently not elected to exercise this right. Upon request, GS Funds
has the right to appoint one designee to each of the committees of the Board
of Directors of GGS Holdings. The Stockholder Agreement does not give GS
Funds the right to appoint any designees to the Board of Directors of any of
the subsidiaries of GGS Holdings.
Certain Rights Of The GS Funds To Cause A Sale of GGS Holdings
Events Which Trigger the Rights of the GS Funds to Cause A Sale of GGS
Holdings.
The Stockholder Agreement establishes certain rights of GS Funds to cause a
sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering
of GGS Holdings stock representing, on a fully diluted basis, at least 20% of
all such stock issued and outstanding, and generating at least $25 million in
net proceeds to the sellers of such securities, by April 30, 2001, (ii) the
third separate occasion, during the term of the Stockholder Agreement, on
which an equity financing or acquisition transaction proposed by GS Funds is
rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or the Company (defined, with respect to Goran, as being
direct or indirect ownership of more than 40% of the outstanding voting stock
of Goran if any other holder or group holds in excess of 10% of the
outstanding voting stock of Goran, and otherwise 25% thereof; and defined,
with respect to the Company, as requiring both (a) direct ownership by Goran
in excess of 50% of the Company's voting stock and (b) retention by Alan G.
Symons and his family members of voting control of Goran) by Alan G. Symons
or his family members or affiliates, or (iv) the cessation of Alan G. Symons'
employment as CEO of GGS Holdings for any reason.
Upon the occurrence of any of such events, and at any time or from time to
time thereafter, GS Funds may, by notifying the Company in writing, initiate
the process of seeking to effect a sale of GGS Holdings on terms and
conditions which are acceptable to the GS Funds. However, within thirty days
after the Company receives notice of GS Funds' intention to initiate the sale
of GGS Holdings, the Company may provide written notice to GS Funds that it
wishes to acquire or combine with GGS Holdings. The Company's notice to GS
Funds must include the proposed purchase price and other material terms and
conditions with such specificity as is necessary to permit GS Funds to
evaluate the Company's offer. If, within 90 days of delivery of the notice by
the Company, GS Funds accepts the Company's offer, the Company will be
obligated to acquire or combine with GGS Holdings. In the event GS Funds
rejects the Company's proposal, (i) any sale to a third party effected within
180 days after receipt of such proposal must not contain terms that are in the
aggregate less favorable to the GGS Holdings stockholders than those set forth
in the Company's proposal, (ii) any sale must provide for the same
consideration to be paid to each stockholder, and (iii) no sale may constitute
an acquisition by or a combination with an affiliate of GS Funds.
Accordingly, under certain circumstances, GS Funds may have the ability to
force the Company to divest itself of its nonstandard automobile operations.
Further, a forced sale of GGS Holdings may also cause the Company to be
characterized as an investment company within the meaning of the "1940 Act"
unless the proceeds are redeployed into other business operations or another
exemption from registration under the 1940 Act is available.
Employees
At December 31, 1996 the Company and its subsidiaries employed approximately
600 persons. The Company believes that relations with its employees are
excellent.
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations, including but not limited to, the 1994 Reform
Act and 1996 Reform Act, on the Company's business and results of operations,
(ii) the competitive advantage afforded to IGF by approaches adopted by
management in the areas of information, technology, claims handling and
underwriting, (iii) the sufficiency of the Company's cash flow to meet the
operating expenses, debt service obligations and capital needs of the Company
and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense
Reimbursements on the Company's results of operations, are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933,
as amended and Section 21E of the Securities Exchange Act of 1934, as amended.
From time to time the Company may also issue other statements either orally or
in writing, which are forward looking within the meaning of these statutory
provisions. Forward looking statements are typically identified by the words
"believe", "expect", "anticipate", "intend", "estimate", "plan" and similar
expressions. These statements involve a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could
differ materially from the forward looking statements in this Form 10-K or
from other forward looking statements made by the Company. In addition to the
risks and uncertainties of ordinary business operations, some of the facts
that could cause actual results to differ materially from the anticipated
results or other expectations expressed in the Company's forward-looking
statements are the risks and uncertainties (i) discussed herein, (ii)
contained in the Company's other filings with the Securities and Exchange
Commission and public statements from time to time, and (iii) set forth below:
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty industry is
that its products generally are priced, before its costs are known, because
premium rates usually are determined before losses are reported. Premium rate
levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in
surplus have generally been accompanied by increased price competition among
property and casualty insurers. The nonstandard automobile insurance business
in recent years has experienced very competitive pricing conditions and there
can be no assurance as to the Company's ability to achieve adequate pricing.
Changes in case law, the passage of new statutes or the adoption of new
regulations relating to the interpretation of insurance contracts can
retroactively and dramatically affect the liabilities associated with known
risks after an insurance contract is in place. New products also present
special issues in establishing appropriate premium levels in the absence of a
base of experience with such products' performance.
The number of competitors and the similarity of products offered, as well as
regulatory constraints, limit the ability of property and casualty insurers to
increase prices in response to declines in profitability. In states which
require prior approval of rates, it may be more difficult for the Company to
achieve premium rates which are commensurate with the Company's under-
writing experience with respect to risks located in those states.
In addition, the Company does not control rates on its MPCI business, which
are instead set by the FCIC. Accordingly, there can be no assurance that
these rates will be sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance company
are also determined, in part, by the establishment of, and adjustments to,
reserves reflecting estimates made by management as to the amount of losses
and loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses
and LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material
adverse effect on the insurer's financial position or results of operations in
future periods.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many factors
which can cause fluctuation in the results of operations of this business.
Many of these factors are not subject to the control of the Company. The
size of the nonstandard market can be significantly affected by, among other
factors, the underwriting capacity and underwriting criteria of standard
automobile insurance carriers. In addition, an economic downturn in the
states in which the Company writes business could result in fewer new car
sales and less demand for automobile insurance. Severe weather conditions
could also adversely affect the Company's business through higher losses and
LAE. These factors, together with competitive pricing and other
considerations, could result in fluctuations in the
Company's underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can vary
substantially from period to period as a result of various factors, including
timing and severity of losses from storms, drought, floods, freezes and other
natural perils and crop production cycles. Therefore, the results for any
quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insurance business are
recognized throughout the year with a reconciliation for the current crop year
in the fourth quarter.
The Company expects that for the foreseeable future a majority of its crop
insurance will continue to be derived from MPCI business. The MPCI program is
federally regulated and supported by the federal government by means of
premium subsidies to farmers, expense reimbursement and federal reinsurance
pools for private insurers. As such, legislative or other changes affecting
the MPCI program could impact the Company's business prospects. The MPCI
program has historically been subject to modification at least annually since
its establishment in 1980, and some of these modifications have been
significant. No assurance can be given that future changes will not
significantly affect the MPCI program and the Company's crop insurance
business.
The 1994 Reform Act also reduced the expense reimbursement rate payable to the
Company for its costs of servicing MPCI policies that exceed the basic CAT
Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and 1999
crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium serviced,
a decrease from the 31% level established for the 1994, 1995 and 1996 crop
years. Although the 1994 Reform Act directs the FCIC to alter program
procedures and administrative requirements so that the administrative and
operating costs of private insurance companies participating in the MPCI
program will be reduced in an amount that corresponds to the reduction in the
expense reimbursement rate, there can be no assurance that the Company's
actual costs will not exceed the expense reimbursement rate. The FCIC has
appointed several committees comprised of members of the insurance industry to
make recommendations concerning this matter.
The 1994 Reform Act also directs the FCIC to establish adequate premiums for
all MPCI coverages at such rates as the FCIC determines are actuarially
sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss
ratio has exceeded this target ratio. There can be no assurance that the FCIC
will not increase rates to farmers in order to achieve the targeted loss ratio
in a manner that could adversely affect participation by farmers in the MPCI
program above the CAT Coverage level.
The 1996 Reform Act, signed into law by President Clinton in April, 1996,
provides that, MPCI coverage is not required for federal farm program benefits
if producers sign a written waiver that waives eligibility for emergency crop
loss assistance. The 1996 Reform Act also provides that, effective for the
1997 crop year, the Secretary of Agriculture may continue to offer CAT
Coverage through USDA offices if the Secretary of Agriculture determines that
the number of approved insurance providers operating in a state is
insufficient to adequately provide catastrophic risk protection coverage to
producers. There can be no assurance as to the ultimate effect which the 1996
Reform Act may have on the business or operations of the Company.
Total MPCI Premium for each farmer depends upon the kinds of crops grown,
acreage planted and other factors determined by the FCIC. Each year, the FCIC
sets, by crop, the maximum per unit commodity price ("Price Election") to be
used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The Company's crop insurance business is also affected by market conditions in
the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating to
agricultural products and producers, demand for agricultural products,
weather, natural disasters, technologic advances in agricultural practices,
international agricultural markets and general economic conditions both in the
United States and abroad. For example, the number of MPCI Buy-up Coverage
policies written has historically tended to increase after a year in which a
major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
Highly Competitive Businesses
Both the nonstandard automobile insurance and crop insurance businesses are
highly competitive. Many of the Company's competitors in both the nonstandard
automobile insurance and crop insurance business segments have substantially
greater financial and other resources than the Company, and there can be no
assurance that the Company will be able to compete effectively against such
competitors in the future.
In its nonstandard automobile business, the Company competes with both large
national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers.
Direct writers may have certain competitive advantages over agency writers,
including increased name recognition, loyalty of the customer base to the
insurer rather than an independent agency and, potentially, reduced
acquisition costs. In addition, certain competitors of the Company have from
time to time decreased their prices in an apparent attempt to gain market
share. Also, in certain states, state assigned risk plans may provide
nonstandard automobile insurance products at a lower price than private
insurers.
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1996 crop year, the
number of insurance companies that have entered into agreements with the FCIC
to sell and service MPCI policies has declined from 50 to 16. The Company
believes that to compete successfully in the crop insurance business it will
have to market and service a volume of premiums sufficiently large to enable
the Company to continue to realize operating efficiencies in conducting its
business. No assurance can be given that the Company will be able to compete
successfully if this market consolidates further.
Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco a
B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior
was reduced from A- to B+ as a result of the leverage of GGS Holdings
resulting from indebtedness in connection with the Acquisition. A "B+" and a
"B-" rating are A.M. Best's sixth and eighth highest rating classifications,
respectively, out of 15 ratings. A "B+" rating is awarded to insurers which,
in A.M. Best's opinion, "have demonstrated very good overall performance when
compared to the standards established by the A.M. Best Company" and "have a
good ability to meet their obligations to policyholders over long period of
time". A "B-" rating is awarded to insurers which, in A.M. Best's opinion,
"have demonstrated adequate overall performance when compared to the standards
established by the A.M. Best Company" and "generally have an adequate ability
to meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions."
IGF recently received an "NA-2" rating (a "rating not assigned" category for
companies that do not meet A.M. Best's minimum size requirement) from A.M.
Best. IGF intends to seek a revised rating after the infusion of capital from
the proceeds of the Offering, although there can be no assurance that a
revised rating will be obtained or as to the level of any such rating. A.M.
Best bases its ratings on factors that concern policyholders and agents and
not upon factors concerning investor protection. Such ratings are subject to
change and are not recommendations to buy, sell or hold securities. One
factor in an insurer's ability to compete effectively is its A.M. Best rating.
The A.M. Best ratings for the Company's rated Insurers are lower than for many
of the Company's competitors. There can be no assurance that such ratings or
future changes therein will not affect the Company's competitive position.
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated in the
states of Florida, California, Indiana, Missouri and Virginia; consequently
the Company will be significantly affected by changes in the regulatory and
business climate in those states. The Company's crop insurance business is
concentrated in the states of Iowa, Texas, Illinois, Kansas and Minnesota and
the Company will be significantly affected by weather conditions, natural
perils and other factors affecting the crop insurance business in those
states.
Future Growth and Continued Operations Dependent on Access to Capital
Property and casualty insurance is a capital intensive business. The Company
must maintain minimum levels of surplus in the Insurers in order to continue
to write business, meet the other related standards established by insurance
regulatory authorities and insurance rating bureaus and satisfy financial
ratio covenants in loan agreements.
Historically, the Company has achieved premium growth as a result of both
acquisitions and internal growth. It intends to continue to pursue
acquisition and new internal growth opportunities. Among the factors which
may restrict the Company's future growth is the availability of capital. Such
capital will likely have to be obtained through debt or equity financing or
retained earnings. There can be no assurance that the Company's insurance
subsidiaries will have access to sufficient capital to support future growth
and also satisfy the capital requirements of rating agencies, regulators and
creditors. In addition, the Company will require additional capital to
finance future acquisitions. If the Company's representatives on the Board of
Directors of GGS Holdings cause GGS Holdings to decline acquisition
opportunities because the Company is unable to raise sufficient capital to
fund its pro rata share of the purchase price, the GS Funds may be able to
force a sale of GGS Holdings. The ability of each of the Company and GGS
Holdings to raise capital through an issuance of voting securities may be
affected by conflicts of interest between each of them and their respective
control persons and other affiliates.
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves for unpaid losses and LAE established by the Company are
estimates of amounts needed to pay reported and unreported claims and related
LAE based on facts and circumstances then known. These reserves are based on
estimates of trends in claims severing judicial theories of liability and
other factors.
Although the nature of the Company's insurance business is primarily short-tail,
the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and have a
material adverse effect on the Company's results of operations and financial
condition. Due to the inherent uncertainty of estimating these amounts, it
has been necessary, and may over time continue to be necessary, to revise
estimates of the Company's reserves for losses and LAE. The historic
development of reserves for losses and LAE may not necessarily reflect future
trends in the development of these amounts. Accordingly, it may not be
appropriate to extrapolate redundancies or deficiencies based on historical
information.
Reliance Upon Reinsurance
In order to reduce risk and to increase its underwriting capacity, the Company
purchases reinsurance. Reinsurance does not relieve the Company of liability
to its insureds for the risks ceded to reinsurers. As such, the Company is
subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers, including the
FCIC, which the Company generally believes to be financially stable, a
significant reinsurer's insolvency or inability to make payments under the
terms of a reinsurance treaty could have a material adverse effect on the
Company's financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing in
property and casualty insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability
to provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity, no
assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may
need to reduce the levels of its underwriting commitments.
Risks Associated with Investments
The Company's results of operations depend in part on the performance of its
invested assets. Certain risks are inherent in connection with fixed maturity
securities including loss upon default and price volatility in reaction to
changes in interest rates and general market factors. Equity securities
involve risks arising from the financial performance of, or other developments
affecting, particular issuers as well as price volatility arising from general
stock market conditions.
Comprehensive State Regulation
The Company's insurance subsidiaries are subject to comprehensive regulation
by government agencies in the states in which they operate. The nature and
extent of that regulation vary from jurisdiction to jurisdiction but typically
involve prior approval of the acquisition of control of an insurance company
or of any company controlling an insurance company, regulation of certain
transactions entered into by an insurance company with any of its affiliates,
limitations on dividends, approval or filing of premium rates and policy forms
for many lines of insurance, solvency standards, minimum amounts of capital
and surplus which must be maintained, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a
single company, limitation of the right to cancel or non-renew policies in
some lines, regulation of the right to withdraw from markets or agencies,
requirements to participate in residual markets, licensing of insurers and
agents, deposits of securities for the benefit of policyholders, reporting
with respect to financial condition, and other matters. In addition, state
insurance department examiners perform periodic financial and market conduct
examinations of insurance companies. Such regulation is generally intended
for the protection of policyholders rather than security holders. No
assurance can be given that future legislative or regulatory changes will not
adversely affect the Company.
Holding Company Structure; Dividend And Other Restrictions; Management Fees
Holding Company Structure. The Company is a holding company whose principal
asset is the capital stock of the subsidiaries. The Company relies primarily
on dividends and other payments from its subsidiaries, including the its
insurance subsidiaries, to meet its obligations to creditors and to pay
corporate expenses. The Insurers are domiciled in the states of Indiana and
Florida and each of these states limits the payment of dividends and other
distributions by insurance companies.
Dividend and Other Restrictions. Indiana law defines as "extraordinary" any
dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the
end of the preceding year, or (ii) the prior year's net income. Dividends
which are not "extraordinary" may be paid ten days after the Indiana
Department of Insurance ("Indiana Department") receives notice of their
declaration. "Extraordinary" dividends and distributions may not be paid
without the prior approval of the Indiana Commissioner of Insurance (the
"Indiana Commissioner") or until the Indiana Commissioner has been given
thirty days' prior notice and has not disapproved within that period. The
Indiana Department must receive notice of all dividends, whether
"extraordinary" or not, within five business days after they are declared.
Notwithstanding the foregoing limit, a domestic insurer may not declare or pay
a dividend from any source of funds other than "Earned Surplus" without the
prior approval of the Indiana Department. "Earned Surplus" is defined as the
amount of unassigned funds set forth in the insurer's most recent annual
statement, less surplus attributable to unrealized capital gain or re-evaluation
of assets. Further, no Indiana domiciled insurer may make payments
in the form of dividends or otherwise to its shareholders unless it possesses
assets in the amount of such payments in excess of the sum of its liabilities
and the aggregate amount of the par value of all shares of capital stock;
provided, that in no instance shall such dividend reduce the total of (i)
gross paid-in and contributed surplus, plus (ii) special surplus funds, plus
(iii) unassigned funds, minus (iv) treasury stock at cost, below an amount
equal to 50% of the aggregate amount of the par value of all shares of the
insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department of Insurance ("Florida
Department") if the dividend or distribution does not exceed the larger of:
(i) the lesser of (a) 10% of surplus or (b) net investment income, not
including realized capital gains, plus a 2-year carryforward, (ii) 10% of
surplus with dividends payable constrained to unassigned funds minus 25% of
unrealized capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net
investment income plus a 3-year carryforward with dividends payable
constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department if (1) the
dividend is equal to or less than the greater of (i) 10% of the insurer's
surplus as regards policyholders derived from net operating profits on its
business and net realized capital gains, or (ii) the insurer's entire net
operating profits (including unrealized gains or losses) and realized net
capital gains derived during the immediately preceding calendar year; (2) the
insurer will have policyholder surplus equal to or exceeding 115% of the
minimum required statutory surplus after the dividend or distribution; (3) the
insurer files a notice of the dividend or distribution with the Florida
Department at least ten business days prior to the dividend payment or
distribution; and (4) the notice includes a certification by an officer of the
insurer attesting that, after the payment of the dividend or distribution, the
insurer will have at least 115% of required statutory surplus as to
policyholders. Except as provided above, a Florida domiciled insurer may only
pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department, or (ii) thirty days after the Florida Department has
received notice of such dividend or distribution and has not disapproved it
within such time. In the consent order approving the Acquisition (the
"Consent Order"), the Florida Department has prohibited Superior from paying
any dividends (whether extraordinary or not) for four years without the prior
written approval of the Florida Department.
Although the Company believes that funds required for it to meet its financial
and operating obligations will be available, there can be no assurance in this
regard. Further, there can be no assurance that, if requested, the Indiana
Department will approve any request for extraordinary dividends from Pafco or
IGF or that the Florida Department will allow any dividends to be paid by
Superior during the four year period described above.
Payment of dividends by IGF requires prior approval by the lender under the
credit agreement which IGF is a party. There can be no assurance that IGF
will be able to obtain this consent. The Company is in the process of seeking
regulatory approval for a new arrangement whereby underwriting, marketing and
administrative functions of IGF will be assumed by, and employees will be
transferred to, IGF Holdings. As a result of this restructuring, management
fees would be paid by IGF to IGF Holdings, thereby providing an additional
source of liquidity for the Company to the extent these payments exceed the
operating and other expenses of IGF Holdings. There can be no assurance that
this regulatory approval will be obtained.
The maximum dividends permitted by state law are not necessarily indicative of
an insurer's actual ability to pay dividends or other distributions to a
parent company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on surplus, which could affect
an insurer's competitive position, the amount of premiums that can be written
and the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in
relation to its outstanding liabilities and adequate for its financial needs.
Management Fees. The management agreement originally entered into between the
Company and Pafco was assigned as of April 30, 1996 by the Company to GGS
Management, a wholly-owned subsidiary of GGS Holdings. This agreement
provides for an annual management fee equal to 15% of gross premiums written.
A similar management agreement with a management fee of 17% of gross premiums
written has been entered into between GGS Management and Superior. Employees
of the Company relating to the nonstandard automobile insurance business and
all Superior employees became employees of GGS Management effective April 30,
1996. As part of the approval of the transaction relating to the formation of
GGS Holdings, the Indiana Department has required Pafco to resubmit its
management agreement for review by the Indiana Department no later than May 1,
1997 (the first anniversary of the Formation Transaction), together with
supporting evidence that management fees charged to Pafco are fair and
reasonable in comparison to fees charged between unrelated parties for similar
services. In the Consent Order approving the Acquisition, the Florida
Department has reserved, for a period of three years, the right to re-evaluate
the reasonableness of fees provided for in the Superior management agreement
at the end of each calendar year and to require Superior to make adjustments
in the management fees based on the Florida Department's consideration of the
performance and operating percentages of Superior and other pertinent data.
There can be no assurance that either the Indiana Department or the Florida
Department will not in the future require a reduction in these management
fees.
Furthermore, as a result of certain restrictive covenants with respect to
dividends and other payments contained in the GGS Senior Credit Facility, GGS
Holdings and its subsidiaries, Pafco and Superior, are not expected to
constitute a significant source of funds for the Company. In addition, since
the GS Funds own 48% of the outstanding capital stock of GGS Holdings, the
Company would only be entitled to receive 52% of any dividend or distribution
paid by GGS Holdings to its stockholders.
Certain Rights of the GS Funds to Cause A Sale of GGS Holdings
The Stockholder Agreement establishes certain rights of the GS Funds to cause
a sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering
of GGS Holdings stock representing, on a fully diluted basis, at least 20% of
all such stock issued and outstanding, and generating at least $25 million in
net proceeds to the sellers of such securities, by April 30, 2001, (ii) the
third separate occasion, during the term of the Stockholder Agreement on which
an equity financing or acquisition transaction proposed by the GS Funds is
rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or the Company (defined, with respect to Goran as being
direct or indirect ownership of more than 40% of the outstanding voting stock
of Goran if any other holder or group holds in excess of 10% of the
outstanding voting stock of Goran and otherwise 25% thereof, and defined, with
respect to the Company, as requiring both (a) direct ownership by Goran in
excess of 50% of the Company's voting stock and (b) retention by Alan G.
Symons and his family members of voting control of Goran by Alan G. Symons or
his family members or affiliates, or (iv) the cessation of Alan G. Symons'
employment as CEO of GGS Holdings for any reason. As a result of the
considerations arising under the Investment Company Act of 1940 (the "1940
Act") with respect to GGS Holdings, any public offering by GGS Holdings would
probably be required to consist solely of a secondary offering of shares held
by stockholders.
Upon the occurrence of any of such events, and at any time or from time to
time thereafter, the GS Funds may, by notifying the Company in writing,
initiate the process of seeking to effect a sale of GGS Holdings on terms and
conditions which are acceptable to the GS Funds. However, within thirty days
after the Company receives notice of the GS Funds' intention to initiate the
sale of GGS Holdings, the Company may provide written notice to the GS Funds
that it wishes to acquire or combine with GGS Holdings. The Company's notice
to the GS Funds must include the proposed purchase price and other material
terms and conditions with such specificity as is necessary to permit the GS
Funds to evaluate the Company's offer. If, within ninety days of delivery of
the notice by the Company, the GS Funds accept the Company's offer, the
Company will be obligated to acquire or combine with GGS Holdings. In the
event the GS Funds reject the Company's proposal, (i) any sale to a third
party effected within 180 days after receipt of such proposal must not contain
terms that are in the aggregate less favorable to the GGS Holdings
stockholders than those set forth in the Company's proposal, (ii) any sale
must provide for the same consideration to be paid to each stockholder, and
(iii) no sale may constitute an acquisition by or a combination with an
affiliate of the GS Funds. Accordingly, under certain circumstances, the GS
Funds may have the ability to force the Company to divest itself of its
nonstandard automobile operations. Further, a forced sale of GGS Holdings may
also cause the Company to be characterized as an investment company within the
meaning of the 1940 Act unless the proceeds are redeployed into other business
operations or another exemption from registration under the 1940 Act is
available.
ITEM 2 - PROPERTIES
The headquarters for the Company, GGS Holdings and Pafco are located at 4720
Kingsway Drive, Indianapolis, Indiana. The building is an 80,000 square foot
multilevel structure approximately 50% of which is utilized by Pafco. The
remaining space is leased to third parties at a price of approximately $10 per
square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel
building leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in Atlanta,
Georgia, Tampa, Florida and Orange, California. Under a lease term which
extends through February, 1998, Superior leases office space at 280 Interstate
North Circle, N.W., Suite 500 Atlanta, Georgia. Superior occupies 43,448
square feet at this location and subleases an additional 3,303 square feet to
third party tenants. Superior also has an office located at 3030 W. Rocky
Pointe Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of
space leased for a term extending through February 2000. In addition,
Superior occupies an office at 1745 West Orangewood, Orange, California
consisting of 3,264 square fee under a lease extending through May 1997.
IGF owns a 17,500 square foot office building located at 2882 106th Street,
Des Moines, Iowa which serves as its corporate headquarters. The building is
fully occupied by IGF. IGF also owns certain improved commercial property
which is adjacent to its corporate headquarters.
IGF has entered into a purchase agreement to acquire an office building in Des
Moines, Iowa, to be used as its crop insurance division home office. The
purchase price was $2.6 million, of which $2.4 million was escrowed on
February 1, 1997. The terms include a floating closing date whereby the
transaction will close on the earlier of February 1, 1998 or thirty days after
the closing of the sale of the Company's currently occupied home office
building, also located in Des Moines. The purchase of the new building is not
contingent on the sale of the current building.
ITEM 3 - LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising in the
ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimated costs of litigation.
IGF is the administrator of a run-off book of business. The FCIC has
requested that IGF take responsibility for the claims liabilities of these
policies under its administration. IGF has requested reimbursement of certain
expenses from the FCIC with respect to this run-off activity. IGF instituted
litigation against the FCIC on March 23, 1995 in the United States District
Court for the Southern District of Iowa seeking $4.3 million as reimbursement
for these expenses. The FCIC has counterclaimed for approximately $1.2
million in claims payments for which FCIC contends IGF is responsible as
successor to the run-off book of business. While the outcome of this lawsuit
cannot be predicted with certainty, the Company believes that the final
resolution of this lawsuit will not have a material adverse effect on the
financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during 1996 to a vote of security holders of the
Registrant, through the solicitation of proxies or otherwise.
SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officers of the
Company who are not also directors. Their respective ages and their
respective positions with the Company are listed as as follows:
Name Age Position
David L. Bates 37 Vice President, General Counsel
and Secretary of the Company
Gary P. Hutchcraft 35 Vice President, Chief Financial
Officer and Treasurer of the
Company
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and
Secretary of the Company since November, 1995 after having been named Vice
President and General Counsel of Goran in April, 1995. Mr. Bates served as a
member of the Fort Howard Corporation Legal Department from September, 1988
through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager
with Deloitte & Touche.
Mr. Hutchcraft, C.P.A., has served as Vice President, Chief Financial Officer
and Treasurer of the Company and Goran since July, 1996. Prior to that time,
Mr. Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP from
July, 1988 to July, 1996.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's Common Shares, the
range of selling prices for each quarterly period since the Offering on
November 4, 1996, with respect to the Common Shares and the approximate number
of holders of Common Shares as of December 31, 1996 and other matters is
included under the caption "Market and Dividend Information" on page 50 of the
1996 Annual Report, included as Exhibit 13, which information is incorporated
herein by reference.
The Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon earnings, capital requirements, any financing
agreement covenants and the financial condition of the Company. In addition,
regulatory restrictions and provisions of the GGS Senior Credit Facility limit
distributions to shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
The data included on pages 4 and 5 of the 1996 Annual Report, included as
Exhibit 13, under "Selected Financial Data" is incorporated herein by
reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF 0PERATIONS
The discussion entitled "Management Discussion and Analysis of Financial
Condition and Results of Operations" included in the 1996 Annual Report on
pages 6 through 19 included as Exhibit is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements in the 1996 Annual Report, included as
Exhibit 13, and listed in Item 14 of this Report are incorporated herein by
reference from the 1996 Annual Report.
ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement
for its 1996 annual meeting of common stockholders filed with the Commission
pursuant to Regulation 14A (the "1996 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report except as
otherwise indicated:
1. Financial Statements. The following described consolidated financial
statements found on the pages of the 1996 Annual Report indicated below are
incorporated into Item 8 of this Report by reference.
Description of Financial Statement Item Location in 1996 Annual
Report
Report of Independent Accountants Page 49
Consolidated Balance Sheets, December 31,
1996 and 1995 Page 20
Consolidated Statements of Earnings, Years
Ended December 31, 1996, 1995 and 1994 Page 21
Consolidated Statements of Changes In
Shareholders' Equity, Years Ended
December 31, 1996, 1995 and 1994 Page 22
Consolidated Statements of Cash Flows,
Years Ended December 31, 1996, 1995 and
1994 Page 23
Notes to Consolidated Financial Statements,
Years Ended December 31, 1996, 1995 and
1994 Page 24
2. Financial Statement Schedules. The following financial statement
schedules are included beginning on Page 58.
Report of Independent Accountants
Schedule II - Condensed Financial Information of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
Schedule VI - Supplemental Information Concerning Property - Casualty
Insurance Operations
3. Exhibits. The Exhibits set forth on the Index to Exhibits are
incorporated herein by reference.
4. Reports on Form 8-K. Registrant filed no reports on Form 8-K during the
quarter ended December 31, 1996.
Board of Directors and Stockholders of
Symons International Group, Inc. and Subsidiaries
Our report on the consolidated financial statements of Symons International
Group, Inc. and Subsidiaries has been incorporated by reference in this Form
10-K from page 49 of the 1996 Annual Report to Shareholders of Symons
International Group, Inc. and Subisidiaries. In connection with our audits of
such financial statements, we have also audited the related financial
statement schedules listed in the index on page 69 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 21, 1997.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
As Of December 31, 1995 and 1996
(In Thousands)
1995 1996
ASSETS
Assets:
Investments In And Advances To $18,589 $77,514
Related Parties
Cash and Cash Equivalents 0 6,160
Deferred Income Taxes 52 0
Property and Equipment 337 8
Other 57 168
Intangible Assets 0 83
Total Assets $19,035 $83,933
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities:
Payables To Affiliates $ 8,671 $ 350
Federal Income Tax Payable 0 81
Line of Credit and Notes Payable 0 0
Other 829 992
Total Liabilities $ 9,500 $ 1,423
Minority Interest 0 21,610
Stockholders' Equity:
Common Stock, No Par, 1,000,000
Shares Authorized, 10,450,000
Issued And Outstanding $ 1,000 $38,969
Additional Paid-In Capital 3,130 5,905
Unrealized Loss On Investments (45) 820
(Net Of Deferred Taxes Of ($23,000)
in 1995 and $1,225,000 in 1996)
Retained Earnings 5,450 15,206
Total Stockholders' Equity $ 9,535 $60,900
Total Liabilities and Stockholders' Equity $19,035 $83,933
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
(In Thousands)
1994 1995 1996
Net Investment Income $ 37 $1,522 $ 98
Net Realized Investment Losses (8) (52) 0
Other Income 8,533 7,626 5,353
Total Revenue 8,562 9,096 5,451
Expenses:
Policy Acquisition And General
And Administrative Expenses 7,528 7,891 4,269
Interest Expense 874 621 613
Total Expenses 8,402 8,512 4,882
Income Before Taxes and Minority
Interest 160 584 569
Provision For Income Taxes:
Current Year 176 293 228
Prior Year (70) 0 0
Provision for Income Taxes 106 293 228
Net Income Before Equity In Net
Income Of Subsidiaries 54 291 341
Equity In Net Income Of Subsidiaries 2,063 4,530 12,915
Net Income For The Period $2,117 $4,821 $13,256
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
(In Thousands)
1994 1995 1996
Net Income $ 2,117 $ 4,821 $13,256
Cash Flows From Operating Activities:
Adjustments To Reconcile Net Cash
Provided By (Used In) Operations:
Equity In Net Income of
Subsidiaries (2,063) (4,530) (12,915)
Depreciation Of Property And
Equipment 91 37 52
Net Realized Capital Loss 8 (52) 0
Amortization Of Intangible Assets 169 88 3
Net Changes In Operating Assets And
Liabilities:
Federal Income Taxes Recoverable
(Payable) 206 (176) 81
Other Assets (70) 216 (145)
Other Liabilities (1,060) 518 163
Net Cash Provided From (Used In) (602) 922 495
Operations
Cash Flow Used In Investing
Activities:
Purchase Of Property And Equipment (58) (179) 0
Net Cash Used In Investing
Activities (58) (179) 0
Cash Flows Provided By (Used In)
Financing Activities:
Proceeds from Common Stock Offering 0 0 37,969
Repayment Of Loans (1,750) (1,250) 0
Contributed Capital 0 0 (20,475)
Loans From Related Parties 2,410 507 (8,329)
Payment of Dividend to Parent 0 0 (3,500)
Net Cash Provided By (Used In)
Financing Activities 660 (743) 5,665
Increase (Decrease) In Cash And
Cash Equivalents 0 0 6,160
Cash And Cash Equivalents -
Beginning Of Year 0 0 0
Cash And Cash Equivalents -
End Of Year 0 0 6,160
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Symons International Group, Inc. The
condensed financial information includes the accounts and activities of the
Parent Company which acts as the holding company for the insurance
subsidiaries.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Direct Amount $102,178 $123,381 $298,596
Assumed From Other
Companies $ 956 $ 1,253 $ 6,903
Ceded To Other
Companies $ 67,995 $ 71,187 $(95,907)
Net Amount $ 35,139 $ 53,447 $209,592
Percentage Of Amount
Assumed To Net 2.7% 2.3% 3.3%
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31,
(In Thousands)
1994-Allowance 1995-Allowance 1996-Allowance
for Doubtful for Doubtful for Doubtful
Accounts Accounts Accounts
Additions:
Balance At Beginning
Of Period $1,179 $1,209 $ 927
Reserves Acquired In
The Superior Acquisition 500
Charged To Costs
And Expenses (1) (86) 2,523 5,034
Charged to Other
Accounts 0 0 0
Deductions From
Reserves (116)(2) 2,805 (2) 4,981
Balance At End
Of Period $1,209 $ 927 $1,480
(1) In 1993, the Company began to direct bill policyholders rather than
agents for premiums. During late 1994 and into 1995, the Company experienced
an increase in premiums written. During 1995, the Company further evaluated
the collectibility of this business and incurred a bad debt expense of
approximately $2.5 million. The Company continually monitors the adequacy of
its allowance for doubtful accounts and believes the balance of such allowance
at December 31, 1994, 1995 and 1996 was adequate.
(2) Uncollectible accounts written off, net of recoveries.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31,
(In Thousands)
Deferred Reserves Discount, Unearned Earned Net Claims and Amortization Paid Premiums
Policy for Unpaid if any, Premiums Prem- Invest- Adjustment of deferred claims Written
Acqui- Claims and deducted iums ment expenses policy and claim
sition claim ad- in Column Income incurred- cquisition adjust-
Costs justment C related to: costs ment-
expense expenses
Column Column Column Column Column Column Cur- Prior Column Column Column
B C D E F G rent Years I J K
Year
Column
H
1994 1,479 29,269 $0 14,416 32,126 1,241 26,268 202 4,852 26,995 103,134
1995 2,379 59,421 $0 17,497 49,641 1,173 35,184 787 7,150 31,075 124,634
1996 12,800 101,719 $0 87,285 191,759 6,733 137,679 (570) 27,657 130,895 305,499
Note: All amounts in the above table are net of the effects of reinsurance
and related commission income, except for net investment income regarding
which reinsurance is not applicable, premiums written liabilities for losses
and loss adjustment expenses, and unearned premiums which are stated on a
gross basis.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
SYMONS INTERNATIONAL GROUP, INC.
/s/ Alan G. Symons
March 15, 1997 By:
Alan G. Symons, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 29, 1996, on
behalf of the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Alan G. Symons
Chief Executive Officer
(2) Principal Financial/Accounting Officer:
/s/ Gary P. Hutchcraft
Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/ G. Gordon Symons /s/ David R. Doyle
G. Gordon Symons David R. Doyle
Chairman of the Board Director
/s/ John K. McKeating /s/ James G. Torrance
John K. McKeating James G. Torrance
Director Director
/s/ Robert C. Whiting /s/ Douglas H. Symons
Robert C. Whiting Douglas H. Symons
Director Director
/s/ Jerome B. Gordon /s/ Alan G. Symons
Jerome B. Gordon Alan G. Symons
Director Director
EXHIBIT INDEX
Reference to Sequential
Regulation S-K Page
Exhibit No. Document Number
1 Final Draft of the Underwriting Agreement, dated November 4,
1996, among Registrant, Goran Capital, Inc., Advest, Inc. and
Mesirow Financial, Inc...........................................76
3.1 The Registrant's Restated Articles of Incorporation are
incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
3.2 Registrant's Restated Code of Bylaws, as amended.................129
4.1 Article V - "Number, Terms and Voting Rights of Shares" of
the Registrant's Restated Articles of Incorporation is
incorporated by reference to the Registrant's Restated
Articles of Incorporation incorporated by reference hereunder
as Exhibit 3.1.
4.2 Article I - "Shareholders" and Article VI - "Stock
Certificates, Transfer of Shares, Stock Records" of the
Registrant's Restated Code of Bylaws are incorporated by
reference to the Registrant's Restated Code of Bylaws, as
amended, filed hereunder as Exhibit 3.2.
10.1 The Stock Purchase Agreement among Goran Capital Inc.,
Registrant, Fortis, Inc. and Interfinancial, Inc. dated
January 31, 1996 is incorporated by reference to Exhibit 10.1
of the Registrant's Registration Statement on Form S-1, Reg.
No. 333-9129.
10.2(1) The Stock Purchase Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Goran Capital Inc. and
Registrant dated January 31, 1996 is incorporated by
reference to Exhibit 10.2(1) of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.2(2) The First Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Goran Capital Inc. and Registrant dated March 28, 1996
is incorporated by reference to Exhibit 10.2(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.2(3) The Second Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Goran Capital Inc. and Registrant dated April 30, 1996
is incorporated by reference to Exhibit 10.2(3) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.2(4) The Third Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Goran Capital Inc., Registrant and Pafco General
Insurance Company dated September 24, 1996 is incorporated by
reference to Exhibit 10.2(4) of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.3(1) The Stockholders Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Registrant and Goran
Capital Inc. dated April 30, 1996 is incorporated by
reference to Exhibit 10.3(1) of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.3(2) The Amended and Restated Stockholder Agreement among GGS
Management Holdings, Inc., GS Capital Partners II, L.P.,
Registrant and Goran Capital Inc. dated September 24, 1996 is
incorporated by reference to Exhibit 10.3(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.4 The Registration Rights Agreement among GGS Management
Holdings, Inc., GS Capital Partners II, L.P., Goran Capital
Inc. and Registrant dated April 30, 1996 is incorporated by
reference to Exhibit 10.4 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.5 The Management Agreement among Superior Insurance Company,
Superior American Insurance Company, Superior Guaranty
Insurance Company and GGS Management, Inc. dated April 30,
1996 is incorporated by reference to Exhibit 10.5 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.6 The Management Agreement between Pafco General Insurance
Company and Registrant dated May 1, 1987, as assigned to GGS
Management, Inc. effective April 30, 1996, is incorporated by
reference to Exhibit 10.6 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.7 The Administration Agreement between IGF Insurance Company
and Registrant dated February 26, 1990, as amended, is
incorporated by reference to Exhibit 10.7 of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.8 The Agreement between IGF Insurance Company and Registrant
dated November 1, 1990 is incorporated by reference to
Exhibit 10.8 of the Registrant's Registration Statement on
Form S-1, Reg. No. 333-9129.
10.9(1) The Credit Agreement between GGS Management, Inc., various
Lenders and The Chase Manhattan Bank (National Association),
as Administrative Agent, dated April 30, 1996 is incorporated
by reference to Exhibit 10.11(1) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.9(2) The Pledge Agreement between GGS Management Holdings, Inc.
and Chase Manhattan Bank, N.A. dated April 30, 1996 is
incorporated by reference to Exhibit 10.11(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.9(3) The Pledge Agreement between GGS Management, Inc. and Chase
Manhattan Bank, N.A. dated April 30, 1996 is incorporated by
reference to Exhibit 10.11(3) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.9(4) The First Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated September 26,
1996..............................................................156
10.9(5) The Second Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated December 31,
1996..............................................................159
10.9(6) The Third Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated March 26,
1997........161
10.10 The Registration Rights Agreement between Goran Capital Inc.
and Registrant dated May 29, 1996 is incorporated by
reference to Exhibit 10.13 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.11(1) The License, Improvement and Support Agreement between
Tritech Financial Systems, Inc. and Registrant dated August
30, 1995 is incorporated by reference to Exhibit 10.14(1) of
the Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.11(2) The License of Computer Software between Tritech Financial
Systems, Inc. and Registrant dated August 30, 1995 is
incorporated by reference to Exhibit 10.14(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.12(1) The Agreement among Cliffstan Investments, Inc., Pafco
General Insurance Company and Gage North Holdings, Inc. dated
September 1, 1989 is incorporated by reference to Exhibit
10.15(1) of the Registrant's Registration Statement on Form
S-1, Reg. No. 333-9129.
10.12(2) The Purchase of Promissory Note and Assignment of Security
Agreement between Pafco General Insurance Company and Granite
Reinsurance Company, Ltd., dated September 30, 1992 is
incorporated by reference to Exhibit 10.15(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.12(3) The Guarantee of Alan G. Symons dated April 22, 1994 is
incorporated by reference to Exhibit 10.15(3) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.12(4) The Share Pledge Agreement between Symons International
Group, Ltd. and Pafco General Insurance Company dated April
22, 1994 is incorporated by reference to Exhibit 10.15(4) of
the Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.13(1) The Employment Agreement between GGS Management Holdings,
Inc. and Alan G. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(1) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.13(2) The Employment Agreement between GGS Management Holdings,
Inc. and Douglas H. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.14(1) The Employment Agreement between IGF Insurance Company and
Dennis G. Daggett effective February 1, 1996 is incorporated
by reference to Exhibit 10.17(1) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.14(2) The Employment Agreement between IGF Insurance Company and
Thomas F. Gowdy effective February 1, 1996 is incorporated by
reference to Exhibit 10.17(2) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.15 The Employment Agreement between Superior Insurance Company
and Roger C. Sullivan, Jr. dated May 9, 1996 is incorporated
by reference to Exhibit 10.18 of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.16 The Employment Agreement between Goran Capital Inc. and Gary
P. Hutchcraft effective June 30, 1996 is incorporated by
reference to Exhibit 10.19 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.17 The Goran Capital Inc. Stock Option Plan is incorporated by
reference to Exhibit 10.20 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.18 The GGS Management Holdings, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.21 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.19 The Registrant's 1996 Stock Option Plan is incorporated by
reference to Exhibit 10.22 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.20 The Registrant's Retirement Savings Plan is incorporated by
reference to Exhibit 10.24 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.21 The Insurance Service Agreement between Mutual Service
Casualty Company and IGF Insurance Company dated May 20, 1996
is incorporated by reference to Exhibit 10.25 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(1) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance. Contract between Pafco General
Insurance Company and Superior Insurance Company is
incorporated by reference to Exhibit 10.27(1) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(2) The Crop Hail Quota Share Reinsurance Contract and Crop
Insurance Service Agreement between Pafco General Insurance
Company and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(2) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.22(3) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance Contract between IGF Insurance
Company and Pafco General Insurance Company is incorporated
by reference to Exhibit 10.27(3) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.22(4) The Multiple Line Quota Share Reinsurance Contract between
IGF Insurance Company and Pafco General Insurance Company is
incorporated by reference to Exhibit 10.27(4) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(5) The Standard Revenue Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(5) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.23 The Commitment Letter, effective October 24, 1996, between
Fifth Third Bank of Central Indiana and Registrant is
incorporated by reference to Exhibit 10.28 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
13 Annual Report to Security Holders.................................170
21 The Subsidiaries of the Registrant are incorporated by
reference to Exhibit 21 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
27 Financial Data Schedule...........................................223
99 Proxy Statement with respect to 1997 Annual Meeting
of Shareholders of Registrant....................................224