-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PwtUxRUS3NjrhQk2q5sPMgoRCZ6FeluLFp40Bj8RNtNTvuy4FA+LXwQesaWaoX2h +JtltAL1vukLcsxJgZ4OhA== 0000950124-96-004118.txt : 19960925 0000950124-96-004118.hdr.sgml : 19960925 ACCESSION NUMBER: 0000950124-96-004118 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19960924 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYMONS INTERNATIONAL GROUP INC CENTRAL INDEX KEY: 0001013698 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 351707115 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09129 FILM NUMBER: 96633866 BUSINESS ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 BUSINESS PHONE: 3172596300 MAIL ADDRESS: STREET 1: 11 SOUTH MERIDIAN STREET STREET 2: SUITE 1313 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 S-1/A 1 S-1/A 1 REGISTRATION NO. 333-9129 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SYMONS INTERNATIONAL GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) INDIANA 6331 35-1707115 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
4720 KINGSWAY DRIVE ALAN G. SYMONS INDIANAPOLIS, INDIANA 46205 4720 KINGSWAY DRIVE (317) 259-6300 INDIANAPOLIS, INDIANA 46205 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (317) 259-6300 NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE, AND AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE TELEPHONE NUMBER, OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO: CATHERINE L. BRIDGE, ESQ. LARS BANG-JENSEN, ESQ. BARNES & THORNBURG ROBERT S. RACHOFSKY, ESQ. 1313 MERCHANTS BANK BUILDING LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. 11 S. MERIDIAN STREET 125 WEST 55TH STREET INDIANAPOLIS, INDIANA 46204 NEW YORK, NEW YORK 10019-5389
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS PROMPTLY AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SYMONS INTERNATIONAL GROUP, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K FOR REGISTRATION STATEMENTS ON FORM S-1 AND FORM OF PROSPECTUS
ITEM IN FORM S-1 CAPTION IN PROSPECTUS - ---------------------------------------------------------- --------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............................. Forepart of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.............................................. Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors, and Ratio of Earnings to Fixed Charges............................ "Prospectus Summary;" "Risk Factors" 4. Use of Proceeds...................................... "Prospectus Summary;" "Use of Proceeds" 5. Determination of Offering Price...................... Front Cover Page of Prospectus; "Underwriting" "Dilution" 6. Dilution............................................. "Dilution" 7. Selling Security Holders............................. Not Applicable 8. Plan of Distribution................................. Outside Front Cover of Prospectus; "Prospectus Summary;" "Underwriting" 9. Description of Securities to be Registered........... "Prospectus Summary;" "Description of Capital Stock;" "Shares Eligible for Future Sale" 10. Interests of Named Experts and Counsel............... "Experts" 11. Information with Respect to the Registrant........... "Organization Structure of SIG and Its Principal Subsidiaries;" "Prospectus Summary;" "The Company;" "Dividend Policy;" "Capitalization;" "Unaudited Pro Forma Consolidated Financial Statements of Operations;" "Selected Consolidated Historical Financial Data of Symons International Group, Inc.;" "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company;" "Selected Consolidated Historical Financial Data of Superior Insurance Company;" "Management's Discussion and Analysis of Financial Condition and Results of Operations of Superior;" "Business;" "Management;" "Certain Relationships and Related Transactions;" "Securities Ownership of Management and Goran;" "Shares Eligible for Future Sale;" Index to Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities....................... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED SEPTEMBER 24, 1996 PROSPECTUS - ----------- 3,000,000 SHARES SYMONS INTERNATIONAL GROUP, INC. SYMONS LOGO COMMON STOCK ------------------------------- All 3,000,000 shares of Common Stock, no par value (the "Common Stock"), are being offered by Symons International Group, Inc. ("SIG" or the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $10.00 and $12.00 per share of Common Stock. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. After giving effect to the Offering, Goran Capital Inc. ("Goran"), a Canadian federally chartered corporation and presently the sole shareholder of the Company, will own approximately 70% of the outstanding shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option. A portion of the proceeds of the Offering will be used to repay certain indebtedness to Goran and to pay a dividend to Goran. See "Use of Proceeds." The Common Stock has been approved for listing on The Nasdaq Stock Market's National Market ("Nasdaq National Market") under the symbol "SIGC," subject to official notice of issuance. There can be no assurance that an active public market for the Common Stock will develop or be maintained after the Offering. ------------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK. ------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS PUBLIC COMMISSIONS(1) TO COMPANY(2) - ------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ - ------------------------------------------------------------------------------------------------- Total (3)......................... $ $ $ - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) The Company, Goran and IGF Holdings, Inc., a subsidiary of the Company, have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock from the Company at the Price to Public less Underwriting Discounts and Commissions solely to cover over- allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------------- The Common Stock is being offered severally by the Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. It is expected that delivery of the certificates representing the Common Stock will be made to the Underwriters on or about , 1996. ------------------------------- ADVEST, INC. MESIROW FINANCIAL, INC. THE DATE OF THIS PROSPECTUS IS , 1996. 4 ORGANIZATIONAL STRUCTURE OF SIG AND ITS PRINCIPAL SUBSIDIARIES SYMONS INTERNATIONAL ______GROUP, INC. FUNDS AFFILIATED WITH | ("SIG" OR THE "COMPANY")(1) GOLDMAN, SACHS & CO. | | ("GS FUNDS")(2) | | | |100% |52% |48% IGF HOOLDINGS, INC. GGS MANAGEMENT | ("IGF HOLDINGS") HOLDINGS, INC.______________| | ("GGS HOLDINGS") | | 100% | |100% | | IGF INSURANCE | COMPANY ("IGF") GGS MANAGEMENT, INC. ("GGS MANAGEMENT") | | ___________________|________ | | | 100% | 100% PAFCO GENERAL SUPERIOR INSURANCE COMPANY INSURANCE COMPANY ("PAFCO") ("SUPERIOR") | | | __________|_________ | | | 100% | 100% SUPERIOR AMERICAN SUPERIOR GUARANTY INSURANCE COMPANY INSURANCE COMPANY Nonstandard Auto Insurance Crop Insurance - ------------------------- (1) Symons International Group, Inc. is a wholly-owned subsidiary of Goran Capital Inc., a Canadian federally chartered corporation. Goran's common stock is traded on the Toronto Stock Exchange under the symbol "GNC" and on the Nasdaq National Market under the symbol "GNCNF." (2) The ownership percentages of the funds affiliated with Goldman, Sachs & Co. in GGS Management Holdings, Inc. are as follows: 30.1% by GS Capital Partners II, L.P., a Delaware limited partnership, 12.0% by GS Capital Partners II Offshore, L.P., a Cayman Islands limited partnership and 5.9% collectively by the following investors: Stone Street Funds L.P., Bridge Street Funds L.P., and Goldman, Sachs & Co. Verwaltungs GmbH. These funds are collectively referred to in this Prospectus as the "GS Funds." ------------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------------ FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA (THE "NORTH CAROLINA INSURANCE COMMISSIONER") NOR HAS THE NORTH CAROLINA INSURANCE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ------------------------------ THE INDIANA AND FLORIDA INSURANCE LAWS PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL (AS DEFINED) OF THE COMPANY, AND THUS INDIRECT CONTROL OF PAFCO, SUPERIOR OR IGF, UNLESS SUCH PERSON HAS GIVEN PRIOR WRITTEN NOTICE TO SUCH INSURANCE COMPANIES AND RECEIVED THE PRIOR APPROVAL OF THE COMMISSIONER OF INSURANCE OF THE STATES OF INDIANA AND FLORIDA. SEE "BUSINESS -- REGULATION." 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and consolidated financial statements, and the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, (i) the "Company" or "SIG" refers to Symons International Group, Inc., an Indiana corporation, and its subsidiaries, (ii) the "Subsidiaries" refer to the direct and indirect subsidiaries of the Company, (iii) the "Insurers" refer to IGF Insurance Company, an Indiana property and casualty insurance company and a wholly-owned subsidiary of the Company ("IGF"), and, through the Company's 52% ownership interest in GGS Management Holdings, Inc. ("GGS Holdings"), Pafco General Insurance Company, an Indiana property and casualty insurance company ("Pafco"), and Superior Insurance Company, a Florida property and casualty insurance company, together with its subsidiaries ("Superior") and (iv) "Goran" refers to Goran Capital Inc. and its subsidiaries, other than the Company and the Subsidiaries. See "Glossary of Selected Insurance and Certain Defined Terms" for the definitions of certain insurance and other terms used herein. Unless otherwise indicated, (i) all data in this Prospectus (a) takes into effect the 7,000-for-1 stock split of the Company's Common Stock that has recently been completed, and (b) assumes that the Underwriters' over-allotment option is not exercised; and (ii) all financial information and operating statistics applicable to the Company and Superior set forth in this Prospectus are based on generally accepted accounting principles ("GAAP") and not statutory accounting practices ("SAP"). In conformity with industry practice, data derived from A.M. Best Company, Inc. ("A.M. Best") and the National Association of Insurance Commissioners ("NAIC") sources, generally used herein for industry comparisons, are based on prescribed SAP. THE COMPANY Symons International Group, Inc., a specialty property and casualty insurer, underwrites and markets nonstandard private passenger automobile insurance and crop insurance. The Company believes that it has demonstrated an ability to acquire under-performing niche insurance businesses and develop them toward their full potential. Through its Subsidiaries, 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. For the twelve months ended June 30, 1996, the Company had consolidated gross premiums written of approximately $175.8 million (including gross premiums written of $25.2 million for Superior for two months of 1996). The Company writes nonstandard automobile insurance through approximately 4,500 independent agencies in 18 states and writes crop 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 automobile 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 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. Nonstandard automobile insurance products are designed for drivers who are unable to obtain coverage from standard market carriers. These drivers are normally charged higher premium rates than the rates charged for preferred or standard risk drivers and generally purchase lower liability limits than preferred or standard risk policyholders. 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. In June, 1995, the Company entered into a letter of intent to acquire Superior from Fortis, Inc. ("Fortis") and, in January, 1996, obtained a commitment from the GS Funds to invest the equity capital needed to finance the acquisition of Superior (the "Acquisition"). GGS Holdings, which is 52% owned by the Company and 48% owned by the GS Funds, was formed (the "Formation Transaction") to focus on the growth and development of the nonstandard automobile insurance business. As part of this strategy, the 3 6 Company contributed Pafco and its right to acquire Superior to GGS Holdings, which completed the Acquisition on April 30, 1996. The Acquisition has allowed the Company to expand its nonstandard automobile business through wider geographic distribution and a broader range of products. Pafco writes business primarily in the Midwest and Colorado, and Superior writes business primarily in the Southeast (particularly Florida) and in California. GGS Holdings plans to pursue additional acquisition opportunities to take advantage of a consolidation trend in the nonstandard automobile insurance industry. There can be no assurance that any suitable acquisition opportunities will arise. IGF Insurance Company ("IGF") is a wholly-owned subsidiary of the Company located in Des Moines, Iowa. IGF underwrites MPCI, crop hail insurance and other named peril crop insurance. MPCI is a federally-subsidized program administered by the FCIC, which is a federally chartered corporation operated through the United States Department of Agriculture ("USDA"). MPCI is designed to provide farmers who suffer an insured crop loss due to the weather or other natural perils with the funds needed to continue operations and plant crops for the next growing season. For the year ended December 31, 1995, the Company wrote approximately $53.4 million in MPCI Premiums (as defined herein) and $17.0 million in crop hail gross premiums. In addition to premium revenues, for the same period, the Company received from the FCIC: (i) CAT Coverage Fees (as defined herein) in the amount of $1.3 million, (ii) Buy-up Expense Reimbursement Payments (as defined herein) in the amount of $16.4 million and (iii) CAT LAE Reimbursement Payments (as defined herein) and MPCI Excess LAE Reimbursement Payments (as defined herein) in the aggregate amount of $3.4 million. IGF uses proprietary software to write and service policies. The Company uses employee claims adjusters rather than relying solely on part-time, independent contractor adjusters as do many of its competitors. Management believes that the approaches adopted by IGF's management team in the information technology, claims handling and underwriting aspects of its business are innovations which provide IGF with a competitive advantage in the crop insurance industry. For a discussion of the accounting treatment of the Company's MPCI business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview." The Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act") required farmers for the first time to purchase at least a basic level of MPCI coverage ("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 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 Premiums increased to $53.4 million in 1995 from $44.3 million in 1994 and the fees and reimbursement payments received by the Company from its MPCI business increased to $21.1 million in 1995 from $14.0 million in 1994. However, 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. 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. As a result of this limitation, 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 has not experienced any material negative impact in 1996 from the delinkage mandated by the 1996 Reform Act. 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. 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. The Company has multiple strategies to achieve profitable growth including the following: - The Company will continue to develop its two niche product lines: nonstandard automobile insurance and crop insurance. - Through GGS Holdings, the Company intends to take advantage of acquisition opportunities in the consolidating nonstandard automobile insurance industry. 4 7 - The Company will use the Superior acquisition to market its automobile insurance products to additional markets and to expand the multi-tiered marketing approach currently employed by Superior. - The Company will continue to emphasize providing quality, cost efficient services to its independent agencies together with a commission structure designed to encourage those agencies to place a high volume of profitable business with its insurance subsidiaries. - The Company will continue to develop and enhance its relationship with its crop agencies by using an electronic communications network that enables agencies to communicate directly with the Company's central computer system, thereby limiting agencies' handling costs. - The Company will seek to enhance the underwriting profits and reduce the volatility of its crop insurance business through geographic diversification and the effective use of federal and third-party catastrophic reinsurance arrangements. The Company is a wholly-owned subsidiary of Goran. The ordinary shares of Goran are traded on the Toronto Stock Exchange under the symbol "GNC" and on the Nasdaq National Market under the symbol "GNCNF." Following the Offering, Goran will hold approximately 70% of the Common Stock, assuming no exercise of the Underwriters' over-allotment option. Goran engages, through subsidiaries other than the Company, in certain reinsurance and surplus lines underwriting operations. These subsidiaries of Goran have certain business relationships with the Company which the Company expects will continue after consummation of the Offering. The Company's state of incorporation is Indiana; its principal executive offices are located at 4720 Kingsway Drive, Indianapolis, Indiana; and its telephone number is (317) 259-6300. THE OFFERING Common Stock being offered by the Company.... 3,000,000 shares Common Stock outstanding (1) Before the Offering........................ 7,000,000 shares After the Offering......................... 10,000,000 shares Use of Proceeds.............................. The Company intends to apply the net proceeds from the Offering as follows: (i) to contribute approximately $9.0 million to IGF to increase its statutory surplus to provide support for the writing of additional crop insurance coverages; (ii) to repay certain bank indebtedness of the Company in the amount of $7.5 million; (iii) to retire a note in the principal amount of approximately $3.5 million issued to Pafco by one of the Company's wholly-owned Subsidiaries; (iv) to retire the Company's indebtedness to Goran (the aggregate outstanding balance of which is approximately $7.5 million (the "Parent Indebtedness")); (v) to pay a dividend to Goran in the amount of up to $3.5 million; and (vi) to apply the remainder of the net proceeds, if any, for general corporate purposes, including acquisitions. See "The Company" and "Use of Proceeds." Proposed Nasdaq National Market Symbol....... SIGC
- ------------------------- (1) Excluding 1,000,000 shares reserved for issuance pursuant to certain employment agreements with officers of IGF and the Company's 1996 Stock Option Plan. See "Management -- Executive Compensation -- Employment Contracts and Termination of Employment -- IGF" and "-- Stock Option Plans -- SIG 1996 Stock Option Plan." 5 8 SUMMARY COMPANY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------------- --------------------------------- PRO FORMA PRO FORMA FOR THE FOR THE TRANSACTIONS TRANSACTIONS AND THE AND THE OFFERING OFFERING 1991 1992 1993 1994 1995 1995(1) 1995 1996(2) 1996(1) ------- -------- ------- -------- -------- ------------ ------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: (3) Gross premiums written... $91,974 $109,219 $88,936 $103,134 $124,634 $214,275 $95,759 $146,950 $190,943 Net premiums written..... 31,543 35,425 31,760 35,139 53,447 142,978 30,855 77,042 120,660 Net premiums earned...... 30,388 35,985 31,428 32,126 49,641 143,682 22,789 59,066 98,453 Net investment income.... 1,370 1,319 1,489 1,241 1,173 8,262 636 1,533 3,985 Other income............. -- -- 886 1,622 2,174 6,345 997 4,062 6,279 Net realized capital gain (loss)............ 381 486 (119) (159) (344) 1,610 79 228 257 ------- -------- ------- -------- -------- -------- ------- -------- -------- Total revenues....... 32,139 37,790 33,684 34,830 52,644 159,899 24,501 64,889 108,974 ------- -------- ------- -------- -------- -------- ------- -------- -------- Net income (loss) (4).... $ 1,770 $ 817 $ (323) $ 2,117 $ 4,821 $ 6,701 $ 2,006 $ 4,304 $ 5,928 Net income (loss) per common share (4)....... $ 0.25 $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 0.66 $ 0.29 $ 0.61 $ 0.58 Weighted average shares outstanding............ 7,000 7,000 7,000 7,000 7,000 10,196 7,000 7,000 10,196 GAAP RATIOS: (3)(5) Loss and LAE ratio....... 76.1% 76.6% 79.8% 82.4% 72.5% 73.4% 69.1% 76.7% 73.1% Expense ratio............ 20.8 23.4 31.5 21.7 18.6 31.0 25.4 22.9 26.4 ------- -------- ------- -------- -------- -------- ------- -------- -------- Combined ratio........... 96.9% 100.0% 111.3% 104.1% 91.1% 104.4% 94.5% 99.6% 99.5%
JUNE 30, 1996 ---------------------- DECEMBER 31, AS ADJUSTED -------------------------------------------------- FOR THE 1991 1992 1993 1994 1995 ACTUAL OFFERING(1) ------- -------- ------- -------- -------- -------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED BALANCE SHEET DATA: (3) Investments................... $26,049 $ 27,941 $21,497 $ 18,572 $ 25,902 $161,205 $ 173,705 Total assets.................. 78,749 75,001 81,540 66,628 110,516 378,673 391,173 Losses and loss adjustment expenses.................... 38,607 38,616 54,143 29,269 59,421 93,628 93,628 Total debt.................... 9,009 11,528 9,341 10,683 11,776 63,287 48,250 Minority interest............. 466 55 -- 16 -- 17,723 17,723 Total shareholders' equity.... 484 1,193 2,219 4,255 9,535 17,757 45,294 Book value per share.......... $ 0.07 $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 2.54 $ 4.53 STATUTORY CAPITAL AND SURPLUS: (6) Pafco......................... $ 8,251 $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 14,872 $ 14,872 IGF........................... $ 5,277 $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 11,559 $ 20,559 Superior...................... $ 48,036 $ 48,036
- ------------------------- (1) Results of operations of Superior for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 are presented herein in "Selected Consolidated Historical Financial Data of Superior Insurance Company." The pro forma consolidated statement of operations data for the year ended December 31, 1995 and for the six months ended June 30, 1996 present results for the Company as if the Formation Transaction, the Acquisition, and the other transactions described in "The Company -- Formation of GGS Holdings; Acquisition of Superior" (collectively, the "Transactions") and the Offering had occurred as of January 1, 1995 and eliminate all of the operations related to the commercial business ceded to Granite Reinsurance Company Ltd., a subsidiary of Goran ("Granite Re"), for the year ended December 31, 1995. See "Unaudited Pro Forma Consolidated Statements of Operations" for a discussion of pro forma statement of operations adjustments. The as adjusted consolidated balance sheet data as of June 30, 1996 gives effect to the Offering as if it had occurred as of June 30, 1996. The as adjusted consolidated balance sheet data assumes a per share offering price of $11.00 per share and 3,000,000 shares issued less estimated issuance costs of $3,300,000 and the application of the net proceeds of the Offering. See "Use of Proceeds." (2) The Company's consolidated results of operations for the six months ended June 30, 1996 include the two months results of operations of Superior subsequent to the Acquisition. (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview" for a discussion of the accounting treatment accorded to the crop insurance business. (4) In 1993, the Company recognized an increase to net income as a result of a cumulative effect of a change in accounting principle of $1,175,000. The net income per share for 1993 excluding this cumulative effect was $(0.20). (5) The loss and LAE ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The expense ratio is calculated by dividing the sum of policy acquisition and general and administrative expenses and interest expense by net premiums earned. The combined ratio is the sum of the loss and LAE and expense ratios. As a result of the unique accounting treatment accorded to the MPCI business, the Company's GAAP loss and LAE, expense and combined ratios are not comparable to the ratios for other property and casualty insurers. (6) Statutory capital and surplus is calculated under SAP and is relevant for insurance regulatory purposes in determining the amount of business an insurance company may write. Among the differences between SAP and GAAP capital and surplus are the following: SAP does not recognize as assets deferred acquisition costs, certain assets such as furniture and fixtures, agents' balances in excess of 90 days, and deferred tax assets or liabilities. In addition, the historical capital and surplus of an acquired entity carries over for statutory purposes. The statutory surplus of Pafco includes Pafco's share of IGF's statutory surplus prior to April 30, 1996. Pafco owned the following percentages of IGF at December 31 for each of the following years: 1991, 87.9%; 1992, 98.2%; 1993, 98.2%; 1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF Holdings to SIG. Prior to the Transfer (as defined below), IGF Holdings also paid a dividend to Pafco in the form of cash of $7,500,000 and a promissory note with a principal amount of $3,500,000. See "The Company -- Formation of GGS Holdings; Acquisition of Superior." 6 9 RISK FACTORS There are certain risks involved in an investment in the Common Stock. Accordingly, prospective purchasers of the Common Stock should consider carefully the factors set forth below as well as the other information contained in this Prospectus. UNCERTAIN PRICING AND PROFITABILITY One of the distinguishing features of the property and casualty industry is that its products generally are priced before its costs are known, because premium rates usually are determined before losses are reported. Premium rate levels are related in part to the availability of insurance coverage, which varies according to the level of surplus in the industry. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. The nonstandard automobile insurance business in recent years has experienced very competitive pricing conditions and there can be no assurance as to the Company's ability to achieve adequate pricing. Changes in case law, the passage of new statutes or the adoption of new regulations relating to the interpretation of insurance contracts can retroactively and dramatically affect the liabilities associated with known risks after an insurance contract is in place. New products also present special issues in establishing appropriate premium levels in the absence of a base of experience with such products' performance. The number of competitors and the similarity of products offered, as well as regulatory constraints, limit the ability of property and casualty insurers to increase prices in response to declines in profitability. In states which require prior approval of rates, it may be more difficult for the Company to achieve premium rates which are commensurate with the Company's underwriting experience with respect to risks located in those states. In addition, the Company does not control rates on its MPCI business, which are instead set by the FCIC. Accordingly, there can be no assurance that these rates will be sufficient to produce an underwriting profit. The reported profits and losses of a property and casualty insurance company are also determined, in part, by the establishment of, and adjustments to, reserves reflecting estimates made by management as to the amount of losses and loss adjustment expenses ("LAE") that will ultimately be incurred in the settlement of claims. The ultimate liability of the insurer for all losses and LAE reserved at any given time will likely be greater or less than these estimates, and material differences in the estimates may have a material adverse effect on the insurer's financial position or results of operations in future periods. See "Risk Factors -- Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE." NATURE OF NONSTANDARD AUTOMOBILE INSURANCE BUSINESS The nonstandard automobile insurance business is affected by many factors which can cause fluctuations 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, droughts, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the 7 10 Company -- Overview -- Crop Insurance Operations -- Recent Developments Affecting MPCI Underwriting Results" for examples of recent events that could adversely affect the Company's operating results. The Company expects that for the foreseeable future a majority of its crop insurance business 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, effective for 1996 spring-planted crops, 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 kind 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, technological 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. For further information about the Company's MPCI business, see "Business -- Crop Insurance - -- Products." 8 11 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. See "Business -- Nonstandard Automobile Insurance -- Competition." 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 1995 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 17. 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. See "Business -- Crop Insurance -- Competition." 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 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." 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. See "Use of Proceeds." 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. See "Business -- Ratings." 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. For the six months ended June 30, 1996 on a pro forma basis after giving effect to the Acquisition of Superior as if it had occurred on January 1, 1996, gross premiums written by the Company in Florida accounted for approximately 37% of the Company's total nonstandard 9 12 automobile insurance gross premiums written for this period. See "Business -- Nonstandard Automobile Insurance -- Marketing." 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. See "Business -- Crop Insurance -- Marketing; Distribution Network." 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 and meet the other related standards established by insurance regulatory authorities and insurance rating bureaus. 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 Insurers will have access to sufficient capital to support future growth and also satisfy the capital requirements of rating agencies and regulators. 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. See "-- Control by Goran, "-- Potential Limitations on Ability to Raise Additional Capital," "-- Conflicts of Interest" and "-- Certain Rights of the GS Funds to Cause A Sale of GGS Holdings" below. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources." UNCERTAINTY ASSOCIATED WITH ESTIMATING RESERVES FOR UNPAID LOSSES AND LAE The reserves for unpaid losses and LAE established by the Company are estimates of amounts needed to pay reported and unreported claims and related LAE based on facts and circumstances then known. These reserves are based on estimates of trends in claims severity, judicial theories of liability and other factors. Although the nature of the Company's insurance business is primarily short-tail, the establishment of adequate reserves is an inherently uncertain process, and there can be no assurance that the ultimate liability will not materially exceed the Company's reserves for losses and LAE and have a material adverse effect on the Company's results of operations and financial condition. Due to the inherent uncertainty of estimating these amounts, it has been necessary, and may over time continue to be necessary, to revise estimates of the Company's reserves for losses and LAE. The historic development of reserves for losses and LAE may not necessarily reflect future trends in the development of these amounts. Accordingly, it may not be appropriate to extrapolate redundancies or deficiencies based on historical information. See "Business -- Reserves for Losses and Loss Adjustment Expenses." 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 10 13 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. See "Business -- Nonstandard Automobile Insurance -- Reinsurance" and "Business -- Crop Insurance -- Third Party Reinsurance in Effect for 1996." RISKS ASSOCIATED WITH INVESTMENTS The Company's results of operations depend in part on the performance of its invested assets. As of June 30, 1996, 74.2% of the Company's investment portfolio was invested in fixed maturity securities, 20.2% in equity securities, 3.7% in short-term investments, and 1.9% in real estate and mortgage loans. 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. See "Business -- Investments." COMPREHENSIVE STATE REGULATION The Insurers 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. See "Business -- Regulation." 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 Insurers, 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 11 14 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 revaluation of assets. As of December 31, 1995, IGF had earned surplus of $2,713,000. 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 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 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 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) 30 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. Under these laws, the maximum aggregate amounts of dividends permitted to be paid in 1996 by IGF without prior regulatory approval is $2,713,000, none of which has been paid, and Pafco cannot pay any dividends in 1996 without prior regulatory approval. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources." Further, there can be no assurance that, if requested, the Indiana Department will approve any request for extraordinary dividends from Pafco or IGF or that the Florida Department will allow any dividends to be paid by Superior during the four year period described above. Payment of dividends by IGF requires prior approval by the lender under the IGF Revolver (as defined herein). There can be no assurance that IGF will be able to obtain this consent. The Company intends to seek 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, Buy-up Expense Reimbursement Payments 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources." 12 15 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, Inc., a wholly-owned subsidiary of GGS Holdings ("GGS Management"). 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 Formation Transaction, 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 reevaluate the reasonableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department or the Florida Department will not in the future require a reduction in these management fees. Furthermore, as a result of certain restrictive covenants with respect to dividends and other payments contained in the GGS Senior Credit Facility (as defined herein), 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources." CONTROL BY GORAN The Company is a wholly-owned subsidiary of Goran, and after completion of the Offering, Goran will own approximately 70% of the outstanding Common Stock, assuming no exercise of the Underwriters' over-allotment option. Goran will have the power to control the Company, to elect its Board of Directors and to approve any action requiring shareholder approval, including adopting amendments to the Company's articles of incorporation and approving or disapproving mergers or sales of all or substantially all of the assets of the Company. Because Goran has the ability to elect the Board of Directors of the Company, it will be able to effectively control all of the Company's policy decisions. As long as Goran is the majority shareholder of the Company, third parties will not be able to obtain control of the Company through purchases of Common Stock not owned by Goran. The shares of the Company owned by Goran are pledged to Montreal Trust Company of Canada, as Trustee, to secure Goran's obligations under certain convertible subordinated notes. G. Gordon Symons, Chairman of the Board of Goran, the Company and GGS Holdings and the father of Alan G. Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President and Chief Operating Officer of the Company, and members of the Symons family beneficially own in the aggregate 61.0% of the outstanding common stock of Goran. Accordingly, since G. Gordon Symons and members of his family have the ability to elect the Board of Directors of Goran, they will have the ability to elect the Board of Directors of the Company and otherwise to influence significantly the Company's business and operations. See "Securities Ownership of Management and Goran." 13 16 Of the seven directors of the Company, five are current directors of Goran (three of whom are members of the Symons family and two of whom are independent directors of Goran) and two are outside directors. Directors and officers of the Company and Goran may have conflicts of interest with respect to certain matters affecting the Company, such as potential business opportunities and business dealings between the Company and Goran and its affiliated companies. See "Management -- Directors and Executive Officers of the Company." POTENTIAL LIMITATIONS ON ABILITY TO RAISE ADDITIONAL CAPITAL Goran's failure to maintain ownership of at least 50% of the Company's voting securities will expose Goran to a risk that it will be characterized as an investment company within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), unless Goran's remaining voting securities of the Company, together with any other investment securities, represent not more than 40% of the total assets of Goran on an unconsolidated basis. In such event, Goran would be required to comply with the registration and other requirements of the 1940 Act, which would be significantly burdensome for Goran. This constraint makes it unlikely that Goran would approve a stock issuance by the Company that reduces Goran's ownership below 50% and therefore would likely limit the amount of additional capital which can be raised by the Company through the issuance of voting securities. Among other consequences, such a limit could affect the Company's ability to raise funds for acquisition opportunities which may become available to the Company or to GGS Holdings. In addition, the stockholder agreement among the Company, the GS Funds, Goran and 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 of more than 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. In any event, the Company will be unable to raise equity capital by issuing additional shares of Common Stock unless Goran agrees to that issuance. In addition, if Goran or the Company ever sold significant amounts of shares of the Common Stock in the public market, those sales might have an adverse effect on the market price of the Common Stock. CONFLICTS OF INTEREST Currently, Goran does not market property and casualty insurance products which compete with products sold by the Company. Although there are no restrictions on the activities in which Goran may engage, management of the Company does not expect that Goran and the Company will compete with each other to any significant degree in the sale of property and casualty insurance products. There can be no assurance, however, that the Company will not encounter competition from Goran in the future or that actions by Goran or its affiliates will not inhibit the Company's growth strategy. See "Certain Relationships and Related Transactions -- Control by Goran; Potential Conflicts with Goran." Conflicts of interest between the Company and Goran could arise with respect to business dealings between them, including potential acquisitions of businesses or properties, the issuance of additional securities, the election of new or additional directors and the payment of dividends by the Company. The Company has not instituted any formal plan or arrangement to address potential conflicts of interest that may arise between the Company and Goran. See "Certain Relationships and Related Transactions -- Control by Goran; Potential Conflicts with Goran." 14 17 Conflicts of interest similar to those which could arise between the Company and Goran could also arise between the Company and GGS Holdings. Alan G. Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President and Chief Operating Officer of the Company, also serve as the Chief Executive Officer and President, and Executive Vice President, respectively, of GGS Holdings. Such individuals have entered into employment agreements with GGS Holdings requiring them to devote substantially all of their working time and attention to the business and affairs of GGS Holdings. Further, Alan G. Symons and certain other members of management of the Company are entitled, under certain circumstances, to receive options to purchase shares of common stock of GGS Holdings. See "Management -- Executive Compensation -- Employment Contracts and Termination of Employment -- GGS Holdings." In addition, in the event that the Company does not continue to own at least 50% of the outstanding voting securities of GGS Holdings and the voting securities of GGS Holdings owned by the Company, together with any other investment securities, represent over 40% of the total assets of the Company on an unconsolidated basis, the Company will be exposed to a risk that it would be characterized as an investment company within the meaning of the 1940 Act. This consideration will limit the amount of additional capital which can be raised through the issuance by GGS Holdings of its voting securities. 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 1940 Act considerations with respect to GGS Holdings discussed above, 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 90 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. 15 18 DEPENDENCE ON KEY PERSONNEL IN CONNECTION WITH FUTURE SUCCESS The future success of the Company depends significantly upon the efforts of certain key management personnel including G. Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief Executive Officer of the Company, Douglas H. Symons, President and Chief Operating Officer of the Company and Pafco, Dennis G. Daggett, President of IGF, and Roger C. Sullivan, Jr., Executive Vice President of Superior. A loss of any of these officers could adversely affect the Company's business. See "Management -- Directors and Executive Officers of the Company." POSSIBLE LIABILITIES RELATING TO TRANSACTIONS Prior to the Offering, the Company entered into a number of transactions, including the Formation Transaction, the Acquisition, the Transfer, the Distribution, the Dividend (all as defined herein) and the other transactions described under "The Company -- Formation of GGS Holdings; Acquisition of Superior" (collectively, the "Transactions"). The application of the tax laws to the factual circumstances relating to certain aspects of the Transactions is uncertain. In particular, while the Company believes that there is substantial authority for treating Pafco's contribution of IGF to IGF Holdings in exchange for all of the capital stock of IGF Holdings (the "Contribution") as a tax-free transaction under Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"), and therefore that no tax penalties would in any event be payable, there can be no assurance that the Internal Revenue Service (the "IRS") would agree with the foregoing tax treatment. Among other things, the IRS could attempt to recharacterize the Contribution and the Dividend which could result in a material liability to the Company. See "The Company -- Formation of GGS Holdings; Acquisition of Superior." The Company cannot predict with certainty whether or when any such liabilities might arise. Accordingly, the Company's results of operations in one or more future periods could be materially adversely affected by liabilities related to the Transactions. Goran has agreed to indemnify the Company against any of the foregoing liabilities; however, in the event that Goran was unable to pay any such amount, the Company would remain liable. NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK; TRADING OF GORAN COMMON STOCK Prior to the Offering, there has been no public market for the Common Stock. Although the Common Stock has been approved for listing on the Nasdaq National Market under the symbol "SIGC," subject to official notice of issuance, there can be no assurance that an active trading market will develop or be sustained. The initial public offering price of the Common Stock will be determined solely through negotiations among the Company, Goran and representatives of the Underwriters based on several factors and will not necessarily reflect the price at which Common Stock may be sold in the public market after this Offering. The market price of the Common Stock may be significantly affected by trading in the shares of Goran common stock on the Toronto Stock Exchange and the Nasdaq National Market since SIG currently constitutes a substantial majority of the consolidated total assets of Goran and contributes a substantial majority of the consolidated net income of Goran. In addition, factors such as quarterly variations in the Company's financial results, announcements by the Company or others and developments affecting the Company could cause the market price of the Common Stock to fluctuate significantly. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE AND POSSIBLE EFFECT ON THE MARKET PRICE OF THE COMMON STOCK Upon completion of the Offering, 7,000,000 shares of Common Stock held by Goran will continue to be "restricted securities" as defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). Such shares may not be resold in the absence of registration under the Securities Act or exemptions from such registration, including, among others, the exemption provided by Rule 144 under the Securities Act. As an affiliate of the Company, Goran is subject to certain volume restrictions on the sale of shares of Common Stock. The Company and Goran have agreed not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. See "Underwriting." 16 19 No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. If such sales reduce the market price of the Common Stock, the Company's ability to raise additional capital in the equity markets could be adversely affected. Pursuant to the registration rights agreement which will be entered into between the Company and Goran (the "Goran Registration Rights Agreement"), Goran will have the right to have any or all of the shares of Common Stock held by it after the Offering included in a registration statement filed by the Company under the Securities Act, subject to certain limitations set forth in the Goran Registration Rights Agreement (a "Piggyback Registration"). See "Certain Relationships and Related Transactions -- Registrations Rights Agreement between the Company and Goran." IMMEDIATE AND SUBSTANTIAL DILUTION Based on an assumed initial public offering price per share of $11.00 and after deduction of estimated underwriting discounts and expenses payable by the Company in connection with the Offering, the Company's net tangible book value per share of Common Stock as of June 30, 1996, after giving effect to the Offering, would be $3.95. Accordingly, purchasers of Common Stock offered hereby would suffer immediate dilution in net tangible book value per share of $7.05. See "Dilution." 17 20 THE COMPANY FORMATION AND EARLY YEARS The Company was incorporated on March 30, 1987 as a wholly-owned subsidiary of Goran. The Company was formed as the holding company for Pafco which acquired in 1987 a book of nonstandard automobile insurance business located in several Midwestern states. In 1990, the Company entered the crop insurance business through its purchase of shares of preferred stock of IGF representing 80% of the outstanding voting securities of IGF. After this acquisition, the Company purchased all the remaining outstanding shares of capital stock of IGF as the shares became available for sale. FORMATION OF GGS HOLDINGS; ACQUISITION OF SUPERIOR In June, 1995, the Company entered into a letter of intent to acquire Superior from Fortis, and in January, 1996, the Company secured a commitment from the GS Funds to invest equity capital. On January 31, 1996, Goran, the Company, Fortis and its wholly-owned subsidiary, Interfinancial, Inc. ("Interfinancial"), a holding company for Superior, entered into a Stock Purchase Agreement (the "Superior Purchase Agreement") pursuant to which the Company agreed to purchase Superior from Interfinancial (the "Acquisition") for a purchase price of approximately $66.0 million. Simultaneously with the execution of the Superior Purchase Agreement, Goran, the Company, GGS Holdings and GS Capital Partners II, L.P., a Delaware limited partnership, entered into an agreement (the "GGS Agreement") to capitalize GGS Holdings and to cause GGS Holdings to issue its capital stock to 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 GGS Holdings (i) all the outstanding common stock of Pafco, with a book value determined in accordance with U.S. GAAP of at least $15.3 million as reflected on an audited post-closing balance sheet of Pafco, (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 GGS Holdings $21.2 million in cash. If the book value of Pafco as reflected on the final post-closing balance sheet is less than $15.3 million, the Company will be required to contribute the amount of the deficiency in cash to GGS Holdings no later than December 31, 1996, plus interest at the prime rate from the date of closing of the Formation Transaction to date of payment. Pursuant to the GGS Agreement, prior to the Company's contribution of Pafco to GGS Holdings, Pafco transferred all of the outstanding capital stock of IGF (the "Transfer") in order to improve the risk-based capital rating of Pafco and to permit GGS Holdings 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"). See "Risk Factors - -- Possible Liabilities Relating to Transactions." The IGFH Bank Debt and the IGF Note will be repaid with a portion of the proceeds from the Offering. See "Use of Proceeds." The Formation Transaction and the Acquisition were completed on April 30, 1996. The purchase price paid by GGS Holdings for Superior was approximately $66.4 million based on a GAAP net book value of Superior of $63.2 million as reflected in a preliminary pre-closing balance sheet, subject to post-closing adjustment based on the net book value of Superior as reflected in an audited post-closing balance sheet as of April 30, 1996. GGS Management funded the purchase price and associated transaction costs with a combination of the $21.2 million contributed by the GS Funds and the proceeds of a $48.0 million senior bank facility extended to GGS Management (the "GGS Senior Credit Facility"). See "Risk Factors -- Holding Company Structure; Dividend and Other Restrictions; Management Fees." The Stockholder Agreement among the Company, the 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 the 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 18 21 Holdings by reason of the issuance of shares of common stock to the 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 contained in 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"). In such event, so long as the Indemnity Date has not occurred, the Company shall be entitled to designate only two directors and the 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 the 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, the 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. The GS Funds have the right at any time to designate a chief operating officer for GGS Holdings but have currently not elected to exercise this right. Upon request, the GS Funds have 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 the GS Funds the right to appoint any designees to the board of directors of any of the subsidiaries of GGS Holdings. 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"). 19 22 USE OF PROCEEDS Based on an estimated offering price of $11.00 per share and estimated offering expenses of $3.3 million, the net proceeds to the Company of the Offering are estimated to be approximately $29.7 million (approximately $34.3 million if the Underwriters' over-allotment option is exercised in full). The Company intends to apply the net proceeds from the Offering as follows: (i) to contribute approximately $9.0 million to IGF to increase its statutory surplus to provide support for the writing of additional crop insurance coverages, (ii) to repay in full the IGFH Bank Debt of approximately $7.5 million, (iii) to retire the approximately $3.5 million IGF Note held by Pafco, (iv) to retire the Parent Indebtedness, the aggregate outstanding balance of which is approximately $7.5 million, and (v) to declare and pay a dividend to Goran in the amount of up to $3.5 million, to the extent that excess net proceeds remain. See "The Company -- Formation of GGS Holdings; Acquisition of Superior." The Company will use the remainder of the net proceeds, if any, for general corporate purposes, including acquisitions. Until utilized for the above purposes, the net proceeds of the Offering will be invested in short-term, interest-bearing, investment-grade securities. In the event that net proceeds of the Offering are not sufficient for all the foregoing uses, the Company would first eliminate the declaration and payment of the dividend payable to Goran and then, if necessary, reduce the repayment of Parent Indebtedness. The IGFH Bank Debt matures on January 1, 2001, with principal repayable in 16 quarterly installments of $468,750 commencing April 1, 1997. Interest will accrue at a variable rate per annum equal to the prime rate until October 1, 1996 and thereafter at a rate equal to the prime rate plus one percent. The IGFH Bank Debt is collateralized by a first priority security interest in all of the outstanding shares of IGF and the guarantee of Symons International Group, Ltd. ("SIGL"), the controlling shareholder of Goran, collateralized by 966,600 shares of Goran common stock. Additionally, certain financial covenants in favor of the lender of the IGFH Bank Debt require IGF Holdings to maintain increasing levels of income, retained earnings, and statutory capital over the term of the IGFH Bank Debt. The IGF Note is payable on the earlier of November 30, 1996, or the consummation of an IGFH or SIG Company Sale (as defined in the GGS Agreement). The IGF Note may be prepaid only with the prior written consent of the lender of the IGFH Bank Debt. The IGF Note bears interest at a variable rate per annum equal to the prime rate plus one percent until October 1, 1996 and thereafter at a rate equal to the prime rate plus two percent, and is collateralized by a second lien on the outstanding shares of capital stock of IGF. The Parent Indebtedness is payable on demand, accrues interest at a rate of 10% and was originally incurred by SIG in 1992 as a result of Goran's partial funding of the repayment of certain loan obligations arising from the capitalization of SIG's U.S. operations. After giving effect to the Transactions and the Offering on a pro forma basis as if the Transactions and the Offering had occurred on January 1, 1995, the pro forma net income per share for the year ended December 31, 1995 and the six months ended June 30, 1996 is $0.66 and $0.58, respectively. DIVIDEND POLICY The Company currently intends to retain earnings to finance the growth and development of its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future, except for the dividend to Goran described in "Use of Proceeds." Any determination to pay cash dividends on the Common Stock will depend on, among other things, the future earnings, capital requirements and financial condition of the Company, legal restrictions on the payment of dividends, and on such other factors as the Company's Board of Directors may consider relevant. As a holding company, the Company will depend on dividends and other payments from the Subsidiaries to meet its expenses and other corporate obligations and, if declared, to pay dividends to shareholders. In the case of the Insurers, such payments are restricted by the laws, regulations and orders of regulatory authorities of the states of Indiana and Florida. In addition, the GGS Senior Credit Facility effectively prohibits GGS Management from paying dividends or making other payments to its affiliates in excess of $100,000 per year in the aggregate and the IGF Revolver prohibits the payment of dividends by IGF without the consent of the lender. See "Risk Factors -- Holding Company Structure; Dividend and Other Restrictions; Management Fees." 20 23 DILUTION At June 30, 1996, the net tangible book value of the Common Stock was approximately $12.0 million, or $1.71 per share. The net tangible book value per share represents the amount of total tangible assets (total assets less intangible assets) of the Company reduced by its total liabilities divided by the number of shares of Common Stock outstanding. After giving effect to the sale of 3,000,000 shares of Common Stock in the Offering at an assumed initial public offering price of $11.00 per share less estimated underwriting discounts and commissions and offering expenses, but without taking into account any other changes in net tangible book value after June 30, 1996, the adjusted net tangible book value of the Common Stock at June 30, 1996 would have been $39.5 million, or $3.95 per share. This represents an immediate increase in the net tangible book value to Goran of $2.24 per share, and an immediate dilution in net tangible book value to new investors purchasing Common Stock in the Offering of $7.05 per share. The following table illustrates this per share dilution: Assumed initial public offering price per share....................... $11.00 Net book value per share.............................................. 2.54 Less: Intangible assets per share................................ 0.83 ---- - Net tangible book value per share...................... 1.71 Increase per share attributable to the purchase of Common Stock by new investors in the Offering................................ 2.24 ---- - As adjusted net tangible book value per share after the Offering...... 3.95 ------ Dilution per share to new investors (1)(2)............................ $ 7.05 ======
- ------------------------- (1) Dilution is determined by subtracting the net tangible book value per share of Common Stock, after giving effect to the Offering, from the amount of cash paid for a share of Common Stock by a new investor in the Offering. (2) Intangible assets per share would be $2.71, net tangible book value per share would be $(0.17), and dilution per share to new investors would be $8.37 if deferred policy acquisition costs (which aggregated $13,192,000 at June 30, 1996) were considered an intangible asset. 21 24 CAPITALIZATION Set forth below is the actual capitalization of the Company at June 30, 1996 and the capitalization of the Company at June 30, 1996 as adjusted to give effect to the application of the net proceeds from the Offering (based on an assumed offering price of $11.00 per share of Common Stock) as described in "Use of Proceeds."
AT JUNE 30, 1996 -------------------------- AS ADJUSTED FOR ACTUAL THE OFFERING(1) ------- --------------- (IN THOUSANDS) Short-term debt...................................................... $15,287 $ 250 ======= ======== Long-term bank debt.................................................. 48,000 48,000 ------- -------- Minority interest.................................................... 17,723 17,723 ------- -------- Shareholders' equity:................................................ Preferred stock; 50,000,000 shares authorized; no shares outstanding.................................................... -- -- Common stock, no par value, and additional paid-in capital; 100,000,000 shares authorized; 7,000,000 shares outstanding and 10,000,000 shares outstanding as adjusted...................... 7,519 37,209 Unrealized gain on investments.................................. 484 484 Retained earnings............................................... 9,754 7,601 ------- -------- Total shareholders' equity.................................... $17,757 $ 45,294 ------- -------- Total capitalization................................................. $83,480 $ 111,017 ======= ========
- ------------------------- (1) The information as adjusted excludes shares reserved for issuance pursuant to certain employment agreements with officers of IGF and the Company's 1996 Stock Option Plan. See "Management -- Executive Compensation -- Employment Contracts and Termination of Employment -- IGF" and "-- Stock Option Plans -- SIG 1996 Stock Option Plan." 22 25 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS The following unaudited pro forma consolidated statements of operations of the Company for the year ended December 31, 1995 and the six months ended June 30, 1996 present results for the Company as if the Transactions and the Offering had occurred as of January 1, 1995, and eliminates all of the operations related to the commercial business ceded to Granite Re for the year ended December 31, 1995. The pro forma adjustments are based on available information and certain assumptions that the Company currently believes are reasonable in the circumstances. The unaudited pro forma consolidated statements of operations have been derived from and should be read in conjunction with the historical Consolidated Financial Statements and Notes of the Company for the year ended December 31, 1995 and the unaudited six months ended June 30, 1996 and the historical Consolidated Financial Statements and Notes of Superior for the year ended December 31, 1995 and the unaudited six months ended June 30, 1996, in each case contained elsewhere herein, and should be read in conjunction with the accompanying Notes to Unaudited Pro Forma Consolidated Statements of Operations. The pro forma adjustments and pro forma consolidated amounts are provided for informational purposes only. For a discussion of the accounting statement accorded to the crop insurance business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview -- Crop Insurance Operations." The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial position that would have occurred had the Transactions and the Offering been consummated on the dates assumed; nor is the pro forma information intended to be indicative of the Company's future results of operations. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FOR THE SIX MONTHS ENDED JUNE 30, 1996 SIX MONTHS FOUR MONTHS --------------------------------------------------------- ENDED ENDED APRIL PRO FORMA JUNE 30, 30, FOR THE 1996 1996 PRO FORMA TRANSACTIONS SIG SUPERIOR FOR THE OFFERING AND THE HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTIONS ADJUSTMENTS OFFERING ---------- ----------- ----------- ------------ ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) Gross premiums written...................... $146,950 $43,993 $ -- $190,943 $ -- $190,943 Net premiums written........................ 77,042 43,618 -- 120,660 -- 120,660 Net premiums earned......................... 59,066 39,387 -- 98,453 -- 98,453 Net investment income....................... 1,533 2,452 -- 3,985 -- 3,985 Other income................................ 4,062 2,217 140C2 6,419 (140)I 6,279 Net realized capital gain (loss)............ 228 29 -- 257 -- 257 ------- -------- ------- -------- ----- -------- Total revenues.......................... 64,889 44,085 140 109,114 (140) 108,974 Losses and loss adjustment expenses......... 45,275 26,715 -- 71,990 -- 71,990 Policy acquisition and general and administrative expenses................... 12,283 11,445 78A1 23,755 -- 23,755 42A2 (174)A3 81B2 Interest expense............................ 1,261 -- 1,330A4 2,962 (375)G 2,216 371C1 (371)H ------- -------- ------- -------- ----- -------- Total expenses.......................... 58,819 38,160 1,728 98,707 (746) 97,961 Income before income taxes and minority interest.................................. 6,070 5,925 (1,588) 10,407 606 11,013 Provision for income taxes.................. 1,854 1,952 (542)F 3,264 206K 3,470 Minority interest........................... (88) -- 1,747B1 1,659 (44)J 1,615 ------- -------- ------- -------- ----- -------- Net income.............................. $ 4,304 $ 3,973 $(2,793) $ 5,484 $ 444 $ 5,928 ======= ======== ======= ======== ===== ======== $0.78 $0.58 Net income per common share................. ======== ======== Weighted average shares outstanding......... 7,000 3,196L 10,196 GAAP RATIOS: Loss and LAE ratio.......................... 76.7% 67.8% 73.1% 73.1% Expense ratio............................... 22.9% 29.1% 27.1% 26.4% ------- -------- -------- -------- Combined ratio.......................... 99.6% 96.9% 100.2% 99.5%
The accompanying notes are an integral part of the pro forma consolidated financial statements. 23 26 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------------------------------------- PRO FORMA FOR THE PRO FORMA TRANSACTIONS SIG SUPERIOR FOR THE OFFERING AND THE HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTIONS ADJUSTMENTS OFFERING ---------- ---------- ----------- ------------ ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) Gross premiums written........ $ 124,634 $ 94,756 $(5,115)E $214,275 $ -- $214,275 Net premiums written.......... 53,447 94,070 (4,539)E 142,978 -- 142,978 Net premiums earned........... 49,641 97,614 (3,573)E 143,682 -- 143,682 Net investment income......... 1,173 7,093 (4)E 8,262 -- 8,262 Other income.................. 2,174 4,171 280C2 6,625 (280)I 6,345 Net realized capital gain (loss)...................... (344) 1,954 -- 1,610 -- 1,610 ---------- ---------- ----------- ------------ ----------- ------------ Total revenues.............. 52,644 110,832 (3,297) 160,179 (280)1 159,899 Losses and loss adjustment expenses.................... 35,971 72,343 (2,880)E 105,434 -- 105,434 Policy acquisition and general and administrative expenses.................... 7,981 32,705 232A1 40,035 -- 40,035 126A2 (521)A3 244B2 (732)E Interest expense.............. 1,248 -- 3,989A4 6,211 (750)G 4,487 974C1 (974)H ---------- ---------- ----------- ------------ ----------- ------------ Total expenses.............. 45,200 105,048 1,432 151,680 (1,724) 149,956 Income before income taxes, minority interest, and discontinued operations..... 7,444 5,784 (4,729) 8,499 1,444 9,943 Provision for income taxes.... 2,619 1,649 (1,565)F 2,703 491K 3,194 Minority interest............. -- -- 136B1 136 (88)J 48 Loss from discontinued operations (less income taxes)...................... (4) -- 4D -- -- -- ---------- ---------- ----------- ------------ ----------- ------------ Net income.................. $ 4,821 $ 4,135 $(3,296) $ 5,660 $ 1,041 $ 6,701 ======== ======== ========= ========= ========= ========= Net income per common share... $0.81 $0.66 ========= ========= Weighted average shares outstanding................. 7,000 3,196L 10,196 GAAP RATIOS: Loss and LAE ratio............ 72.5% 74.1% 73.4% 73.4% Expense ratio................. 18.6 33.5 32.2 31.0 ---------- ---------- ------------ ------------ Combined ratio.............. 91.1% 107.6% 105.6% 104.4%
The accompanying notes are an integral part of the pro forma consolidated financial statements. 24 27 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS PRO FORMA ADJUSTMENTS RELATING TO THE TRANSACTIONS Acquisition of Superior The Acquisition was accounted for under the purchase method of accounting. Under this method, the total cost to acquire Superior was allocated to the assets and liabilities based on their fair values as of the date of the Acquisition with any excess of the total purchase price over the fair value of the assets acquired less the fair value of the liabilities assumed recorded as goodwill. Under the terms of the Superior Purchase Agreement, the total purchase price for Superior was $66,389,000, including transaction costs of $140,000. The GAAP carrying value of assets acquired and liabilities assumed at the Acquisition date approximated fair value. There were no significant identifiable intangible assets. Therefore, the excess cost of the total purchase price ($3,161,000) was recorded as goodwill. The Acquisition was funded with (i) $21,200,000 of cash contributions from the GS Funds in exchange for a 48% minority interest in GGS Holdings; and (ii) $48,000,000 in cash from the GGS Senior Credit Facility. Funds received in excess of the total purchase price of Superior plus acquisition costs financed, estimated to be $192,000, are reflected as cash until final determination of the Acquisition purchase price. No additional investment income is assumed to be earned on the excess cash retained from the proceeds of the Acquisition financing. Pro forma adjustments relating to the Acquisition pertaining to the six month period ended June 30, 1996 were calculated based on the period from January 1, 1996 to April 30, 1996, the date of the Acquisition. Pro forma adjustments to give effect to the Acquisition and related transactions are summarized as follows: A1. Policy acquisition and general and administrative expenses for the periods prior to the Acquisition are adjusted by $232,000 for the year ended December 31, 1995 and by $78,000 for the six months ended June 30, 1996 to reflect the amortization of deferred loan origination costs of $1,397,000 incurred related to the GGS Senior Credit Facility. The debt issuance costs are amortized over six years, the term of the GGS Senior Credit Facility. A2. Policy acquisition and general and administrative expenses for the periods prior to the Acquisition are adjusted by $126,000 for the year ended December 31, 1995 and by $42,000 for the six months ended June 30, 1996 to reflect the amortization of goodwill of $3,161,000. Goodwill is amortized over a 25-year period on a straight line basis based upon management's estimate of the expected benefit period. A3. Policy acquisition and general and administrative expenses for the periods prior to the Acquisition are adjusted by $521,000 for the year ended December 31, 1995 and by $174,000 for the six months ended June 30, 1996 to reflect the elimination of management fees charged by Superior's former parent, Fortis, for corporate expenses. A4. Interest expense for the periods prior to the Acquisition is adjusted by $3,989,000 for the year ended December 31, 1995 and by $1,330,000 for the six months ended June 30, 1996 to reflect the GGS Senior Credit Facility financing of $48,000,000 related to the Acquisition. It is assumed that the interest rate on the GGS Senior Credit Facility was 8.31% for both periods. The Company entered into an interest rate swap to effectively fix its borrowing costs at 8.31% through November 15, 1996 and 9.02% through July 30, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources." The Formation Transaction B1. Minority interest for the periods prior to the Formation Transaction is $136,000 for the year ended December 31, 1995 and $1,747,000 for the six months ended June 30, 1996 reflecting the 48% minority interest in GGS Holdings. 25 28 B2. Policy acquisition and general and administrative expenses for the periods prior to the Formation Transaction is adjusted by $244,000 for the year ended December 31, 1995 and by $81,000 for the six months ended June 30, 1996 to reflect the amortization of organizational costs of $1,220,000. Organizational costs are amortized over a 5-year period on a straight line basis. The Transfer In connection with the Transfer and immediately prior to the Formation Transaction, IGF Holdings paid to Pafco the Dividend, consisting of $7,500,000 in cash and the $3,500,000 IGF Note. IGF Holdings funded the cash portion of the Dividend with the proceeds of the $7,500,000 IGFH Bank Debt. Pro forma adjustments to give effect to the Transfer and related transactions are summarized as follows: C1. Interest expense for the periods prior to the Transfer is adjusted to reflect the financing of the Dividend. The interest rate on the IGFH Bank Debt was 9.25% (prime rate plus 1%), which represents the interest applicable for the majority of the debt service period. The stated interest rate on the IGF Note is 8.0%. Pro forma interest expense adjustments to give effect to the financing are summarized as follows:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ---------------- IGFH Bank Debt.............. $ 694,000 $231,000 IGF Note.................... 280,000 140,000 -------- -------- $ 974,000 $371,000 ======== ========
C2. Other income has been adjusted by $280,000 for the year ended December 31, 1995 and by $140,000 for the six months ended June 30, 1996 to reflect the interest income Pafco would earn which is derived from the $3,500,000 IGF Note, at a stated rate of 8.0%. The Distribution D. Loss from discontinued operations is adjusted to reflect the Distribution, which occurred on January 1, 1996. Accordingly, all of the discontinued operations related to SIGF activities have been eliminated on a pro forma basis. No adjustments have been made to the Pro Forma Consolidated Statements of Operations for the six months ended June 30, 1996 as the Distribution occurred on January 1, 1996. E. On April 29, 1996, Pafco ceded all of its commercial business relating to (i) 1995 and previous years, and (ii) prospectively written commercial business, through a 100% quota share reinsurance agreement to Granite Re, an affiliate of the Company, with an effective date of January 1, 1996. Granite Re, a subsidiary of Goran, is not part of the consolidated group of the Company. Therefore, the commercial business ceded to Granite Re has been excluded from the Company's results of operations to reflect the continuing impact of the Company's results of operations. On a pro forma basis, all of the operations related to the commercial business have been eliminated for the year ended December 31, 1995. No adjustments have been made to the Pro Forma Consolidated Statements of Operations for the six months ended June 30, 1996 as the cession of commercial business to Granite Re occurred as of January 1, 1996. The following amounts have been eliminated, on a pro forma basis:
YEAR ENDED DECEMBER 31, 1995 ----------------- Gross premiums written......................... $ 5,115,000 Net premiums written........................... 4,539,000 Net premiums earned............................ 3,573,000 Net investment income.......................... 4,000 Losses and LAE................................. 2,880,000 Policy acquisition and general and administrative expenses...................... 732,000
26 29 The Company remains contingently liable with respect to the reinsurance with Granite Re, which would become an ultimate liability of the Company in the event that Granite Re is unable to meet its obligations under the reinsurance agreements. F. All applicable pro forma adjustments to operations are tax affected at the effective rate. PRO FORMA ADJUSTMENTS RELATING TO THE OFFERING The Pro Forma Consolidated Statements of Operations reflect the assumed issuance by the Company of 3,000,000 shares at an offering price of $11.00 per share, and the application of the proceeds thereof (net of assumed offering expenses of $3,300,000) as described in "Use of Proceeds." G. Interest expense for the periods prior to the Offering are adjusted by $750,000 for the year ended December 31, 1995 and by $375,000 for the six months ended June 30, 1996 to reflect the retirement of the Parent Indebtedness of $7,500,000, with a stated interest rate of 10%. H. Interest expense for the periods prior to the Offering is adjusted to reflect the repayment of the $7,500,000 IGFH Bank Debt, with an interest rate of 9.25%, and the repayment of the IGF Note of $3,500,000, with a stated interest rate of 8.0% as follows:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ---------------- IGFH Bank Debt.............. $ 694,000 $231,000 IGF Note.................... 280,000 140,000 -------- -------- $ 974,000 $371,000 ======== ========
I. Other income has been adjusted by $280,000 for the year ended December 31, 1995 and by $140,000 for the six months ended June 30, 1996 to reflect the elimination of interest income Pafco would have earned on the IGF Note of $3,500,000, at a stated rate of 8%. No additional investment income is assumed to be earned on the cash received by Pafco from the proceeds of the IGF Note. J. Minority interest for the periods prior to the Formation Transaction has been adjusted by $88,000 for the year ended December 31, 1995 and by $44,000 for the six months ended June 30, 1996 to reflect the 48.0% minority interest in GGS Holdings resulting from entry I above. K. All applicable pro forma adjustments to operations are tax affected at the effective rate. L. The weighted average shares outstanding have been adjusted to reflect the 3,000,000 shares issued in the Offering, and have been further increased by 195,727 shares for the $2.2 million dividend to be paid to Goran from the proceeds of the Offering, in accordance with accounting rules which require such presentation for purposes of pro forma earnings per share calculations. 27 30 SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF SYMONS INTERNATIONAL GROUP, INC. The selected consolidated financial data presented below is derived from the consolidated financial statements of the Company and its Subsidiaries. Such financial statements for, and as of the end of, each of the years in the three year period ended December 31, 1995, have been audited by Coopers & Lybrand L.L.P., independent public accountants, and are included in this Prospectus. The selected consolidated financial data presented below for, and as of the end of, each of the six month periods ended June 30, 1995 and 1996 are derived from the unaudited consolidated financial statements of the Company included elsewhere in this Prospectus. The results of the operations of the Company for the six months ended June 30, 1996 are not necessarily indicative of the results of operations that may be expected for the full year. In the opinion of management, the unaudited information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such periods. The information set forth below should be read in conjunction with the consolidated financial statements of the Company and the notes thereto, included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------------- ---------------------------------- PRO FORMA PRO FORMA FOR THE FOR THE TRANSACTION TRANSACTION AND THE AND THE OFFERING OFFERING 1991 1992 1993 1994 1995 1995(1) 1995 1996(2) 1996(1) ------- -------- ------- -------- -------- ------------ -------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) CONSOLIDATED STATEMENT OF OPERATIONS DATA:(3) Gross premiums written.... $91,974 $109,219 $88,936 $103,134 $124,634 $214,275 $ 95,759 $146,950 $190,943 Net premiums written...... 31,543 35,425 31,760 35,139 53,447 142,978 30,855 77,042 120,660 Net premiums earned....... 30,388 35,985 31,428 32,126 49,641 143,682 22,789 59,066 98,453 Net investment income..... 1,370 1,319 1,489 1,241 1,173 8,262 636 1,533 3,985 Other income.............. -- -- 886 1,622 2,174 6,345 997 4,062 6,279 Net realized capital gain (loss).................. 381 486 (119) (159) (344) 1,610 79 228 257 -------- --------- -------- --------- --------- -------- --------- --------- --------- Total revenues.... 32,139 37,790 33,684 34,830 52,644 159,899 24,501 64,889 108,974 -------- --------- -------- --------- --------- -------- --------- --------- --------- Losses and loss adjustment expenses................ 23,137 27,572 25,080 26,470 35,971 105,434 15,751 45,275 71,990 Policy acquisition and general and administrative expenses................ 5,480 7,955 8,914 5,801 7,981 40,035 5,589 12,283 23,755 Interest expense.......... 847 459 996 1,184 1,248 4,487 193 1,261 2,216 -------- --------- -------- --------- --------- -------- --------- --------- --------- Total expenses.... 29,464 35,986 34,990 33,455 45,200 149,956 21,533 58,819 97,961 -------- --------- -------- --------- --------- -------- --------- --------- --------- Income (loss) before taxes, discontinued operations, extraordinary item, cumulative effect of an accounting change and minority interest....... 2,675 1,804 (1,306) 1,375 7,444 9,943 2,968 6,070 11,013 Income taxes.............. 771 996 83 (718) 2,619 3,194 958 1,854 3,470 -------- --------- -------- --------- --------- -------- --------- --------- --------- Income (loss) before discontinued operations, extraordinary item, cumulative effect of an accounting change and minority interest....... $ 1,904 $ 808 $(1,389) $ 2,093 $ 4,825 $ 6,749 $ 2,010 $ 4,216 $ 7,543 Net income (loss)......... $ 1,770 $ 817 $ (323) $ 2,117 $ 4,821 $ 6,701 $ 2,006 $ 4,304 $ 5,928 ======== ========= ======== ========= ========= ======== ========= ========= ========= Per common share data: Income (loss) before discontinued operations, extraordinary item, and cumulative effect of an accounting change and minority interest.............. $ 0.27 $ 0.12 $ (0.20) $ 0.30 $ 0.69 $ 0.66 $ 0.29 $ 0.61 $ 0.74 Net income (loss)....... $ 0.25 $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 0.66 $ 0.29 $ 0.61 $ 0.58 ======== ========= ======== ========= ========= ======== ========= ========= ========= Weighted average shares outstanding............. 7,000 7,000 7,000 7,000 7,000 10,196 7,000 7,000 10,196 GAAP RATIOS: (3)(4) Loss and LAE ratio........ 76.1% 76.6% 79.8% 82.4% 72.5% 73.4% 69.1% 76.7% 73.1% Expense ratio............. 20.8 23.4 31.5 21.7 18.6 31.0 25.4 22.9 26.4 -------- --------- -------- --------- --------- -------- --------- --------- --------- Combined ratio............ 96.9% 100.0% 111.3% 104.1% 91.1% 104.4% 94.5% 99.6% 99.5%
(consolidated balance sheet data and footnotes on following page) 28 31
JUNE 30, 1996 -------------------- AS DECEMBER 31, ADJUSTED ------------------------------------------------------ FOR THE 1991 1992 1993 1994 1995 ACTUAL OFFERING(1) ------- -------- ------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED BALANCE SHEET DATA:(3) Investments................................ $26,049 $ 27,941 $21,497 $ 18,572 $ 25,902 $161,205 $173,705 Total assets............................... 78,749 75,001 81,540 66,628 110,516 378,673 391,173 Losses and loss adjustment expenses........ 38,607 38,616 54,143 29,269 59,421 93,628 93,628 Total debt................................. 9,009 11,528 9,341 10,683 11,776 63,287 48,250 Minority interest.......................... 466 55 -- 16 -- 17,723 17,723 Total shareholders' equity................. 484 1,193 2,219 4,255 9,535 17,757 45,294 Book value per share....................... $ 0.07 $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 2.54 $ 4.53 STATUTORY CAPITAL AND SURPLUS:(5) Pafco...................................... $ 8,251 $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 14,872 $ 14,872 IGF........................................ $ 5,277 $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 11,559 $ 20,559 Superior................................... $ 48,036 $ 48,036
- ------------------------- (1) Results of operations of Superior for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 are presented herein in "Selected Consolidated Historical Financial Data of Superior Insurance Company." The pro forma consolidated statement of operations data for the year ended December 31, 1995 and for the six months ended June 30, 1996 present results for the Company as if the Transactions and the Offering had occurred as of January 1, 1995 and eliminate all of the operations related to the commercial business ceded to Granite Re for the year ended December 31, 1995. See "Unaudited Pro Forma Consolidated Statements of Operations" for a discussion of such adjustments. The as adjusted consolidated balance sheet data as of June 30, 1996 gives effect to the Offering as if it had occurred as of June 30, 1996. The as adjusted consolidated balance sheet data assumes a per share offering price of $11.00 and 3,000,000 shares issued less estimated issuance costs of $3,300,000 and the application of the net proceeds of the Offering. See "Use of Proceeds." (2) The Company's consolidated results of operations for the six months ended June 30, 1996 include the results of operations of Superior subsequent to the Acquisition. (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview -- Crop Insurance Operations" for a discussion of the accounting treatment accorded to the crop insurance business. (4) The loss and LAE ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The expense ratio is calculated by dividing the sum of policy acquisition and general and administrative expenses and interest expense by net premiums earned. The combined ratio is the sum of the loss and LAE and expense ratios. As a result of the unique accounting treatment accorded to the MPCI business, the Company's GAAP loss and LAE, expense and combined ratios are not comparable to the ratios for other property and casualty insurers. (5) The statutory surplus of Pafco includes Pafco's share of IGF's statutory surplus prior to April 30, 1996. Pafco owned the following percentages of IGF at December 31 of each of the following years: 1991, 87.9%; 1992, 98.2%; 1993, 98.2%; 1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF Holdings to SIG. Prior to the Transfer, IGF Holdings also paid a dividend to Pafco in the form of cash of $7,500,000 and a promissory note with a principal amount of $3,500,000. See "The Company -- Formation of GGS Holdings; Acquisition of Superior." 29 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY OVERVIEW The Company underwrites and markets nonstandard private passenger automobile insurance and crop insurance. Nonstandard Automobile Insurance Operations; Impact of Formation Transaction and Superior Acquisition 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 insureds 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 higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Due to the low limits of coverage, the period of time that elapses between the incurrence and settlement of losses under nonstandard policies is shorter than many other types of insurance. Also, since the nonstandard automobile insurance business typically experiences lower rates of retention than standard automobile insurance, the number of new policyholders underwritten by nonstandard automobile insurance carriers each year is substantially greater than the number of new policyholders underwritten by standard carriers. While pricing conditions have improved in certain markets in 1996, the nonstandard automobile insurance business has experienced a high degree of competition in recent years that has made it difficult for the Company to achieve adequate pricing. As a consequence of these pricing conditions, the Company from time to time has had to temporarily reduce its writings in certain markets. For information concerning the Company's historical loss and LAE ratios on its nonstandard automobile insurance business, see "-- Selected Segment Data of the Company." Prior to consummation of the Formation Transaction and the Acquisition on April 30, 1996, the Company provided nonstandard automobile insurance coverage primarily through Pafco as a wholly-owned subsidiary. In connection with the Formation Transaction, the management agreement formerly in place between the Company and Pafco, which provides for an annual management fee payable to the Company in an amount equal to 15% of gross premiums written, was assigned to GGS Management. As a result of the change in the capital structure of the Company's nonstandard automobile insurance business, the acquisition of Superior by GGS Holdings and the assignment of the Pafco management agreement to GGS Management, certain financial information relating to the Company's nonstandard business in respect of periods prior to consummation of the Formation Transaction and the Acquisition will not be comparable to corresponding financial information for subsequent periods. See "The Company -- Formation of GGS Holdings; Acquisition of Superior" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Superior." Crop Insurance Operations General. The majority of the Company's crop insurance business consists of Multi-Peril Crop Insurance ("MPCI"). MPCI is a government-sponsored program with accounting treatment which differs in certain respects from more traditional property and casualty insurance lines. Farmers may purchase "CAT Coverage" (the minimum available level of MPCI coverage) upon payment of a fixed administrative fee of $50 per policy (the "CAT Coverage Fee") instead of a premium. This fee is included in Other Income. Commissions paid to agents to write CAT policies are partially offset by the CAT Coverage Fee, with such offset reflected in Other Income. For purposes of the profit-sharing formula under the MPCI program referred to below, the Company is credited with an imputed premium (its "MPCI Imputed Premium") for all CAT Coverage policies it sells, 30 33 determined in accordance with the profit-sharing formula established by the FCIC. For income statement purposes under GAAP, gross premiums written consist of the aggregate amount of premiums paid by farmers for "Buy-up Coverage" (MPCI coverage in excess of CAT Coverage), and any related federal premium subsidies, but do not include any MPCI Imputed Premium credited on CAT Coverage. By contrast, net premiums written (and net premiums earned) do not include any MPCI premiums or premium subsidies, all of which are deemed to be ceded to the U.S. Government as reinsurer. The Company's profit or loss from its MPCI business is determined after the crop season ends on the basis of a complex profit-sharing formula established by federal regulation and the FCIC. For GAAP income statement purposes, any such profit or loss sharing earned or payable by the Company is treated as an adjustment to commission expense and is included in policy acquisition and general and administrative expenses. Amounts receivable from the FCIC are reflected on the Company's consolidated balance sheet as reinsurance recoverables. The Company also receives from the FCIC (i) an expense reimbursement payment equal to a percentage of gross premiums written for each Buy-up Coverage policy it writes (the "Buy-up Expense Reimbursement Payment"), (ii) an LAE reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it writes (the "CAT LAE Reimbursement Payment") and (iii) a small excess LAE reimbursement payment of two hundredths of one percent (.02%) of MPCI Retention (as defined herein) to the extent the Company's MPCI loss ratios on a per state basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For 1994, 1995 and 1996, the Buy-up Expense Reimbursement Payment has 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. For GAAP income statement purposes, the Buy-up Expense Reimbursement Payment is treated as a contribution to income and reflected as an offset against policy acquisition and general and administrative expenses. The CAT LAE Reimbursement Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement purposes, recorded as an offset against LAE, up to the actual amount of LAE incurred by the Company in respect of such policies, and the remainder of the payment, if any, is recorded as Other Income. See "Business -- Crop Insurance -- Products." As a result of the unique accounting treatment accorded to the MPCI business, the Company's GAAP loss and LAE, expense and combined ratios are not comparable to the ratios for other property and casualty insurers. This lack of comparability results from, among other things, (i) the recognition of MPCI underwriting gain or loss as an offset to commission expense, (ii) the lack of any net premium or loss and LAE for MPCI because of the deemed 100% reinsurance by the federal government, and (iii) other aspects of MPCI accounting that affect one or more aspects of the Company's operating ratios. Accordingly, such ratios are included in this Prospectus not for comparison to other insurers, but instead as a measure of the Company's relative performance in different years. For loss and LAE, expense and combined ratio information with respect to the Company's nonstandard automobile insurance business only, see "Business -- Nonstandard Automobile Insurance -- Underwriting." Certain other characteristics of the Company's crop business may affect comparisons of the Company's results and operating ratios with those of other insurers, including: (i) the seasonal nature of the business whereby underwriting gains are generally recognized throughout the year with a reconciliation in the last quarter of the year; (ii) the short-term nature of crop business whereby losses are known within a short time period; and (iii) the limited amount of investment income associated with crop business. In addition, cash flows from the crop business differ from cash flows from certain more traditional lines. See "-- Liquidity and Capital Resources." The seasonal and short term nature of the Company's crop business, as well as the impact on such business of weather and other natural perils, may produce variations in the Company's operating results. Impact of 1994 Reform Act and 1996 Reform Act. 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. As a result of an increase in the number of policies and acres insured in 1995, the Company's MPCI Premiums increased to $53.4 million in 1995 from $44.3 million in 1994 and the fees and commissions received by the Company from its MPCI business increased to $21.1 million in 1995 from $14.0 million in 1994. However, the 1996 Reform Act limits the role of the USDA offices in the delivery of MPCI coverage beginning in July, 1996, which is the 31 34 commencement of the 1997 crop year, and also eliminates the linkage between CAT Coverage and qualification for certain federal farm program benefits. 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. As a result of this limitation, 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 has not experienced any material negative impact in 1996 from the delinkage mandated by the 1996 Reform Act. 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) many 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. Crop Revenue Coverage. The Company has recently introduced a new product in its crop insurance business called Crop Revenue Coverage, or "CRC." In contrast to standard MPCI coverage, which features a yield guarantee or coverage for the loss of production at a fixed price per commodity unit established by the FCIC, 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 for the 1996 crop year. The Company believes that 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. Since the FCIC generally regulates CRC as one of its own programs, the material aspects of the CRC program are substantially similar to those of other federal programs such as MPCI, including the FCIC profit-sharing arrangement, the use of reinsurance pools and expense reimbursement payments paid by the FCIC. Since CRC is, in certain respects, a new product approved by the FCIC with which neither the Company nor the crop insurance industry has had any prior experience, there is uncertainty as to the demand for, and the pricing and profitability of, this product. Accordingly, there can be no assurance that the Company's financial condition or results of operations will not be adversely affected by the writing of CRC policies. For more information concerning the pricing of this product and the liabilities insured, see "Business -- Crop Insurance -- Products -- Crop Revenue Coverage." Recent Developments Affecting MPCI Underwriting Results. A combination of weather events occurring in early 1996 will affect the Company's underwriting results from its MPCI business in 1996. Although underwriting results for winter wheat crops were adversely affected by drought conditions, these losses were offset, in part, by unusually good results from Florida citrus crops as a result of better than normal weather. Additionally, weather conditions for summer crops in most growing areas where IGF markets its products have been favorable to date. The next main peril in 1996 is freeze, which may present a somewhat higher exposure than usual for the Company in 1996 as a result of delays in planting crops in the first part of 1996 due to rainy conditions. Certain Accounting Policies for Crop Insurance Operations. In 1996, the Company instituted a policy of recognizing (i) 35% of its estimated MPCI gross premiums written for each of the first and second quarters, 20% for the third quarter and 10% for the fourth quarter, (ii) commission expense at a rate of 16% of MPCI gross premiums written recognized and (iii) Buy-up Expense Reimbursement at a rate of 31% of MPCI gross premiums written recognized along with normal operating expenses incurred in connection with premium writings. All amounts are reconciled in the fourth quarter after final gross premium amounts are computed from policyholder acreage reports which are generally filed by late September. In prior years, recognition of MPCI gross premiums written was 30%, 30%, 30% and 10%, for the first, second, third and fourth quarters, respectively. Commencing with its June 30, 1995 financial statements, the Company also began recognizing MPCI underwriting gain or loss during the first and second quarters, as well as the third quarter, reflecting the 32 35 Company's best estimate of the amount of such gain or loss to be recognized for the full year, based on, among other things, historical results, plus a provision for adverse developments. As a result of the inclusion in the Company's estimate of this general provision for adverse development (which is spread over the year), the Company's results of operations through June 30, 1996 do not reflect any reduction in underwriting gain specifically as a result of potential losses due to the southern plains drought conditions which affected winter wheat crops in Spring 1996. In the fourth quarter, a reconciliation amount is recognized for the underwriting gain or loss based on final premium and loss information. Policy Acquisition and General and Administrative Expenses Policy acquisition and general and administrative expenses consist of (i) gross commissions paid to agents, (ii) ceding commission income from reinsurers, (iii) Buy-up Expense Reimbursement Payments, (iv) underwriting gain or loss on the Company's MPCI business and (v) other operating expenses. The following table sets forth certain information with respect to the Company's policy acquisition and general and administrative expenses for the periods indicated.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------- --------------------------------------- 1993 1994 1995 1995 1996 ----------------- ------------------ ------------------ ------------------ ------------------ AUTO CROP AUTO CROP AUTO CROP AUTO CROP(1) AUTO CROP(1) ------- ------- ------- -------- ------- -------- ------- -------- ------- -------- (IN THOUSANDS) Gross commission expenses.......... $ 8,345 $ 5,524 $ 7,070 $ 9,867 $ 7,162 $ 13,391 $ 2,893 $ 6,489 $12,040 $ 11,604 Ceding commission income............ (9,173) (969) (5,381) (1,651) (2,991) (2,968) (1,473) -- 890 (530) Buy-up Expense Reimbursement Payments(2)....... (8,854) (13,845) (16,366) (10,233) (19,402) MPCI underwriting (gain) or loss(2)........... 1,515 (3,257) (9,653) (768) (1,610) Other operating expenses.......... 6,683 4,252 7,020 4,084 8,758 8,130 5,179 2,524 3,540 5,672 ------- ------- ------- -------- ------- -------- ------- -------- ------- -------- Policy acquisition and general and administrative expenses(3)....... $ 5,855 $ 1,468 $ 8,709 $ (4,802) $12,929 $ (7,466) $ 6,599 $ (1,988) $16,470 $ (4,266) ======= ======= ======= ======== ======= ======== ======= ======== ======= ========
- ------------------------- (1) See discussion above under "-- Certain Accounting Policies for Crop Insurance Operations." (2) For GAAP income statement purposes, Buy-up Expense Reimbursement Payments are treated as a contribution to income and reflected as an offset against commission expenses. MPCI underwriting gain or loss is also treated as an adjustment to commission expenses. This unique accounting treatment may from time to time result in the creation of a "negative" expense for this line item. (3) Includes policy acquisition and general and administrative expenses for crop insurance and nonstandard automobile insurance segments but excludes policy acquisition and general and administrative expenses attributable to corporate and discontinued operations. DISCONTINUANCE OF SURPLUS LINES UNDERWRITING UNIT Prior to the Offering, the Company, through SIGF, its specialized managing general agency and 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 Pafco as well as a number of other insurers, including 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. All Pafco insurance policies issued through SIGF in respect of business other than nonstandard automobile insurance have been 100% reinsured by Granite Reinsurance Company, Ltd. ("Granite Re"), a wholly-owned subsidiary of Goran. Although Pafco will in the future continue to write business through SIGF, this business will also be reinsured with Granite Re pursuant to such 100% quota share arrangement. 33 36 SELECTED SEGMENT DATA OF THE COMPANY The following table presents historical segment data for the Company's nonstandard automobile and crop insurance operations. This data does not reflect results of operations attributable to corporate and discontinued operations nor does it include the results of operations of Superior prior to April 30, 1996.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------- ------------------ 1993 1994 1995 1995 1996(1) ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT RATIOS) NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS: Gross premiums written.................................. $52,187 $45,593 $49,005 $23,745 $62,290 Net premiums written.................................... 26,479 28,114 37,302 18,444 62,089 Net premiums earned..................................... 26,747 25,390 34,460 16,539 52,844 Net investment income................................... 1,144 904 624 446 1,435 Other income............................................ 886 1,545 1,787 450 2,333 Net realized capital gain (loss)........................ (44) (55) (508) 12 212 ------- ------- ------- ------- ------- Total revenues...................................... 28,733 27,784 36,363 17,447 56,824 ------- ------- ------- ------- ------- Losses and loss adjustment expenses..................... 17,152 18,303 25,423 11,808 38,831 Policy acquisition and general and administrative expenses.............................................. 5,855 8,709 12,929 6,599 16,470 ------- ------- ------- ------- ------- Total expenses...................................... 23,007 27,012 38,352 18,407 55,301 ------- ------- ------- ------- ------- Income (loss) before income taxes....................... $ 5,726 $ 772 $(1,989) $ (960) $ 1,523 ======= ======= ======= ======= ======= GAAP RATIOS (NONSTANDARD AUTOMOBILE ONLY): Loss and LAE ratio...................................... 64.1% 72.1% 73.8% 71.4% 73.5% Expense ratio........................................... 21.9 34.3 37.5 39.9 31.2 ------- ------- ------- ------- ------- Combined ratio.......................................... 86.0% 106.4% 111.3% 111.3% 104.7% CROP INSURANCE OPERATIONS:(2) Gross premiums written(3)............................... $35,156 $54,455 $70,374 $69,942 $80,537 Net premiums written(3)................................. 4,281 4,565 11,608 10,323 14,953 Net premiums earned(3).................................. 4,281 4,565 11,608 4,779 6,222 Net investment income................................... 347 339 674 253 96 Other income............................................ 0 73 384 1,246 1,148 Net realized capital gain (loss)........................ 114 (104) 164 85 16 ------- ------- ------- ------- ------- Total revenues...................................... 4,742 4,873 12,830 6,363 7,482 ------- ------- ------- ------- ------- Losses and loss adjustment expenses..................... 6,774 7,031 8,629 4,351 6,444 Policy acquisition and general and administrative expenses.............................................. 1,468 (4,802) (7,466) (1,988) (4,266) Interest expense........................................ 235 492 627 323 120 ------- ------- ------- ------- ------- Total expenses...................................... 8,477 2,721 1,790 2,686 2,298 ------- ------- ------- ------- ------- Income (loss) before income taxes....................... $(3,735) $ 2,152 $11,040 $ 3,677 $ 5,184 ======= ======= ======= ======= ======= STATUTORY CAPITAL AND SURPLUS: Pafco(4)................................................ $ 8,132 $ 7,848 $11,875 $ 9,656 $14,872 IGF..................................................... 2,789 4,512 9,219 6,653 11,559 Superior................................................ 56,656 43,577 49,277 45,891 48,036
- ------------------------- (1) The nonstandard automobile insurance operations include the results of operations of Superior subsequent to the Acquisition. (2) See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview -- Crop Insurance Operations" for a discussion of the accounting treatment accorded to the crop insurance business. (3) Crop hail insurance premiums are primarily written in the second and third calendar quarters. (4) The statutory surplus of Pafco includes Pafco's share of IGF's statutory surplus prior to April 30, 1996. Pafco owned the following percentages of IGF at December 31 of each of the following years: 1993, 98.2%; 1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF to SIG. Prior to the Transfer, IGF also paid a dividend to Pafco in the form of cash of $7,500,000 and a promissory note of $3,500,000. See "The Company -- Formation of GGS Holdings; Acquisition of Superior." 34 37 RESULTS OF OPERATIONS Six Months ended June 30, 1996 and 1995: Gross Premiums Written. Gross premiums written for the six month period ended June 30, 1996 increased $51,191,000, or 53.5%, to $146,950,000 from $95,759,000 for the same period in 1995 reflecting an increase in gross premiums written of $38,545,000 in nonstandard automobile insurance, an increase of $10,595,000 in crop insurance and an increase of $2,051,000 in premiums from commercial business. Premiums on commercial business were 100% ceded to Granite Re effective January 1, 1996. The increase in nonstandard automobile gross premiums written was due to the Acquisition, which generated gross premiums written of $25,202,000 subsequent to the Acquisition, as well as an increase in policies in-force issued by Pafco of 15,888, or 32.3%, to 65,023 as of June 30, 1996 from 49,135 as of June 30, 1995. The increase in Pafco policies in-force primarily resulted from improved service and certain product improvements. The increase in crop insurance gross premiums written was primarily due to farmers' electing higher percentage of crop price levels to be insured under MPCI Buy-up Coverages, an increase in MPCI policies in-force and an increase in the number of acres insured, together with an increase of $6,747,000, or 62.1%, in crop hail premiums in the first six months of 1996 compared to the same period in 1995. Net Premiums Written. The Company's net premiums written for the six month period ended June 30, 1996 increased $46,187,000, or 149.7%, to $77,042,000 from $30,855,000 for the same period in 1995 due to the Acquisition, which generated net premiums written for Superior of $25,165,000 subsequent to the Acquisition, and the increase in gross premiums written in Pafco's nonstandard automobile insurance business. In addition, the increase in net premiums written resulted from the Company's election not to renew, as of January 1, 1996, its 25% quota share reinsurance on its nonstandard automobile business. As a result of increases over time in its statutory capital, the Company determined that it no longer required the additional capacity provided by this coverage in order to maintain acceptable premium to surplus ratios. Although the Company's decision not to renew this coverage will require the Company to pay a greater percentage of the losses from the business it writes, the Company's operations will also be affected by the savings on the cost of reinsurance and by the investment income from potential increases in invested assets. Since all MPCI premiums are reported as 100% ceded, MPCI gross premiums written have no effect on net premiums written. Net Premiums Earned. The Company's net premiums earned for the six month period ended June 30, 1996 increased $36,277,000, or 159.2%, to $59,066,000 from $22,789,000 for the same period in 1995 reflecting the increase in net premiums written. The ratio of net premiums earned to net premiums written for nonstandard automobile business decreased for the six months ended June 30, 1996 to 85.1% from 89.7% for the same period in 1995 due to growth in net premiums written in 1996 exceeding growth in net premiums written in 1995. Net Investment Income. The Company's net investment income for the six month period ended June 30, 1996 increased $897,000, or 141.0%, to $1,533,000 from $636,000 for the same period in 1995. This increase was due to the Acquisition, which generated net investment income of $850,000 subsequent to the Acquisition. Also contributing to the increase in net investment income is an increase in average invested assets (not including Superior) to $29,801,000 for the six month period ended June 30, 1996 from $22,033,000 for the same period in 1995. Other Income. The Company's other income for the six month period ended June 30, 1996 increased $3,065,000, or 307.4%, to $4,062,000 from $997,000 for the same period in 1995 due principally to (i) the Acquisition, which generated other income, principally billing fee revenue, of $993,000 subsequent to the Acquisition, (ii) increased billing fee revenue of $640,000 from nonstandard automobile insurance policies, resulting from the increase in the in-force policy count described above, and an increase in fees charged per installment in late 1995, and (iii) increased CAT Coverage Fees and CAT LAE Reimbursement Payments resulting from the introduction of CAT Coverages in the 1994 Reform Act. Net Realized Capital Gain (Loss). The Company recorded a net realized capital gain from the sale of investments of $228,000 for the six month period ended June 30, 1996 compared to a net realized capital gain 35 38 from the sale of investments of $79,000 for the same period ended June 30, 1995. The gains for the six month period ended June 30, 1996 were the result of the sale of investments made in conjunction with the repositioning of the Company's investment portfolio into a higher concentration of fixed income securities. The repositioning was begun in the latter part of 1995 in connection with a change in investment managers. Losses and LAE. The Company's losses and LAE for the six month period ended June 30, 1996 increased $29,524,000, or 187.4%, to $45,275,000 from $15,751,000 for the same period in 1995. Included in the losses and LAE for 1996 are $18,804,000 from Superior subsequent to the Acquisition. The losses and LAE for the nonstandard automobile segment for the six month period ended June 30, 1996 increased $27,023,000 to $38,831,000 compared to $11,808,000 for the same period in 1995 primarily as a result of the Acquisition and the Company's nonrenewal of its 25% automobile quota share reinsurance treaty effective January 1, 1996. As a result of increases over time in statutory capital, the Company determined that it no longer required the additional capacity provided by this coverage in order to maintain acceptable premium to surplus ratios. The loss ratio for the nonstandard automobile segment for the six month period ended June 30, 1996 was 73.5% as compared to 71.4% for the same period ended in 1995. The crop insurance business experienced an increase in losses and LAE for the six month period ended June 30, 1996 of $2,093,000 to $6,444,000, compared to $4,351,000 for the same period in 1995. This 48.1% increase in losses and LAE reflected an increase in net premiums earned for crop hail insurance for the same period, due to (i) higher commodity prices, (ii) more acres insured and (iii) more policies written. Crop hail loss ratios are similar for the periods at 62.0% and 60.2% for the six month periods ended June 30, 1996 and 1995, respectively. Policy Acquisition and General and Administrative Expenses. Policy acquisition and general and administrative expenses for the six months ended June 30, 1996 increased $6,694,000, or 119.8%, to $12,283,000 from $5,589,000 for the same period in 1995. The nonstandard automobile business experienced an increase in policy acquisition and general and administrative expenses of $9,871,000 due to (i) the Acquisition, which generated policy acquisition and general and administrative expenses of $6,599,000 subsequent to the Acquisition, and (ii) the Company's nonrenewal of nonstandard automobile quota share reinsurance for 1996 which resulted in a reduction in ceding commission income from $1,473,000 for the six months ended June 30, 1995 to an expense of $890,000 for the six months ended June 30, 1996 due to the recording of a ceding commission expense on the recovery in 1996 of the unearned premium on the previously ceded 1995 business. The remaining increase in nonstandard automobile business was primarily due to an increase in expenses associated with growth in premium volume, primarily commission expense. As a result of the unique accounting for the crop insurance segment, such segment experienced a contribution to income reflected in the policy acquisition and general and administrative expense line item of $4,266,000 for the six months ended June 30, 1996 compared to a contribution to income of $1,988,000 for the same period in 1995. This increase in contribution resulted from (i) the adoption of new accounting procedures for crop insurance operations as described above, (ii) an increase in Buy-up Expense Reimbursement Payments due to higher gross premium writings, and (iii) an increase in the estimated MPCI underwriting gain. See "Management's Discussion and Analysis of Financial Condition and Results of Operations for the Company -- Overview -- Crop Insurance Operations" and "-- Policy Acquisition and General and Administrative Expenses." Interest Expense. The Company's interest expense for the six month period ended June 30, 1996 increased $1,068,000 to $1,261,000 from $193,000 for the same period in 1995 due primarily to (i) interest on the $48,000,000 GGS Senior Credit Facility of $696,000, (ii) interest on the $7,500,000 IGFH Bank Debt of $162,000, and (iii) interest expense related to increased borrowings under the IGF Revolver due to increases in premiums written and timing of cash receipts. Income Tax Expense. The Company's income tax expense for the six month period ended June 30, 1996 increased $896,000 to $1,854,000 from $958,000 for the same period in 1995 primarily as a result of an 104.5% increase in the Company's income before federal income tax. The effective tax rate for the six month period ended June 30, 1996 reflects a 30.5% provision compared to a 32.3% provision for the same period in 1995. Years ended December 31, 1995 and 1994: Gross Premiums Written. Gross premiums written in 1995 increased $21,500,000, or 20.8%, to $124,634,000 from $103,134,000 in 1994 reflecting an increase in gross premiums written of $15,919,000 in crop 36 39 insurance, $3,412,000 in nonstandard automobile insurance and $2,169,000 in premiums from commercial business. The increase in gross premiums written for the nonstandard automobile insurance segment was primarily attributable to an increase in policies in-force of 6,220, or 13.4%, to 52,483 in 1995 from 46,263 in 1994. The Company experienced a greater percentage increase in certain states due to the introduction of product improvements. In Colorado, policies in-force increased by 4,676 in 1995. In that state, the Company increased the number of its deductible options and implemented more favorable pricing for certain of its personal injury protection coverages. The crop insurance segment experienced growth in both the crop hail and MPCI business. The increase in crop hail gross premiums written to $16,966,000 in 1995 from $10,130,000 in 1994 was due primarily to increased opportunities to market crop hail coverages to farmers as a result of the increases in sales of MPCI products (both Buy-up Coverage and CAT Coverage) due to the 1994 Act. The net increase in MPCI gross premiums written to $53,408,000 in 1995 from $44,325,000 in 1994 resulted from an increase in the number of acres insured in 1995 following the 1994 Reform Act. Net Premiums Written. The Company's net premiums written in 1995 increased $18,308,000, or 52.1%, to $53,447,000 from $35,139,000 in 1994 due to an increase in gross premiums written and a reduction in premiums ceded to reinsurers under quota share reinsurance for both nonstandard automobile and crop hail insurance. The percent of the Company's nonstandard automobile premiums ceded under its quota share reinsurance treaty was reduced to 25% from an effective percent ceded of 38% in 1994 as a result of a reduction in the Company's need for the additional capacity provided by this reinsurance. Net Premiums Earned. The Company's net premiums earned in 1995 increased $17,515,000, or 54.5%, to $49,641,000 from $32,126,000 in 1994 reflecting an increase in net premiums written and a reduction in quota share reinsurance on the nonstandard automobile insurance business. The ratio of net premiums earned to net premiums written for nonstandard automobile insurance in 1995 remained relatively unchanged at 92.4% as compared to 90.3% in 1994. Net Investment Income. Net investment income in 1995 decreased $68,000, or 5.5%, to $1,173,000 from $1,241,000 in 1994 principally due to a decrease in the average yield earned on invested assets to 5.2% in 1995 from 6.0% in 1994. Although market interest rates increased in 1995, the average yield on investments declined primarily as a result of the repositioning of the Company's investment portfolio, begun in the latter part of 1995, into a higher concentration in fixed income securities, particularly including shorter term securities. The decrease in the average yield was partially offset by an increase in average invested assets to $22,653,000 in 1995 from $20,628,000 in 1994. Other Income. The Company's other income in 1995 increased $552,000, or 34.0%, to $2,174,000 from $1,622,000 in 1994 as a result of increased billing fee income on nonstandard automobile business of $351,000 due primarily to the increase in the in-force policy count as described above, with the remainder due primarily to the receipt of CAT Coverage Fees and CAT LAE Reimbursement Payments following the 1995 introduction of CAT Coverages. Net Realized Capital Gain (Loss). The Company recorded a net realized capital loss from the sale of investments of $344,000 in 1995 as compared to a net realized capital loss of $159,000 in 1994. The net realized capital loss in 1995 was the result of appointing a new investment manager in October 1995 and the resulting repositioning of the Company's investment portfolio described above, as well as certain write-downs taken on investments with an other than temporary decline in estimated fair value. Losses and LAE. The Company's losses and LAE in 1995 increased $9,501,000, or 35.9%, to $35,971,000 from $26,470,000 in 1994. The 35.9% increase in losses and LAE was less than the 54.5% increase in net premiums earned. Of such amounts, the nonstandard automobile business experienced a $7,120,000 increase in losses and LAE to $25,423,000 in 1995 from $18,303,000 in 1994 due primarily to an increase in net premium writings. The nonstandard automobile business loss and LAE ratio increased to 73.8% in 1995 from 72.1% in 1994 primarily due to increased repair costs for automobile parts resulting from the implementation of laws prohibiting use of reconditioned parts as well as general inflationary pressures on costs of settling claims. In addition, the crop business experienced an increase in losses and LAE to $8,629,000 in 1995 from $7,031,000 in 1994 primarily as a result of the increased volume of crop hail business written in 1995. The crop hail loss and LAE ratio decreased to 74.3% in 1995 from 154.0% in 1994 due to more favorable weather conditions than in the prior year. Crop insurance losses and LAE were also impacted by net MPCI LAE of $0 37 40 in 1995 and $936,000 in 1994, after reduction for LAE reimbursements of $3,324,000 in 1995 compared to $107,000 in 1994. These reimbursements are reflected in losses and LAE up to the actual amount of LAE incurred with any excess reflected in Other Income. For more information concerning losses and LAE, see "Business -- Reserves for Losses and Loss Adjustment Expenses." Policy Acquisition and General and Administrative Expenses. The Company's policy acquisition and general and administrative expenses in 1995 increased $2,180,000, or 37.6%, to $7,981,000 from $5,801,000 in 1994. The nonstandard automobile business experienced an increase in policy acquisition and general and administrative expense of $4,220,000 primarily due to a $2,390,000, or 44%, reduction in ceding commission income in 1995 arising from reduced reliance on quota share reinsurance. As a result of the unique accounting for the crop insurance segment, such segment experienced a contribution to income reflected in the policy acquisition and general and administrative expense line item of $7,466,000 in 1995 compared to a contribution to income of $4,802,000 in 1994. This increase in contribution resulted from an increase in Buy-Up Expense Reimbursement Payments due to higher gross premium writings in 1995, together with an increase in the MPCI underwriting gain. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview -- Policy Acquisition and General and Administrative Expenses." Interest Expense. The Company's interest expense in 1995 increased $64,000, or 5.4%, to $1,248,000 from $1,184,000 in 1994 as a result of increased line of credit borrowings by IGF due to an increase in cash flow requirements and an increase in applicable interest rates. This was partially offset by interest savings in 1995 over 1994 resulting from debt principal repayments and the retirement of a Company term loan in June, 1995. Income Tax Expense. The Company's income tax expense (benefit) related to a tax provision on income (loss) from continuing operations increased to $2,619,000 in 1995 from $(718,000) in 1994. The effective tax rate in 1995 was 35.2% as compared to an effective tax rate of (52.2)% in 1994. The tax benefit in 1994 was due to a $1,492,000 reduction in the valuation allowance the Company had previously established for its deferred tax assets. Years Ended December 31, 1994 and 1993: Gross Premiums Written. Gross premiums written in 1994 increased $14,198,000, or 16.0%, to $103,134,000 from $88,936,000 in 1993 reflecting an increase in gross premiums written of $19,299,000 in crop insurance, a decrease in gross premiums written of $6,594,000 in nonstandard automobile insurance, and a $1,493,000 increase in premiums from commercial business. The increase in crop insurance gross premiums written resulted from (i) farmers increasing the amounts of catastrophe protection as a result of the significant losses caused by the severe flooding in the Midwest in 1993, and (ii) increased market share. The decrease in nonstandard automobile gross premiums written was due in part to price competition as the Company decided not to match the lower premium rates of certain of its competitors who were seeking to gain market share. As a result in part of the foregoing, policies in force declined by 1,473, or 3.1%, to 46,263 in 1994 from 47,736 in 1993. Net Premiums Written. The Company's net premiums written in 1994 increased $3,379,000, or 10.6%, to $35,139,000 from $31,760,000 in 1993 due to a reduction in premiums ceded to reinsurers due to the Company's reduction of its quota share reinsurance on its nonstandard automobile insurance to an effective percent ceded of 38% from 49% in 1993. The Company anticipated lower gross premiums written in 1994 due principally to increased competition and adjusted its reinsurance capacity accordingly. Net Premiums Earned. The Company's net premiums earned in 1994 increased $698,000, or 2.2%, to $32,126,000 from $31,428,000 in 1993 reflecting an increase in net premiums written. The ratio of net premiums earned to net premiums written for nonstandard automobile insurance decreased in 1994 to 90.3% from 101.0% in 1993. In late 1992, the Company experienced significant growth in net premiums written that were primarily earned in 1993. In 1993, the Company's net premiums written continued to decline throughout the year as the Company decided not to match the lower premium rates of certain of its competitors who were seeking to gain market share. 38 41 Net Investment Income. Net investment income in 1994 decreased $248,000, or 16.7%, to $1,241,000 from $1,489,000 in 1993 principally due to a decrease in average invested assets of $4,091,000 resulting from a reduction in nonstandard automobile insurance premium volume and higher losses and LAE. Other Income. The Company's other income in 1994 increased $736,000, or 83.1%, to $1,622,000 from $886,000 in 1993 primarily as a result of 1994 being the first full year in which the Company earned billing fee income in the nonstandard automobile insurance business. Billing fee income from nonstandard automobile insurance increased to $1,033,000 in 1994 as compared to approximately $521,000 in 1993, as a result of the new billing program introduced on July 1, 1993. Net Realized Capital Gain (Loss). The Company recorded a net realized capital loss from the sale of investments of $159,000 in 1994 as compared to a net realized capital loss of $119,000 in 1993. The losses in 1994 were the result of the Company's election to take net realized capital losses from the sale of certain investments. The losses in 1993 were due to sales of investments and write-downs of investments. Losses and LAE. The Company's losses and LAE in 1994 increased $1,390,000, or 5.5%, to $26,470,000 from $25,080,000 in 1993. Of such amounts, the nonstandard automobile business experienced a $1,151,000 increase in losses and LAE to $18,303,000 in 1994 from $17,152,000 in 1993 as higher replacement part costs for automobile repairs resulting from the implementation of laws prohibiting the use of reconditioned parts increased costs associated with physical damage losses. The Company also reduced its quota share reinsurance resulting in a higher retention of losses and LAE liabilities. The nonstandard automobile loss and LAE ratio increased to 72.1% in 1994 as compared to 64.1% in 1993. In addition, the crop insurance business experienced an increase of $257,000, or 3.8%, in losses and LAE to $7,031,000 in 1994 from $6,774,000 in 1993. Despite the decline in the crop hail loss and LAE ratio from 158.2% in 1993 to 154.0% in 1994, the increase in net premiums earned accounted for the small dollar increase in losses and LAE. For more information concerning losses and LAE, see "Business -- Reserves for Losses and Loss Adjustment Expenses." Policy Acquisition and General and Administrative Expenses. The Company's policy acquisition and general and administrative expenses in 1994 decreased $3,113,000, or 34.9%, to $5,801,000 from $8,914,000 in 1993. The nonstandard automobile business experienced an increase in policy acquisition and general and administrative expense of $2,854,000 primarily due to a $3,792,000, or 44.3%, reduction in ceding commission income in 1994 arising from reduced reliance on quota share reinsurance. As a result of the unique accounting for the crop insurance segment, such segment experienced a contribution to income reflected in the policy acquisition and general and administrative expense line item of $4,802,000 in 1994 compared to an expense of $1,468,000 in 1993. The contribution to income in 1994 resulted from an increase in Buy-Up Expense Reimbursement Payments due to higher gross premium writings in 1994, together with an increase in the MPCI underwriting gain. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview -- Policy Acquisition and General and Administrative Expenses." Interest Expense. The Company's interest expense in 1994 increased $188,000, or 18.9%, to $1,184,000 from $996,000 in 1993 due to increased cash flow requirements and line of credit borrowings by IGF on the crop business. This was partially offset by a decline in applicable interest rates. Income Tax Expense. In 1994, the Company recognized an income tax benefit of $718,000 as it reduced the valuation allowance it had previously established for its deferred tax assets. The effective tax rate in 1994 was (52.2)%. This compares to income tax expense of $83,000 and an effective tax rate of (6.35)% in 1993. In 1993, the Company increased its valuation allowance by $696,000 to $1,752,000. LIQUIDITY AND CAPITAL RESOURCES The primary sources of funds available to the Company and its Subsidiaries are premiums, investment income and proceeds from the maturity of invested assets. Such funds are used principally for the payment of claims, operating expenses, commissions, dividends and the purchase of investments. There is variability to cash outflows because of uncertainties regarding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. Accordingly, the Company maintains 39 42 investment programs generally intended to provide adequate funds to pay claims without the forced sale of investments. Net cash provided by operating activities for the six months ended June 30, 1996 was $7,982,000 compared to $4,006,000 for the six months ended June 30, 1995 for an increase of $3,976,000. This increase was due to improved profitability and growth in written premiums. Loss payments in the nonstandard automobile insurance business tend to lag behind receipt of premiums thus providing cash for operations. Cash used in investing activities increased from $3,488,000 for the six months ended June 30, 1995 to $82,579,000 for the six months ended June 30, 1996. Included in the six month results for 1996 was a $66,389,000 use of cash for the Acquisition. The remaining increase in cash used in investing activities for the six months ended June 30, 1996 related to the growth in investments due to increased cash provided by operating activities. The primary items comprising the $72,286,000 of cash provided by financing activities for the six months ended June 30, 1996 were the $48,000,000 of proceeds from the GGS Senior Credit Facility and the $21,200,000 minority interest investment received as part of the formation of GGS Holdings and the Acquisition. Net cash provided by operating activities in 1995 was $9,654,000 compared to net cash used by operating activities of $3,302,000 in 1994. Operations in 1995 provided an additional $12,956,000 in cash compared to 1994 due to additional net earnings of $2,704,000 and cash flow provided of $5,109,000 relating to premium receipts and loss payments, including effects of reinsurance, due primarily to growth in operations with the remainder due to timing of tax and other liability payments. Net cash used in operating activities decreased in 1994 to $3,302,000 from $7,561,000 in 1993. Operations in 1994 used $4,259,000 less cash than in 1993 due primarily to additional net income of $2,440,000. Cash flow activity in 1994 and 1993 relating to premium receipts and loss payments including effects of reinsurance were comparable. Net cash of $8,835,000 was used in investing activities in 1995 compared to net cash provided by investing activities in 1994 of $1,473,000. Net cash provided by investing activities in 1994 of $1,473,000 decreased from $5,466,000 in 1993. The increase in the use of cash in 1995 and the decrease in net cash provided by investing activities in 1994 primarily relates to investing of excess funds generated by additional operating earnings in fixed income securities. Due to the nature of insurance operations, the Company does not have a significant amount of expenditures on property and equipment. Cash provided or used by financing activities in the three years ended December 31, 1995 primarily related to activity in the Company's line of credit for its crop segment. The nonstandard auto segment generates sufficient cash from operations to preclude the need for working capital borrowings while the timing of receipts and payments in the crop segment is such that an operating line of credit is necessary. After the Offering, SIG, on a stand-alone basis, will require funds to defray operating expenses which will consist primarily of legal, accounting and other fees and expenses in connection with the disclosure and regulatory obligations of a public company and to satisfy debt service obligations on any remaining balance of the Parent Indebtedness. The Parent Indebtedness is payable on demand, accrues interest at a rate of 10% and was originally incurred by SIG in 1992 as a result of Goran's partial funding of the repayment of certain loan obligations arising from the capitalization of SIG's U.S. operations. In order to satisfy its cash requirements, SIG intends to rely primarily on the fees from an administrative agreement between SIG and IGF (the "Administration Agreement") pursuant to which the Company will provide certain executive management, accounting, investing, marketing, data processing and reinsurance services in exchange for a fee in the amount of $150,000 quarterly. In addition, subject to obtaining the required approval from the Indiana Department, the Company is currently implementing arrangements whereby the underwriting, marketing and administrative functions of IGF will be assumed by, and employees will be transferred to, IGF Holdings. In accordance with industry practice, the FCIC will continue to pay Buy-up Expense Reimbursement Payments to IGF, and such payments will be in turn paid by IGF to IGF Holdings. Accordingly, IGF Holdings will be able to pay dividends to the Company to the extent that Buy-up Expense Reimbursement Payments exceed the operating and other expenses of IGF Holdings. There can, however, be no assurance that IGF Holdings will have 40 43 sufficient excess cash flow to permit the payment of any dividends to the Company. Except for the fees to be paid under the Administration Agreement and amounts paid in respect of Buy-up Expense Reimbursement Payments, IGF is not expected to provide a significant source of funds for the Company in view of Indiana regulatory restrictions on the payment of dividends, restrictive covenants contained in the IGF Revolver (as defined herein) and the capital needed by IGF to support growth in its premium writings. If, however, the Company does not obtain regulatory approval for the payment by IGF of Buy-up Expense Reimbursement Payments to IGF Holdings, the Company will have to rely on dividends from IGF to satisfy liquidity needs in excess of the amounts paid pursuant to the Administration Agreement. Payment of dividends by IGF requires prior approval by the lender under the IGF Revolver. There can be no assurance that IGF will be able to obtain this consent or any required regulatory approvals. See "Risk Factors -- Holding Company Structure -- Dividends and Other Restrictions." As a result of the restrictive covenants contained in the credit agreement with respect to 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. The GGS Senior Credit Facility restricts the ability of GGS Management to undertake certain actions, including making, or permitting any of its subsidiaries to make, certain restricted payments in excess of $100,000 per year in the aggregate. For purposes of the GGS Senior Credit Facility, "restricted payments" include dividends in the form of cash or other tangible or intangible property (other than stock, options, warrants or other rights to purchase stock), as well as administrative, advisory, management and billing fees payable by GGS Management to any of its affiliates (other than investment banking fees payable to Goldman, Sachs). As a result, this covenant restricts the ability of GGS Management to pay dividends to its parent company, GGS Holdings, in excess of $100,000 per year. GGS Management, the wholly-owned subsidiary of GGS Holdings, collects billing fees charged to policyholders of Pafco and Superior who elect to make their premium payments in installments. GGS Management also receives management fees of 15% of gross premiums and 17% of gross premiums, respectively, under its management agreements with Pafco and Superior. 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. Further, in the Consent Order approving the Acquisition, 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, and extraordinary dividends within the meaning of the Indiana Insurance Code cannot be paid by Pafco without the prior approval of the Indiana Commissioner. See "Risk Factors -- Holding Company Structure; Dividend and Other Restrictions; Management Fees." GGS Management will require cash flow to defray operating expenses and repay the GGS Senior Credit Facility. See "The Company -- Formation of GGS Holdings; Acquisition of Superior." The GGS Senior Credit Facility, with an outstanding principal balance of $48 million, matures on April 30, 2002 and will be repaid in 11 consecutive semi-annual installments, the first of which will occur on the first anniversary of the closing date of the GGS Senior Credit Facility. The first installments of principal repayments will be $3,128,000 and $2,886,500, respectively, with the remaining annual installments to be paid as follows: 1997 - $6,014,500; 1998 - $6,494,500; 1999 - $7,938,000; 2000 - $9,742,000; 2001 - $11,611,500; and 2002 - $6,199,500. At the election of GGS Management, interest on the GGS Senior Credit Facility shall be payable either at the "Base Rate" option or LIBOR option, plus in each case the applicable margin. The Base Rate is defined as the higher of (i) the federal funds rate plus 1/2 of 1% or (ii) the prime commercial lending rate of the lending bank. LIBOR is defined as an annual rate equal to the London Interbank Offered Rate for the corresponding deposits of U.S. dollars. The applicable margin for Base Rate loans is 1.50% and for LIBOR loans is 2.75%. In May, 1996, the Company entered into an interest rate swap agreement to protect the Company against interest rate volatility. As a result, the Company fixed its interest rate on the GGS Senior Credit Facility at 8.3% through November, 1996. The GGS Senior Credit Facility is collateralized by a pledge of all of the tangible and intangible assets of GGS Holdings, including all of the outstanding shares of GGS Management, and by a pledge of all of the tangible and intangible assets of GGS Management, including all of the outstanding shares of capital stock of Pafco and Superior. GGS Management intends to rely primarily on management fees from Pafco and Superior and billing fee income to satisfy these debt service requirements. See "Risk Factors -- Holding Company Structure -- Management Fees." While the Company anticipates that the holding company will have sufficient funds to meet operating expenses and debt service requirements at the holding company level, there can be no assurance given the 41 44 various restrictions and uncertainties related to the payment of dividends and fees by its Subsidiaries that liquidity will be sufficient beyond the next twelve months. Liquidity constraints may also significantly affect the Company's ability to finance future acquisitions. See "Risk Factors -- Future Growth and Continued Operations Dependent on Access to Capital." While GAAP shareholders' equity was $17,757,000 at June 30, 1996, it does not reflect the statutory equity upon which SIG conducts its various insurance operations. Pafco, Superior and IGF individually had statutory surplus at June 30, 1996 of $14,872,000, $48,036,000 and $11,559,000, respectively. Cash flows in the Company's MPCI business differ from cash flows from certain more traditional lines. The Company pays insured losses to farmers as they are incurred during the growing season, with the full amount of such payments being reimbursed to the Company by the federal government within three business days. MPCI premiums are not received from farmers until covered crops are harvested. Such premiums are required to be paid over in full to the FCIC by the Company, with interest if not paid by a specified date in each crop year. During 1995, IGF continued the practice of borrowing funds under a revolving line of credit to finance premium payables to the FCIC on amounts not yet received from farmers (the "IGF Revolver"). The maximum borrowing amount under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a weighted average interest rate of 6.0%, 8.1% and 9.7%, in 1993, 1994 and 1995, respectively, and 9.57% and 8.75% for the six months ended June 30, 1995 and 1996, respectively. These payables to the FCIC accrue interest at a rate of 15%, as do the receivables from farmers. By utilizing the IGF Revolver, which bears interest at a floating rate equal to the prime rate plus 1/4%, IGF avoids incurring interest expense at the rate of 15% on interest payable to the FCIC while continuing to earn 15% interest on the receivables due from the farmer. The IGF Revolver contains certain covenants which restrict IGF's ability to (i) incur indebtedness; (ii) declare dividends or make any capital distribution upon its stock whether through redemption or otherwise; and (iii) make loans to others, including affiliates. The IGF Revolver also contains other customary covenants which, among other things, restrict IGF's ability to participate in mergers, acquire another enterprise or participate in the organization or creation of any other business entity. In 1995, IGF incurred $627,222 in interest expense attributable to draws under the IGF Revolver to satisfy premium payables to the FCIC. At June 30, 1996, $2,254,000 remains available under the IGF Revolver. IGF has the opportunity to increase its business as the result of the addition of new agents and the transfer of the delivery of MPCI coverage for winter wheat and certain spring crops from the USDA to private agencies in designated states. See "Business -- Crop Insurance -- Industry Background." Because of surplus-based limits imposed on all MPCI insurers by the FCIC on the volume of MPCI business that may be written as well as restrictions on premium writing imposed by state regulatory authorities, IGF is at present unable to increase its MPCI writings without additional capital. These limits prohibit MPCI writers from (i) writing aggregate MPCI Premiums and MPCI Imputed Premiums in excess of nine times an insurer's capital base and (ii) retaining an exposure to net MPCI losses after reinsurance of greater than 50% of capital. The Company estimates that the $9.0 million capital contribution to be made to IGF with a portion of the net proceeds of the Offering would provide IGF with the surplus capacity under the FCIC's rules to write up to approximately $65 million in additional MPCI Premiums and MPCI Imputed Premiums in the aggregate. There can be no assurance, however, as to the amount of increase, if any, in MPCI business written that IGF will actually be able to achieve. EFFECTS OF INFLATION The effects of inflation on the Company are implicitly considered in estimating reserves for unpaid losses and LAE, and in the premium rate-making process. The actual effects of inflation on the Company's results of operations cannot be accurately known until the ultimate settlement of claims. However, based upon the actual results reported to date, it is management's opinion that the Company's liability for losses and LAE, including liabilities for losses that have been incurred but not yet reported, make adequate provision for the effects of inflation. 42 45 NEW ACCOUNTING STANDARDS During January, 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The Company adopted SFAS No. 109 for the year ended December 31, 1993. The Statement adopts the liability method of accounting for deferred income taxes. Under the liability method, companies will establish a deferred tax liability or asset for the future tax effects of temporary differences between book and taxable income. The effect on years prior to 1993 of changing to this method was an increase in net income for 1993 of $1,175,000 and is reflected in the Consolidated Statement of Operations for the Company, included elsewhere in this Prospectus, as the cumulative effect of a change in accounting principles. On January 1, 1994, the Company adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of January 1, 1994 of adopting Statement 115 has no effect on net income. The effect of this change in accounting principle was an increase in stockholder's equity of $139,000, net of deferred taxes of $73,000 on net unrealized gains on fixed maturities classified as available for sale that were previously carried at amortized cost. On January 1, 1996, the Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement is effective for financial statements for fiscal years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations. In December 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. It introduces the use of a fair-value based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize compensation expense for stock-based compensation to employees based on the new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." However, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company has not yet determined the impact of adopting SFAS No. 123; however, the adoption of this statement is not expected to have a material impact on the Company's financial condition or results of operations. The National Association of Insurance Commissioners ("NAIC") is considering the adoption of a recommended statutory accounting standard for crop insurers, the impact of which is uncertain since several methodologies are currently being examined. Although the Indiana Department has permitted the Company to continue for its statutory financial statements through December 31, 1996 its practice of recording its MPCI business as 100% ceded to the FCIC with net underwriting results recognized in ceding commissions, the Indiana Department has indicated that in the future it will require the Company to adopt the MPCI accounting practices recommended by the NAIC or any similar practice adopted by the Indiana Department. Since such a standard would be adopted industry wide for crop insurers, the Company would also be required to conform its future GAAP financial statements to reflect the new MPCI statutory accounting methodology and to restate all historical GAAP financial statements consistently with this methodology for comparability. The Company can not predict what accounting methodology will eventually be implemented or when the Company will be required to adopt such methodology. The Company anticipates that any such new crop accounting methodology will not affect GAAP net income. 43 46 SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF SUPERIOR INSURANCE COMPANY The following table presents historical data of Superior and its subsidiaries.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------- ------------------ 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT RATIOS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Gross premiums written...................... $115,660 $112,906 $ 94,756 $42,915 $69,119 Net premiums written........................ 115,294 112,515 94,070 42,515 68,707 Net premiums earned......................... 118,136 112,837 97,614 50,053 62,739 Net investment income....................... 8,170 7,024 7,093 4,161 3,476 Other income................................ 5,879 3,344 4,171 1,692 3,092 Net realized capital gain (loss)............ 3,559 (200) 1,954 711 2,104 -------- -------- -------- ------- ------- Total revenues............................ 135,744 123,005 110,832 56,617 71,411 Losses and loss adjustment expenses......... 85,902 92,378 72,343 38,129 45,963 Policy acquisition and general and administrative expenses................... 36,292 38,902 32,705 17,212 17,104 -------- -------- -------- ------- ------- Total expenses............................ 122,194 131,280 105,048 55,341 63,067 Income (loss) before income taxes, and a cumulative effect of a change in accounting principle...................... 13,550 (8,275) 5,784 1,276 8,344 Income taxes................................ 3,981 (3,800) 1,649 161 2,313 Income (loss) before cumulative effect of a change in accounting principle............ 9,569 (4,475) 4,135 1,115 6,031 Cumulative effective of a change in accounting principle...................... 1,389 -- -- -- -- -------- -------- -------- ------- ------- Net income (loss)......................... $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031 ======== ======== ======== ======= ======= GAAP RATIOS: (1) Loss and LAE ratio.......................... 72.7% 81.9% 74.1% 76.2% 73.3% Expense ratio............................... 30.7 34.5 33.5 34.4 27.3 -------- -------- -------- ------- ------- Combined ratio.............................. 103.4% 116.4% 107.6% 110.6% 100.6%
DECEMBER 31, -------------------------------- 1993 1994 1995 JUNE 30, 1996 -------- -------- -------- ------------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Investments................................. $132,060 $107,346 $116,362 $120,503 Total assets................................ 180,241 161,864 160,130 172,158 Losses and loss adjustment expenses......... 52,610 54,577 47,112 47,155 Total shareholders' equity.................. 73,756 51,878 61,616 64,617 STATUTORY CAPITAL AND SURPLUS............... $ 56,656 $ 43,577 $ 49,277 $ 48,036
- ------------------------- (1) The loss and LAE ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The expense ratio is calculated by dividing the sum of policy acquisition and general and administrative expenses and interest expense by net premiums earned. The combined ratio is the sum of the loss and LAE and expense ratios. 44 47 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SUPERIOR OVERVIEW Superior is engaged in the writing of insurance coverage on automobile physical damage and liability policies for "nonstandard risks." Nonstandard insureds are those individuals who are unable to obtain insurance 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 higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Due to the low limits of coverage, the period of time that elapses between the incurrence and settlement of losses under nonstandard policies is shorter than under many other types of insurance. Also, since the nonstandard automobile insurance business typically experiences lower rates of retention than standard automobile insurance, the number of new policyholders underwritten by nonstandard automobile insurance carriers each year is substantially greater than the number of new policyholders underwritten by standard carriers. While pricing conditions have improved in 1996, the nonstandard automobile insurance business has experienced very competitive pricing conditions in recent years which have made it difficult for Superior to achieve adequate pricing. The majority of Superior's business consists of personal lines nonstandard automobile insurance. Superior writes in eleven states, principally in the southeastern United States, and distributes its product through 3,250 independent agents. In mid-1995, Superior made a strategic decision to modify its approach from providing a broad band single nonstandard automobile product with a 15% commission rate to a multi-tiered, multi-commission program that was similar to, but provided a price advantage over, programs offered by the larger competitors in the nonstandard automobile marketplace. This step, combined with a concentration of Superior's efforts on four major states, was designed to present a more competitive product with a lower loss ratio and provide a franchised configuration that could be exported to the remainder of Superior's states. The modification of Superior's programs, more stringent underwriting criteria and a concentration on four specific states resulted in a reduction in gross premiums written from the 1994 level of $112.9 million to a 1995 year end level of $94.8 million. From September 1995, Superior took steps to reduce its cost of operations. For example, more favorable contracts were negotiated with outside vendors and internal processes were evaluated for cost effectiveness. The change in market approach, the effects of cost containment and the acceptance of a lower commission level by the independent agents resulted in net income in 1995 of $4.1 million compared to a net loss of $4.5 million in 1994. The combined ratio in 1995 was reduced to 107.6% compared to 1994's combined ratio of 116.4%. In order to shorten reporting lines, improve quality and decrease costs, the branch claims offices were reduced from nine to three in the second half of 1995. In addition to the consolidation of claims offices, the claims department management was changed and revised operating procedures were introduced that included the creation of specialties within the department for the handling of claims involving subrogation, salvage and physical damage litigation. These changes resulted in a substantial reduction in the expense for the operation of the claims department and an improvement in the quality of file handling with a resulting reduction in average paid severity. Superior's strategy for 1996 is to refine its three-tier, multi-commission level programs and to move the multi-tiered products into the states of Georgia and Mississippi, in addition to its current multi-tiered offerings in California, Florida, Texas and Virginia. Superior's processing flow has undergone a reengineering to reduce cost and shorten processing intervals in order to provide an improved level of service. In addition to the reengineering of the processing flow, Superior has made a commitment to eliminate its previous manually intensive automated operating system for a new processing system that Superior believes will help improve productivity and lower operating expense by freeing it from an outside data processing vendor. 45 48 On April 30, 1996, Superior was acquired by GGS Holdings. As a result of the Acquisition, certain financial information relating to Superior's nonstandard business in respect of periods prior to consummation of the Acquisition will not be comparable to corresponding financial information for subsequent periods. See "The Company -- Formation of GGS Holdings; Acquisition of Superior" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company." RESULTS OF OPERATIONS Six Months Ended June 30, 1996 and 1995: Gross Premiums Written. Superior's gross premiums written for the six month period ended June 30, 1996 increased $26,204,000, or 61.1%, to $69,119,000 from $42,915,000 for the same period in 1995 due to the modification of the multi-tiered product offered in Florida and the introduction of a multi-tiered product in the states of Virginia and California, the introduction of variable commission levels and improved service to policyholders. The new variable commission structure attracted sales from independent agents who perceived one of Superior's major competitors as pursuing a direct marketing approach. Net Premiums Written. Superior's net premiums written for the six month period ended June 30, 1996 increased $26,192,000, or 61.6%, to $68,707,000 from $42,515,000 for the same period in 1995 due to an increase in gross premiums written. Net Premiums Earned. Superior's net premiums earned for the six month period ended June 30, 1996 increased $12,686,000, or 25.3%, to $62,739,000 from $50,053,000 for the same period in 1995 reflecting an increase in net premiums written. This increase in net premiums earned does not fully reflect the 61.6% increase in net premiums written since net premiums earned lagged behind net premiums written. Net Investment Income. Superior's net investment income for the six month period ended June 30, 1996 decreased $685,000, or 16.5%, to $3,476,000 from $4,161,000 for the same period in 1995 due to the net effects of a decline in the average yield on invested assets which was partially offset by an increase in average invested assets. Other Income. Superior's other income for the six month period ended June 30, 1996 increased $1,400,000, or 82.7%, to $3,092,000 from $1,692,000 for the same period in 1995 due to a growth in premiums and an increase in billing fees relating to payment programs associated with an increased number of policies written. Net Realized Capital Gain (Loss). Superior recorded a net realized capital gain from the sale of investments of $2,104,000 for the six month period ended June 30, 1996 compared to a net realized capital gain from the sale of investments of $711,000 for the same period in 1995. Losses and LAE. Superior's losses and LAE for the six month period ended June 30, 1996 increased $7,834,000, or 20.5%, to $45,963,000 from $38,129,000 for the same period in 1995 due to an increase in net premiums earned. However, the 20.5% increase in losses and LAE was less than the 25.3% increase in net premiums earned due to improved results in claims administration which resulted in a change of estimate that resulted in a decrease in reserves of $1,300,000 in the first quarter of 1996. As a result, the loss and LAE ratio for the six month period ended June 30, 1996 was 73.3% as compared to 76.2% for the same period in 1995. The improved results also reflect an improved work flow, productivity, and a reduction in middle management positions as a result of the claims department restructuring. Superior has negotiated flat rate fee agreements with all counsel representing it and has obtained discounts for vendor service for independent appraisals, total loss evaluations, medical bill review and the sale of salvage. Policy Acquisition and General and Administrative Expenses. Superior's policy acquisition and general and administrative expenses for the six month period ended June 30, 1996 decreased $108,000, or 0.6%, to $17,104,000 from $17,212,000 for the same period in 1995. Policy acquisition and general and administrative expenses decreased 0.6% although net premiums earned increased 25.3% due to reduced agents' commissions in Florida and a general reduction in the cost of overhead. As a result, the expense ratio for the six month period ended June 30, 1996 was 27.3% as compared to 34.4% for the same period in 1995. 46 49 Income Tax Expense. Superior's income tax expense for the six month period ended June 30, 1996 increased $2,152,000 to $2,313,000 from $161,000 for the same period in 1995. The effective tax rate in 1996 was 27.7% compared to 12.6% in 1995. The increase in income tax expense and the effective tax rate was due to the utilization of net operating loss carry-forwards in 1995. Years Ended December 31, 1995 and 1994: Gross Premiums Written. Superior's gross premiums written in 1995 decreased $18,150,000, or 16.1%, to $94,756,000 from $112,906,000 in 1994 due to 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 those states and other unfavorable market conditions. Net Premiums Written. Superior's net premiums written in 1995 decreased $18,445,000, or 16.4%, to $94,070,000 from $112,515,000 in 1994 due to a decrease in gross premiums written. Net Premiums Earned. Superior's net premiums earned in 1995 decreased $15,223,000, or 13.5%, to $97,614,000 from $112,837,000 in 1994 reflecting a decrease in net premiums written. Net Investment Income. Superior's net investment income in 1995 increased $69,000, or 1.0%, to $7,093,000 from $7,024,000 in 1994 due to a slight increase in the average yield earned on invested assets resulting from improved market conditions and an increase in invested assets due to improved operating cash flows. Other Income. Superior's other income in 1995 increased $827,000, or 24.7%, to $4,171,000 from $3,344,000 in 1994 due to higher billing fees in Florida resulting from the ability to collect billing fees during the entire year in 1995 compared to only part of the year in 1994 because of an interruption in the charging of billing fees due to a regulatory intervention. Net Realized Capital Gain (Loss). Superior recorded a net realized capital gain from the sale of investments of $1,954,000 in 1995 compared to a net realized capital loss from the sale of investments of $200,000 in 1994. The net realized capital gain in 1995 was the result of disposing of invested assets with increased market values. Losses and LAE. Superior's losses and LAE in 1995 decreased $20,035,000, or 21.7%, to $72,343,000 from $92,378,000 in 1994 due to a decrease in net premiums earned. However, the 21.7% decrease in losses and LAE was greater than the 13.5% decrease in net premiums earned due to a more responsive approach in evaluating and settling bodily injury claims, the specialization of the handling of physical damage claims with a resulting reduction in average paid severities, and an improvement in productivity and a reduction in cost as a result of the consolidation of nine claims offices to three. As a result, the loss and LAE ratio for 1995 was 74.1% as compared to 81.9% in 1994. For more information concerning losses and LAE, see "Business -- Reserves for Losses and Loss Adjustment Expenses." Policy Acquisition and General and Administrative Expenses. Superior's policy acquisition and general and administrative expenses in 1995 decreased $6,197,000, or 15.9%, to $32,705,000 from $38,902,000 in 1994 due to reengineering of internal operations aimed at reducing cost and the introduction of reduced agent commission programs. Income Tax Expense. Superior's income tax expense and effective tax rate for 1995 were $1,649,000 and 28.5%, respectively. This compares to an income tax benefit of $3,800,000 in 1994, which resulted in an effective tax rate of (45.9)%. The increase in income tax expense is primarily a function of the improvement in net income before taxes in 1995 as compared to 1994 and a decreased portion of net investment income being derived from tax-free sources. 47 50 Years Ended December 31, 1994 and 1993: Gross Premiums Written. Superior's gross premiums written in 1994 decreased $2,754,000, or 2.4%, to $112,906,000 from $115,660,000 in 1993 due to the implementation of certain underwriting restrictions in Texas and the termination of certain agency relationships in Texas. Net Premiums Written. Superior's net premiums written in 1994 decreased $2,779,000, or 2.4%, to $112,515,000 from $115,294,000 in 1993 due to a decrease in gross premiums written. Net Premiums Earned. Superior's net premiums earned in 1994 decreased $5,299,000, or 4.5%, to $112,837,000 from $118,136,000 in 1993 reflecting a decrease in net premiums written. Net Investment Income. Superior's net investment income in 1994 decreased $1,146,000, or 14.0%, to $7,024,000 from $8,170,000 in 1993 due primarily to a decline in average invested assets which resulted from a decrease in operating cash flow and dividends paid in early 1994. Other Income. Superior's other income in 1994 decreased $2,535,000, or 43.1%, to $3,344,000 from $5,879,000 in income in 1993 due to an interruption in the state of Florida in the charging of billing fees caused by a regulatory change which increased the minimum down payments. Net Realized Capital Gain (Loss). Superior recorded a net realized capital loss from the sale of investments of $200,000 in 1994 compared to a net realized capital gain from the sale of investments of $3,559,000 in 1993 due to market conditions which drove market interest rates higher in 1994 causing Superior's fixed maturity portfolio to decline in market value. Losses and LAE. Superior's losses and LAE in 1994 increased $6,476,000, or 7.5%, to $92,378,000 from $85,902,000 in 1993 due to claims management inefficiencies arising from inadequate managerial supervision and a conversion to a new claims management system. These claims management inefficiencies were substantially corrected in 1995 as a result of the completion of the implementation of the new claims management system. The loss and LAE ratio for 1994 was 81.9% as compared to 72.7% for 1993. For more information concerning losses and LAE, see "Business -- Reserves for Losses and Loss Adjustment Expenses." Policy Acquisition and General and Administrative Expenses. Superior's policy acquisition and general and administrative expenses in 1994 increased $2,610,000, or 7.2%, to $38,902,000 from $36,292,000 in 1993 due to a significant increase in employee compensation caused by the hiring of new officers and managers. Income Tax Expense. Superior recorded an income tax benefit of $3,800,000 and an effective tax rate of (45.9)% in 1994 as compared to an income tax expense of $3,981,000 and an effective tax rate of 29.4% in 1993. The income tax benefit in 1994 was a function of the Company's generation of a net loss before income taxes. The low effective tax rate in 1993 was due to a greater portion of net investment income being derived from tax-free sources. 48 51 BUSINESS GENERAL The Company underwrites and markets nonstandard private passenger automobile insurance and crop insurance. 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. For the twelve months ended June 30, 1996, the Company had consolidated gross premiums written of approximately $175.8 million (including gross premiums written of $25.2 million for Superior for two months of 1996). In addition to premium revenues, for the same period, the Company received fee income of $31.2 million, consisting of CAT Coverage Fees in the amount of $1.8 million, Buy-up Expense Reimbursement Payments in the amount of $25.5 million and CAT LAE Reimbursement Payments and MPCI Excess LAE Reimbursement Payments in the amount of $3.9 million. 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 automobile group the sixteenth largest underwriter of nonstandard automobile insurance in the United States. Based on premium information compiled in 1995 by the FCIC and NCIS, the Company believes that IGF is the fifth largest underwriter of MPCI in the United States. The following table sets forth the premiums written by Pafco and IGF by line of business for the periods indicated:
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- SIX MONTHS ENDED 1993 1994 1995 JUNE 30, 1996 ------------------- ------------------- ------------------- ------------------- GROSS NET GROSS NET GROSS NET GROSS NET PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Nonstandard Automobile(1)........... $52,187 $26,479 $ 45,593 $28,114 $ 49,005 $37,302 $ 62,290 $62,089 Crop Hail(2).............. 8,593 4,281 10,130 4,565 16,966 11,608 17,620 14,953 MPCI(3)................... 26,563 -- 44,325 -- 53,408 -- 62,916 -- Other..................... 1,593 1,000 3,086 2,460 5,255 4,537 4,124 -- -------- -------- --------- -------- --------- -------- --------- -------- Total................ $88,936 $31,760 $103,134 $35,139 $124,634 $53,447 $146,950 $77,042 ======== ======== ========= ======== ========= ======== ========= ========
- ------------------------- (1) Does not reflect net premiums written for Superior for the years ended December 31, 1993, 1994 and 1995 and for the four months ended April 30, 1996. For the years ended December 31, 1993, 1994 and 1995, Superior and its subsidiaries had gross premiums written of $115.7 million, $112.9 million and $94.8 million, respectively, and net premiums written of $115.3 million, $112.5 million and $94.1 million, respectively. For the four months ended April 30, 1995 and 1996, Superior and its subsidiaries had gross premiums written of $28.6 million and $44.0 million, respectively, and net premiums written of $27.9 million and $43.6 million, respectively. (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." 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 49 52 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: - 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. - 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. - 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. - 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. - 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. - 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 nonstandard automobile 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 144,000 combined policies of Pafco and Superior in force on December 31, 1995, fewer than 6% had policy limits in excess of these basic limits of coverage. Of the 54,000 policies of Pafco in force on December 31, 1995, approximately 90% had policy periods of six months or less. Of the approximately 90,000 policies of Superior in force as of December 31, 1995, approximately 42% had policy periods of six months and approximately 58% had policy periods of 12 months. 50 53 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 market place. 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 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 table 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.
COMBINED COMPANY SUPERIOR COMPANY AND SUPERIOR -------------------------------------- ---------------------------------------- ----------------------------------------- SIX SIX SIX MONTHS MONTHS MONTHS YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, --------------------------- -------- ----------------------------- -------- ------------------------------ -------- 1993 1994 1995 1996 1993 1994 1995 1996 1993 1994 1995 1996 ------- ------- ------- -------- -------- -------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS) STATE Arkansas... $ 1,497 $ 1,619 $ 1,796 $ 1,286 -- -- -- $ 1,497 $ 1,619 $ 1,796 $ 1,286 California... -- -- -- -- $ 13,132 $ 13,422 $15,350 $ 9,561 13,132 13,422 15,350 9,561 Colorado... 9,634 5,629 9,257 5,572 -- -- -- -- 9,634 5,629 9,257 5,572 Florida... -- -- -- -- 49,262 55,282 54,535 39,126 49,262 55,282 54,535 39,126 Georgia... -- -- -- -- 6,149 7,342 5,927 3,707 6,149 7,342 5,927 3,707 Illinois... -- -- 80 534 3,906 3,894 2,403 851 3,906 3,894 2,483 1,385 Indiana... 16,559 13,648 13,710 9,087 57 414 132 -- 16,616 14,062 13,842 9,087 Iowa... 5,239 3,769 3,832 2,873 -- -- -- -- 5,239 3,769 3,832 2,873 Kentucky... 6,093 9,573 7,840 5,790 -- -- -- -- 6,093 9,573 7,840 5,790 Mississippi... -- -- -- -- 5,526 4,411 2,721 1,010 5,526 4,411 2,721 1,010 Missouri... 10,766 8,163 8,513 8,120 -- -- -- -- 10,766 8,163 8,513 8,120 Nebraska... 2,399 3,192 3,660 2,627 -- -- -- -- 2,399 3,192 3,660 2,627 Ohio... -- -- -- -- 7,312 4,325 3,164 1,639 7,312 4,325 3,164 1,639 Oklahoma... -- -- 317 1,199 -- -- -- -- -- -- 317 1,199 Tennessee... -- -- -- -- 891 1,829 332 (2) 891 1,829 332 (2) Texas... -- -- -- -- 19,318 10,660 3,464 4,774 19,318 10,660 3,464 4,774 Virginia... -- -- -- -- 8,748 7,500 5,035 8,370 8,748 7,500 5,035 8,370 Washington... -- -- -- -- 1,359 3,827 1,693 83 1,359 3,827 1,693 83 ------- ------- ------- ------- -------- -------- ------- ------- -------- -------- -------- -------- Totals... $52,187 $45,593 $49,005 $ 37,088 $115,660 $112,906 $94,756 $ 69,119 $167,847 $158,499 $143,761 $106,207 ======= ======= ======= ======= ======== ======== ======= ======= ======== ======== ======== ========
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 21 territorial managers, each of whom resides in a 51 54 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 deliver prompt service while ensuring consistent underwriting, the Company offers rating software to its agents in some states which permits them to evaluate risks in their offices. The agent has the authority to sell and bind insurance coverages in accordance with procedures established by the Company, which is a common practice in the 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 and California. 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. As of June 30, 1996, the Company had a combined nonstandard automobile underwriting and processing staff of approximately 200 employees. 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. 52 55 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 each 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.
COMBINED COMPANY SUPERIOR COMPANY AND SUPERIOR(1) ---------------------------------- ----------------------------------- ----------------------------------- SIX SIX SIX MONTHS MONTHS MONTHS YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, ---------------------- -------- ----------------------- -------- ----------------------- -------- 1993 1994 1995 1996 1993 1994 1995 1996(2) 1993 1994 1995 1996(2) ---- ----- ----- -------- ----- ----- ----- -------- ----- ----- ----- -------- Loss ratio.... 55.5% 62.3% 65.8% 66.5% 64.8% 72.3% 64.2% 67.2% 63.1% 70.5% 64.6% 65.7% LAE ratio..... 8.6 9.8 8.0 7.0 7.9 9.6 9.9 6.1 8.0 9.6 9.4 5.9 Underwriting expense ratio....... 21.9% 34.3% 37.5% 31.2% 30.7% 34.5% 33.5% 27.3% 29.3% 34.5% 34.8% 30.0% ---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Combined ratio....... 86.0% 106.4% 111.3% 104.7% 103.4% 116.4% 107.6% 100.6% 100.4% 114.6% 108.8% 101.6% ==== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
- ------------------------- (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 through April 30, 1996. (2) During the four months ended April 30, 1996, Superior decreased its IBNR reserves by $1.3 million due to a change in estimate resulting from improved claims administration. In an effort to maintain and improve underwriting profits, the territorial managers regularly monitor loss ratios of the agencies in their regions and meet periodically with the agencies in order to address any adverse trends in loss ratios. Claims The Company's nonstandard automobile claims department, consisting of approximately 36 salaried claims personnel at Pafco and 83 at Superior as of May 31, 1996, 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 data base, 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 53 56 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. For the six months ended June 30, 1996, premiums ceded to reinsurers on this excess of loss cover were $49,995. 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:
REINSURANCE RECOVERABLES AS OF JUNE 30, 1996(1) A.M. BEST ------------------------ REINSURERS RATING - -------------------------------------------------------------- --------- (IN THOUSANDS) Chartwell Reinsurance Company................................. A(2) $ 619 Constitution Reinsurance Corporation.......................... A+(3) 2,566 SCOR Reinsurance Company...................................... A 292 Security Insurance Company of Hartford........................ A 290 Winterthur Reinsurance Corporation of America................. A 277
- ------------------------- (1) Only recoverables greater than $200,000 are shown. Total nonstandard automobile reinsurance recoverables as of June 30, 1996 were approximately $4,382,000. (2) An A.M. Best rating of "A" is the third highest of 15 ratings. (3) An A.M. Best rating of "A+" is the second highest of 15 ratings. 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 54 57 Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%; Transatlantic Reinsurance Company, 15%; SOREMA North America 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 Corporation of America -- "A"; and Zurich Reinsurance Centre, Inc. -- "A". For the six months ended June 30, 1996, Superior had $412,000 of ceded premiums to reinsurers. 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 Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop hail insurance. Crop insurance is purchased by farmers to reduce the risk of crop loss from adverse weather and other uncontrollable events. Farms are subject to drought, floods and other natural disasters that can cause widespread crop losses and, in severe cases, force farmers out of business. 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 55 58 insurance (with an average loss ratio of 147%) and ad hoc disaster payments since 1980, Congress has, since 1990, considered major reform of its crop insurance and disaster assistance policies. The 1994 Reform Act was enacted in order to increase participation in the MPCI program and eliminate the need for ad hoc federal disaster relief payments to farmers. The 1994 Reform Act required farmers for the first time to purchase at least CAT Coverage in order to be eligible for other federally sponsored farm benefits, including, but not limited to, low interest loans and crop price supports. The 1994 Reform Act also authorized the marketing and selling of CAT Coverage by the local USDA offices. As a result of an increase in the number of policies and acres insured, the Company's MPCI Premiums increased to $53.4 million in 1995 from $44.3 million in 1994 and the fees and commissions received by the Company from its MPCI business increased to $21.1 million in 1995 from $14.0 million in 1994. With respect to its MPCI business for recent crop years, IGF issued 24,400 policies on 4,260,000 gross acres in 1993; 31,200 policies on 5,423,000 gross acres in 1994; and 68,600 policies on 13,957,000 gross acres in 1995. The foregoing acreages represent the gross acres insured by the Company, without reduction for interests in insured acreage which are shared by two or more persons. In 1995, 25,400 policies were CAT Coverage. The Company has not experienced any material negative impact in 1996 from the delinkage mandated by the 1996 Reform Act. 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. For a more detailed description of the Company's MPCI business, see "Risk Factors -- Nature of Crop Insurance Business" and "Business -- Crop Insurance -- Products." Strategy The Company has multiple strategies for its crop insurance operations, including the following: - 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. - The Company also limits the risks associated with crop insurance through selective underwriting of crops based on its historical loss experience data base. - The Company continues to develop and maintain a proprietary knowledge-based underwriting system which utilizes a database of Company-specific underwriting rules. 56 59 - 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. - Unlike many of its competitors, the Company employs a number of full time claims adjusters in order to reduce the losses experienced by IGF. - 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. - The Company continues to explore growth opportunities and product diversification through new specialty coverages, including Crop Revenue Coverage and named peril insurance. - 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 (such policies, "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 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 57 60 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. 58 61 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. The Company does not utilize its own resources to pay MPCI or CAT losses. 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 Premium, and underwriting gains or losses of IGF for the periods indicated:
YEARS ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------- ------- ------- (IN THOUSANDS) MPCI Premiums.................................................... $26,563 $44,325 $53,408 MPCI Imputed Premiums............................................ -- 2,171 19,552 Gross underwriting gain (loss)................................... (3,534) 4,344 10,870 Net private third-party reinsurance recovery (expense) and other.......................................................... 2,019 (1,087) (1,217) ------- ------- ------- Net underwriting gain (loss)..................................... $(1,515) $ 3,257 $ 9,653 ======= ======= =======
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. 59 62 In addition to premium revenues, the Company received the following fees and commissions from its crop insurance segment for the periods indicated:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------- ------------------ 1993 1994 1995 1995(1) 1996(1) ------ ------- ------- ------- ------- (IN THOUSANDS) CAT Coverage Fees............................... $ -- $ 74 $ 1,298 $ 446 $ 941 Buy-up Expense Reimbursement Payments........... 8,854 13,845 16,366 10,233 19,402 CAT LAE Reimbursement Payments and MPCI Excess LAE Reimbursement Payments.................... 190 107 3,427 1,198 1,646 ------- -------- -------- -------- -------- Total......................................... $9,044 $14,026 $21,091 $11,877 $21,989 ======= ======== ======== ======== ========
- ------------------------- (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview -- Crop Insurance Operations" for a discussion of the accounting treatment accorded to the crop insurance business. Crop Revenue Coverage. The Company has recently introduced a new product in its crop insurance business called Crop Revenue Coverage, or "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 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. 60 63 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 Multi-Peril Crop Insurance, 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(TM) product which combines the application and underwriting process for MPCI and hail coverages. IGF wrote crop hail coverage in the following amounts for the following crop years: 6,500 policies on 2,595,000 gross acres in 1993; 7,300 policies on 3,066,000 gross acres in 1994; and 9,000 policies on 4,422,000 gross acres in 1995. The HAILPLUS(TM) 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 61 64 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;
CEDED PREMIUM FOR THE SIX MONTHS A.M. BEST ENDED JUNE 30, 1996(1) REINSURERS RATING ---------------------- - --------------------------------------------------------------- --------- (IN THOUSANDS) Folksam International Insurance Co. Ltd........................ A-(2) $487 Frankona Ruckversicherungs AG.................................. A(3) 265 Granite Re..................................................... NR(4) 221 Insurance Corporation of Hannover.............................. A- 395 Liberty Mutual Insurance Co. (UK) Ltd.......................... A 210 Partner Reinsurance Company Ltd................................ A 604 R + V Versicherung AG.......................................... NR 457 Scandinavian Reinsurance Company Ltd........................... A+(5) --(6)
- ------------------------- (1) For the six months ended June 30, 1996, total ceded premiums were $2,666,837. (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) An A.M. Best rating of "A+" is the second highest of 15 ratings. (6) As of June 30, 1996, IGF had not yet recognized significant ceded premiums to Scandinavian Reinsurance Company, although it expects to recognize significant ceded premiums to such company for the full year. 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 1995. Through its agencies, IGF targets farmers with an acreage base of at least 1,000 acres. With respect to its MPCI business, policies written on 1,000 or more acres accounted for the following portion of gross acreage insured by IGF in the following crop years: for 1993, 12.5% (534,000 gross acres); for 1994, 12.1% (657,000 gross acres); and for 1995, 21.3% (2,975,000 gross acres). With respect to its crop hail business, policies written on 1,000 or more acres accounted for the following portion of gross acreage insured by IGF in the following crop years: for 1993, 37.3% (967,000 gross acres); for 1994, 42.0% (1,291,000 gross acres); and for 1995, 48.4% (2,142,000 gross 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. 62 65 The following table sets forth an analysis of the number of acres insured by policy for the 1994 and 1995 crop years.
ACREAGE (MILLIONS OF ACRES) ------------------------------------------- 1994 1995 ------------------ ------------------- ACREAGE RANGE PER POLICY MPCI CROP HAIL MPCI CROP HAIL - ------------------------------------------------------ ---- --------- ----- --------- 1 to 499.............................................. 3.68 1.05 8.04 1.29 500 to 999............................................ 1.09 .73 2.94 .99 1,000+................................................ .66 1.29 2.97 2.14 ---- - ---- - ----- ---- - Total............................................... 5.43 3.07 13.95 4.42 ===== ===== ===== =====
The following table presents MPCI Premiums written by IGF by state for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996.
YEARS ENDED DECEMBER 31, --------------------------------- SIX MONTHS ENDED STATE 1993 1994 1995 JUNE 30, 1996 - ------------------------------------------ ------- ------- ------- ---------------- (IN THOUSANDS) Texas..................................... $ 5,004 $ 6,751 $11,075 $ 12,214 Iowa...................................... 5,578 8,506 9,296 10,920 Illinois.................................. 4,090 7,302 7,305 8,485 Kansas.................................... 1,152 2,003 3,476 2,899 Minnesota................................. 1,030 1,965 2,026 2,524 Nebraska.................................. 843 1,536 1,992 2,275 Indiana................................... 1,047 1,486 1,875 2,161 Colorado.................................. 902 1,526 1,771 2,523 Missouri.................................. 633 1,785 1,718 1,881 North Dakota.............................. 1,037 1,153 1,638 2,454 All Other................................. 5,247 10,312 11,236 14,580 ------- ------- ------- ------- Total................................ $26,563 $44,325 $53,408 $ 62,916 ======= ======= ======= =======
The following table presents gross premiums written by IGF by state for crop hail coverages for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996.
YEARS ENDED DECEMBER 31, --------------------------------- SIX MONTHS ENDED STATE 1993 1994 1995 JUNE 30, 1996 - ------------------------------------------ ------ ------- ------- ---------------- (IN THOUSANDS) Iowa...................................... $3,158 $ 3,954 $ 4,667 $ 3,481 Minnesota................................. 294 318 2,162 1,993 Colorado.................................. 558 964 1,775 760 Nebraska.................................. 672 1,022 1,477 1,086 Montana................................... 695 239 1,355 3,655 North Dakota.............................. 729 1,087 1,283 1,231 Kansas.................................... 705 765 846 477 South Dakota.............................. 101 124 756 1,291 Wisconsin................................. 328 315 458 351 Mississippi............................... 208 277 400 480 All Other................................. 1,145 1,065 1,787 2,815 ------- ------- ------- ------- Total................................ $8,593 $10,130 $16,966 $ 17,620 ======= ======= ======= =======
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 63 66 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). As of December 31, 1995, IGF's average exposure was approximately $30,000 per policy and approximately $375,000 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, as of May 31, 1996, IGF employed approximately 40 full-time professional claims adjusters who are agronomy trained as well as approximately 190 part-time loss 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. 64 67 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 1995 crop year, the number of insurance companies having agreements with the FCIC to sell and service MPCI policies has declined from 50 to 17. 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 table sets forth a three year analysis of the undiscounted reserves for loss and LAE of the Company (not including Superior) at the beginning of each year, the provision for new claims incurred in the 65 68 current year, the effect of reserve adjustments on claims of prior years and the actual payments made during the year on both current year and prior year claims.
YEARS ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------- ------- ------- (IN THOUSANDS) Balance at January 1............................................. $30,924 $54,143 $29,269 Less reinsurance recoverables.................................... 11,643 36,891 12,542 ------- ------- ------- Net balance at January 1....................................... 19,281 17,252 16,727 ------- ------- ------- Incurred related to: Current Year................................................... 23,931 26,268 35,184 Prior Years.................................................... 1,149 202 787 ------- ------- ------- Total incurred............................................ 25,080 26,470 35,971 ------- ------- ------- Paid related to: Current Year................................................... 14,877 16,647 21,057 Prior Years.................................................... 12,232 10,348 10,018 ------- ------- ------- Total paid................................................ 27,109 26,995 31,075 ------- ------- ------- Net balance at December 31....................................... 17,252 16,727 21,623 Plus reinsurance recoverables.................................... 36,891 12,542 37,798 ------- ------- ------- Balance at December 31........................................... $54,143 $29,269 $59,421 ======= ======= =======
Unpaid gross loss and loss adjustment expenses at December 31, 1994 decreased by $24,874,000 to $29,269,000 from $54,143,000 at December 31, 1993, primarily due to a decline in reinsurance recoverables of $24,349,000, of which $22,695,000 represented a decline in the amount recoverable from the FCIC in respect of MPCI business. In addition, Pafco's statutory surplus began to grow in the latter half of 1994, resulting in a decrease in its ratio of net premiums written to surplus. State regulators generally establish required surplus levels based on an insurer's premium levels. For property-casualty insurance companies, ratios in excess of 3 to 1 in the amount of net premiums written to the amount of statutory surplus are considered outside the usual range by insurance regulators and rating agencies. Pafco's ratio of net premiums written to surplus declined from 3.3 to 1 in 1992 to 2.1 to 1 in 1993, causing the Company to reevaluate the amount of quota share reinsurance it needed to maintain a ratio of premiums to surplus at or near 3 to 1. Therefore, in the second half of 1994, the Company reduced its nonstandard quota share reinsurance to 32% in 1994 from 50% in 1993. Unpaid gross loss and loss adjustment expenses at December 31, 1995 increased by $30,152,000 to $59,421,000 from $29,269,000 at December 31, 1994, due to an increase in reinsurance recoverables and a higher volume of premiums. The net increase in reinsurance recoverables of $25,256,000 was due to a substantial increase in the MPCI business, all of which was ceded to the federal government (representing a $26,262,000 increase in reinsurance recoverables), offset in part by a continued decline in nonstandard quota share reinsurance with third party reinsurers. In 1995, the Company reduced its nonstandard quota share reinsurance from 32% to 25% based on excess surplus capacity. The following table sets forth a three year analysis of the undiscounted reserves for loss and LAE of Superior at the beginning of each year, the provision for new claims incurred in the current year, the effect of 66 69 reserve adjustments on claims of prior years and the actual payments made during the year on both current year and prior year claims.
YEARS ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------- ------- ------- (IN THOUSANDS) Balance at January 1............................................. $57,164 $52,610 $54,577 Less reinsurance recoverables.................................... 361 68 1,099 ------- ------- ------- Net balance at January 1....................................... 56,803 52,542 53,478 ------- ------- ------- Incurred related to: Current Year................................................... 92,619 91,064 77,266 Prior Years.................................................... (6,717) 1,314 (4,923) ------- ------- ------- Total incurred............................................ 85,902 92,378 72,343 ------- ------- ------- Paid related to: Current Year................................................... 57,929 56,505 48,272 Prior Years.................................................... 32,234 34,937 31,424 ------- ------- ------- Total paid................................................ 90,163 91,442 79,696 ------- ------- ------- Net balance at December 31....................................... 52,542 53,478 46,125 Plus reinsurance recoverables.................................... 68 1,099 987 ------- ------- ------- Balance at December 31........................................... $52,610 $54,577 $47,112 ======= ======= =======
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 recur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies from the table. 67 70 THE COMPANY -- NONSTANDARD AUTOMOBILE INSURANCE ONLY (NOT INCLUDING SUPERIOR)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 1993 1994 1995 ------ ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Gross reserves for unpaid losses and LAE........................ $29,125 $26,819 $30,844 Deduct: Reinsurance recoverable.................... 12,581 10,927 9,921 ------- ------- ------- 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 Paid cumulative as of: One year later................. 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059 Two years later................ 4,318 7,510 10,388 10,930 12,723 14,934 12,966 Three years later.............. 4,433 7,875 12,107 12,497 14,461 16,845 Four years later............... 4,146 8,225 12,863 13,271 15,071 Five years later............... 4,154 8,513 13,147 13,503 Six years later................ 4,297 8,546 13,237 Seven years later.............. 4,297 8,561 Eight 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 Two years later................ 4,588 11,413 14,178 14,745 16,943 19,599 17,023 Three years later.............. 4,702 10,923 14,236 14,993 16,914 19,662 Four years later............... 4,311 10,791 14,479 14,809 16,750 Five years later............... 4,234 10,877 14,436 14,659 Six years later................ 4,320 10,825 14,368 Seven years later.............. 4,278 10,922 Eight years later.............. 4,309 Net cumulative (deficiency) or redundancy..................... 439 (147) (22) 2,424 699 (956) (479) (478) -- Expressed as a percentage of unpaid losses and LAE.......... 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.9%) (2.9%)
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. 68 71 SUPERIOR
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Gross reserves for unpaid losses and LAE................... $52,610 $54,577 $47,112 Deduct: Reinsurance recoverable........... 68 1,099 987 ------- ------- ------- Reserve for unpaid losses and LAE, net of reinsurance........... $15,070 $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125 Paid cumulative as of: One year later........ 13,540 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227 Two years later....... 17,390 25,526 34,122 43,547 44,128 40,513 41,231 38,908 Three years later..... 19,355 29,670 39,524 48,037 47,442 44,183 43,198 Four years later...... 20,119 32,545 41,257 49,064 49,256 44,708 Five years later...... 21,090 33,242 41,492 49,522 49,365 Six years later....... 21,422 33,395 41,716 49,327 Seven years later..... 21,512 33,535 41,576 Eight years later..... 21,523 33,469 Nine years later...... 21,447 Liabilities reestimated as of: One year later........ 22,557 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564 Two years later....... 22,985 37,118 49,327 53,715 56,626 50,520 50,474 50,006 Three years later..... 24,968 37,932 49,051 53,022 55,147 51,854 46,624 Four years later...... 24,724 38,424 49,436 52,644 57,720 49,739 Five years later...... 24,971 38,580 49,297 54,030 56,824 Six years later....... 25,111 38,584 50,701 53,697 Seven years later..... 25,116 39,965 50,515 Eight years later..... 26,471 39,861 Nine years later...... 26,376 Net cumulative (deficiency) or redundancy............ (11,306) (13,616) (12,664) 2,727 3,294 10,485 10,179 2,536 4,923 Expressed as a percentage of unpaid losses and LAE........ (75.0%) (51.9%) (33.5%) 4.8% 5.5% 17.4% 17.9% 4.8% 9.2%
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. 69 72 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, in accordance with pre-established investment policy guidelines established by the Company. The investment portfolios of the Company at June 30, 1996 consisted of the following:
ESTIMATED AMORTIZED MARKET TYPE OF INVESTMENT COST VALUE - ------------------------------------------------------------------- --------- --------- (IN THOUSANDS) Fixed maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies..................................... $ 58,152 $ 56,474 Obligations of states and political subdivisions................. 26,409 24,727 Corporate securities............................................. 34,375 38,436 -------- -------- Total fixed maturities...................................... 118,936 119,637 Equity securities: Preferred stocks................................................. 3,353 3,285 Common stocks.................................................... 29,107 29,207 -------- -------- 32,460 32,492 Short-term investments............................................. 5,989(1) 5,989(1) Real estate........................................................ 477 477 Mortgage loans..................................................... 2,560 2,560 Other loans........................................................ 50 50 -------- -------- Total investments........................................... $ 160,472 $ 161,205 ======== ========
- ------------------------- (1) Due to the nature of crop insurance, the Company must maintain short-term investments to fund amounts due under the MPCI program. Historically, these short-term funds are highest in the fall corresponding to the cash flow of the agricultural industry. 70 73 The following table sets forth, as of December 31, 1994 and 1995 and June 30, 1996, the composition of the fixed maturity securities portfolio of the Company by time to maturity.
THE COMPANY ------------------------------------------------------------- DECEMBER 31, -------------------------------------- JUNE 30, 1994 1995 1996 ----------------- ----------------- ------------------- PERCENT PERCENT PERCENT TOTAL TOTAL TOTAL MARKET MARKET MARKET MARKET MARKET MARKET TIME TO MATURITY VALUE VALUE VALUE VALUE VALUE VALUE - ------------------------------------------ ------ ------- ------- ------ -------- ------- (IN THOUSANDS) 1 year or less............................ $1,573 17.8% $ 4,610 35.6 % $ 1,750 1.5% More than 1 year through 5 years.......... 4,074 46.0 5,051 39.1 67,599 56.5 More than 5 years through 10 years........ 1,724 19.4 3,270 25.3 31,861 26.6 More than 10 years........................ 1,490 16.8 -- -- 18,427 15.4 ------ ----- ------- ----- -------- ----- Total................................ $8,861 100.0% $12,931 100.0 % $119,637 100.0% ====== ===== ======= ===== ======== =====
The following table sets forth, as of December 31, 1994 and 1995 and June 30, 1996, the ratings assigned to the fixed maturity securities of the Company.
THE COMPANY ------------------------------------------------------------- DECEMBER 31, -------------------------------------- JUNE 30, 1994 1995 1996 ----------------- ----------------- ------------------- PERCENT PERCENT PERCENT TOTAL TOTAL TOTAL MARKET MARKET MARKET MARKET MARKET MARKET RATING(1) VALUE VALUE VALUE VALUE VALUE VALUE - ------------------------------------------ ------ ------- ------- ------ -------- ------- (IN THOUSANDS) Aaa or AAA................................ $5,772 65.1% $ 7,753 60.0 % $ 57,632 48.1% Aa or AA.................................. 748 8.4 680 5.2 5,384 4.5 A......................................... 1,144 12.9 257 2.0 21,979 18.4 Baa or BBB................................ 100 1.2 100 0.8 11,913 10.0 Ba or BB.................................. -- -- -- -- 2,817 2.4 Other below investment grade.............. -- -- -- -- -- -- Not rated (2)............................. 1,097 12.4 4,141 32.0 19,912 16.6 ------ ----- ------- ----- -------- ----- Total................................ $8,861 100.0% $12,931 100.0 % $119,637 100.0% ====== ===== ======= ===== ======== =====
- ------------------------- (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:
THE COMPANY ------------------------------------------------------ SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- (DOLLARS IN THOUSANDS) Net investment income (1)................... $ 1,489 $ 1,241 $ 1,173 $ 636 $ 1,533 Average investment portfolio (2)............ $24,719 $20,628 $22,653 $22,033 $146,757 Pre-tax return on average investment portfolio (3)............................. 6.0% 6.0% 5.2% 5.8% 4.4% Net realized gains (losses)................. $ (119) $ (159) $ (344) $ 79 $ 228
- ------------------------- (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. For the six months ended June 30, 1996, the average investment portfolio included $29,801 of the Company prior to the Acquisition and $116,956 due to the Acquisition. (3) The pre-tax return on average investment portfolio for the six months ended June 30, 1995 and 1996 was calculated based upon a simple annualization of net investment income. 71 74 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. See "Use of Proceeds." 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, 72 75 1987), and Superior as of December 31, 1993 (covering the period to that date from January 1, 1991). Pafco, 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 the Insurers are domiciled. These laws, among other things, (i) require the Company to file periodic information with state regulatory authorities including information concerning its capital structure, ownership, financial condition and general business operations; (ii) regulate certain transactions between the Company, its affiliates and 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 19% 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 Indiana Commissioner and the Commissioner of Insurance of the State of Florida, 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 receives notice of their declaration. "Extraordinary" dividends and distributions may not be paid without the prior approval of the Indiana Commissioner or until the Indiana Commissioner has been given thirty days prior notice and has not disapproved within that period. The Indiana Department must receive notice of all dividends, whether "extraordinary" or not, within five business days after they are declared. Notwithstanding the foregoing limit, a domestic insurer may not declare or pay a dividend 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 gains or reevaluation of assets. As of December 31, 1995, IGF had earned surplus of $2,713,000. 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 make dividend payments or distributions to stockholders without prior approval of the Florida Department 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 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 73 76 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) 30 days after the Florida Department has received notice of such dividend or distribution and has not disapproved it within such time. In the Consent Order approving the Acquisition, the Florida Department has prohibited Superior from paying any dividends (whether extraordinary or not) for four years without the prior written approval of the Florida Department. Under these laws, the maximum aggregate amounts of dividends permitted to be paid to the Company in 1996 by IGF without prior regulatory approval is $2,713,000, none of which has been paid, and Pafco cannot pay to the Company any dividends in 1996 without prior regulatory approval. Although the Company believes that amounts required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources." Further, there can be no assurance that, if requested, the Indiana Department will approve any request for extraordinary dividends from Pafco or IGF or that the Florida Department will allow any dividends to be paid by Superior during the four year period 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, 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 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 three years, the right to reevaluate the reasonableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department or the Florida Department will not in the future require a reduction in these management fees. Federal Regulation The Company's MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. Consequently, the MPCI program is subject to oversight by the legislative and executive branches of the federal government, including the FCIC. The MPCI program regulations generally require compliance with federal guidelines with respect to underwriting, rating and claims administration. The Company is required to perform continuous internal audit procedures and is subject to audit by several federal government agencies. 74 77 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. See "Risk Factors -- Nature of Crop Insurance Business." 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 75 78 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 1993, 1994 and 1995, Pafco had a liabilities to liquid assets ratio ranging from 115% to 147%. The NAIC considers as "unusual" a liabilities to liquid assets ratio in an amount greater than 105%. Pafco maintained such an "unusual" ratio during this period due to its investment in IGF, which is not considered a liquid asset. Primarily as a result of the Transfer, Pafco's liabilities to liquid assets ratio declined to 100% as of June 30, 1996. During 1993, 1994 and 1995, IGF had "unusual" values in the IRIS tests for premiums to surplus, liabilities to liquid assets and reserve deficiency to surplus ratios. IGF also had "unusual" values for investment yield, agents balances to surplus and surplus aid to surplus ratios for 1994 and 1995. Due to the unique accounting method employed by IGF, it is expected that these "unusual" ratios will develop. The ratios for premiums to surplus, agents' balances to surplus and surplus aid to surplus are impacted by the reinsurance program mandated by the FCIC for the distribution of the MPCI program. See "-- Crop Insurance -- Products." The ratio of liabilities to liquid assets is "unusual" since agents' balances at December 31 are usually not settled until late February. The investment yield ratio is "unusual" as premiums for crop insurance are not due and payable until the crops are harvested. In addition, late February is also the point in time where claims settlement is the highest, thus resulting in minimal invested assets. The reserve deficiency to surplus ratio is also "unusual" because such ratio is calculated utilizing a projection of historical reserve development which can be inaccurate due to potential corrections in reserving methodology. Additionally, crop reserves are short tail lines which do not generate a significant adverse reserve development. The Company believes the proceeds applied to IGF from the Offering will substantially ameliorate the premium writings to surplus leverage test. 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 May 1, 1996, the RBC ratios of the Insurers were in excess of levels that would require regulatory action. 76 79 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. 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. PROPERTIES The headquarters for the Company, GGS Holdings and Pafco are located at 4720 Kingsway Drive, Indianapolis, Indiana 46205. 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 Point Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of space leased for a term extending through February, 2000. In addition, Superior occupies an office at 1745 West Orangewood, Orange, California consisting of 3,264 square feet under a lease extending through 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. The Company has a townhouse in Indianapolis, Indiana with an original purchase price of $135,000 which is principally for use by out-of-town employees and visitors to Indianapolis. EMPLOYEES At June 30, 1996, the Company and its Subsidiaries employed approximately 600 persons. The Company believes that relations with its employees are excellent. 77 80 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The directors of the Company are divided into three classes and are elected to hold office for a three-year term or until their successors are elected and qualified. The election of each class of directors is staggered over each three-year period. See "Description of Capital Stock -- Anti-takeover Provisions." All directors of the Company were elected by Goran as the sole shareholder of the Company. After completion of the Offering, Goran will own approximately 70% of the outstanding Common Stock (assuming no exercise of the Underwriters' over-allotment option) and will continue to have the power to control the Company and to be able to elect the Company's Board of Directors. See "Risk Factors -- Control by Goran; Certain Continuing Relationships with Goran and its Affiliates; Conflicts of Interest." All executive officers of the Company are elected for one year terms and serve at the pleasure of the Board of Directors. The following table provides information regarding the executive officers and directors of the Company and certain officers of the Subsidiaries.
EXPIRATION OF TERM AS DIRECTOR NAME AGE POSITION OF THE COMPANY - ------------------------------- --- -------------------------------------------- ---------------- G. Gordon Symons............... 75 Chairman of the Board of Directors of the 1999 Company Alan G. Symons................. 49 Director and Chief Executive Officer of the 1997 Company Douglas H. Symons.............. 44 Director, President and Chief Operating 1998 Officer of the Company John J. McKeating.............. 60 Director of the Company 1999 Robert C. Whiting.............. 64 Director of the Company 1997 James G. Torrance, Q.C......... 67 Director of the Company 1998 David R. Doyle................. 50 Director of the Company 1999 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 Dennis G. Daggett.............. 41 President and Chief Operating Officer of IGF Thomas F. Gowdy................ 37 Executive Vice President of IGF Roger C. Sullivan, Jr.......... 50 Executive Vice President of Superior Donald J. Goodenow............. 49 Executive Vice President of Pafco
Biographical information for each of the individuals listed in the above table is set forth below. G. Gordon Symons has been Chairman of the Board of Directors of the Company since its formation in 1987. He founded the predecessor to Goran in 1964 and has served as the Chairman of the Board of Goran since its formation in 1986. Mr. Symons also served as the President of Goran until 1992 and the Chief Executive Officer of Goran until 1994. Mr. Symons currently serves as a director of Symons International Group Ltd. ("SIGL"), a federally-chartered Canadian corporation controlled by him which, together with members of the Symons family, controls Goran. Mr. Symons also serves as Chairman of the Board of Directors of all of the subsidiaries of Goran, including the Subsidiaries. Mr. Symons is the father of Alan G. Symons and Douglas H. Symons. Alan G. Symons has served as a director of the Company since 1995 and was named its Chief Executive Officer in 1996. Mr. Symons has been a director of Goran since 1986, and has served as Goran's President and Chief Executive Officer since 1994. Mr. Symons has served as a director and as President and Chief Executive Officer of each of GGS Holdings and GGS Management since the formation of such companies in 1996, has served as Vice Chairman of the Board of Directors of Pafco since 1995 and has served as President and Chief Executive Officer of Superior since 1996. Prior to becoming the President and Chief Executive Officer of 78 81 Goran, Mr. Symons held other executive positions within Goran since its inception in 1986. Mr. Symons is the son of G. Gordon Symons and the brother of Douglas H. Symons. Douglas H. Symons has served as a director and as President of the Company since its formation in 1987 and as its Chief Operating Officer since July, 1996. Mr. Symons served as Chief Executive Officer of the Company from 1989 until July, 1996. Mr. Symons has been the President, Chief Executive Officer and a director of Pafco since 1987. Mr. Symons has been a director of Goran since 1989, and has served as Goran's Chief Operating Officer and Vice President since 1989. Mr. Symons has served as a director and an Executive Vice President of each of GGS Holdings and GGS Management since their formation in 1996 and has served as a director and Executive Vice President of Superior since 1996. Mr. Symons is the son of G. Gordon Symons and the brother of Alan G. Symons. Mr. McKeating has served as a director of the Company since 1996 and as a director of Goran since 1995. Mr. McKeating retired in January, 1996 after serving as President and owner of Vision 20/20 Optometric Clinics ("Vision 20/20") for 36 years. Vision 20/20, located in Montreal, Quebec, is a chain of Canadian full-service retail clinics offering all aspects of professional eye care. Mr. Whiting has served as a director of the Company since 1996, and has served as a director of Granite Re since its formation in 1990. Since July, 1994, Mr. Whiting has served as President of Prime Advisors, Ltd., a Bermuda-based insurance consulting firm. From its inception until June, 1994, Mr. Whiting served as President and Chairman of the Board of Directors of Jardine Pinehurst Management Co., Ltd., a Bermuda-based insurance management and brokerage firm. Mr. Torrance has served as a director of the Company since 1996. Mr. Torrance was a founding partner in the Canadian law firm of Smith Lyons in 1962, and, in April 1993, was named a partner emeritus in that firm. Mr. Torrance was reelected as a director of Goran in 1995 after having left the Board of Directors of Goran in 1991. He also serves as a director of Dynacare Inc., Mitsui & Co. (Canada) Ltd., Potash Company of Canada Limited, Sakura Bank (Canada), Toyota Canada Inc. and Wintershall Canada Ltd. Mr. Doyle has served as a director of the Company since 1996. Since January, 1996, Mr. Doyle has been Vice President, Finance & Administration, and a director of Avantec, Inc., a Carmel, Indiana-based company which provides data management services for the pharmaceutical industry in connection with clinical trials. From May, 1994 to January, 1996, Mr. Doyle served as Vice President -- Financial Consultant of Raffensberger Hughes & Co., which provides securities brokerage and financial consulting services. From December, 1992 to May, 1994, Mr. Doyle was employed by Prudential Securities, Inc. as Vice President -- Investments. Prior to that, Mr. Doyle was employed by INB National Bank of Indianapolis, Indiana from 1973 to 1992, including his service as First Vice President & Department Manager from 1989 to 1992. Mr. Doyle has served on the boards of numerous civic organizations, including the Children's Bureau of Indianapolis, the Children's Bureau Foundation and Child Advocates, Inc. 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. Mr. Daggett has served as the Chief Operating Officer of IGF since 1994, as its President since September, 1996 and as a director of IGF since 1989. From 1992 to 1996, Mr. Daggett served as an Executive Vice President of IGF. Mr. Daggett also served as Vice President of Marketing for IGF from 1988 to 1993. Prior to joining IGF, Mr. Daggett was an initial employee of a crop insurance managing general agency, McDonald National Insurance Services, Inc., from 1984 until 1988. From 1977 to 1983, Mr. Daggett was employed as a crop insurance specialist with the FCIC. 79 82 Mr. Gowdy joined IGF in 1987 as a field representative, and subsequently served as a regional manager for IGF's Mid-America service office. Mr. Gowdy served as the Vice President of Marketing of IGF from 1993 until September, 1996, when he was named Executive Vice President of IGF. Mr. Gowdy has served as a director of IGF since 1993. Mr. Sullivan was named Executive Vice President of Superior in May, 1996. From June, 1995 to May, 1996, Mr. Sullivan served as Vice President of Claims for Superior. Prior to joining Superior, Mr. Sullivan served as a claim consultant and on-site manager for Milliman and Robertson, Inc., a Chicago-based insurance consulting firm, from August, 1994, to June, 1995. From May, 1987 to August, 1994, Mr. Sullivan served as Vice President of Claims for Atlanta Casualty Insurance Companies, an Atlanta-based carrier of standard and nonstandard automobile insurance. Mr. Goodenow has served as a director and Executive Vice President of Pafco since 1989 and as a director of Superior since 1996. Mr. Goodenow also served as a director and Executive Vice President of the Company from 1989 to 1996. Prior to joining the Company, Mr. Goodenow served in various executive capacities at Horace Mann Insurance Company, an Illinois insurance company. COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS Directors of the Company who are not employees of the Company or its affiliates receive a flat annual retainer of $10,000. The annual retainer is paid currently in cash. In addition, the Company reimburses Directors for reasonable travel expenses incurred in attending Board and Board committee meetings. Each director of the Company who is not also an employee of the Company will automatically be granted options to acquire 5,000 shares of Common Stock upon consummation of the Offering under the Company's 1996 Stock Option Plan. See "Executive Compensation -- Stock Option Plans -- SIG 1996 Stock Option Plan." The Company's Compensation Committee consists of Messrs. Doyle, Torrance and Douglas H. Symons. The Company's Audit Committee consists of Messrs. Alan G. Symons, Torrance and McKeating. EXECUTIVE COMPENSATION The following table sets forth the compensation paid to the Chief Executive Officer of the Company and to each of the other four most highly compensated executive officers of the Company and the Subsidiaries whose annual salary and bonus for services rendered to the Company and the Subsidiaries in 1995 exceeded $100,000 (such individuals being collectively referred to as the "Named Executives").
LONG-TERM COMPENSATION -------------- SECURITIES ANNUAL COMPENSATION UNDERLYING NAME AND FISCAL --------------------- SIG OPTIONS PRINCIPAL POSITION YEAR SALARY(1) BONUS (#) - ---------------------------------------------------- ------ --------- -------- -------------- Alan G. Symons Chief Executive Officer of the Company............ 1995 $ 50,000 $ -- (2) Douglas H. Symons President and Chief Operating Officer of the Company........................................... 1995 $ 149,982 $ 40,000 (2) Dennis G. Daggett President and Chief Operating Officer of IGF...... 1995 $ 125,000 $115,000 20,000(3) Thomas F. Gowdy Executive Vice President of IGF................... 1995 $ 92,000 $ 86,000 20,000(3) Roger C. Sullivan, Jr. Executive Vice President of Superior.............. 1995 $ 125,000 $ 24,940 --
(footnotes on following page) 80 83 - ------------------------- (1) Effective May, 1996, the annual salaries of the Named Executives were increased to the following amounts: Alan G. Symons, $200,000; Douglas H. Symons, $150,000; Mr. Daggett, $180,000; Mr. Gowdy, $140,000; and Mr. Sullivan, $130,000. (2) Alan G. Symons and Douglas H. Symons hold options to acquire 125,828 shares and 73,855 shares, respectively, of Goran common stock. These executives have also been granted options to acquire 55,555 and 27,777 shares, respectively, of common stock of GGS Holdings under the GGS Stock Option Plan. See "-- Stock Option Plans -- GGS Holdings Stock Option Plan." (3) Under their employment agreements with IGF, each of Mr. Daggett and Mr. Gowdy will automatically acquire an option to purchase 20,000 shares of Common Stock of the Company upon consummation of the Offering, with an exercise price per share equal to the initial public offering price. See "-- Employment Contracts and Termination of Employment -- IGF." Stock Option Plans Goran Share Option Plan. The directors and executive officers of the Company, including the Named Executives, are eligible to participate in Goran's Share Option Plan (the "Share Option Plan"). Under the Share Option Plan, 10% of the common shares of Goran outstanding from time to time have been reserved for issuance. The objective of these grants is to increase the participant's equity interest in Goran and to allow them to share in the appreciation of Goran's common stock. The Share Option Plan has been approved by Goran's shareholders. The terms, conditions and limitations of options granted under the Share Option Plan are determined by the Board of Directors of Goran with respect to each option, within certain limitations. The exercise price per share is the closing price on The Toronto Stock Exchange on the date of grant of the option. The term of each option is fixed by the Board of Directors of Goran when the option is granted, but may not be longer than eight years from the date of the grant. The exercise price per share is payable in full on the date of exercise. Options granted under the Share Option Plan are not assignable. The following table sets forth information on grants of stock options pursuant to the Share Option Plan during 1995 to certain of the Named Executives. All options are for the purchase of shares of common stock of Goran. The Named Executives and other employees of Goran who participate in the Share Option Plan will continue to hold their Goran stock options which remain unexercised after the closing of the Offering. During 1995, options to purchase a total of 63,354 common shares were granted to executive officers and directors of Goran pursuant to the Share Option Plan, excluding options granted and subsequently cancelled during the year. Options have been granted under the Share Option Plan for an aggregate of 436,410 common shares of Goran as of December 31, 1995, at an average exercise price of CDN$1.94 per share. OPTION GRANTS IN 1995
INDIVIDUAL GRANTS --------------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF % OF AT ASSUMED ANNUAL RATES OF SECURITIES TOTAL OPTIONS PER SHARE STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3) OPTIONS EMPLOYEES OR BASE EXPIRATION -------------------------- NAME GRANTED IN 1995(1) PRICE DATE(2) 5% 10% - ---------------------- ---------- ------------- --------- ---------- ----------- ------------ Alan G. Symons........ 18,945 29.9 CDN$7.25 4/25/2000 CDN$86,380 CDN$218,897 Douglas H. Symons..... 9,473 15.0 7.25 4/25/2000 43,192 109,454
- ------------------------- (1) Goran granted options totalling 63,364 shares to all employees of Goran and its subsidiaries in 1995. (2) The options were granted for a term of five years, subject to earlier termination upon the occurrence of certain events related to termination of employment. (3) Amounts represent the potential realizable value of each grant of options, assuming that the market price of the underlying shares appreciates in value from the date of grant to the end of the option term, at annualized rates of 5% and 10%. 81 84 The following table sets forth information with respect to option exercises in 1995 and unexercised options to purchase shares of common stock of Goran granted in 1995 and prior years under the Share Option Plan to the Named Executives. As in the table above, all options are for the purchase of shares of common stock of Goran. AGGREGATED OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT SHARES DECEMBER 31, 1995 DECEMBER 31, 1995(2) ACQUIRED VALUE --------------------------- ----------------------------- NAME ON EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------ -------------- -------- ----------- ------------- ------------- ------------- Alan G. Symons.......... 0 0 125,828 0 CDN$1,164,386 0 Douglas H. Symons....... 0 0 73,855 0 637,131 0
- ------------------------- (1) In 1996, Alan G. Symons and Douglas H. Symons acquired 49,383 and 33,333 shares, respectively, of common stock of Goran through the exercise of options. (2) Based on the closing price of the Toronto Stock Exchange of Goran's common stock on December 29, 1995 (CDN$11.88). GGS Holdings Stock Option Plan. The Board of Directors of GGS Holdings has adopted the GGS Management Holdings, Inc. 1996 Stock Option Plan (the "GGS Stock Option Plan"), effective as of April 30, 1996. A maximum of 10% of the issued and outstanding shares of GGS Holdings' common stock (on a fully diluted basis assuming exercise in full of all options) may be made the subject of options granted under the GGS Stock Option Plan. A total of 111,111 shares of common stock of GGS Holdings have actually been reserved for issuance under the GGS Stock Option Plan, which authorizes the grant of incentive stock options to such officers and other key employees as may be designated by the Board of Directors of GGS Holdings. Stock options granted under the GGS Stock Option Plan will be exercisable at such times and at such exercise prices as the Board of Directors of GGS Holdings shall determine, but in any event not prior to the earlier of (i) an initial public offering of GGS Holdings, and (ii) a Company Sale (as defined in the GGS Agreement), and not later than ten years from the date of the grant. Options granted under the GGS Stock Option Plan vest at a rate of 20% per year for five years after the date of the grant. The exercise price of options granted as of April 30, 1996 is, with respect to 50% of the shares subject to each such option, $44.17 per share. The exercise price per share for the remaining 50% is $44.17, subject to a compound annual increase in the exercise price of 10%. Alan G. Symons has received 55,555 such options, and Douglas H. Symons has received 27,777 such options. The exercise price of any options granted under the GGS Stock Option Plan after April 30, 1996, will be subject to a similar formula, with 50% of the shares subject to any such option having an exercise price determined by the Board of Directors in its discretion, and the other 50% having an exercise price which increases on each anniversary of the date of the grant. No option granted under the GGS Stock Option Plan is transferable by the option holder other than by the laws of descent and distribution. Shares received upon exercise of such an option are not transferable, except as provided in the Stockholder Agreement among the Company and the GS Funds. SIG 1996 Stock Option Plan. Presently, there are no outstanding options to acquire shares of Common Stock of the Company. The Company intends to adopt, and Goran as the sole shareholder is expected to approve, the Company's 1996 Stock Option Plan (the "Stock Option Plan"), which will contain provisions similar to the provisions of the Share Option Plan of Goran. A total of 1,000,000 shares of Common Stock has been reserved for issuance under the Stock Option Plan. The Stock Option Plan authorizes the granting of (i) both incentive stock options and non-qualified stock options to officers and other key employees of the Company and its subsidiaries, and (ii) non-qualified stock options to non-employee directors of the Company ("Outside Directors"). Stock option grants will provide the opportunity for officers and key employees of the Company to purchase shares of Common Stock of the Company at a price equal to the average of the high and the low prices of the Common Stock on the date of grant (or if the date of grant is not a trading date, then on the last previous trading day.) Stock options shall not be exercisable after expiration of such period as shall be fixed by 82 85 the Compensation Committee at the time of grant, which such period shall in no event exceed ten years for incentive stock options and ten years and one day for non-qualified stock options. Under the terms of the Stock Option Plan, the Compensation Committee may not grant options to an employee of the Company who possesses more than 10% of the voting power of all shares of common stock of the Company unless at the time the option is granted the exercise price is at least 110% of the fair market value of the Common Stock and the option is not exercisable after the expiration of five years from the date of grant. The Compensation Committee may also award a stock appreciation right in conjunction with an incentive stock option or non-qualified stock option. The Stock Option Plan also provides for automatic grants of non-qualified stock options to purchase 5,000 shares of Common Stock to directors as of the first day following each annual meeting of the Company's shareholders. The exercise price of the non-qualified stock options so granted to Outside Directors shall be the average of the high and low prices of the Common Stock as traded on the Nasdaq National Market on the date of grant (or, if the date of grant is not a trading date, then on the next succeeding trade date). Each of such options will have a term of ten years from the date of grant and will not be exercisable during the first six months of their term. Once they become exercisable, such options may be exercised in whole or in part during their term. The provisions of the Stock Option Plan applicable to the administration, construction or interpretation of options granted to Outside Directors shall be administered, construed and interpreted by those members of the Company's Board of Directors who are not Outside Directors (the "Inside Directors"). The Stock Option Plan provides that, in the event of any reorganization, recapitalization, stock split, stock dividend, or other capital change, the Compensation Committee and the Inside Directors, as appropriate, are empowered to determine what changes, if any, are appropriate in the option price of, and the number and kind of shares covered by, outstanding options granted thereunder. For the most part, an option granted under the Stock Option Plan may not be transferred by an optionee otherwise than by the laws of descent and distribution, and during the lifetime of the optionee shall be exercisable only by the optionee. If an employee optionee ceases to be an employee of the Company, any option granted to such optionee shall forthwith terminate unless the option grant to the optionee provides otherwise. If an Outside Director ceases to be a director of the Company for any reason other than death, any option granted to that Outside Director may be exercised in whole or in part at any time within the three year period immediately following the date on which his or her status as a director terminated. In the event of the death of an Outside Director while serving as a director of the Company, any option granted to that Outside Director may be exercised in whole or in part by the executor or administrator of the Outside Director's estate or by the person or persons entitled to the option by will or by applicable laws of descent and distribution within three years after the date of the Outside Director's death, as long as the option is exercised within ten years of its date of grant. Retirement Savings Plan The Company maintains the Symons International Group, Inc. Retirement Savings Plan, a savings plan designed to take advantage of section 401(k) of the Code (the "Savings Plan"). The Company is in the process of securing a determination letter from the IRS confirming that the Savings Plan meets the criteria of section 401(k). Employees who have been employed by the Company or its Subsidiaries for at least six months and who elect to participate in the Savings Plan, including the Company's executive officers, may deposit between 1% to 15% of their pay, subject to a maximum dollar limitation, into an account maintained for them by the Savings Plan's trustee. The Company may make discretionary matching contributions and profit sharing contributions to the Savings Plan depending on the performance of the Company, in accordance with a formula adopted by the Board of Directors from time to time. For a participating employee with less than five years of service to the Company, employer contributions vest over time, based on the number of years of service. Participants may select from a number of investment options under the Savings Plan, including shares of common stock of Goran, and they are permitted to change their investment options from time to time, subject to certain limitations. 83 86 Employment Contracts and Termination of Employment GGS Holdings. In connection with the Formation Transaction, GGS Holdings has entered into employment agreements with each of Alan G. Symons and Douglas H. Symons, pursuant to which these executives have agreed to serve as Chief Executive Officer and Executive Vice President, respectively, of GGS Holdings. Alan G. Symons' employment agreement provides that he is entitled to serve on the Board of Directors of GGS Holdings until removed pursuant to the terms of the Stockholder Agreement among the Company and the GS Funds. The term of each of these employment agreements commenced as of the closing of the Formation Transaction, or April 30, 1996, and continues in effect for an initial period of five years. Upon the expiration of the initial five-year period, the term of each agreement is automatically extended from year to year thereafter, unless either party gives the other party six months' written notice of an intention not to extend the term of the agreement. Each of the agreements may be earlier terminated upon mutual agreement, retirement, death, or disability, or for "cause," as defined in the agreements. The employment agreements set forth the responsibilities of the employees in their capacities as officers of GGS Holdings, as well as their compensation, benefits and eligibility for stock options under the GGS Stock Option Plan. These agreements require these individuals to devote substantially all of their working time and attention to the business and affairs of GGS Holdings. Each of the employment agreements also provides that in the event of termination of employment for any reason, GGS Holdings will continue to provide the executive's base salary, bonus and other compensation and benefits in accordance with GGS Holdings' policies then in effect. Further, in the event such termination is by reason of the executive's death, GGS Holdings will continue to provide the executive's base salary for a period of six months after the date of termination. The employment agreements also contain customary restrictive covenants respecting confidentiality and non-competition which prevent the executives from, among other things, competing with GGS Holdings in various capacities both during the term of their employment and for a period of two years after their termination in the event such termination is effected voluntarily by the executive, by reason of his disability, or by GGS Holdings for "cause." Under the employment agreements, Alan G. Symons is entitled to a base salary of not less than $200,000 per year, and Douglas H. Symons is entitled to a base salary of not less than $150,000 per year. The employment agreements further provide that Alan G. Symons may earn a bonus in an amount ranging from 25% to 100% of base salary, or $50,000 to $200,000, and Douglas H. Symons may earn a bonus in an amount ranging from 25% to 50% of base salary, or $37,500 to $75,000. IGF. IGF has entered into employment agreements with each of Dennis G. Daggett and Thomas F. Gowdy, pursuant to which these executives have agreed to serve as Chief Operating Officer and President and as Executive Vice President, respectively, of IGF. The agreements provide that each of the executives is entitled to serve on the Board of Directors of IGF until his successor is duly elected and qualified. Should he not be appointed to the Board during the term of his employment agreement, IGF will be deemed to be in material breach of the agreement, and the executive may treat such a breach as "termination without cause." The term of each of these employment agreements commenced as of February 1, 1996, and continues for a period of three years through January 31, 1999, unless earlier terminated in accordance with the terms of the agreement. Upon the expiration of the initial three-year period, the term of each agreement is automatically extended from year to year thereafter, unless either party gives the other party six months' written notice of an intention not to extend the term of the agreement. Notwithstanding the initial three-year period, an executive's employment under each of these agreements may be terminated by either party at any time for any reason. However, if the executive's employment is terminated for any reason other than for "cause" (as defined in the agreements), the executive is entitled to receive severance pay in the form of one year's salary continuation from the date of termination. If the executive is terminated without cause, receipt of severance payments is conditioned upon the execution by both IGF and the executive of a mutual waiver and release. The employment agreements also contain customary restrictive covenants respecting confidentiality and non-competition which prevent the executives from, among other things, competing with IGF in various capacities both during the term of their employment and for a period of two years after their termination, in the event 84 87 such termination is effected voluntarily by the executive, by reason of his disability, by IGF for "cause," or pursuant to a notice of non-renewal delivered by either party. The employment agreements with Mr. Daggett and Mr. Gowdy set forth the responsibilities of the employees in their capacities as officers of IGF, as well as their compensation, benefits, perquisites, expense reimbursement and eligibility for stock options under Goran's Share Option Plan and any stock option plan that may be adopted by IGF. Mr. Daggett receives a minimum annual salary of $180,000 and Mr. Gowdy receives a minimum annual salary of $140,000. Each of Mr. Daggett and Mr. Gowdy participates in a bonus program established for achieving certain pre-tax profit figures, pursuant to which the Compensation Committee of the Board of Directors of IGF may make a discretionary award not to exceed 150% of the awardee's base salary. Upon entering into their employment agreements, each of Mr. Daggett and Mr. Gowdy received an option to acquire 20,000 shares of common stock of Goran, with an exercise price equal to the fair market value of such shares on the date of grant. In addition, the employment agreements provide that each of Mr. Daggett and Mr. Gowdy will automatically acquire an option to purchase 20,000 shares of Common Stock of the Company upon consummation of the Offering with an exercise price per share equal to the initial public offering price. Finally, the IGF employment agreements provide that each of Mr. Daggett and Mr. Gowdy will receive options to acquire shares of IGF common stock, either (i) at the discretion of the Board of Directors of IGF, or (ii) in the event of an initial public offering of IGF common stock, pursuant to a formula set forth in the agreement. This formula generally entitles the executive to receive options to acquire up to 1.25% of the total shares of IGF common stock outstanding after such an offering, provided that the executive relinquishes all previously granted Goran options in connection therewith. Alternatively, the formula provides that the executive may receive options to acquire only 0.75% of the total shares of IGF common stock outstanding after such an offering and still retain his Goran options. Any options to acquire shares of IGF common stock granted pursuant to these agreements vest ratably over a five year period from the date of grant. The employment agreements further entitle Mr. Daggett and Mr. Gowdy to borrow up to $500,000 from IGF or one of its affiliates for the purpose of purchasing IGF common stock. Superior. Superior has entered into an employment agreement with Roger Sullivan. The employment agreement provides that Mr. Sullivan is to receive an annual salary in the amount of $125,000, subject to annual salary reviews which commenced on February 1, 1996. Mr. Sullivan is also entitled to participate in Superior's Executive Bonus Program, pursuant to which he will be eligible to receive an annual bonus of up to 30% of his gross annual salary based on individual performance and Superior's profitability. In addition, Mr. Sullivan is entitled to participate in Superior's 401(k) profit sharing plan and pension plan and to receive other customary employee benefits. In the event Superior is sold, liquidated or merged with another company within four years after the effective date of Mr. Sullivan's employment and, as a result of such event, his employment is terminated, Mr. Sullivan is entitled to receive severance pay in an amount equal to his then current annual base salary, provided that his termination is not due to unsatisfactory performance. Mr. Sullivan is also entitled to additional perquisites, including a company car and an expense allowance, and is eligible to receive options of GGS Holdings common stock under the GGS Stock Option Plan. Goran. Goran has entered into an employment agreement with Gary P. Hutchcraft, pursuant to which Mr. Hutchcraft has agreed to serve as Vice President and Chief Financial Officer of Goran and its subsidiaries, including the Company. Under the employment agreement, Mr. Hutchcraft is entitled to a base salary of not less than $120,000 per year and may earn a bonus in an amount ranging from 10% to 30% of his base salary or $12,000 to $36,000. The term of this employment agreement commenced as of June 30, 1996 and continues until December 31, 1996, unless earlier terminated in accordance with the terms of the agreement. Upon expiration of the initial six month period, the term of the agreement is automatically extended from year to year thereafter, unless either party gives the other party six months' written notice of an intention not to extend the term of the agreement. Notwithstanding the foregoing, the employment agreement may be terminated by either party at any time for any reason. However, if Mr. Hutchcraft's employment is terminated for any reason other than for "cause," as is defined in the agreement, he shall receive, as severance pay, one month's current salary for each full and partial year of service to SIG. Such severance pay is conditioned, however, upon the execution by both parties of a mutual release and waiver. Furthermore, if within twelve months after a change 85 88 of control (defined in the agreement as the inability of the Symons family to cause the election of a majority of the Board of Directors of Goran, SIG or their successors) Mr. Hutchcraft receives a notice of non-renewal, is terminated without cause or the Company is in breach of the employment agreement (the "Change of Control Termination"), then Mr. Hutchcraft shall receive his then current salary for (i) 78 weeks or (ii) until he commences employment with another entity such that his base salary with that entity is equal to or greater than his salary as of the Change of Control Termination. In the case of Mr. Hutchcraft's commencing employment with another entity within 78 weeks of the Change of Control Termination at a salary less than his salary with the Company at the time of the Change of Control Termination, the Company will pay Mr. Hutchcraft an amount equal to the difference between his salary with the Company at the time of the Change of Control Termination and his salary with the new entity for a period ending 78 weeks after the Change of Control Termination. The employment agreement sets forth the responsibilities of Mr. Hutchcraft in his capacity as an officer of SIG, as well as his compensation, benefits, and perquisites. The employment agreement also contains customary restrictive covenants respecting confidentiality and non-competition which prevent Mr. Hutchcraft from, among other things, competing with SIG in various capacities both during the term of his employment and for a period of two years after his termination in the event such termination is effected voluntarily by Mr. Hutchcraft, by reason of his disability, or by SIG for "cause" or pursuant to a "notice of non-renewal" as provided in the agreement. Compensation Committee Interlocks and Insider Participation The Company's Compensation Committee consists of three directors, Messrs. Doyle, Torrance and Douglas H. Symons. Neither Mr. Torrence nor Mr. Doyle have any interlocks reportable under Item 402(j)(3) and (4) of Regulation S-K. Douglas H. Symons has served as a director and executive officer of the Company since its formation in 1987 and as a director and Chief Operating Officer of Goran since 1989. Douglas H. Symons is also an executive officer of each of the Subsidiaries. Since Alan G. Symons, the Chief Executive Officer of the Company, is a director of each of the Subsidiaries and is empowered by the Stockholder Agreement to determine the compensation of the managers of GGS Holdings, Douglas and Alan Symons have reportable interests under Item 402(j)(3)(i)-(iii) of Regulation S-K. See "Management -- Executive Compensation" for details regarding the compensation of Douglas and Alan Symons. See also "Certain Relationships and Related Transactions" for information concerning certain transactions between each of Goran and GGS Holdings and the Company. Mr. Alan Symons determined executive compensation for fiscal year 1995. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE FORMATION TRANSACTION AND THE SUPERIOR ACQUISITION Formation Transaction Simultaneously with the execution of the Superior Purchase Agreement, Goran, the Company, GGS Holdings and GS Capital Partners II, L.P., a Delaware limited partnership, entered into the GGS Agreement to capitalize GGS Holdings and to cause GGS Holdings 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 in GGS Holdings. Pursuant to the GGS Agreement, (a) the Company contributed to GGS Holdings (i) Pafco common stock with a book value determined in accordance with U.S. GAAP of at least $15.3 million as reflected on an audited post-closing balance sheet of Pafco, (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 GGS Holdings $21.2 million in cash. If the book value of Pafco as reflected on the final post-closing balance sheet is less than $15.3 million, the Company will be required to contribute the amount of the deficiency in cash to GGS Holdings no later than December 31, 1996, plus interest at the prime rate from the date of closing of the Formation Transaction to the date of payment. 86 89 In the GGS Agreement, Goran and the Company have jointly and severally given customary representations and warranties which relate to, among other matters, (i) due organization and good standing, (ii) corporate power and authorization, (iii) conformity of financial statements to GAAP and statutory accounting principles as applicable, (iv) absence of undisclosed liabilities and material changes in business and financial condition, (v) possession of necessary intellectual property rights to conduct business, (vi) good and marketable title to assets, (vii) litigation and judicial orders, (viii) compliance of regulatory filings with applicable laws and regulations, (ix) approval of policy forms, and (x) material contracts and agreements and the absence of a default under reinsurance agreements. The GGS Agreement also contains representations that all tax returns of Pafco applicable to periods prior to the execution of the GGS Agreement have been filed and all taxes shown to have become due pursuant to such terms have been paid. Further, pursuant to the GGS Agreement, Goran and SIG agree to jointly and severally indemnify and hold harmless GGS Management and Pafco against any and all tax liabilities assessed against Pafco for periods prior to the execution of the GGS Agreement. The GGS Agreement also contains representations that Goran, SIG, Pafco and each of their respective ERISA affiliates have performed all material obligations required to be performed by them and that each Pafco benefit plan is in compliance with applicable laws; that such plans remain so qualified and that no prohibited transactions (within the meaning of Section 4975 of the Internal Revenue Code of 1986) have occurred. Further, Goran and SIG jointly and severally indemnify GGS Management against any and all losses arising out of or relating to any benefit matter arising prior to the date of execution of the GGS Agreement. The GGS Agreement also contains provisions whereby Goran and SIG, jointly and severally, shall indemnify, defend and hold harmless the GS Funds and their affiliates, for all loss incurred by such parties as a result of a breach of the representations and warranties contained in the GGS Agreement. Any issuance of stock in connection with satisfying an indemnification obligation could expose the Company to a risk that it would be characterized as an investment company within the meaning of the 1940 Act. See "Risk Factors -- Conflicts of Interest." If a claim for indemnification is brought, the indemnitor shall have the right to conduct any proceeding or negotiation in connection therewith, to take all other steps to settle or defend any such claim (provided that such settlement is with the consent of the indemnitee) and to employ counsel, reasonably acceptable to the indemnitee, to contest any such claim or liability in the name of the indemnitee or otherwise. The indemnitor shall have the right to conduct the defense of such claim for which indemnity is sought, but the indemnitee shall be entitled to participate at its own expense and by its own counsel in any proceedings relating to any third party claim. The representations and warranties survive the closing of the Formation Transaction for at least three years from the closing date and, in some cases (including representations as to environmental and tax liabilities and as to employee benefits), indefinitely. The GGS Agreement sets forth the methods by which Goran and the Company may indemnify the GS Funds for indemnifiable losses. Before the earlier of an IGF or SIG Company Sale (as defined in the GGS Agreement) or the first anniversary of the Formation Transaction, Goran or the Company shall indemnify the GS Funds for any losses by, at the option of the GS Funds, either (1) issuing to the GS Funds a promissory note for the losses, (2) issuing a promissory note to GGS Holdings for the losses, or (3) causing GGS Holdings to issue to the GS Funds (a) additional shares of GGS Holdings common stock, up to a maximum number of shares which would result in the Company's retention of majority ownership of GGS Holdings, and (b) a promissory note for the balance of any losses after the maximum number of shares have been issued. After the earlier of an IGF or SIG Company Sale (as defined in the GGS Agreement) or the first anniversary of the Formation Transaction, Goran or the Company shall indemnify the GS Funds for any losses by, at the option of the GS Funds, either (1) paying cash to the GS Funds, (2) making a contribution to GGS Holdings, or (3) issuing to the GS Funds additional shares of GGS Holdings common stock. Any promissory note issued in connection with these indemnification arrangements will bear interest at the prime rate. 87 90 IGF Transfer Pafco transferred all of the outstanding capital stock of IGF pursuant to the Transfer in order to improve the risk based capital rating of Pafco and to permit GGS Holdings to focus exclusively on the nonstandard automobile insurance business. Pafco accomplished the Transfer by forming a wholly-owned subsidiary, IGF Holdings, to which Pafco contributed all of the outstanding shares of capital stock of IGF. IGF Holdings Dividend Prior to the Transfer, Pafco received as a dividend from IGF Holdings cash and the IGF Note having an aggregate value of approximately $11.0 million. IGF Holdings funded the cash portion of the Dividend with the proceeds of the IGFH Bank Debt. The IGFH Bank Debt matures on January 1, 2001, with principal repayable in 16 quarterly installments of $468,750 commencing April 1, 1997. Interest will accrue at a variable rate per annum equal to the prime rate until October 1, 1996 and thereafter at a rate equal to the prime rate plus one percent. The IGFH Bank Debt is collateralized by a first priority security interest in all of the outstanding shares of IGF and the guarantee of Symons International Group, Ltd., the controlling shareholder of Goran, collateralized by 966,600 shares of Goran common stock. Additionally, certain financial covenants in favor of the lender of the IGFH Bank Debt require IGF Holdings to maintain increasing levels of income, retained earnings and statutory capital over the term of the IGFH Bank Debt. The IGF Note is payable on the earlier of November 30, 1996, or the consummation of an IGF or SIG Company Sale (as defined in the GGS Agreement). The IGFH Note may be prepaid only with the prior written consent of the lender of the IGFH Bank Debt. The IGF Note bears interest at a variable rate per annum equal to the prime rate plus one percent until October 1, 1996 and thereafter at a rate equal to the prime rate plus two percent and is collateralized by a second lien on the outstanding shares of capital stock of IGF. The IGFH Bank Debt and the IGF Note will be repaid with a portion of the proceeds from the Offering. See "Use of Proceeds." GGS Holdings Stockholder Agreement The Stockholder Agreement among the Company, the GS Funds, Goran and GGS Holdings provides, subject to certain exceptions, 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 the GS Funds. See "The Company -- Formation of GGS Holdings; Acquisition of Superior.". 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. The Stockholder Agreement places restrictions on the ability of the Company and the GS Funds to transfer their shares in GGS Holdings, other than proposed transfers to affiliates or transfers made in connection with a sale of GGS Holdings, without first offering the shares to the other party pursuant to a right of first refusal procedure. In addition, in the event that either party proposes to sell more than 20% of the issued and outstanding shares of GGS Holdings to an outside purchaser, the other party is granted "tag-along rights" pursuant to which it may participate proportionately in the proposed sale. 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 of more than 50% of the Company's voting stock and (b) retention by Alan G. Symons and his family members of voting control of 88 91 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, 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 90 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. Except as provided in the immediately preceding paragraph, and except for sales either to affiliates or in a public offering, neither stockholder may sell any of its stock in GGS Holdings for a period of two years from the closing date of the Formation Transaction. Registration Rights Agreement Pursuant to a registration rights agreement that GGS Holdings, the GS Funds, Goran and the Company entered into in connection with the Formation Transaction (the "Registration Rights Agreement"), each of the GS Funds and the Company has certain "demand registration" rights to require GGS Holdings, after the closing of an initial public offering of GGS Holdings common stock or after the expiration of the two-year period following consummation of the Formation Transaction, to file a registration statement under the Securities Act covering all or any part of its shares, subject to the following conditions: (a) that it holds at least 25% of the shares issued and outstanding as of the closing date of the Formation Transaction; (b) that it seeks to register at least 20% of the shares which were issued and outstanding as of the closing date; (c) that the offering price would be at least $25 million; and (d) that GGS Holdings need not effect such demand registration within six months of the effective date of another registration of GGS Holdings common stock. Each of the GS Funds and the Company also has certain "piggyback registration" rights to have any or all of its shares of GGS Holdings common stock included in any proposed or required registration of equity securities by GGS Holdings under the Securities Act on Form S-1, S-2 or S-3. If, in connection with either demand registration or piggyback registration, there is to be an underwritten offering, all persons participating in such registration must agree to sell their shares pursuant to the underwriting agreement. Neither this nor any other provision of the Registration Rights Agreement, however, should be deemed to create an independent obligation on the part of the Company or the GS Funds to sell its shares pursuant to any effective registration statement. The Registration Rights Agreement requires GGS Holdings to indemnify the Company and the GS Funds, and requires the Company and the GS Funds to indemnify each other, against certain liabilities, including liabilities under the Securities Act, in connection with the registration of the shares of GGS Holdings common stock pursuant to the Registration Rights Agreement. In the event that such indemnification is unavailable or is insufficient, each indemnifying party will be subject to a duty of contribution based on rules of proportionate fault. 89 92 REINSURANCE ARRANGEMENTS Prior to the Transactions, certain of the Subsidiaries from time to time have written policies of insurance on behalf of other Subsidiaries. Under the GGS Agreement, Goran and the Company are required to cause Pafco to enter into agreements of reinsurance with respect to all insurance policies previously issued by Pafco (i) on behalf of SIGF and (ii) in respect of any other type of insurance other than nonstandard automobile insurance. Pursuant to such arrangements, all liabilities under, and all rights to receive premiums with respect to, such policies are to be assigned to and assumed by a third party, provided that such arrangements are on arm's length market terms. All Pafco insurance policies previously issued through SIGF in respect of business other than nonstandard automobile insurance have been 100% reinsured by Granite Re. Although Pafco will, in the future, continue to write business through SIGF, this business will also be reinsured with Granite Re pursuant to a 100% quota share arrangement. Pafco has in the past issued policies, and will in the future continue to issue policies for, MPCI, commercial crop hail and commercial named peril insurance on behalf of IGF, all of which business is 100% ceded to IGF through reinsurance. Also under the GGS Agreement, Goran and the Company have caused Pafco and IGF to enter into agreements of reinsurance pursuant to which all policies relating to nonstandard automobile insurance previously issued by IGF on behalf of Pafco have been assigned to and assumed by Pafco. Also, for so long as Goran has voting control of IGF, Goran and the Company are obligated, upon request by GGS Holdings, to cause IGF to issue policies on behalf of Pafco, which policies must be fully reinsured by Pafco. Under the terms of a quota share reinsurance agreement effective for business written on or after May 1, 1996, Pafco shall cede to Superior 100% of its gross premiums written that are in excess of three times statutory capital and surplus at the end of 1996 or any subsequent year for which such agreement is in force. IGF reinsures a significant portion of its crop insurance business with Granite Re. For 1996, Granite Re reinsures 15% of IGF's MPCI underwriting losses to the extent that aggregate losses of its insureds nationwide exceed 100% of MPCI Retention up to 125% of MPCI Retention, and 95% of IGF's MPCI underwriting losses to the extent that aggregate losses of its insureds nationwide exceed 125% of MPCI Retention up to 150% of MPCI Retention. Also for 1996, Granite Re has a 5% participation in 95% of IGF's crop hail losses in excess of an 80% pure loss ratio up to a 100% pure loss ratio, and a 10% participation in 95% of IGF's crop hail losses in excess of a 100% pure loss ratio up to a 140% pure loss ratio. As of June 30, 1996, premiums ceded by IGF to Granite Re totaled $221,000. In the event the Company and the GS Funds agree to the issuance of any insurance policy on behalf of Goran or any of its affiliates by GGS Holdings or its subsidiaries, Goran will be required to arrange for an agreement of reinsurance with a third party, such as, subject to certain restrictions, Granite Re. Goran and the Company must indemnify GGS Holdings and its subsidiaries from and against all losses relating to such policies. MANAGEMENT AGREEMENTS Pafco and Superior Management Agreements The management agreement formerly in place between the Company and Pafco (the "Pafco Management Agreement") which provides for an annual management fee equal to 15% of gross premiums has been assigned to GGS Management. Under the management agreement, as assigned, GGS Management is granted the exclusive authority, on behalf of Pafco, to receive and accept proposals for insurance in all states in which Pafco conducts business. GGS Management has full and exclusive authority and responsibility, as manager, to engage in certain activities relating to Pafco's insurance business including, among other things, collecting premium payments, appointing adjusters, adjusting and settling claims, and fulfilling the obligations of Pafco under applicable laws and regulations, including those to the Indiana Department and other governmental agencies. The management agreement requires Pafco to indemnify GGS Management with respect to (i) all claims for losses incurred by policyholders which are caused directly by Pafco's error in processing and handling policies and (ii) any actions taken by Pafco which result in loss or damage to GGS Management. Likewise, GGS Management is required to indemnify Pafco for damages arising from actions taken on behalf 90 93 of Pafco as its agent under the agreement. Although the agreement provides for an initial five-year term followed by automatically renewable three-year terms, either party may terminate the agreement upon sixty days' written notice to the other party. A similar management agreement, with a management fee of 17% of gross premiums, has been entered into between GGS Management and Superior (the "Superior Management Agreement"). All employees of SIG related to the nonstandard automobile insurance business and employees of Superior are now employees of GGS Management. The management agreement between GGS Management and Superior is similar to the Pafco management agreement and confers upon GGS Management the exclusive authority, on behalf of Superior, to receive and accept proposals for insurance in all states in which such companies conduct business. GGS Management has full authority and responsibility, as manager, to engage in certain activities relating to Superior's insurance business including, among other things, collecting premium payments and holding such funds in a fiduciary capacity, appointing adjusters, adjusting and settling claims, and fulfilling the obligations of Superior under applicable laws and regulations, including those to the Florida Department and other governmental agencies. Under the agreement, GGS Management has a duty to report claims to Superior in a timely manner, and to notify Superior in certain situations relating to the payment of claims. Furthermore, the agreement prohibits GGS Management from engaging in certain activities on behalf of Superior, including, among other things, binding Superior to reinsurance treaties or retrocession agreements or committing Superior to participate in insurance or reinsurance syndicates. The management agreement requires Superior to indemnify GGS Management with respect to (i) all claims for losses incurred by policyholders which are caused directly by Superior's error in processing and handling policies and (ii) any actions taken by Superior which result in loss or damage to GGS Management. Likewise, GGS Management is required to indemnify Superior for damages arising from actions taken on behalf of Superior as its agent under the agreement. Although the agreement provides for an initial five-year term followed by automatically renewable three-year terms, either party may terminate the agreement without cause upon sixty days' written notice to the other party, or under certain conditions defined in the agreement as constituting cause. The Pafco Management Agreement and the Superior Management Agreement are subject to periodic review by the Indiana Department and the Florida Department, respectively, in order to determine whether the fees charged thereunder and other terms are fair and reasonable to policyholders. As part of the approval of the Formation Transaction and the Transfer, 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 reevaluate the reasonableness of fees provided for in the Superior Management Agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department or the Florida Department may not in the future require a reduction in these management fees. IGF Administration Agreement (Nonstandard Automobile) The Company and IGF have entered into an administration agreement (the "IGF Administration Agreement") with respect to nonstandard automobile insurance policies written by IGF and ceded to Pafco. The IGF Administration Agreement confers broad authority upon the Company, as manager, to conduct IGF's nonstandard automobile insurance business, subject to IGF's right to review and consult with the Company concerning underwriting, rates, claims issues, reserves and other matters pertaining to IGF's nonstandard automobile insurance operations. The agreement prohibits IGF from marketing nonstandard automobile insurance through any agents or brokers other than those appointed by the Company, but it does not limit IGF's ability to make other products available to its agency force, including crop insurance products. In consideration for its services under the agreement, the Company receives an administration fee in an amount equal to 30.5% of IGF's gross premiums written for nonstandard automobile insurance, from which the Company is obligated to pay applicable underwriting expenses and unallocated LAE. Other expenses are 91 94 to be paid by the Company out of funds derived from IGF's operations. IGF is entitled to 1% of all investment income on funds deposited under this agreement to the account of IGF, and Pafco is entitled to 99% of such investment income, which is payable quarterly on a pro rata basis. Under the IGF Administration Agreement, the Company has agreed to indemnify IGF and its directors, officers and employees for (i) fines or penalties imposed on IGF by governmental authorities and (ii) claims and expenses arising from contractual liability or punitive damages, including damages arising under insurance contracts. The IGF Administration Agreement is for an indefinite term but is subject to termination by either party upon sixty (60) days' prior written notice, and immediately by IGF for "cause," which is generally defined to mean the failure of Pafco to comply with the Quota Share Reinsurance Agreement between IGF and Pafco and the failure of the Company to comply with applicable laws and regulations in administering the agreement. IGF Administration Agreement (Crop) The Company and IGF have also entered into an administrative agreement (the "Administration Agreement") with respect to the management of IGF's crop insurance operations by the Company, pursuant to which the Company receives fees payable in quarterly installments of $150,000. This Administration Agreement requires the Company, through certain of its senior executives, to provide such executive management functions as may from time to time be required by IGF, including without limitation management services in the areas of accounting, investments, marketing, data processing and reinsurance. The initial term of the Administration Agreement commenced on January 1, 1990 and continued through December 31, 1991. The Administration Agreement may be extended year to year by written addendum executed by both parties and has been so extended through December 31, 1996. Goran Management Agreement Prior to 1996, the Company was a party to a management agreement with Goran, pursuant to which Goran provided to the Company various administrative services. The Company paid to Goran $300,000, $494,000 and $414,000 in 1993, 1994 and 1995, respectively, under this agreement. This agreement has been terminated as of April 30, 1996. INVESTMENT BANKING SERVICES Under the GGS Agreement, Goldman Sachs and any of its affiliates are given the right to perform all investment banking services for GGS Holdings for which an investment banking firm is retained after consummation of the Formation Transaction. These services include, for example, advice and consultation in connection with any sale of GGS Holdings, or service as the lead managing underwriter with respect to any public offering or secondary offering of securities of GGS Holdings. REGISTRATION RIGHTS AGREEMENT BETWEEN THE COMPANY AND GORAN Pursuant to the registration rights agreement which will be entered into between the Company and Goran (the "Goran Registration Rights Agreement"), Goran will have the right to have any or all of the shares of Common Stock held by it after the Offering included in a registration statement filed by the Company under the Securities Act, subject to certain limitations set forth in the Goran Registration Rights Agreement (a "Piggyback Registration"). In addition, subject to (i) the Underwriting Agreement among the Underwriters, the Company and Goran, which restricts the right of Goran to sell any Common Stock for 180 days after the completion of the Offering, and (ii) certain other conditions, Goran also will have the right to require the Company to file a registration statement under the Securities Act with respect to the Common Stock held by Goran (a "Demand Registration"). Goran will be entitled to an unlimited number of Demand Registrations, provided that each Demand Registration is for a number of shares of Common Stock exceeding 10% of the number of shares of Common Stock outstanding at the time Goran requires the Demand Registration or Goran owns less than 10% of the number of shares of Common Stock outstanding at the time it requires a Demand Registration (unless the Company has been eligible to utilize a simplified form of registration statement), and an unlimited number of 92 95 Piggyback Registrations. The registration rights will be assignable in whole or in part. Generally, the Company will be required to file a registration statement within 30 days of a request by Goran; however, the Company may defer compliance with any Demand Registration request for up to 120 days if, in the good faith judgment of its Board of Directors, the filing of a registration statement would be seriously detrimental to the Company and its shareholders. In general, Goran will bear all of the registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, "blue sky" fees and expenses and the expense of any special audits incident to or required by any Demand Registration. Goran will generally be responsible for its pro rata share of such expenses in excess of $100,000 in connection with any Piggyback Registration. Goran will also bear all fees and expenses of its counsel and all underwriting discounts and selling commissions applicable to its sales. The Company and Goran will agree to indemnify each other against certain liabilities, including liabilities under the Securities Act, in connection with the registration of Common Stock pursuant to the Goran Registration Rights Agreement. CONTROL BY GORAN; POTENTIAL CONFLICTS WITH GORAN The Company is a wholly-owned subsidiary of Goran, and after completion of the Offering, Goran will own approximately 70% of the outstanding Common Stock, assuming no exercise of the Underwriters' over-allotment option. Goran will have the power to control the Company, to elect its Board of Directors and to approve any action requiring shareholder approval, including adopting amendments to the Company's articles of incorporation and approving or disapproving mergers or sales of all or substantially all of the assets of the Company. Because Goran has the ability to elect the Board of Directors of the Company, it will be able to effectively control all of the Company's policy decisions. As long as Goran is the majority shareholder of the Company, third parties will not be able to obtain control of the Company through purchases of Common Stock not owned by Goran. The shares of the Company owned by Goran are pledged to Montreal Trust Company of Canada, as Trustee, to secure Goran's obligations under certain convertible subordinated notes. G. Gordon Symons, Chairman of the Board of Goran, the Company and GGS Holdings and the father of Alan G. Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President and Chief Operating Officer of the Company, and members of the Symons family beneficially own in the aggregate 61.0% of the outstanding common stock of Goran. Accordingly, since G. Gordon Symons and members of his family have the ability to elect the Board of Directors of Goran, they will have the ability to elect the Board of Directors of the Company and otherwise to influence significantly the Company's business and operations. Further, directors and executive officers of SIG, including members of the Symons family, beneficially own in the aggregate approximately 62.4% of the outstanding shares of Goran. See "Securities Ownership of Management and Goran." Of the seven directors of the Company, five are current directors of Goran (three of whom are members of the Symons family and two of whom are independent directors of Goran), and two are outside directors. Directors and officers of the Company and Goran may have conflicts of interest with respect to certain matters affecting the Company, such as potential business opportunities and business dealings between the Company and Goran and its affiliated companies. See "Management -- Directors and Executive Officers of the Company." Goran's failure to maintain ownership of at least 50% of the Company's voting securities will expose Goran to a risk that it will be characterized as an investment company within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), unless Goran's remaining voting securities of the Company together with any other investment securities represent not more than 40% of the total assets of Goran on an unconsolidated basis. In such event, Goran would be required to comply with the registration and other requirements of the 1940 Act, which would be significantly burdensome for Goran. This constraint makes it unlikely that Goran would approve a stock issuance by the Company that reduces Goran's ownership below 50% and therefore would likely limit the amount of additional capital which can be raised by the Company through the issuance of voting securities. Among other consequences, such a limit could affect the Company's ability to raise funds for acquisition opportunities which may become available to the Company or 93 96 to GGS Holdings. In addition, the stockholder agreement between the Company and the GS Funds (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 of more than 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. In any event, the Company will be unable to raise equity capital by issuing additional shares of Common Stock unless Goran agrees to that issuance. In addition, if Goran or the Company ever sold significant amounts of shares of the Common Stock in the public market, those sales might have an adverse effect on the market price of the Common Stock. Currently, Goran does not market property and casualty insurance products which compete with products sold by the Company. Although there are no restrictions on the activities in which Goran may engage, management of the Company does not expect that Goran and the Company will compete with each other to any significant degree in the sale of property and casualty insurance products. There can be no assurance, however, that the Company will not encounter competition from Goran in the future or that actions by Goran or its affiliates will not inhibit the Company's growth strategy. See "Risk Factors -- Control by Goran; Certain Continuing Relationships with Goran and its Affiliates; Conflicts of Interest." Conflicts of interest between the Company and Goran could arise with respect to business dealings between them, including potential acquisitions of businesses or properties, the issuance of additional securities, the election of new or additional directors and the payment of dividends by the Company. The Company has not instituted any formal plan or arrangement to address potential conflicts of interest that may arise between the Company and Goran. See "Risk Factors -- Control by Goran; Certain Continuing Relationships with Goran and its Affiliates; Conflicts of Interest." Conflicts of interest similar to those which could arise between the Company and Goran could also arise between the Company and GGS Holdings. Alan G. Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President and Chief Operating Officer of the Company, also serve as the Chief Executive Officer and President, and Vice President, respectively, of GGS Holdings. Such individuals have entered into employment agreements with GGS Holdings requiring them to devote substantially all of their working time and attention to the business and affairs of GGS Holdings. Further, Alan G. Symons and certain other members of management of the Company are entitled, under certain circumstances, to receive options to purchase shares of common stock of GGS Holdings. See "Management -- Executive Compensation -- Employment Contracts and Termination of Employment -- GGS Holdings." In addition, in the event that the Company does not continue to own at least 50% of the outstanding voting securities of GGS Holdings and the voting securities of GGS Holdings owned by the Company, together with any other investment securities, represent over 40% of the total assets of the Company on an unconsolidated basis, the Company will be exposed to a risk that it would be characterized as an investment company within the meaning of the 1940 Act. This consideration will limit the amount of additional capital which can be raised through the issuance by GGS Holdings of voting securities. COMPUTER SOFTWARE SUPPORT AND LICENSING AGREEMENTS The Company is a party to a software support agreement and software licensing agreement with Tritech Financial Systems, Inc. ("Tritech"), which provides software and maintenance services for numerous companies in the insurance industry to facilitate compliance with applicable insurance laws and industry mandated requirements. Robert Symons, the brother of Alan G. Symons and Douglas H. Symons and son of 94 97 G. Gordon Symons, is the President and controlling shareholder of Tritech. Pursuant to the support and licensing agreements, the Company paid $74,488 during the fiscal year ended December 31, 1995. PARENT INDEBTEDNESS The Parent Indebtedness consists of: (i) a demand note of the Company payable to Goran which bears interest at 10% per annum and had a balance of approximately $2,344,000, including accrued interest of approximately $508,000, at June 30, 1996; (ii) a demand note of the Company payable to Granite Re which bears interest at 10% per annum and had a balance of approximately $4,193,000, including accrued interest of approximately $1,235,000, at June 30, 1996; and (iii) a demand note issued in April, 1996 payable to Goran which has a principal balance of $1,000,000 and bears interest at 10% per annum. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS The following directors and Named Executive Officers of the Company were indebted to Goran in amounts exceeding $60,000 during the financial year ended December 31, 1995, on account of loans to purchase common shares of Goran and its affiliates, certain of which were made pursuant to the Share Option Plan (see "Management -- Executive Compensation -- Stock Option Plans -- Goran Share Option Plan"):
LARGEST LOAN BALANCE NAME DATE OF LOAN DURING 1995 PRESENT BALANCE - ---------------------------------------------------- ------------- ------------ --------------- G. Gordon Symons.................................... June 27, 1986 $148,000 $ 148,000 June 30, 1986 200,000 200,000 Alan G. Symons...................................... June 27, 1986 9,974 9,974 June 30, 1986 50,599 40,172
The foregoing loans are collateralized by pledges of the common shares of Goran acquired and are payable on demand and are interest free. In addition, G. Gordon Symons has an unsecured loan payable to Goran in the amount of $70,000 not relating to the purchase of common shares of Goran. This loan was taken out on January 2, 1988, is payable on demand and is interest free. G. Gordon Symons also has a demand loan payable to the Company in the amount of $76,729 as of December 31, 1995 that bears interest at a per annum rate equal to the 180-day treasury bill rate, of which $51,729 was used to purchase common shares of Goran and its affiliates. Douglas H. Symons has a demand loan payable to the Company in the amount of $74,000 as of December 31, 1995 that bears interest at a per annum rate equal to the 180-day treasury bill rate. Alan G. Symons has a demand loan payable to the Company in the amount of $47,875 as of December 31, 1995 that bears interest at a per annum rate equal to the 180-day treasury bill rate, of which $27,309 was used to purchase common shares of Goran and its affiliates. In addition, the Company holds a mortgage note of G. Gordon Symons collateralized by a second mortgage on his personal residence. This mortgage loan was originally incurred on October 3, 1988, has a current principal balance of $277,502, matures on May 8, 1999 and bears interest at 7% per annum. OTHER TRANSACTIONS WITH AFFILIATES IGF owns 9,800 shares of nonredeemable, nonvoting preferred stock of Granite Insurance Company, a subsidiary of Goran. At December 31, 1995, this preferred stock had a book value of $702,000. The Company also has a receivable in the approximate amount of $116,000 at December 31, 1995 from Vector Solutions, Inc., a wholly-owned subsidiary of Goran ("Vector"). The amounts were advanced by the Company to fund operating costs of Vector, including the payment of third party suppliers. On September 1, 1989, the following interrelated transactions occurred. First, Pafco loaned $1,700,000 (the "Pafco Loan") to Cliffstan Investments, Inc., a Nevada corporation ("Cliffstan"). In return, Cliffstan issued a promissory note in the amount of $1,700,000, bearing interest at 7.8% per annum, in favor of Pafco (the "Cliffstan Note"). The Cliffstan Note is collateralized by the unconditional guarantee of Gage North Holdings, Inc., an Ontario corporation ("Gage North"). The guarantee of Gage North is in turn collateralized by a mortgage on certain real property held by Gage North. Alan G. Symons has a 33% ownership interest in, and is Chairman of the Board of Directors of, Gage North. Second, Cliffstan loaned the proceeds of the Pafco Loan to SIGL, who in return issued a promissory note in the amount of $1,700,000, bearing interest at a rate of 8.3% per annum, in favor of Cliffstan (the "SIGL Note"). Lastly, SIGL agreed to discharge the obligations of Cliffstan under the Cliffstan Note in return for Cliffstan discharging SIGL's obligations under the SIGL 95 98 Note. On September 30, 1992, Pafco and Granite Re entered into a purchase agreement (the "Cliffstan Note Purchase Agreement") whereby Pafco assigned a beneficial interest in the Cliffstan Note, as amended to be payable on demand, to Granite Re and Granite Re agreed to pay Pafco: (i) one installment of $345,201, comprising the accrued interest on the Cliffstan Note, on September 30, 1992 and (ii) consecutive quarterly installments of $200,000 plus interest at a rate of 7.8% per annum beginning on December 31, 1992, until the full amount of the purchase price is repaid, at which time Granite Re is to take legal title to the Cliffstan Note. Pursuant to a guaranty dated April 22, 1994, Alan G. Symons guarantees the obligations of Granite Re to Pafco under the Cliffstan Note Purchase Agreement and the obligations of Cliffstan to Granite Re under the Cliffstan Note, up to $350,000 in the aggregate. Once the obligations of Granite Re to Pafco under the Cliffstan Note Purchase Agreement are less than $1,000,000, the guaranty of Alan G. Symons is null and void. The guarantee of Alan G. Symons is collateralized by 200,000 shares of Goran common stock pledged by SIGL. The largest amount owing under the Cliffstan Note since the beginning of 1995 was $1,355,335. The amount due under the Cliffstan Note as of June 30, 1996 is $1,355,335. SECURITIES OWNERSHIP OF MANAGEMENT AND GORAN OWNERSHIP OF THE COMPANY The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock, as of the date of this Prospectus and after giving effect to the Offering, by each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock. As of the date hereof, none of the outstanding shares of Common Stock is owned by any director or executive officer of the Company.
PERCENTAGE OF PERCENTAGE OF SHARES OF SHARES OF NUMBER COMMON STOCK COMMON STOCK OF BENEFICIALLY OWNED BENEFICIALLY OWNED NAME AND ADDRESS TITLE OF CLASS SHARES PRIOR TO THE OFFERING AFTER THE OFFERING - --------------------------------- -------------- --------- --------------------- ------------------ Goran Capital Inc. Common Stock, 7,000,000(1) 100.0% 70.0%(2) 181 University Avenue no par value Suite 1101 Toronto, Ontario Canada M5H 3M7
- ------------------------- (1) Goran has sole voting and dispositive power over all of these shares. (2) Goran would beneficially own 67.0% of the Company after the Offering if the Underwriters' over-allotment option is exercised in full. OWNERSHIP OF GORAN The following table sets forth certain information regarding beneficial ownership of the capital stock of Goran, as of July 25, 1996 (unless otherwise indicated), by (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of a class of capital stock of Goran, (ii) by each of the Company's Named Executives and directors, and (iii) by all executive officers and directors of the Company as a group. Except as otherwise indicated, based on information furnished by such owners, the beneficial owners of the capital stock listed below have sole voting and dispositive power with respect to such shares, subject to community property laws where applicable. Fractional shares are rounded to the nearest whole share. 96 99 The ownership of Goran will not be affected by the Offering.
PERCENTAGE OF SHARES NATURE NUMBER OF OF COMMON STOCK NAME AND ADDRESS TITLE OF CLASS OF OWNERSHIP SHARES BENEFICIALLY OWNED - -------------------------- -------------- ------------------------------ --------- -------------------- Symons International...... Common Shares Directly Owned 1,650,413(1) 31.0% Group, Ltd. 4720 Kingsway Drive Indianapolis, Indiana 46205 G. Gordon Symons.......... Common Shares Directly Owned 855,167 (1) 3 Queen's Cove, Apt. B6 Held of Record by SIGL 1,650,413 Fairylands Subject to Exercisable Options 243,345 Pembroke, Bermuda HM 05 -------- 2,748,925 49.3% Alan G. Symons............ Common Shares Directly Owned 509,366 4720 Kingsway Drive Subject to Exercisable Options 55,344 Indianapolis, Indiana -------- 46205 564,710 10.5% Douglas H. Symons......... Common Shares Directly Owned 87,083 4720 Kingsway Drive Subject to Exercisable Options 93,855 Indianapolis, Indiana -------- 46205 180,938 3.3% John J. McKeating......... Common Shares Subject to Exercisable Options 2,000 2120 Guy Street Montreal, Quebec H3H218 Robert C. Whiting......... Common Shares Directly Owned 41,000 * 7 Hastings Road Pembroke, Bermuda James G. Torrance, Q.C.... Common Shares Subject to Exercisable Options 2,000 * 100 North Drive Etobicoke, Ontario Canada M9A 4R2 David R. Doyle............ Common Shares Directly Owned 2,350 * 1821 Park North Lane Indianapolis, Indiana 46260 Dennis G. Daggett......... Common Shares Directly Owned 257 2882 106th Street Subject to Exercisable Options 20,000 Des Moines, Iowa 50322 -------- 20,257 * Thomas F. Gowdy........... Common Shares Directly Owned 568 2882 106th Street Subject to Exercisable Options 20,000 Des Moines, Iowa 50322 -------- 20,568 * Roger C. Sullivan, Jr..... Common Shares N/A -0- 0% 280 Interstate Circle NW Atlanta, Georgia 30339 All Directors and Common Shares Directly Owned 1,505,288(1) Executive................. Held of Record by SIGL 1,650,413 Officers as a group (13 Subject to Exercisable Options 436,544 persons) -------- 3,592,245 62.4%
- ------------------------- (1) These shares are also indicated as being beneficially owned by G. Gordon Symons, since he is the controlling shareholder of Symons International Group, Ltd. * Less than 1%. 97 100 DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The Company's authorized capital stock consists of 100,000,000 shares of Common Stock and 50,000,000 shares of preferred stock (the "Preferred Stock"). Immediately following the Offering, approximately 10,000,000 shares of Common Stock will be outstanding (10,450,000 shares assuming the Underwriters' over- allotment option is exercised). All of the shares of Common Stock that will be outstanding immediately following consummation of the Offering, including the shares of the Common Stock sold in the Offering, will be validly issued, fully paid and nonassessable. COMMON STOCK The holders of Common Stock will be entitled to one vote for each share on all matters voted on by shareholders, including elections of directors, and, except as otherwise required by law and provided in any resolution adopted by the Company's Board of Directors with respect to any series of Preferred Stock, the holders of such shares will possess exclusive voting power. The Articles of Incorporation of the Company (the "Articles") do not provide for cumulative voting in the election of directors. Holders of Common Stock shall have no preemptive, subscription, redemption or conversion rights. Subject to any preferential rights of any outstanding series of Preferred Stock created by the Company's Board of Directors from time to time, the holders of Common Stock will be entitled to such dividends as may be declared from time to time by the Company's Board of Directors from funds available therefor, and upon liquidation will be entitled to receive pro rata all assets of the Company available for distribution to such holders. PREFERRED STOCK The Indiana Business Corporation Law (the "IBCL") and the Company's Articles authorize the Company's Board of Directors to establish one or more series of Preferred Stock and to determine, with respect to any series of Preferred Stock, the terms and rights of such series, including (i) the designation of the series, (ii) the number of shares of the series, which number the Company's Board of Directors may thereafter (except where otherwise provided in the applicable certificate of designation) increase or decrease (but not below the number of shares thereof then outstanding), (iii) whether dividends, if any, will be cumulative or noncumulative, the preference or relation which such dividend, if any, will bear to the dividends payable on any other class or classes of any other series of capital stock, and the dividend rate of the series, (iv) the conditions and dates upon which dividends, if any, will be payable, (v) the redemption rights and price or prices, if any, for shares of the series, (vi) the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series, (vii) the amounts payable on and the preference, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, (viii)(a) whether the shares of the series will be convertible or exchangeable into shares of any other class or series, or any other security, of the Company or any other corporation, and (b) if so, the specification of such other class or series or such other security, the conversion or exchange price(s) or rate(s), any adjustments thereof, the date(s) as of which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made, (ix) restrictions on the issuance of shares of the same series or of any other class or series, (x) the voting rights, if any, of the holders of the shares of the series, and (xi) any other relative rights, preferences and limitations of such series. Although the Company's Board of Directors has no present intention of doing so, it could issue a series of Preferred Stock that, depending on the terms of such series, could impede the completion of a merger, tender offer or other takeover attempt. The Company's Board of Directors will make any determination to issue such shares based on its judgment as to the best interests of the Company and its shareholders. The Company's Board of Directors, in so acting, could issue Preferred Stock having terms that could discourage an acquisition attempt through which an acquiror may be able to change the composition of the Company's Board of Directors, including a tender offer or other transaction that some, or a majority, of the Company's shareholders may believe to be in their best interests or in which shareholders might receive a premium for their Common Stock over the then current market price of such Common Stock. 98 101 ANTI-TAKEOVER PROVISIONS The following discussion is a general summary of the material provisions of the Company's Articles, the Company's By-Laws (the "By-Laws") and certain other provisions which may be deemed to have an effect of delaying, deferring or preventing a change in control. The following description of certain of these provisions is general and not necessarily complete and is qualified by reference to the Articles and By-Laws. Directors Certain provisions in the Articles and By-Laws will impede changes in majority control of the Board of Directors of the Company. The Articles and By-Laws provide that the Board of Directors of the Company will be divided into three classes, with directors in each class elected for three-year staggered terms. Therefore, it would take two annual elections to replace a majority of the Company's Board of Directors. The By-Laws also impose certain notice and information requirements in connection with the nomination by shareholders of candidates for election to the Board of Directors or the proposal by shareholders of business to be acted upon at an annual meeting of shareholders. The Articles provide that directors may be removed only by the affirmative vote of at least a majority of the shares eligible to vote generally in the election of directors. Authorization of Preferred Stock The Board of Directors of the Company is authorized, without shareholder approval, to issue Preferred Stock in series and to fix the voting designations, preferences and relative, participating, optional or other special rights of the shares of each series and the qualifications, limitations and restrictions thereof. Preferred Stock may rank prior to the Common Stock as to dividend rights, liquidation preferences, or both, and could have full or superior voting rights. The holders of Preferred Stock will be entitled to vote as a separate class or a series under certain circumstances, regardless of any other voting rights which such holders may have. Accordingly, issuance of shares of Preferred Stock could adversely affect the voting power of holders of Common Stock or could have the effect of deterring or delaying an attempt to obtain control of the Company. Provisions of Indiana Law Several provisions of the IBCL could affect the acquisition of shares of the Common Stock or otherwise the control over the Company. Chapter 43 of the IBCL prohibits certain business combinations, including but not limited to mergers, sales of assets, recapitalizations and reverse stock splits, between corporations such as the Company (assuming that it has over 100 shareholders) and any interested shareholder, defined to include any direct or indirect beneficial owner of 10% or more of the voting power of the outstanding voting shares, for five years following the date on which the shareholder obtained 10% ownership unless the business combination or the purchase of the shares was approved in advance of that date by the board of directors. If prior approval is not obtained, several price and procedural requirements must be met before the business combination can be completed. In addition, Chapter 42 of the IBCL (the "Control Share Acquisition Statute") contains provisions designed to assure that minority shareholders have a voice in determining their future relationship with an Indiana corporation (the definition of which would include the Company if the Company has over 100 shareholders) in the event that a person were to make a tender offer for, or otherwise acquire enough shares to increase such person's percentage holdings of such corporation's outstanding voting securities past any one or more of the following threshold levels: 20%, 33 1/3%, and 50%. Under the Control Share Acquisition Statute, if an acquiror purchases those shares at a time that the corporation is subject to the Control Share Acquisitions Statute, then until each class or series of shares entitled to vote separately on the proposal approves, by a majority of all votes entitled to be cast by that group (excluding shares held by officers of the corporation, by employees of the corporation who are directors thereof and by the acquiror), the rights of the acquiror to vote the shares that take the acquiror over each level of ownership as stated in the statute, the acquiror cannot vote those shares. The IBCL requires directors to discharge their duties, based on the facts then known to them, in good faith, with the care an ordinary, prudent person in a like position would exercise under similar circumstances 99 102 and in a manner the director reasonably believes to be in the best interests of the corporation. The director is not personally liable for any action taken as a director, or any failure to take any action, unless the director has breached, or failed to perform the duties of the director's office in compliance with, the foregoing standard and the breach or failure to perform constitutes willful misconduct or recklessness. The IBCL specifically authorizes directors, in considering the best interests of a corporation, to consider the effects of any action on shareholders, employees, suppliers, and customers of the corporation, and communities in which offices or other facilities of the corporation are located, and any other factors the directors consider pertinent. Under the IBCL, directors are not required to approve a proposed business combination or other corporate action if the directors determine in good faith that such approval is not in the best interests of the corporation. The IBCL explicitly provides that the different or higher degree of scrutiny imposed in Delaware and certain other jurisdictions upon director actions taken in response to potential changes in control will not apply. The foregoing provisions of the IBCL could have the effect of preventing or delaying a person from acquiring or seeking to acquire a substantial equity interest in, or control of, the Company. Insurance Regulation Concerning Change of Control Many state insurance regulatory laws, including Indiana's and Florida's, intended primarily for the protection of policyholders contain provisions that require advance approval by state agencies of any change in control of an insurance company or insurance holding company which owns an insurance company that is domiciled (or, in some cases, having such substantial business that it is deemed commercially domiciled) in that state. In addition, many state insurance regulatory laws contain provisions that require prenotification to state agencies of a change in control of a nondomestic admitted insurance company in that state. While such prenotification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize issuance of a cease and desist order with respect to the nondomestic admitted insurer if certain conditions exist, such as undue market concentration. Any future transactions constituting a change in control of the Company would generally require prior approval by the insurance departments of Indiana and Florida, as well as notification in those states which have preacquisition notification statutes or regulations. The need to comply with those requirements may deter, delay or prevent certain transactions affecting the control of the Company or the ownership of the Company's Common Stock, including transactions which could be advantageous to the shareholders of the Company. For a more comprehensive discussion of applicable Indiana and Florida regulations, see "Business -- Regulation." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 10,000,000 shares of Common Stock outstanding (10,450,000 if the Underwriters' over-allotment option is exercised in full). Of those shares, the 3,000,000 shares of Common Stock sold in the Offering (3,450,000 if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction under the Securities Act, except for any such shares of Common Stock which may be acquired by an "affiliate" of the Company (as that term is defined in Rule 144 promulgated under the Securities Act), which shares will be subject to the resale limitations of Rule 144. The remaining 7,000,000 shares of outstanding Common Stock held by Goran are "restricted securities" within the meaning of Rule 144 and may not be resold in a public distribution except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, such as that to which Rule 144 relates. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has beneficially owned "restricted securities" for a period of at least two years from the later of the date on which such restricted securities were acquired from the Company or from an affiliate of the Company is entitled to sell, within any three-month period, a number of such securities that does not exceed the greater of 1% of the then outstanding shares of the Common Stock or the average weekly trading volume in the Common Stock reported through the automated quotation system of a registered securities association during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain 100 103 restrictions on the manner of sale, notice requirements, and the availability of current public information about the Company. Further, under Rule 144(k), if a period of at least three years has elapsed between the later of the date on which restricted shares were acquired from the Company or from an affiliate of the Company, a holder of such restricted securities who is not an affiliate of the Company for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. The Company, its directors and executive officers and Goran have agreed not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Advest, Inc., except for shares of Common Stock offered in connection with the Offering. See "Underwriting." Goran, its directors, executive officers and principal stockholders have agreed not to sell or otherwise dispose of any shares of common stock of Goran, or securities convertible into or exchangable or exercisable for such common stock, for a period of 180 days after the date of this Prospectus without the prior written consent of Advest, Inc. Pursuant to the Goran Registration Rights Agreement between the Company and Goran, Goran has certain rights to require the Company to effect the registration under the Securities Act of shares of Common Stock owned by Goran, in which event such shares could be sold publicly upon the effectiveness of any such registration without restriction. See "Certain Relationships and Related Transactions -- Registration Rights Agreement between the Company and Goran." Prior to the Offering, there has been no public market for the Common Stock and no prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. The Company is unable to estimate the number of shares that may be sold in the public market pursuant to Rule 144 because this will depend on the market price of the Common Stock, the individual circumstances of the sellers and other factors. Any sale of substantial amounts of Common Stock in the open market could adversely affect the market price of the Common Stock. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "SIGC," subject to official notice of issuance. UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement among the Company, Goran and each of the Underwriters named below (the "Underwriting Agreement"), the Underwriters named below have agreed, severally and not jointly, through Advest, Inc. and Mesirow Financial, Inc., the representatives of the Underwriters (the "Representatives"), to purchase from the Company, and the Company has agreed to sell to the Underwriters, the aggregate number of shares of Common Stock set forth opposite their respective names below:
NUMBER UNDERWRITER OF SHARES - --------------------------------------------------------------------------------- --------- Advest, Inc...................................................................... Mesirow Financial, Inc........................................................... --------- Total....................................................................... 3,000,000 =========
The Underwriters are committed to purchase and pay for all of the shares of Common Stock offered hereby if any are purchased. The Underwriting Agreement provides that the obligations of the several Underwriters are subject to approval of certain matters by their counsel and to various other conditions. 101 104 The Underwriters have advised the Company that they propose to offer the shares of the Common Stock directly to the public at the offering price set forth on the cover page of this Prospectus and to certain selected dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After the public offering of the shares, the public offering price, concession and re-allowance to dealers may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable during the 30-day period beginning on the date of the Prospectus, to purchase up to 450,000 additional shares of Common Stock, solely to cover over-allotments, if any, at the public offering price less the underwriting discounts set forth on the cover page of the Prospectus. If the Underwriters exercise such option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the table above, bears to the 3,000,000 shares of Common Stock. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 3,000,000 shares are being sold. The Company, Goran and the executive officers and directors of the Company have agreed that they will not offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock held by them (other than issuances by the Company pursuant to outstanding warrants or options) for a period of 180 days after the date of this Prospectus, without the written consent of the Representatives. Goran, its directors, executive officers and principal stockholders have agreed not to sell or otherwise dispose of any shares of common stock of Goran, or securities convertible into or exchangable or exercisable for such common stock, for a period of 180 days after the date of this Prospectus without the prior written consent of Advest, Inc. The Company, Goran and IGF Holdings have agreed to indemnify the Underwriters against, and to contribute to losses arising out of, certain liabilities, including liabilities under the Securities Act subject to certain limitations. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined solely through negotiations among the Company, Goran and representatives of the Underwriters based on several factors and will not necessarily reflect the price at which Common Stock may be sold in the public market after this Offering. The foregoing is a summary of the principal terms of the Underwriting Agreement and does not purport to be complete. Reference is made to a copy of the Underwriting Agreement which is on file as an exhibit to the Registration Statement. The Representatives have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. LEGAL MATTERS The validity of the Shares offered hereby and certain other legal matters in connection with the Offering are being passed upon for the Company by Barnes & Thornburg, Indianapolis, Indiana. Certain legal matters in connection with the Offering are being passed upon for the Underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership including professional corporations, New York, New York. EXPERTS The consolidated financial statements and related schedules of the Company as of December 31, 1994 and 1995 and for each of the years in the three year period ended December 31, 1995 appearing in this Prospectus and the Registration Statement have been audited and reported upon by Coopers & Lybrand L.L.P., independent public accountants, as set forth in their reports thereon appearing elsewhere herein and are included herein upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements and related schedules of Superior as of December 31, 1994 and 1995 and for each of the years in the three year period ended December 31, 1995 appearing in this Prospectus and the Registration Statement have been audited and reported upon by Coopers & Lybrand L.L.P., independent public 102 105 accountants, as set forth in their reports thereon appearing elsewhere herein and are included herein upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (including any amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act, with respect to the securities offered by this Prospectus. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, to which reference is made. Statements made in this Prospectus regarding the contents of any contract or any other document filed as an exhibit to the Registration Statement are not necessarily complete and, in each instance, reference is hereby made to the copy of such contract or other document filed as an exhibit to the Registration Statement and the full text of such statement is qualified in its entirety by reference to such contract or document. The Registration Statement may be inspected at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web site on the Internet that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. The address of such site is: http://www.sec.gov. The Company will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith will be required to file periodic reports and other information with the Commission. Such information can be inspected and copied after the Offering at the public reference facilities maintained by the Commission. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "SIGC," subject to official notice of issuance. Such listing application will also be available for inspection at the National Association of Securities Dealers, Inc., 1735 K Street, Washington, D.C. 20006. In addition, the Company intends to furnish its shareholders with annual reports containing consolidated financial statements certified by an independent public accounting firm. 103 106 GLOSSARY OF SELECTED INSURANCE AND CERTAIN DEFINED TERMS 1940 ACT...................... The Investment Company Act of 1940, as amended. 1994 REFORM ACT............... The Federal Crop Insurance Reform Act of 1994. 1996 REFORM ACT............... The Federal Agriculture Improvement and Reform Act of 1996. ACQUISITION................... The acquisition by GGS Holdings of Superior Insurance Company, a Florida property and casualty insurer primarily engaged in the writing of nonstandard automobile insurance. ACTUAL PRODUCTION HISTORY ("APH")..................... A plan of MPCI which provides the yield component and yield forecast of an insured by utilizing the insured's historic yield record. CRC plans use the policy terms and conditions of the APH as their basic provisions of coverage. ACTUARIAL ANALYSIS; ACTUARIAL MODELS........................ Evaluation of risks in order to attempt to assure that premiums and loss reserves adequately reflect expected future loss experience and claims payments; in evaluating risks, mathematical models are used to predict future loss experience and claims payments based on past loss ratios and loss development patterns and other relevant data and assumptions. ADMITTED INSURER.............. An insurance company licensed by a state regulatory authority to transact insurance business in that state. An admitted insurer is subject to the rules and regulations of each state in which it is licensed governing virtually all aspects of its insurance operations and financial condition. A non-admitted insurer, also known as an excess and surplus lines insurer, is not licensed to transact insurance business in a given state but may be permitted to write certain business in that state in accordance with the provisions of excess and surplus lines insurance laws which generally involve less rate and operational regulation. A.M. BEST..................... A. M. Best Company, Inc., a rating agency and publisher for the insurance industry. ASSUME........................ To accept from the primary insurer or reinsurer all or a portion of the liability underwritten by such primary insurer or reinsurer. BUY-UP COVERAGE............... Multi-Peril Crop Insurance policy providing coverage in excess of that provided by CAT Coverage. Buy-up Coverage is offered only through private insurers. BUY-UP EXPENSE REIMBURSEMENT PAYMENT..................... An expense reimbursement payment made by the FCIC to an MPCI insurer equal to a percentage of gross premiums written for each Buy-up Coverage policy written by such MPCI insurer. CASUALTY INSURANCE............ Insurance which is primarily concerned with the losses caused by injuries to third persons (i.e., not the policyholder) and the legal liability imposed on the insured resulting therefrom. It includes, but is not limited to, employers' liability, workers' compensation, public liability, automobile liability, personal liability and aviation liability insurance. It excludes certain types of loss that by law or 104 107 custom are considered as being exclusively within the scope of other types of insurance, such as fire or marine. CAT COVERAGE (CAT)............ The minimum available level of Multi-Peril Crop Insurance, providing coverage for 50% of a farmer's historical yield for eligible crops at 60% of the price per commodity unit for such crop set by the FCIC. This coverage is offered through private insurers and, in certain states, USDA field offices. CAT COVERAGE FEE.............. A fixed administrative fee of $50 per policy for which farmers may purchase CAT Coverage. The CAT Coverage Fee takes the place of a premium. CAT LAE REIMBURSEMENT PAYMENT....................... An LAE reimbursement payment made by the FCIC to an MPCI insurer equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy written by such MPCI insurer. CEDE; CEDING COMPANY.......... When an insurance company reinsures its risk with another insurance company, it "cedes" business and is referred to as the "ceding company." CODE.......................... Internal Revenue Code of 1986, as amended. COMBINED RATIO................ The sum of the expense ratio and the loss and LAE ratio determined in accordance with GAAP or SAP. COMMISSION.................... The Securities and Exchange Commission. COMMON STOCK.................. The shares of common stock, no par value, of the Company. COMPANY (OR SIG).............. Symons International Group, Inc. and its Subsidiaries, unless the context indicates otherwise. CONTRIBUTION.................. The contribution by Pafco of IGF to IGF Holdings in exchange for all of the capital stock of IGF Holdings. CROP REVENUE COVERAGE (CRC)... CRC provides the insured with a guaranteed revenue stream by combining both yield and price variability protection and 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. CROP YEAR..................... For MPCI, a crop year commences on July 1 and ends on June 30. For crop hail insurance, the crop year is the calendar year. DIRECT PREMIUMS WRITTEN....... Total premiums collected in respect of policies issued by an insurer during a given period without any reduction for premiums ceded to reinsurer. DIRECT WRITER................. An insurer or reinsurer that markets and sells insurance directly to its insured, either by use of telephone, mail or exclusive agents. DISTRIBUTION.................. The distribution by the Company to Goran of all of the outstanding capital stock of Symons International Group, Inc. (Florida), a Florida based surplus lines underwriting manager. DIVIDEND...................... The payment by IGF Holdings to Pafco of a dividend consisting of $7.5 million in cash and the IGF Note. 105 108 EXCESS AND SURPLUS LINES INSURANCE..................... The business of insuring risks for which insurance is unavailable from admitted insurers in whole or in part. Such business is placed by the broker or agent with nonadmitted insurers in accordance with the excess and surplus lines provisions of state insurance laws. EXCESS OF LOSS REINSURANCE.... A form of reinsurance whereby the reinsurer, subject to a specified limit, agrees to indemnify the ceding company for the amount of each loss, on a defined class of business, that exceeds a specified retention. EXCHANGE ACT.................. The Securities Exchange Act of 1934, as amended. EXPENSE RATIO................. Under statutory accounting, the ratio of underwriting expenses to net premiums written. Under GAAP accounting, the ratio of underwriting expenses to net premiums earned. FEDERAL CROP INSURANCE CORPORATION (FCIC)............ A wholly-owned federal government corporation within the Farm Services Agency. FLORIDA DEPARTMENT............ The Florida Department of Insurance. FORMATION TRANSACTION......... The formation of GGS Management Holdings, Inc., a corporation 52% owned by the Company and 48% owned by the GS Funds. FORTIS........................ Fortis, Inc., the parent company of Interfinancial, the former holding company for Superior. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)........... Accounting principles as set forth in opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. GGS AGREEMENT................. The agreement by and among Goran, SIG, GGS Holdings and the GS Funds dated January 31, 1996 evidencing the Formation Transaction. GGS HOLDINGS.................. GGS Management Holdings, Inc., a holding company for Pafco and Superior controlled by the Company. GGS MANAGEMENT................ GGS Management, Inc., a wholly-owned subsidiary of GGS Holdings. GGS SENIOR CREDIT FACILITY.... A $48 million senior bank facility extended to GGS Management used to partially fund the purchase of Superior. GOLDMAN SACHS................. Goldman, Sachs & Co. GORAN......................... Goran Capital Inc., a Canadian federally-chartered corporation and the current sole shareholder of the Company. GRANITE RE.................... Granite Reinsurance Company Ltd., a subsidiary of Goran. GROSS PREMIUMS WRITTEN........ Direct premiums written plus premiums collected in respect of policies assumed, in whole or in part, from other insurance carriers. GS FUNDS...................... GS Capital Partners II, L.P.; GS Capital Partners II Offshore, L.P.; Stone Street Funds L.P.; Bridge Street Funds L.P.; and 106 109 Goldman Sachs & Co. Verwaltungs GmbH, all of which are investment funds affiliated with Goldman Sachs. IBCL.......................... The Indiana Business Corporation Law. IGF........................... IGF Insurance Company, an indirect wholly-owned subsidiary of the Company. IGFH BANK DEBT................ Promissory note with respect to a bank loan in the principal amount of $7.5 million issued by IGF Holdings. IGF HOLDINGS.................. IGF Holdings, Inc., a wholly-owned subsidiary of the Company. IGF NOTE...................... A subordinated promissory note of IGF Holdings in the principal amount of approximately $3.5 million issued to Pafco by IGF Holdings as part of the Dividend. IGF REVOLVER.................. IGF's revolving line of credit used to finance premium payables on amounts not yet received from farmers. INCURRED BUT NOT REPORTED (IBNR) CLAIMS................. Claims under policies that have been incurred but have not yet been reported to the Company by the insured. INCURRED BUT NOT REPORTED (IBNR) RESERVES............... IBNR reserves include LAE related to losses anticipated from IBNR claims and may also provide for future adverse loss development on reported claims. INDIANA COMMISSIONER.......... The Indiana Commissioner of Insurance. INDIANA DEPARTMENT............ The Indiana Department of Insurance. INSURANCE REGULATORY INFORMATION SYSTEM (IRIS)..... A system of ratio analysis developed by the NAIC primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies. INSURERS...................... The direct and indirect consolidated insurance subsidiaries of the Company, which include IGF, Pafco and Superior. INTERFINANCIAL................ Interfinancial, Inc., a wholly-owned subsidiary of Fortis, Inc. and the former holding company for Superior. IRS........................... Internal Revenue Service. LOSS ADJUSTMENT EXPENSES (LAE)......................... Expenses incurred in the settlement of claims, including outside adjustment expenses, legal fees and internal administrative costs associated with the claims adjustment process, but not including general overhead expenses. LOSS AND LAE RATIO............ The ratio of losses and LAE incurred to premiums earned. LOSS AND LAE RESERVES......... Liabilities established by insurers to reflect the ultimate estimated cost of claim payments as of a given date. MPCI EXCESS LAE REIMBURSEMENT PAYMENT..................... A small excess LAE reimbursement payment made by the FCIC to an MPCI insurer of two hundredths of one percent of MPCI Retention determined after ceding to the FCIC's three reinsurance 107 110 pools, to the extent that loss ratios on a per state basis exceeds certain levels. MPCI IMPUTED PREMIUM.......... For purposes of the profit/loss sharing arrangement with the federal government, the amount of premiums credited to the Company for all CAT Coverage it sells, as such amount is determined by formula. MPCI PREMIUM.................. For purposes of the profit/loss sharing arrangement with the federal government, the amount of premiums credited to the Company for all Buy-up Coverage sold, consisting of amounts paid by farmers plus the amount of any related federal premium subsidies. MPCI RETENTION................ The aggregate amount of MPCI Premium and MPCI Imputed Premium on which the Company retains risk after allocating farms to the three federal reinsurance pools. MULTI-PERIL CROP INSURANCE (MPCI)...................... A federally-regulated and subsidized crop insurance program that provides producers of crops with varying levels of insurance protection against substantially all natural perils to growing crops. NAIC.......................... The National Association of Insurance Commissioners. NASDAQ NATIONAL MARKET........ The Nasdaq Stock Market's National Market. NCIS.......................... National Crop Insurance Services, Inc., the actuarial data facility for the commercial crop insurance industry. NET PREMIUMS EARNED........... The portion of net premiums written applicable to the expired period of policies and, accordingly, recognized as income during a given period. NET WRITTEN PREMIUMS.......... Total premiums for insurance written (less any return premiums) during a given period, reduced by premiums ceded in respect of liability reinsured by other carriers. NONSTANDARD AUTOMOBILE INSURANCE..................... Personal lines automobile insurance written for those individuals presenting an above average risk profile (i.e., higher risk) in terms of payment history, driving experience, record of prior accidents or driving violations, particular occupation or type of vehicle and other factors. OFFERING...................... The offering by the Company of up to 3,450,000 shares of its Common Stock by the Underwriters. PAFCO......................... Pafco General Insurance Company, an Indiana property and casualty insurance company. PARENT INDEBTEDNESS........... Indebtedness of the Company to Goran in the principal amount of approximately $7.5 million. POLICIES IN-FORCE............. Policies written and recorded on the books of an insurance carrier which are unexpired as of a given date. POLICYHOLDERS' OR STATUTORY SURPLUS....................... As determined under SAP, the excess of total admitted assets over total liabilities. PRICE ELECTION................ The maximum per unit commodity price by crop to be used in computing MPCI Premiums, which is set each year by the FCIC. 108 111 QUOTA SHARE REINSURANCE....... A form of reinsurance in which the reinsurer shares a proportional part of both the original premiums and the losses of the reinsured. REINSURANCE................... The practice whereby a company called the "reinsurer" assumes, for a share of the premium, all or part of a risk originally undertaken by another insurer called the "ceding" company or "cedent." Reinsurance may be affected by "treaty" reinsurance, where a standing agreement between the ceding and reinsuring companies automatically covers all risks of a defined category, amount and type, or by "facultative" reinsurance where reinsurance is negotiated and accepted on a risk-by-risk basis. REPRESENTATIVES............... Advest, Inc. and Mesirow Financial, Inc., the representatives of the Underwriters. RETENTION..................... The amount of liability, premiums or losses which an insurance company keeps for its own account after reinsurance. RISK-BASED CAPITAL (RBC) REQUIREMENTS................ Capital requirements for property and casualty insurance companies adopted by the NAIC to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. SECURITIES ACT................ The Securities Act of 1933, as amended. SIG (OR THE COMPANY).......... Symons International Group, Inc., a specialty insurer which underwrites and markets nonstandard private passenger automobile insurance and crop insurance. SIGF.......................... Symons International Group, Inc. (Florida), a Florida based surplus lines underwriting manager and a subsidiary of Goran. SIGL.......................... Symons International Group, Ltd., a Canadian corporation and the controlling shareholder of Goran. STANDARD AUTOMOBILE INSURANCE..................... Personal lines automobile insurance written for those individuals presenting an average risk profile in terms of loss history, driving record, type of vehicle driven and other factors. STATUTORY ACCOUNTING PRACTICES (SAP)....................... Accounting practices which consist of recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by state regulatory authorities. Statutory accounting emphasizes solvency rather than matching revenues and expenses during an accounting period. STATUTORY SURPLUS............. The excess of admitted assets over total liabilities (including loss reserves), determined using data reported in accordance with SAP. STOCKHOLDER AGREEMENT......... The stockholder agreement, as amended and restated, among the Company, Goran, GGS Holdings and the GS Funds. STOP LOSS REINSURANCE......... A form of reinsurance, similar to Excess of Loss Reinsurance, whereby the primary insurer caps its loss on a particular risk by purchasing reinsurance in excess of such cap. SUBSIDIARIES.................. All of the direct and indirect consolidated subsidiaries of the Company. 109 112 SUPERIOR...................... Superior Insurance Company, a Florida property and casualty insurer primarily engaged in the writing of nonstandard automobile insurance and its principal subsidiaries, Superior American Insurance Company, a Florida insurance company, and Superior Guaranty Insurance Company, a Florida insurance company. SUPERIOR PURCHASE AGREEMENT... Stock Purchase Agreement, dated January 31, 1996, by and among Goran, the Company, Fortis and Interfinancial pursuant to which the Company purchased Superior. SURPLUS....................... The same as "policyholders' or statutory surplus," defined above. TAIL.......................... The period of time that elapses between the incurrence and settlement of losses under a policy. A "short-tail" insurance product is one where losses are known comparatively quickly; ultimate losses under a "long-tail" insurance product are sometimes not known for years. TRANSACTIONS.................. The Formation Transaction (defined herein), the Acquisition (defined herein) and other related transactions, including the Transfer (defined herein), the Dividend (defined herein) and the Distribution (defined herein). TRANSFER...................... The transfer by Pafco of all of the outstanding capital stock of IGF through the formation of IGF Holdings and the contribution to IGF Holdings of all of the outstanding shares of capital stock of IGF and the distribution of IGF Holdings to the Company. TREATY REINSURANCE............ The reinsurance of a specified type or category of risks defined in a reinsurance agreement (a "treaty") between a primary insurer or other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer and the reinsurer is obligated to accept a specified portion of all such type or category of risks originally underwritten by the primary insurer or reinsured. UNDERWRITING.................. The insurer's or reinsurer's process of reviewing applications submitted for insurance coverage, deciding whether to accept all or part of the coverage requested and determining the applicable premiums. UNDERWRITING EXPENSES......... The aggregate of policy acquisition costs, including commissions, and the portion of administrative, general and other expenses attributable to underwriting operations. UNEARNED PREMIUMS............. The portion of a premium representing the unexpired portion of the contract term as of a certain date. USDA.......................... United States Department of Agriculture. 110 113 INDEX TO FINANCIAL STATEMENTS
PAGE --------- SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES Report of Independent Accountants............................................... F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996....................................................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-4 Consolidated Statements of Changes in Stockholder's Equity for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996....................................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-6 Notes to Consolidated Financial Statements...................................... F-7-F-26 SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES Report of Independent Accountants............................................... F-27 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996....................................................................... F-28 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-29 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996....................................................................... F-30 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-31 Notes to Consolidated Financial Statements...................................... F-32-F-44
F-1 114 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholder of Symons International Group, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Symons International Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, changes in stockholder's equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Symons International Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1994, the Company adopted Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. As discussed in Notes 1 and 8 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, during the year ended December 31, 1993. COOPERS & LYBRAND, L.L.P. Indianapolis, Indiana March 18, 1996, except for Note 1.a., the second, third and fourth paragraphs in Note 6, and Note 18, as to which the date is July 29, 1996 F-2 115 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996 ASSETS
DECEMBER 31, ------------------ JUNE 30, 1994 1995 1996 ------- -------- ----------- (UNAUDITED) (IN THOUSANDS) Assets: Investments: Available for sale: Fixed maturities, at market............................... $ 8,861 $ 12,931 $ 119,637 Equity securities, at market.............................. 5,424 4,231 32,492 Short-term investments, at amortized cost which approximates market............................... 790 5,283 5,989 Real estate, at cost......................................... 507 487 477 Mortgage loans............................................... 2,940 2,920 2,560 Other........................................................ 50 50 50 Investments in and advances to related parties............... 2,948 2,952 2,868 Cash and cash equivalents.................................... 42 2,311 -- Receivables (net of allowance for doubtful accounts of $1,209,000, $927,000, and $1,673,000 (unaudited) in 1994, 1995 and June 30, 1996, respectively)..................... 14,665 8,203 59,189 Reinsurance recoverable on paid and unpaid losses, net....... 12,886 54,136 83,611 Prepaid reinsurance premiums................................. 6,988 6,263 42,407 Federal income taxes recoverable............................. 192 -- -- Deferred policy acquisition costs............................ 1,479 2,379 13,192 Deferred income taxes........................................ 2,002 1,421 1,635 Property and equipment....................................... 4,236 5,502 6,552 Goodwill..................................................... -- -- 3,140 Other........................................................ 2,618 1,447 4,874 ------- -------- -------- Total assets......................................... $66,628 $110,516 $ 378,673 ======= ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Losses and loss adjustment expenses.......................... $29,269 $ 59,421 $ 93,628 Unearned premiums............................................ 14,416 17,497 114,854 Reinsurance payables......................................... 4,073 6,206 52,555 Payables to affiliates....................................... 5,390 6,474 7,537 Federal income tax payable................................... -- 133 563 Line of credit and notes payable............................. 5,441 5,811 7,750 Term debt.................................................... -- -- 48,000 Other........................................................ 3,768 5,439 18,306 ------- -------- -------- Total liabilities.................................... 62,357 100,981 343,193 ------- -------- -------- Minority interest in consolidated subsidiary................. 16 -- 17,723 ------- -------- -------- Commitments and contingencies Stockholder's equity: Common stock, no par value, 100,000,000 shares authorized, 7,000,000 issued and outstanding........................ 1,000 1,000 1,000 Additional paid-in capital................................ 3,130 3,130 6,519 Unrealized gain (loss) on investments, net of deferred tax benefit (expense) of $260,000 in 1994, $23,000 in 1995 and ($249,000) (unaudited) at June 30, 1996............. (504) (45) 484 Retained earnings......................................... 629 5,450 9,754 ------- -------- -------- Total stockholder's equity........................... 4,255 9,535 17,757 ------- -------- -------- Total liabilities and stockholder's equity........... $66,628 $110,516 $ 378,673 ======= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 116 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ------------------------------ ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Gross premiums written............................... $ 88,936 $103,134 $124,634 $ 95,759 $146,950 Less ceded premiums.................................. (57,176) (67,995) (71,187) (64,904) (69,908) ------- ------- ------- ------- ------- Net premiums written................................. 31,760 35,139 53,447 30,855 77,042 Change in unearned premiums.......................... (332) (3,013) (3,806) (8,066) (17,976) ------- ------- ------- ------- ------- Net premiums earned.................................. 31,428 32,126 49,641 22,789 59,066 Net investment income................................ 1,489 1,241 1,173 636 1,533 Other income......................................... 886 1,622 2,174 997 4,062 Net realized capital gain (loss)..................... (119) (159) (344) 79 228 ------- ------- ------- ------- ------- Total revenues............................... 33,684 34,830 52,644 24,501 64,889 ------- ------- ------- ------- ------- Expenses: Losses and loss adjustment expenses.................. 25,080 26,470 35,971 15,751 45,275 Policy acquisition and general and administrative expenses.......................................... 8,914 5,801 7,981 5,589 12,283 Interest expense..................................... 996 1,184 1,248 193 1,261 ------- ------- ------- ------- ------- Total expenses....................................... 34,990 33,455 45,200 21,533 58,819 ------- ------- ------- ------- ------- Income (loss) before taxes, discontinued operations, cumulative effect of a change in accounting principle, and minority interest.................. (1,306) 1,375 7,444 2,968 6,070 ------- ------- ------- ------- ------- Income taxes: Current income tax expense (benefit)................. (530) 462 2,275 1,009 1,190 Deferred income tax expense (benefit)................ 613 (1,180) 344 (51) 664 ------- ------- ------- ------- ------- Total income taxes........................... 83 (718) 2,619 958 1,854 ------- ------- ------- ------- ------- Income (loss) from continuing operations before discontinued operations, cumulative effect of a change in accounting principle, and minority interest.......................................... (1,389) 2,093 4,825 2,010 4,216 Income (loss) from discontinued operations, net of income taxes...................................... (160) 10 (4) -- -- ------- ------- ------- ------- ------- Net income (loss) before cumulative effect of a change in accounting principle and minority interest........................................ (1,549) 2,103 4,821 2,010 4,216 Cumulative effect on prior years of accounting change............................................ 1,175 -- -- -- -- ------- ------- ------- ------- ------- Net income (loss) before minority interest........... (374) 2,103 4,821 2,010 4,216 Minority interest.................................... 51 14 -- (4) 88 ------- ------- ------- ------- ------- Net income (loss).................................... $ (323) $ 2,117 $ 4,821 $ 2,006 $ 4,304 ======= ======= ======= ======= ======= Weighted average shares outstanding.................. 7,000 7,000 7,000 7,000 7,000 ======= ======= ======= ======= ======= Per common share data: Income (loss) from continuing operations before discontinued operations, cumulative effect of a change in accounting principle and after minority interest.......................................... $ (0.20) $ 0.30 $ 0.69 $ 0.29 $ 0.61 Income (loss) from discontinued operations, net of income taxes...................................... (0.02) -- -- -- -- Cumulative effect on prior years of accounting change............................................ 0.17 -- -- -- -- ------- ------- ------- ------- ------- Net income (loss).................................... $ (0.05) $ 0.30 $ 0.69 $ 0.29 $ 0.61 ======= ======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 117 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
ADDITIONAL UNREALIZED RETAINED TOTAL COMMON PAID-IN LOSS ON EARNINGS STOCKHOLDER'S STOCK CAPITAL INVESTMENTS (DEFICIT) EQUITY ------ ---------- ----------- -------- ------------- (IN THOUSANDS) Balance at January 1, 1993................... $1,000 $1,530 $(172) $ (1,165) $ 1,193 Additional paid-in capital................. -- 1,600 -- -- 1,600 Change in unrealized loss on equity securities, net of deferred taxes....... -- -- (251) -- (251) Net loss................................... -- -- -- (323) (323) ----- ------ ----- ------ ------- Balance at December 31, 1993................. 1,000 3,130 (423) (1,488) 2,219 Unrealized gain on fixed maturities, resulting from a change in accounting principle, net of deferred taxes........ -- -- 139 -- 139 Change in unrealized loss on investments, net of deferred taxes................... -- -- (220) -- (220) Net income................................. -- -- -- 2,117 2,117 ----- ------ ----- ------ ------- Balance at December 31, 1994................. 1,000 3,130 (504) 629 4,255 Change in unrealized loss on investments, net of deferred taxes (unaudited)....... -- -- 13 -- 13 Net income (unaudited)..................... -- -- -- 2,006 2,006 ----- ------ ----- ------ ------- Balance at June 30, 1995 (unaudited)....... $1,000 $3,130 $(491) $ 2,635 $ 6,274 ===== ====== ===== ====== ======= Balance at December 31, 1994................. $1,000 $3,130 $(504) $ 629 $ 4,255 Change in unrealized loss on investments, net of deferred taxes................... -- -- 459 -- 459 Net income................................. -- -- -- 4,821 4,821 ----- ------ ----- ------ ------- Balance at December 31, 1995................. 1,000 3,130 (45) 5,450 9,535 Sale of subsidiary stock................... -- 3,389 -- -- 3,389 Change in unrealized loss on investments, net of deferred taxes (unaudited)....... -- -- 529 -- 529 Net income (unaudited)..................... -- -- -- 4,304 4,304 ----- ------ ----- ------ ------- Balance at June 30, 1996 (unaudited)......... $1,000 $6,519 $ 484 $ 9,754 $17,757 ===== ====== ===== ====== =======
The accompanying notes are an integral part of the consolidated financial statements. F-5 118 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------ ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net income (loss):................................ $ (323) $ 2,117 $ 4,821 $ 2,006 $ 4,304 Adjustments to reconcile net income (loss) to net cash provided from (used in) operations: Minority interest................................. (51) (14) -- 4 (88) Depreciation and amortization..................... 913 690 742 244 221 Deferred income tax expense (benefit)............. (562) (1,180) 344 51 664 Net realized capital (gain) loss.................. 119 159 344 (79) (228) Net changes in operating assets and liabilities (net of assets acquired): Receivables....................................... 6,965 (9,057) 6,462 (34,116) (48,085) Reinsurance recoverable on paid and unpaid losses, net............................................. (18,681) 25,130 (41,250) (11,283) (29,475) Prepaid reinsurance premiums...................... (14) (3,343) 725 (1,464) (3,824) Federal income taxes recoverable (payable)........ (890) 759 325 870 (490) Deferred policy acquisition costs................. (249) (727) (900) (470) (2,888) Other assets...................................... (409) 98 1,019 2,127 (3,264) Losses and loss adjustment expenses............... 15,527 (24,874) 30,152 13,576 (10,216) Unearned premiums................................. 346 6,356 3,081 9,371 52,077 Reinsurance payables.............................. (7,464) 1,982 2,133 20,992 46,349 Other liabilities................................. (2,788) (1,398) 1,656 2,177 2,925 -------- -------- -------- -------- -------- Net cash provided from (used in) operations....... (7,561) (3,302) 9,654 4,006 7,982 -------- -------- -------- -------- -------- Cash flow provided from (used in) investing activities: Cash paid for Superior net of cash acquired....... -- -- -- -- (66,389) Net (purchases) sales of short-term investments... 2,194 (308) (4,493) (2,685) 11,342 Purchases of fixed maturities..................... (7,855) (7,587) (12,517) (2,832) (24,976) Proceeds from sales, calls and maturities of fixed maturities...................................... 11,702 8,460 8,603 5,566 17,896 Purchases of equity securities.................... (17,729) (10,122) (28,173) (13,717) (86,177) Proceeds from sales of equity securities.......... 18,393 10,510 29,599 10,892 65,944 Proceeds from the sale of real estate............. -- 1,166 -- -- -- Purchase of real estate........................... (730) (1) -- -- -- Purchases of mortgage loans....................... -- (50) (100) -- -- Proceeds from repayment of mortgage loans......... -- 60 120 60 360 Purchase of property and equipment................ (509) (655) (1,874) (772) (579) -------- -------- -------- -------- -------- Net cash provided from (used in) investing activities...................................... 5,466 1,473 (8,835) (3,488) (82,579) -------- -------- -------- -------- -------- Cash flow provided from (used in) financing activities: Proceeds from additional paid-in capital.......... 1,600 -- -- -- -- Proceeds from line of credit and notes payable.... 4,000 26,900 1,620 -- 7,750 Proceeds from term debt........................... -- -- -- -- 48,000 Payments on line of credit and notes payable...... (5,800) (26,459) (1,250) (1,314) (5,811) Proceeds from minority interest owner............. -- -- -- -- 21,200 Repayments from related parties................... 1,188 711 44 407 1,063 Loans from related parties........................ 344 425 1,036 400 84 -------- -------- -------- -------- -------- Net cash provided from (used in) financing activities...................................... 1,332 1,577 1,450 (507) 72,286 -------- -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents..................................... (763) (252) 2,269 11 (2,311) Cash and cash equivalents, beginning of year...... 1,057 294 42 42 2,311 -------- -------- -------- -------- -------- Cash and cash equivalents, end of year............ $ 294 $ 42 $ 2,311 $ 53 $ -- ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-6 119 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Symons International Group, Inc. (the "Company") is a wholly-owned subsidiary of Goran Capital, Inc. ("Goran"), a Canadian insurance holding company. The Company is primarily involved in the sale of personal nonstandard automobile insurance and crop insurance. Nonstandard automobile represents approximately 51% of the Company's volume. The Company's products are marketed through independent agents and brokers, within a 31 state area, primarily in the Midwest and Southern United States. The following is a description of the significant accounting policies and practices employed: a. Principles of Consolidation: The consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its wholly-owned subsidiaries as follows: - GGS Management Holdings, Inc. ("GGSH") -- a holding company for GGS Management, Inc. - GGS Management, Inc. ("GGS") -- a holding company for the nonstandard automobile operations which include PGIC, PPFC and Superior entities. - Pafco General Insurance Company ("PGIC") -- an insurance company domiciled in Indiana; - Pafco Premium Finance Company ("PPFC") -- an Indiana-based premium finance company; - IGF Holdings, Inc., ("IGFH") -- a holding company for the crop operations which includes IGF and Hail Plus Corp. - IGF Insurance Company ("IGF") -- an insurance company domiciled in Indiana; - Hail Plus Corp -- an Iowa-based premium finance company; and - Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIG-FLA") -- a managing general insurance agency. On May 1, 1996, the Company acquired the following entities through a purchase business combination: - Superior Insurance Company ("Superior") -- an insurance company domiciled in Florida; - Superior American Insurance Company ("Superior American") -- an insurance company domiciled in Florida; and - Superior Guaranty Insurance Company ("Superior Guaranty") -- an insurance company domiciled in Florida. In 1995, PGIC acquired the remaining 1.2%, or 28,335 shares, of voting interest IGF common stock for $56,670. On January 1, 1996, the Company sold SIG-FLA to Goran for $2,000. The Company's consolidated results of operations for the six months ended June 30, 1996 include the results of operations of these entities subsequent to April 30, 1996, the date of the acquisition. (See Note 18.) b. Basis of Presentation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ from statutory accounting practices ("SAP") prescribed or permitted for insurance companies by regulatory authorities in the following respects: - Certain assets are included in the balance sheet that are excluded as "Nonadmitted Assets" under statutory accounting. - Costs incurred by the Company relating to the acquisition of new business which are expensed for statutory purposes are deferred and amortized on a straight-line basis over the term of the related F-7 120 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): policies. Commissions allowed by reinsurers on business ceded are deferred and amortized with policy acquisition costs. - The investment in wholly-owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method. The net income or loss and changes in unassigned surplus of the subsidiaries is reflected in net income for the period rather than recorded directly to unassigned surplus. - Investments in bonds are designated at purchase as held to maturity, trading, or available for sale. Held-to-maturity fixed maturity investments are reported at amortized cost, and the remaining fixed maturity investments are reported at fair value with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of stockholder's equity for those designated as available for sale. All securities have been designated as available for sale. For SAP, such fixed maturity investments would be reported at amortized cost or market value based on their NAIC rating. - The liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes. - Deferred income taxes are not recognized on a statutory basis. - Credits for reinsurance are recorded only to the extent considered realizable. Under SAP, credit for reinsurance ceded are allowed to the extent the reinsurers meet the statutory requirements of the Insurance Department of the State of Indiana, principally statutory solvency. Net income and capital and surplus for PGIC and IGF reported on the statutory accounting basis is as follows (dollars in thousands):
DECEMBER 31, ------------------------------ 1993 1994 1995 ------- ------ ------- Capital and surplus: PGIC....................................... $ 8,132 $7,848 $11,875 IGF........................................ 2,789 4,512 9,219
YEARS ENDED DECEMBER 31, ------------------------------ 1993 1994 1995 ------- ------ ------- Net income (loss): PGIC....................................... $ 1,943 $ (571) $ (553) IGF........................................ (3,020) 1,511 6,574
c. Use of Estimates: The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. d. Premiums: Premiums are recognized as income ratably over the life of the related policies and are stated net of ceded premiums. Unearned premiums are computed on the semimonthly pro rata basis. e.Investments: Investments are presented on the following bases: - Fixed maturities and equity securities -- at market value -- all such securities are classified as available for sale and are carried at market value with the unrealized gain or loss as a component of stockholder's equity, net of deferred tax, and accordingly, have no effect on net income. F-8 121 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): - Real estate -- at cost, less allowances for depreciation. - Mortgage loans -- at outstanding principal balance. Realized gains and losses on sales of investments are recorded on the trade date and are recognized in net income on the specific identification basis. Interest and dividend income are recognized as earned. f. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company includes in cash and cash equivalents all cash on hand and demand deposits with original maturities of three months or less. g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are comprised of agents' commissions, premium taxes and certain other costs which are related directly to the acquisition of new and renewal business, net of expense allowances received in connection with reinsurance ceded, which have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. These costs, to the extent that they are considered recoverable, are deferred and amortized over the terms of the policies to which they relate. h. Property and Equipment: Property and equipment are recorded at cost. Depreciation for buildings is based on the straight-line method over 31.5 years and the declining balance method for other property and equipment over their estimated useful lives ranging from five to seven years. Asset and accumulated depreciation accounts are relieved for dispositions, with resulting gains or losses reflected in net income. i. Losses and Loss Adjustment Expenses: Reserves for losses and loss adjustment expenses include estimates for reported unpaid losses and loss adjustment expenses and for estimated losses incurred but not reported. These reserves have not been discounted. The Company's losses and loss adjustment expense reserves include an aggregate stop-loss program. The Company retains an independent actuarial firm to estimate reserves. Reserves are established using individual case-basis valuations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves are adequate, the provisions for losses and loss adjustment expenses are necessarily based on estimates and are subject to considerable variability. Changes in the estimated reserves are charged or credited to operations as additional information on the estimated amount of a claim becomes known during the course of its settlement. The reserves for losses and loss adjustment expenses are reported net of the receivables for salvage and subrogation of approximately $795,000 and $948,000, at December 31, 1994 and 1995, respectively. j. Income Taxes: During January 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The Company adopted SFAS No. 109 for the year ended December 31, 1993. The Statement adopts the liability method of accounting for deferred income taxes. Under the liability method, companies will establish a deferred tax liability or asset for the future tax effects of temporary differences between book and taxable income. Changes in future tax rates will result in immediate adjustments to deferred taxes. (See Note 8.) Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. k. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. F-9 122 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): l. Accounting Changes: On January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, ("Statement 115"). In accordance with Statement 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of January 1, 1994 of adopting Statement 115 has no effect on net income. The effect of this change in accounting principle was an increase to stockholder's equity of approximately $139,000, net of deferred taxes of approximately $73,000, of net unrealized gains on fixed maturities classified as available for sale that were previously carried at amortized cost. m. Recently Issued Accounting Pronouncements: On January 1, 1996, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement was effective for financial statements for fiscal years beginning after December 31, 1995. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations. In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was issued. It introduces the use of a fair-value-based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize compensation expense for stock-based compensation to employees based on the new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. However, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 15, 1995. On May 1, 1996, GGS Management Holdings, Inc., a recently formed subsidiary of the Company, adopted a stock option plan. The purpose of the plan is to provide an incentive to the officers and employees based on the success of the Company's business enterprises. The Company has not yet quantified the impact of the adoption of SFAS No. 123. n. Vulnerability from Concentration: At December 31, 1995, the Company did not have a material concentration of financial instruments in an industry or geographic location. Also at December 31, 1995, the Company did not have a concentration of (1) business transactions with a particular customer, lender or distributor, (2) revenues from a particular product or service, (3) sources of supply of labor or services used in the business, or (4) a market or geographic area in which business is conducted that makes it vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a serious impact to the Company's financial condition. o. Earnings Per Share: The Company's net income per share calculations are based upon the weighted average number of shares of common stock outstanding during each period, as restated for the 7,000-for-1 stock split. p. Unaudited Interim Financial Statements: The consolidated financial statements for the six months ended June 30, 1995 and June 30, 1996 have been prepared using the applicable accounting principles used in the audited financial statements. These statements are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial information set forth herein. The operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. F-10 123 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVESTMENTS: Investments are summarized as follows (dollars in thousands).
COST OR UNREALIZED ESTIMATED AMORTIZED -------------- MARKET COST GAIN LOSS VALUE --------- ---- ------- --------- DECEMBER 31, 1994 Fixed maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies.................. $ 6,956 $ 12 $ (169) $ 6,799 Obligations of states and political subdivisions......... 311 -- -- 311 Corporate securities..................................... 1,779 -- (28) 1,751 ------- ---- ------- ------- Total fixed maturities........................... 9,046 12 (197) 8,861 ------- ---- ------- ------- Equity securities: Preferred stocks......................................... 1,502 -- (11) 1,491 Common stocks............................................ 4,501 234 (802) 3,933 ------- ---- ------- ------- 6,003 234 (813) 5,424 ------- ---- ------- ------- Short-term investments................................... 790 -- -- 790 Real estate.............................................. 507 -- -- 507 Mortgage loan............................................ 2,940 -- -- 2,940 Other loans.............................................. 50 -- -- 50 ------- ---- ------- ------- Total investments................................ $19,336 $246 $(1,010) $18,572 ======= ==== ======= ======= DECEMBER 31, 1995 Fixed maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies.................. $10,978 $ 63 $ (1) $11,040 Obligations of states and political subdivisions......... 1,470 57 (1) 1,526 Corporate securities..................................... 364 1 -- 365 ------- ---- ------- ------- Total fixed maturities........................... 12,812 121 (2) 12,931 ------- ---- ------- ------- Equity securities: Preferred stocks......................................... 100 1 (4) 97 Common stocks............................................ 4,318 108 (292) 4,134 ------- ---- ------- ------- 4,418 109 (296) 4,231 ------- ---- ------- ------- Short-term investments................................... 5,283 -- -- 5,283 Real estate.............................................. 487 -- -- 487 Mortgage loans........................................... 2,920 -- -- 2,920 Other loans.............................................. 50 -- -- 50 ------- ---- ------- ------- Total investments................................ $25,970 $230 $ (298) $25,902 ======= ==== ======= =======
At December 31, 1995 67.67% (remainder were not rated) of the Company's fixed maturities were considered investment grade by The Standard & Poors Corporation or Moody's Investor Services, Inc., and 64.97% were rated at least AA by those agencies. Securities with quality ratings Baa and above are considered investment grade securities. In addition, the Company's investments in fixed maturities did not contain any significant geographic or industry concentration of credit risk. F-11 124 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVESTMENTS (CONTINUED): The amortized cost and estimated market value of fixed maturities by contractual maturity, are shown in the table which follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty (dollars in thousands):
DECEMBER 31, ----------------------------------------------- 1994 1995 ---------------------- ---------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- Maturity: Due in one year or less................ $ 1,569 $1,573 $ 4,609 $ 4,610 Due after one year through five years................................ 4,181 4,074 4,988 5,051 Due after five years through ten years................................ 1,807 1,724 3,215 3,270 Due after ten years.................... 1,489 1,490 -- -- ------ ------ ------- ------- Total........................ $ 9,046 $8,861 $12,812 $ 12,931 ====== ====== ======= =======
Gains and losses realized on sales of investments in fixed maturities are as follows (dollars in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1993 1994 1995 ------ ------ ------ Proceeds from sales.................................. $6,630 $4,083 $7,903 Gross gains realized................................. 132 119 106 Gross losses realized................................ 91 29 291
Real estate is reported net of accumulated depreciation of approximately $131,000 and $143,000 for December 31, 1994 and 1995, respectively. Investments in a single issuer greater than 10% of shareholder's equity at December 31, 1995 are as follows (dollars in thousands):
DECEMBER 31, 1995 -------------------------------------------------------------- FIXED EQUITY MORTGAGE SHORT-TERM TOTAL DESCRIPTION MATURITIES SECURITIES LOANS INVESTMENTS INVESTMENTS - --------------------------------------------- ---------- ---------- -------- ----------- ----------- United States Treasury Notes................. $ 3,126 $ -- $ -- $ -- $ 3,126 Federal Home Loan Bank....................... 4,116 -- -- -- 4,116 Federal National Mortgage Association........ 3,018 -- -- -- 3,018 Federal Government Obligation Fd 395......... -- 1,556 -- -- 1,556 United States Treasury Bill.................. -- -- -- 2,666 2,666 Dreyfus Treasury Cash Management............. -- -- -- 1,242 1,242 Comfort Inn.................................. -- -- 2,820 -- 2,820 ------- ------ ------ ------ ------- $ 10,260 $1,556 $2,820 $ 3,908 $18,544 ======= ====== ====== ====== =======
F-12 125 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVESTMENTS (CONTINUED): An analysis of net investment income follows (dollars in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1993 1994 1995 ------ ------ ------ Fixed maturities................................. $ 745 $ 470 $ 534 Equity securities................................ 362 677 256 Cash and short-term investments.................. 78 99 194 Real estate...................................... 558 273 52 Mortgage loans................................... 2 132 231 Other............................................ 322 96 270 ------ ------ ------ Total investment income..................... 2,067 1,747 1,537 Investment expenses.............................. (578) (506) (364) ------ ------ ------ Net investment income............................ $1,489 $1,241 $1,173 ====== ====== ======
In 1992, PGIC acquired a hotel property through a deed in lieu of foreclosure on a mortgage it held in the amount of approximately $2,985,000. In 1993, the property was renovated and changed to a Comfort Inn. In June 1994, the property was sold for net proceeds of approximately $4,166,000, resulting in a gain on sale of approximately $147,000. Upon the sale, PGIC issued an 8% mortgage loan due in the year 2001 in the amount of approximately $3,000,000. It calls for monthly principal payments of approximately $10,000 plus interest. All payments on the mortgage were current at December 31, 1995. In 1995 a note with a balance outstanding of approximately $40,000 at December 31, 1994 was repaid in full. The note was guaranteed by a foreign corporation, which is 50% owned by a related party. The loan bore interest at 10% per annum and was repayable at approximately $10,000 per month plus interest. Investments with a market value of approximately $6,180,000 and $6,410,000 (amortized cost of approximately $6,245,000 and $6,296,000) as of December 31, 1994 and 1995, respectively, were on deposit in the United States and Canada. The deposits are required by law to support certain reinsurance contracts, performance bonds and outstanding loss reserves on assumed business. Fixed maturities and short-term investments with a market value of approximately $1,636,000 (amortized cost of approximately $1,619,000) as of December 31, 1995 were pledged as collateral for an undrawn letter of credit in the principal amount of approximately $1,500,000 which had been issued for the benefit of certain ceding reinsurers. 3. DEFERRED POLICY ACQUISITION COSTS: Policy acquisition costs are capitalized and amortized over the life of the policies. Policy acquisition costs are those costs directly related to the issuance of insurance policies including commissions and underwriting expenses net of reinsurance commission income on such policies. Policy acquisition costs deferred and the related amortization charged to income were as follows (dollars in thousands):
DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Balance, beginning of year.................... $ 503 $ 752 $ 1,479 Costs deferred during year.................... 9,211 5,579 8,050 Amortization during year...................... (8,962) (4,852) (7,150) ------- ------- ------- Balance, end of year.......................... $ 752 $ 1,479 $ 2,379 ======= ======= =======
F-13 126 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT: Property and equipment are summarized as follows (dollars in thousands):
DECEMBER 31, ---------------------------------------------- 1994 1995 ACCUMULATED 1995 NET COST DEPRECIATION NET ------ ------ ------------- ------ Land........................................ $ 226 $ 226 $ -- $ 226 Buildings................................... 3,180 4,006 (797) 3,209 Office furniture and equipment.............. 229 1,256 (646) 610 Automobiles................................. 2 5 (4) 1 Computer equipment.......................... 599 2,235 (779) 1,456 ------ ------ ------- ------ $4,236 $7,728 $(2,226) $5,502 ====== ====== ======= ======
Accumulated depreciation at December 31, 1994 was approximately $1,589,000. Depreciation expense related to property and equipment for the years ended December 31, 1993, 1994 and 1995 were approximately $294,000, $374,000, and $637,000, respectively. 5. OTHER ASSETS: Included in other assets in the accompanying Consolidated Balance Sheets are intangible assets composed of goodwill of approximately $150,000 at December 31, 1994. Goodwill was amortized on a straight-line basis over a two- to five-year period. Amortization of intangible assets were approximately $439,000, $178,000, and $150,000 in 1993, 1994 and 1995, respectively. 6. LINE OF CREDIT AND NOTES PAYABLE AND TERM DEBT: Line of credit and notes payable consists of the following (dollars in thousands):
DECEMBER 31, ------------------- 1994 1995 ------ ------ Term loan note, bank, due in quarterly installments of $500 commencing June 30, 1993, plus interest at prime plus 2% (10.5% at December 31, 1994), maturing June 30, 1995.................. $1,000 $ -- Revolving line of credit, not to exceed $6,000, due May 15, 1996. Interest payable monthly at prime plus 0.5% (9% and 9.5% at December 31, 1995 and 1994, respectively). See below for collateralization and restrictive covenants.................... 4,191 5,811 Promissory note, maturing July 1, 1996, at prime plus 1% (9.5% at December 31, 1994)............................................. 250 -- ------ ------ $5,441 $5,811 ====== ======
At December 31, 1995, IGF maintained a revolving bank line of credit in the amount of $6,000,000. At December 31, 1995, the outstanding balance was approximately $5,811,000. Interest on this line of credit was at the bank's prime rate (8.5% at December 31, 1995) plus 0.5% adjusted daily. This line is collateralized by the crop-related uncollected premiums, reinsurance recoverable on paid losses, Federal Crop Insurance Corporation ("FCIC') annual settlement and FCIC premium tax recoverable, and a first lien on the real estate owned by IGF. The line requires IGF to maintain its primary banking relationship with the issuing bank, limits dividend payments and capital purchases and requires the maintenance of certain financial ratios. At December 31, 1995, IGF was in compliance with or had obtained waivers for all covenants associated with the line. F-14 127 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. LINE OF CREDIT AND NOTES PAYABLE AND TERM DEBT (CONTINUED): In May 1996, IGF renewed its line of credit with the same bank expiring in June 1997. The new facility is in the amount of $7,000,000 and bears an interest rate of .25% above the New York prime rate. The weighted average interest rate on the line of credit was 6.0%, 8.1%, and 9.7% during December 31, 1993, 1994 and 1995, respectively. Included in line of credit and notes payable is a note maintained by IGFH which matures on January 1, 2001, with principal repayable in 16 quarterly installments of $468,750 commencing April 1, 1997. In the event the Company successfully completes an initial public offering, the IGFH Bank Debt will become immediately due and payable. Interest will accrue at a variable rate per annum equal to the prime rate through October 1996 and prime plus one percent thereafter. The IGFH Bank Debt is collateralized by a first priority security interest in all of the outstanding shares of IGF and the guarantee of Symons International Group, Ltd. ("SIGL"), the controlling shareholder of Goran, collateralized by 966,600 shares of Goran common stock. Additionally, certain financial covenants in favor of the lender of the IGFH Bank Debt require IGFH to maintain increasing levels of income, retained earnings, and statutory capital over the term of the IGFH Bank Debt. The Term Debt, with an outstanding principal balance of $48 million, matures on April 30, 2002 and will be repaid in 11 consecutive semi-annual installments, the first of which will occur on the first anniversary of the closing date. The first installments of principal repayments will be $3,128,000 and $2,886,500, respectively, with the remaining annual installments over the term of the debt to be paid as follows: 1997 -- $6,014,500; 1998 -- $6,494,500; 1999 -- $7,938,000; 2000 -- $9,742,000; 2001 -- $11,611,500; and 2002 -- $6,199,500. Interest on the Term Debt shall be payable either at the "Base Rate" option or LIBOR option, plus in each case the applicable margin. The Base Rate is defined as the higher of (i) the federal funds rate plus 1/2 of 1% or (ii) the prime commercial lending rate of the lending bank. The applicable margin for Base Rate loans is 1.50% and for LIBOR loans is 2.75%. In May, 1996, the Company entered into an interest rate swap agreement to protect the Company against interest rate volatility. As a result, the Company fixed its interest rate on the Term Debt at 8.31% through November, 1996 and 9.07% from November, 1996 through July, 1997. The Term Debt is collateralized by a pledge of all of the tangible and intangible assets of GGSH, including all of the outstanding shares of GGS, and by a pledge of all of the tangible and intangible assets of GGS, including all of the outstanding shares of capital stock of Pafco and Superior. F-15 128 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES: Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows (dollars in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Balance at January 1.......................... $30,924 $54,143 $29,269 Less reinsurance recoverables................. 11,643 36,891 12,542 ------- ------- ------- Net balance at January 1................. 19,281 17,252 16,727 ------- ------- ------- Incurred related to: Current year............................. 23,931 26,268 35,184 Prior years.............................. 1,149 202 787 ------- ------- ------- Total incurred...................... 25,080 26,470 35,971 ------- ------- ------- Paid related to: Current year............................. 14,877 16,647 21,057 Prior years.............................. 12,232 10,348 10,018 ------- ------- ------- Total paid.......................... 27,109 26,995 31,075 ------- ------- ------- Net balance at December 31.......... 17,252 16,727 21,623 Plus reinsurance recoverables................. 36,891 12,542 37,798 ------- ------- ------- Balance at December 31........................ $54,143 $29,269 $59,421 ======= ======= =======
The foregoing reconciliation shows that deficiencies of approximately $1,149,000, $202,000, and $787,000 in the December 31, 1992, 1993, and 1994 liability for losses and loss adjustment expenses, respectively, emerged in the following year. These deficiencies resulted from higher than anticipated losses resulting from a change in settlement costs relating to those estimates. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. Liabilities for loss and loss adjustment expenses have been established when sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, a liability has been established to cover additional exposure on both known and unasserted claims. These liabilities are reviewed and updated continually. 8. INCOME TAXES: The Company files a consolidated federal income tax return with its subsidiaries. An intercompany tax sharing agreement between the Company and its subsidiaries provides that income taxes will be allocated based upon separate return calculations in accordance with the Internal Revenue Code of 1986, as amended. Intercompany tax payments are remitted at such times as estimated taxes would be required to be made to the Internal Revenue Service. F-16 129 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED): A reconciliation of the differences between federal tax computed by applying the federal statutory rate of 34% to income before income taxes and the income tax provision is as follows (dollars in thousands):
YEARS ENDED DECEMBER 31, ---------------------------- 1993 1994 1995 ----- ------- ------ Computed income taxes at statutory rate......... $(444) $ 468 $2,531 Dividends received deduction.................... (25) (30) (54) Tax-exempt interest............................. (37) (36) (32) Change in valuation allowance................... 696 (1,492) (237) Other........................................... (107) 372 411 ----- ------- ------ Income taxes.......................... $ 83 $ (718) $2,619 ===== ======= ======
State income taxes for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 are not significant. Therefore, state income taxes have been recorded in general and administrative expenses and not as part of income taxes. As described in Note 1, the Company adopted SFAS No. 109 effective in 1993. The effect on years prior to 1993 of changing to this method was approximately $1,175,000 and is reflected in the Consolidated Statement of Operations as the cumulative effect of a change in accounting principle. The current or deferred tax consequences of a transaction are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable currently or in future years. The method of accounting for income taxes prior to SFAS No. 109 provided that deferred taxes, once recorded, were not adjusted for changes in tax rates. The net deferred tax asset is comprised of the following (dollars in thousands):
DECEMBER 31, ----------------- 1994 1995 ------ ------ Deferred tax assets: Unpaid losses and loss adjustment expenses............... $ 750 $ 422 Unearned premiums........................................ 505 764 Allowance for doubtful accounts.......................... 411 315 Unrealized losses on investments......................... 260 23 Net operating loss carryforwards......................... 595 457 Other.................................................... 374 411 ------ ------ 2,895 2,392 Valuation allowance........................................ 260 23 ------ ------ Net deferred tax asset........................... 2,635 2,369 ------ ------ Deferred tax liabilities: Deferred policy acquisition costs........................ (503) (809) Other.................................................... (130) (139) ------ ------ (633) (948) ------ ------ Net deferred tax asset........................... $2,002 $1,421 ====== ======
The Company is required to establish a "valuation allowance" for any portion of its deferred tax assets which is unlikely to be realized. At December 31, 1994 and 1995, approximately $260,000 and $23,000 respectively, of deferred tax assets relating to net unrealized capital losses on fixed maturity and equity securities available for sale were available to be recorded in shareholder's equity before considering a valuation F-17 130 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED): allowance. For federal income tax purposes, capital losses may be used only to offset capital gains in the current year or during a three-year carryback and five-year carryforward period. Due to these restrictions, and the uncertainty at that time of future capital gains, these deferred tax assets were fully offset in 1994 and 1995 by a valuation allowance of approximately $260,000 and $23,000, respectively. No additional valuation allowance was established as of December 31, 1994 or 1995 on the remaining deferred tax assets, since management believes it is more likely than not that the Company will realize the benefit of its deferred tax assets. During 1994, as a result of the Company's improved operations, the valuation allowance related to the net operating loss carryforwards was reduced. Management considers primarily the scheduled reversal of deferred tax liabilities and carryback provisions in making this assessment. As of December 31, 1995, the Company has unused net operating loss carryovers available as follows (dollars in thousands):
EXPIRATION DATE AMOUNT ------------------------------------------------------------ ------ 2000................................................... $1,217 2002................................................... 126 ------ Total............................................. $1,343 ======
Federal income tax attributed to the Company has been examined through 1993. In the opinion of management, the Company has adequately provided for the possible effects of future assessments related to prior years. 9. REINSURANCE: The Company limits the maximum net loss that can arise from a large risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain levels of risks with other insurers or reinsurers, either on an automatic basis under general reinsurance contracts known as "treaties," or by negotiation on substantial individual risks. Such reinsurance includes quota share, excess of loss, stop-loss and other forms of reinsurance on essentially all property and casualty lines of insurance. In addition, the Company assumes reinsurance on certain risks. The Company remains contingently liable with respect to reinsurance, which would become an ultimate liability of the Company in the event that such reinsuring companies might be unable, at some later date, to meet their obligations under the reinsurance agreements. Approximately 77% of amounts recoverable from reinsurers as of December 31, 1995 are with the FCIC, a branch of the federal government. Another 12% of uncollateralized recoverable amounts as of such date are with a company which maintains an A.M. Best rating of A+. Company management believes amounts recoverable from reinsurers are collectible. Amounts recoverable from reinsurers relating to unpaid losses and loss adjustment expenses were approximately $36,891,000, $12,542,000, and $37,798,000, as of December 31, 1993, 1994 and 1995, respectively. These amounts are also included in the related reserves for unpaid losses and loss adjustment expenses in the accompanying Consolidated Balance Sheets. F-18 131 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. REINSURANCE (CONTINUED): Reinsurance activity for 1993, 1994 and 1995, which includes reinsurance with related parties, is summarized as follows (dollars in thousands):
1993 DIRECT ASSUMED CEDED NET -------- ------- -------- ------- Premiums written................................ $ 88,847 $ 89 $(57,176) $31,760 Premiums earned................................. 88,506 84 (57,162) 31,428 Incurred losses and loss adjustment expenses.... 106,871 4,728 (86,519) 25,080 Commission expenses (income).................... 15,787 149 (17,195) (1,259) 1994 Premiums written................................ $102,178 $ 956 $(67,995) $35,139 Premiums earned................................. 96,053 1,308 (65,235) 32,126 Incurred losses and loss adjustment expenses.... 57,951 1,588 (33,069) 26,470 Commission expenses (income).................... 19,619 48 (24,174) (4,507) 1995 Premiums written................................ $123,381 $1,253 $(71,187) $53,447 Premiums earned................................. 116,860 1,256 (68,475) 49,641 Incurred losses and loss adjustment expenses.... 125,382 2,839 (92,250) 35,971 Commission expenses (income).................... 17,177 174 (27,092) (9,741)
10. RELATED-PARTY TRANSACTIONS: The Company and its subsidiaries have entered into transactions with various related parties including transactions with Goran, and its affiliates, Symons International Group, Ltd. ("SIG Ltd."), Goran's parent, Granite Insurance Company ("Granite"), and Granite Reinsurance Company, Ltd. ("Granite Re"), Goran's subsidiaries. The following balances were outstanding (dollars in thousands):
DECEMBER 31, ----------------- 1994 1995 ------ ------ Investments in and advances to related parties: Nonredeemable, nonvoting preferred stock of Granite...... $ 702 $ 702 Secured notes receivable from related parties............ 1,395 1,355 Unsecured mortgage loan from director and officer........ 278 278 Due from directors and officers.......................... 212 199 Other receivables from related parties................... 361 418 ------ ------ $2,948 $2,952 ====== ====== Payable to affiliates: Loan and related interest payable to Goran............... $2,024 $2,232 Loan and related interest payable to Granite Re.......... 3,218 3,733 Other payables to Goran.................................. 146 500 Other payables to related parties........................ 2 9 ------ ------ $5,390 $6,474 ====== ======
F-19 132 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. RELATED-PARTY TRANSACTIONS (CONTINUED): The following transactions occurred with related parties (dollars in thousands):
YEARS ENDED DECEMBER 31, ---------------------- 1993 1994 1995 ---- ---- ---- Management fees charged by Goran...................... $300 $494 $414 Reinsurance under various treaties, net: Ceded premiums earned............................... (23) (73) 5,235 Ceded losses and loss adjustment expenses incurred......................................... 44 -- 2,612 Ceded commissions................................... -- -- 1,142 Consulting fees charged by various related parties.... 50 75 26 Interest charged by Goran............................. 188 188 208 Dividend income from Granite Re....................... 70 18 -- Interest charged by Granite Re........................ 283 312 346
Included in Secured notes receivable from related parties is a note for approximately $1,700,000 to a third-party corporation ("TPC") carrying a principal balance with capitalized interest of approximately $1,355,000 at December 31, 1995 and 1994. The loan is collateralized by a guarantee and a collateral mortgage from a corporation, one-third of which is owned by an individual who is related to the majority shareholder of SIG Ltd. The TPC loaned the approximately $1,700,000 to SIG Ltd. The renewed promissory note is payable on demand and bears interest at 7.8% per annum. The guarantee is collateralized by 200,000 common shares of Goran common stock. Also included in Secured notes receivable from related parties is a loan receivable held by PGIC in the amount of approximately $40,000 as of December 31, 1994. The unsecured mortgage loan to the Chairman of the Company was amended in 1995 to extend the payment terms. The loan is due and payable on May 8, 1999 and bears interest at 7% per annum. Interest payments on the loan are due monthly. Amounts due from directors and officers of the Company bear interest at 6.11% per annum, payable semiannually. Subsequent to year end, the rate was changed to the 180-day treasury bill rate. Loan principal is payable on demand. The loan payable, including accrued interest, to Goran of approximately $2,024,000 and $2,232,000, at December 31, 1994 and 1995, respectively, bears interest at 10% per annum. The loan plus accrued interest is payable on demand. The balance at December 31, 1994 and 1995 includes accrued interest of approximately $188,000 and $396,000, respectively. During 1992, Granite Re loaned the Company approximately $2,500,000. An additional approximately $200,000 was loaned by Granite Re in 1995. The loan bears interest at 10% per annum and is due on demand. The balance at December 31, 1994 and 1995 includes accrued interest of approximately $718,000 and $1,064,000, respectively. 11. EFFECTS OF STATUTORY ACCOUNTING PRACTICES AND DIVIDEND RESTRICTIONS: At December 31, 1994 and 1995, PGIC's statutory capital and surplus was approximately $7,848,000 and $11,875,000, respectively, and IGF's statutory capital and surplus was approximately $4,512,000 and $9,219,000, respectively. The minimum regulatory requirement for capital and surplus is approximately $1,250,000. The Indiana statute allows 10% of surplus as regards policyholders or 100% of net income, whichever is greater, to be paid as dividends only from earned surplus. Statutory requirements place F-20 133 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EFFECTS OF STATUTORY ACCOUNTING PRACTICES AND DIVIDEND RESTRICTIONS (CONTINUED): limitations on the amount of funds which can be remitted to the Company from PGIC and to PGIC from IGF. Subsequent to Board of Directors and regulatory approval, IGF declared and paid in December 1995 an extraordinary dividend to PGIC in the amount of $2 million on the 2,494,000 shares of convertible preferred stock owned by PGIC. In December 1995, upon Board of Directors of PGIC and regulatory approval, PGIC declared and paid to the Company a $1.5 million extraordinary dividend on the common stock owned by the Company. 12. REGULATORY MATTERS: PGIC and IGF, domiciled in Indiana, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Indiana Department of Insurance ("IDOI"). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. IGF received written approval through June 30, 1996 from the IDOI to reflect its business transacted with the FCIC as a 100% cession with any net underwriting results recognized in ceding commissions for statutory accounting purposes, which differs from prescribed statutory accounting practices. As of December 31, 1995, that permitted transaction had no effect on statutory surplus or net income. The underwriting profit (loss) results of the FCIC business, net of reinsurance, of approximately $(1,515,000), $3,257,000, and $9,653,000, are netted with policy acquisition and general and administrative expenses for the years ended December 31, 1993, 1994, and 1995, respectively, in the accompanying Consolidated Statements of Operations. During the year, IGF and PGIC entered into a reinsurance agreement in which IGF ceded approximately $17,696,000 of multi-peril crop business to PGIC, who in turn ceded it to the FCIC. As a matter of course, intercompany reinsurance agreements are filed with the IDOI for their approval. IDOI approval has not yet been received with respect to this agreement; however, management believes it will be received in due course. The NAIC has promulgated risk-based capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks, such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. The RBC information is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized control level RBC requires no corrective actions by PGIC, IGF or regulators. PGIC's Ratio at December 31, 1995 was below the "company action level," as defined by the NAIC RBC model law. At this level, PGIC must submit a corrective action plan. After the spin-off of IGF (see Note 18), PGIC's Ratio will be well above the minimum "company action level" of 200%. As of December 31, 1995, IGF had a Ratio that was in excess of the minimum RBC requirements. 13. LEASES: The Company has certain commitments under long-term operating leases, principally for equipment. Rental expense under these commitments were approximately $186,000, $248,000, and $297,000 for 1993, F-21 134 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. LEASES (CONTINUED): 1994 and 1995, respectively. Future minimum lease payments required under these noncancelable operating leases are as follows (dollars in thousands): 1996.................................................. $181 1997.................................................. 89 1998.................................................. 26 1999.................................................. 8 2000.................................................. 8 ---- Total............................................ $312 ====
14. CONTINGENCIES: The Company, and its subsidiaries, are named as defendants in various lawsuits relating to their business. Legal actions arise from claims made under insurance policies issued by the subsidiaries. These actions were considered by the Company in establishing its loss reserves. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. IGF is responsible for the administration of a run-off book of business. FCIC has requested that IGF take responsibility for the claim liabilities under its administration of these policies, and IGF has requested reimbursement of certain expenses from the FCIC with respect to this run-off activity. It is the Company's opinion, and that of its legal counsel, that there is no material liability on the part of the Company for claim liabilities of other companies under IGF's administration. The increase in number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in increased assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. The Company recognizes its obligations for guaranty fund assessments when it receives notice that an amount is payable to a guaranty fund. The ultimate amount of these assessments may differ from that which has already been assessed. 15. SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest and income taxes are summarized as follows (dollars in thousands):
DECEMBER 31, -------------------------- 1993 1994 1995 ------ ---- ------ Cash paid for interest............................. $1,217 $685 $ 553 Cash paid for income taxes, net of refunds......... 372 166 1,953
During 1994, IGF exchanged 700,000 shares of Granite Reinsurance Company, Ltd. stock for 9,800 shares of Granite Insurance Company stock, recording no gain or loss. In addition, PGIC exchanged an investment in real estate for a mortgage loan of approximately $3,000,000 plus cash of approximately $1,166,000. During 1996, the Company sold the stock of Pafco and certain assets of the Company totaling $15,907,000 to GGSH in exchange for a 52% ownership interest in GGSH. In addition GGSH received a cash contribution of $21,200,000 from Goldman, Sachs & Co. ("Goldman Funds") in return for a 48% ownership interest in GGSH. For its cash contribution of $21,200,000, Goldman Funds received a minority interest share in GGSH at the date of contribution of $17,811,000 resulting in a $3,389,000 increase to additional paid in capital from the sale of Pafco common stock and certain assets. See Note 18. F-22 135 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: The following discussion outlines the methodologies and assumptions used to determine the estimated fair value of the Company's financial instruments. Considerable judgment is required to develop these fair values and, accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of the Company's financial instruments. a. Fixed Maturity and Equity Securities: Fair values for fixed maturity and equity securities are based on market values obtained from the NAIC Securities Valuation Office. Such values approximate quoted market prices from published information. b. Mortgage Loan: The estimated fair value of the mortgage loan on real estate on the Comfort Inn property was established using a discounted cash flow method based on credit rating, maturity and future income when compared to the expected yield for mortgages having similar characteristics. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service coverage, loan to value, caliber of tenancy, borrower and payment record. Fair values for impaired mortgage loans are measured based either on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's market price or the fair value of the collateral if the loan is collateral dependent. c. Short-term Investments, and Cash and Cash Equivalents: The carrying value for assets classified as short-term investments, and cash and cash equivalents in the accompanying balance sheets approximates their fair value. d. Short-term and Long-term Debt: Fair values for long-term debt issues are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. In 1994, the rates on long-term debt ranged from 9% to 9.5%, which approximates the current rate for similar types of borrowing arrangements. For short-term debt, the carrying value approximates fair value. e. Advances to Related Parties and Payables to Affiliates: It is not practicable to determine the fair value of the advances to related parties or the payables to affiliates as of December 31, 1995, because these are related party obligations and no comparable fair value measurement is available. 17. SEGMENT INFORMATION: The Company has two business segments: Nonstandard automobile and Crop insurance. The Nonstandard automobile segment offers personal nonstandard automobile coverages through a network of independent general agencies. These products are sold throughout the Midwest by PGIC in eight states and IGF in two states. Effective in the first quarter of 1996, all nonstandard automobile business will be retained in PGIC (see Note 18). The Crop segment writes Multi-peril crop insurance ("MPCI") and crop hail insurance in 31 states through independent agencies with its primary concentration in the Midwest. Activity which is not included in the major business segments is shown as "Corporate and Other." "Corporate and Other" includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt and unallocated overhead expenses). F-23 136 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED): The revenue and pre-tax income by segment are as follows (dollars in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Revenue: Nonstandard automobile...................................... $28,733 $27,784 $36,363 Crop........................................................ 4,742 4,873 12,830 Corporate and other......................................... 209 2,173 3,451 ------- ------- ------- Total revenue....................................... $33,684 $34,830 $52,644 ======= ======= ======= Income (loss) before income taxes, discontinued operations, cumulative effect of a change in accounting principle, and minority interest: Nonstandard automobile...................................... $ 5,726 $ 772 $(1,989) Crop........................................................ (3,735) 2,152 11,040 Corporate and other......................................... (3,297) (1,549) (1,607) ------- ------- ------- Income (loss) from continuing operations before taxes, discontinued operations, cumulative effect of a change in accounting principle, and minority interest.............. $(1,306) $ 1,375 $ 7,444 ======= ======= =======
18. SUBSEQUENT EVENTS (UNAUDITED): On May 1, 1996, the Company entered into an agreement ("Agreement") with GS Capital Partners II, L.P. to create a company, GGSH to be owned 52% by the Company and 48% owned by Goldman Funds. In accordance with the Agreement, the Company sold certain fixed assets and PGIC common stock with a predetermined value of at least $15,300,000, to GGSH. If the sale of PGIC stock and certain assets by the Company is less than $15,300,000, Goran will be required to contribute the amount of the deficiency in cash to GGSH. Goldman Funds contributed approximately $21,200,000 in cash in accordance with the Agreement, for which it received a minority interest in GGSH of $17,811,000, resulting in a $3,389,000 increase to additional paid in capital of the Company from the sale of Pafco's common stock and certain assets. In connection with the above transactions, GGSH acquired all of the outstanding shares of common stock of Superior and its wholly owned subsidiaries, Superior American and Superior Guaranty, insurance companies domiciled in Florida, (collectively referred to as "Superior") for cash of approximately $66,389,000. In conjunction with the acquisition, the Company's funding was through a senior bank facility of approximately $48,000,000 and a cash contribution from Goldman Funds of approximately $21,200,000. PGIC also transferred all of the outstanding shares of IGF capital stock to the Company's newly formed subsidiary, IGFH. Although the Company believes the plan of reorganization or spin off did not result in gain or loss, no assurance can be given that the Internal Revenue Service will not challenge the transaction. The contribution of PGIC common stock to GGSH has been accounted for in a manner similar to a pooling-of-interests. Accordingly, no gain or loss has been recognized in connection with this transaction. The purchase of Superior has been accounted for in accordance with the purchase method of accounting. In April 1996, the IGF Board of Directors declared an $11,000,000 distribution to Pafco in the form of cash of $7,500,000 and a note payable of $3,500,000. Effective January 1, 1996, the Company transferred SIG-FL to Goran at its net book value. At December 31, 1995, the net book value of SIG-FL was approximately $2,000. The Company received approximately $2,000 consideration. Accordingly, no gain or loss was recognized in 1996 on the transaction. F-24 137 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED): In July 1996, the Company filed an initial draft of Form S-1 Registration Statement with the Securities and Exchange commission in anticipation of an initial public offering ("IPO") of common stock. The Company intends to sell up to 3,000,000 shares of newly issued common stock to the general public. A maximum of 30% (not assuming any of the underwriters' overallotment is exercised) of the total outstanding common shares will be sold. After completion of the IPO, it is expected that Goran will own 70% of the total common stock outstanding. It is uncertain at this time what the total net sale proceeds to the Company will be from the IPO. The acquisition of Superior was accounted for under the purchase method of accounting and was recorded as follows: Assets Acquired: Invested Assets............................................. $118,665,000 Receivables................................................. 35,223,000 Deferred Acquisition Costs.................................. 7,925,000 Other Assets................................................ 1,981,000 ------------ Total....................................................... 163,794,000 ------------ Liabilities Assumed: Unpaid Losses and Loss Adjustment Expenses.................. 44,423,000 Unearned Premiums........................................... 45,280,000 Other Liabilities........................................... 10,863,000 ------------ Total....................................................... 100,566,000 ------------ Net Assets Acquired........................................... 63,228,000 Purchase Price................................................ 66,389,000 ------------ Goodwill...................................................... $ 3,161,000 ============
Goodwill is amortized over a 25 year period on a straight line basis based upon management's estimate of the expected benefit period. The Company's results from operations for the six months ended June 30, 1996 include the results of Superior subsequent to April 30, 1996 as follows: Gross Premiums Written.......................................... $25,202,000 =========== Net Premiums Earned............................................. $23,429,000 Net Investment and Other Income................................. 2,060,000 ----------- Total Revenue................................................... 25,489,000 ----------- Losses and Loss Adjustment Expenses............................. 18,804,000 Policy Acquisition and General and Administration Expenses...... 6,149,000 ----------- Total Expenses.................................................. 24,953,000 ----------- Income Before Taxes and Minority Interest....................... 536,000 Income Taxes.................................................... 182,000 ----------- Income before Minority Interest................................. 354,000 Minority Interest............................................... 169,000 ----------- Net Income...................................................... $ 185,000 ===========
F-25 138 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED): Amortization includes goodwill, as previously discussed, and deferred debt and organizational costs of approximately $1,900,000 which are being amortized over 5 to 6 years on the straight line basis. The impact on net income of the aforementioned items was a reduction of $265,000. Pro-forma operating results for the Company, assuming the acquisition of Superior and formation of GGS Management Holdings, Inc. took place at the beginning of each of the periods presented, follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1996 DECEMBER 31, 1995 ---------------- ----------------- Gross Premium Revenue....................... $190,943,000 $ 219,390,000 Net Premiums Earned......................... $ 98,453,000 $ 147,255,000 Net Income.................................. $ 5,636,000 $ 4,371,000 Earnings Per Share.......................... $ 0.81 $ 0.62
On July 29, 1996, the Board of Directors approved an increase in the authorized common stock of the Company from 1,000 shares to 100,000,000 shares. The common stock remains at no par value. On July 29, 1996, the Board approved a 7,000-for-1 stock split of the Company's issued and outstanding shares. All share and per share amounts have been restated to retroactively reflect the stock split. On July 29, 1996, the Board of Directors authorized the issuance of 50,000,000 shares of Preferred Stock. No shares of Preferred Stock have been issued. On April 29, 1996, PGIC and IGF entered into a 100% quota share reinsurance agreement, whereby all of IGF's nonstandard automobile business from 1996 and forward will be ceded to PGIC effective January 1, 1996. On April 29, 1996, PGIC retroactively ceded all of its commercial business relating to 1995 and previous years to Granite Re, with an effective date of January 1, 1996. Amounts ceded for outstanding losses and loss adjustment expenses and unearned premiums were approximately $3,519,000 and $2,380,000, respectively. On this date, PGIC also entered into a 100% quota share reinsurance agreement with Granite Re, whereby all of PGIC's commercial business from 1996 and forward will be ceded to Granite Re effective January 1, 1996. For purposes of disclosing the pro forma effect of the Company's ownership interest in GGSH, the Company has reflected GGSH as a consolidated entity of the Company. Assuming that these transactions took place (including the IPO) at January 1, 1995 or at January 1, 1996, the pro forma effect of these transactions on the Company's consolidated statement of operations is as follows:
DECEMBER 31, JUNE 30, 1995 1996 ------------ ------------ (UNAUDITED) Revenues........................................ $159,899,000 $108,974,000 Net income...................................... $ 6,701,000 $ 5,928,000 Net income per common share..................... $ .66 $ .58
The pro forma results are not necessarily indicative of what actually would have occurred if these transactions had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results. F-26 139 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholders of Superior Insurance Company, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Superior Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Superior Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities in 1993. As discussed in Notes 1 and 6 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, during the year ended December 31, 1993. COOPERS & LYBRAND L.L.P. Atlanta, Georgia June 14, 1996 F-27 140 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996 ASSETS
DECEMBER 31, --------------------- 1994 1995 -------- -------- JUNE 30, 1996 ----------- (IN THOUSANDS) (UNAUDITED) Assets: Investments: Available for sale: Fixed maturities, at market.......................... $ 93,860 $ 99,556 $ 102,777 Equity securities, at market......................... 7,140 8,070 13,987 Short-term investments, at amortized cost, which approximates market.......................... 5,538 8,462 3,739 Other investment, at cost............................ 808 274 -- Cash and cash equivalents............................... 11 1,430 4,331 Receivables (net of allowance for doubtful accounts of $310,000 and $500,000 at December 31, 1994 and 1995, respectively, and $500,000 (unaudited) at June 30, 1996)........... 31,425 30,209 32,894 Reinsurance recoverable on unpaid losses................ 1,099 987 1,478 Federal income tax receivable........................... 3,521 -- -- Accrued investment income............................... 1,888 1,602 1,586 Deferred policy acquisition costs....................... 9,004 7,574 8,038 Deferred income taxes................................... 3,785 44 1,511 Property and equipment.................................. 357 697 657 Other assets............................................ 3,428 1,225 1,160 -------- -------- -------- Total assets.................................... $161,864 $160,130 $ 172,158 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Losses and loss adjustment expenses..................... $ 54,577 $ 47,112 $ 47,155 Unearned premiums....................................... 44,593 41,048 47,016 Draft payables.......................................... 6,509 6,070 7,998 Accrued expenses........................................ 4,307 4,107 4,088 Federal income tax payable.............................. -- 177 1,284 -------- -------- -------- Total liabilities............................... 109,986 98,514 107,541 -------- -------- -------- Stockholders' equity: Common stock, $100 par value, 30,000 shares authorized, issued and outstanding............................... 3,000 3,000 3,000 Additional paid-in capital.............................. 37,025 37,025 37,025 Unrealized (loss) gain on investments, net of deferred tax (benefit) expense of $(412,000) in 1994, $2,605,000 in 1995 and $973,000 (unaudited) at June 30, 1996............ (765) 4,838 1,808 Retained earnings....................................... 12,618 16,753 22,784 -------- -------- -------- Total stockholders' equity........................... 51,878 61,616 64,617 -------- -------- -------- Total liabilities and stockholders' equity........... $161,864 $160,130 $ 172,158 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-28 141 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- (UNAUDITED) (IN THOUSANDS) Gross premiums written................ $115,660 $112,906 $ 94,756 $42,915 $69,119 Less ceded premiums................... (366) (391) (686) (400) (412) -------- -------- -------- ------- ------- Net premiums written................ 115,294 112,515 94,070 42,515 68,707 Change in unearned premiums........... 2,842 322 3,544 7,538 (5,968) -------- -------- -------- ------- ------- Net premiums earned................. 118,136 112,837 97,614 50,053 62,739 Net investment income................. 8,170 7,024 7,093 4,161 3,476 Other income.......................... 5,879 3,344 4,171 1,692 3,092 Net realized capital gain (loss)...... 3,559 (200) 1,954 711 2,104 -------- -------- -------- ------- ------- Total revenues.............. 135,744 123,005 110,832 56,617 71,411 -------- -------- -------- ------- ------- Expenses: Losses and loss adjustment expenses... 85,902 92,378 72,343 38,129 45,963 Policy acquisition and general and administrative expenses............. 36,292 38,902 32,705 17,212 17,104 -------- -------- -------- ------- ------- Total expenses.............. 122,194 131,280 105,048 55,341 63,067 -------- -------- -------- ------- ------- Income (loss) before income taxes and cumulative effect of change in accounting principle................ 13,550 (8,275) 5,784 1,276 8,344 -------- -------- -------- ------- ------- Income taxes: Current income tax expense (benefit)........................... 3,207 (2,770) 925 (539) 2,153 Deferred income tax expense (benefit)........................... 774 (1,030) 724 700 160 -------- -------- -------- ------- ------- Total income taxes.......... 3,981 (3,800) 1,649 161 2,313 -------- -------- -------- ------- ------- Income (loss) before cumulative effect of a change in accounting principle........................ 9,569 (4,475) 4,135 1,115 6,031 Cumulative effect of a change in accounting principle............. 1,389 -- -- -- -- -------- -------- -------- ------- ------- Net income (loss)................... $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031 ======== ======== ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-29 142 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
UNREALIZED ADDITIONAL GAIN (LOSS) TOTAL COMMON PAID-IN ON RETAINED STOCKHOLDERS' STOCK CAPITAL INVESTMENT EARNINGS EQUITY ------ ---------- ----------- -------- ------------ (IN THOUSANDS) Balance at January 1, 1993................. $1,500 $ 37,025 $ 655 $ 29,635 $ 68,815 Change in unrealized (loss) gain on investments, net of deferred taxes.... -- -- 3,983 -- 3,983 Cash dividends paid...................... -- -- -- (10,000) (10,000) Common stock dividends paid.............. 1,500 -- -- (1,500) -- Net income............................... -- -- -- 10,958 10,958 ------ ------- ------ -------- -------- Balance at December 31, 1993............... 3,000 37,025 4,638 29,093 73,756 Change in unrealized (loss) gain on investments, net of deferred taxes.... -- -- (5,403) -- (5,403) Cash dividends paid...................... -- -- -- (12,000) (12,000) Net loss................................. -- -- -- (4,475) (4,475) ------ ------- ------ -------- -------- Balance at December 31, 1994............... 3,000 37,025 (765) 12,618 51,878 Change in unrealized (loss) gain on investments, net of deferred taxes (unaudited)........................... -- -- 4,211 -- 4,211 Net income (unaudited)................... -- -- -- 1,115 1,115 ------ ------- ------ -------- -------- Balance at June 30, 1995 (unaudited)....... $3,000 $ 37,025 $ 3,446 $ 13,733 $ 57,204 ====== ======= ====== ======== ======== Balance at December 31, 1994............... 3,000 $ 37,025 $ (765) $ 12,618 $ 51,878 Change in unrealized (loss) gain on investments, net of deferred taxes.... -- -- 5,603 -- 5,603 Net income (unaudited)................... -- -- -- 4,135 4,135 ------ ------- ------ -------- -------- Balance at December 31, 1995............... 3,000 37,025 4,838 16,753 61,616 Change in unrealized (loss) gain on investments, net of deferred taxes.... -- -- (3,030) -- (3,030) Net income (unaudited)................... -- -- -- 6,031 6,031 ------ ------- ------ -------- -------- Balance at June 30, 1996 (unaudited)....... $3,000 $ 37,025 $ 1,808 $ 22,784 $ 64,617 ====== ======= ====== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-30 143 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- --------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net income (loss)........................ $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031 Adjustments to reconcile net income to net cash provided from (used in) operations: Net amortization on fixed maturities.......................... 909 499 205 108 124 Depreciation of property and equipment........................... 128 185 214 81 97 Deferred income tax expense (benefit)........................... (615) (1,030) 724 700 160 Net (gain) loss on sale of fixed assets and investments.............. (3,546) 210 (1,940) (711) (2,104) Net changes in operating assets and liabilities: Receivables........................... (4,052) (1,303) 1,216 6,839 (2,685) Reinsurance recoverable on unpaid losses.............................. (12) -- 49 4 -- Accrued investment income............. 504 524 286 177 16 Federal income taxes receivable (payable)........................... (23) (4,075) 3,698 (558) 1,107 Deferred policy acquisition costs..... 248 (78) 1,430 1,684 (464) Other assets.......................... 89 (2,382) 2,203 2,210 65 Losses and loss adjustment expenses... (4,260) 985 (7,402) (4,966) 43 Unearned premiums..................... (2,842) (322) (3,545) (7,538) 5,968 Drafts payable........................ (2,091) (1,897) (439) (562) 1,928 Accrued expenses...................... -- 4,307 (200) (835) (19) -------- --------- -------- -------- -------- Net cash provided from (used in) operations..................... (4,605) (8,852) 634 (2,252) 10,267 -------- --------- -------- -------- -------- Cash flow from investing activities: Net (purchases) sales of short-term investments........................... 5,322 1,845 (2,924) (2,242) 4,723 Proceeds from sales, calls and maturities of fixed maturities................... 91,866 77,224 58,725 36,513 49,057 Purchases of fixed maturities............ (76,991) (64,678) (56,222) (32,461) (55,323) Proceeds from sales of equity securities............................ 91,397 136,121 87,319 43,210 80,205 Purchase of equity securities............ (92,605) (133,482) (86,663) (43,022) (86,233) Proceeds from the sale of other investments........................... -- -- 1,105 382 274 Proceeds from sales of property and equipment............................. 30 33 -- -- -- Purchases of property and equipment...... (388) (198) (555) (139) (69) -------- --------- -------- -------- -------- Net cash provided from (used in) investing activities........... 18,631 16,865 785 2,241 (7,366) -------- --------- -------- -------- -------- Cash flow from financing activities: Payment of dividends..................... (10,000) (12,000) -- -- -- -------- --------- -------- -------- -------- Net cash (used in) financing activities..................... (10,000) (12,000) -- -- -- Increase (decrease) in cash and cash equivalents........................... 4,026 (3,987) 1,419 (11) 2,901 Cash and cash equivalents, beginning of year..................................... (28) 3,998 11 11 1,430 -------- --------- -------- -------- -------- Cash and cash equivalents, end of year..... $ 3,998 $ 11 $ 1,430 $ -- $ 4,331 ======== ========= ======== ======== ======== Supplemental cash flow information: Cash paid for income taxes, net of refunds............................... $ 3,230 $ 1,305 $ (2,773) $ 19 $ 1,046 ======== ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-31 144 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: Superior Insurance Company, Inc. ("Superior" or the "Company") was a wholly-owned subsidiary of Interfinancial Inc. (the "Parent"). Interfinancial Inc. is a wholly-owned subsidiary of Fortis, Inc. Fortis, Inc. is equally owned by Fortis AMEV, The Netherlands ("AMEV") and Fortis AG, Brussels, Belgium. As further discussed in Note 14 the Company was sold by the Parent to GGS Holdings on May 1, 1996. The Company writes primarily private passenger automobile insurance coverage. Approximately one-half of the Company's business is written in the State of Florida. As such, a significant portion of agents' balances and uncollected premiums is due from Florida policyholders. The following is a description of the significant accounting policies and practices employed: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its wholly owned subsidiaries as follows: Superior American Insurance Company ("Superior American") and Superior Guaranty Insurance Company ("Superior Guaranty"). BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ from statutory accounting practices ("SAP") prescribed or permitted for insurance companies by regulatory authorities in the following respects: - Certain assets are included in the balance sheet that are excluded as "Nonadmitted Assets" under statutory accounting. - Costs incurred by the Company relating to the acquisition of new business which are expensed for statutory purposes are deferred and amortized on a straight-line basis over the term of the related policies. Commissions allowed by reinsurers on business ceded are deferred and amortized with policy acquisition costs. - The investment in wholly owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method. The net income or loss and changes in unassigned surplus of the subsidiaries is reflected in net income for the period rather than recorded directly to unassigned surplus. - Investments in bonds are designated at purchase as held to maturity, trading, or available for sale. Held-to-maturity fixed maturity investments are reported at amortized cost, and the remaining fixed maturity investments are reported at fair value with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of stockholders' equity for those designated as available for sale. All securities have been designated as available for sale. For SAP, such fixed maturity investments would be reported at amortized cost or market value based on their NAIC rating. - The liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes. - Deferred income taxes are not recognized on a statutory basis. - Credits for reinsurance are recorded only to the extent considered realizable. Under SAP, credit for reinsurance ceded are allowed to the extent the reinsurers meet the statutory requirements of the Insurance Department of the State of Florida, principally statutory solvency. F-32 145 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): A reconciliation of statutory net income and capital and surplus to GAAP net income and stockholders' equity for Superior Insurance Company is as follows (dollars in thousands):
1993 1994 1995 ------------------- ------------------- ------------------ CAPITAL CAPITAL NET CAPITAL AND NET AND INCOME AND NET SURPLUS INCOME SURPLUS (LOSS) SURPLUS INCOME ------- ------- ------- ------- ------- ------ Statutory balance.................. $56,656 $10,597 $43,577 $ 201 $49,277 $5,639 Non-admitted assets................ 130 -- 225 -- 472 -- Investments market value adjustment....................... 5,571 -- (1,988) -- 5,279 -- Deferred acquisition costs......... 8,926 (248) 9,004 78 7,574 (1,430) Losses and loss adjustment expense.......................... 2,677 59 (1,600) (4,822) -- 600 Deferred income tax................ (154) 615 3,785 1,030 44 (724) Rent rebate........................ -- -- (333) (333) (277) 55 Pension and other postretirement benefits......................... (50) 49 (548) (479) (667) (120) Other.............................. -- (114) (244) (150) (86) 115 ------- ------- ------- ------- ------- ------ GAAP balance....................... $73,756 $10,958 $51,878 $(4,475) $61,616 $4,135 ======= ======= ======= ======= ======= ======
PREMIUMS Premiums are recognized as income ratably over the life of the related policies and are stated net of ceded premiums. Unearned premiums are computed on the semimonthly pro rata basis. INVESTMENTS During 1993, the Company adopted Financial Accounting Standards Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, investments are presented on the following bases: - Fixed maturities and equity securities -- at market value -- all such securities are classified as available for sale and are carried at market value with the unrealized gain or loss as a component of stockholders' equity. - Short-term investments -- at amortized cost, which approximates market - Other investment -- at cost Realized gains and losses on sales of investments are recorded on the trade date and are recognized in net income on the specific identification basis. Other than temporary market value declines are recognized in the period in which they are determined. Other changes in market values of debt and equity securities are reflected as unrealized gain or loss directly in stockholders' equity, net of deferred tax, and, accordingly, have no effect on net income. Interest and dividend income are recognized as earned. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company includes in cash and cash equivalents all cash on hand and demand deposits with original maturities of three months or less. F-33 146 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs are comprised of agents' commissions, premium taxes and certain other costs which are related directly to the acquisition of new and renewal business, net of expense allowances received in connection with reinsurance ceded, which have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. These costs, to the extent that they are considered recoverable, are deferred and amortized over the terms of the policies to which they relate. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. All additions to property and equipment made in 1995 are depreciated based on the straight-line method over their estimated useful lives. Additions made prior to 1995 are depreciated using the declining balance method over their estimated useful lives ranging from five to seven years. Asset and accumulated depreciation accounts are relieved for dispositions, with resulting gains or losses reflected in net income. LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for losses and loss adjustment expenses includes estimates for reported unpaid losses and loss adjustment expenses and for estimated losses incurred, but not reported. This liability has not been discounted. The Company's losses and loss adjustment expense liability includes an aggregate stop-loss program. The Company retains an independent actuarial firm to estimate the liability. The liability is established using individual case-basis valuations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the liability is adequate, the provisions for losses and loss adjustment expenses are necessarily based on estimates and are subject to considerable variability. Changes in the estimated liability are charged or credited to operations as additional information on the estimated amount of a claim becomes known during the course of its settlement. The liability for losses and loss adjustment expenses is reported net of the receivables for salvage and subrogation of approximately $1,622,000 and $2,242,000 at December 31, 1995 and 1994, respectively. INCOME TAXES During January 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The Company adopted SFAS No. 109 during the year ended December 31, 1993. The Statement adopts the liability method of accounting for deferred income taxes. Under the liability method, companies establish a deferred tax liability or asset for the future tax effects of temporary differences between book and taxable income. Changes in future tax rates result in immediate adjustments to deferred taxes. (See Note 6.) Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. REINSURANCE Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. F-34 147 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): OTHER INCOME Other income consists of finance and service fees paid by policyholders in relation to installment billings. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was issued. SFAS No. 121 requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement is effective for financial statements for fiscal years beginning after December 31, 1995. The Company intends to adopt SFAS No. 121 in 1996. Based upon management's review and analysis, adoption of SFAS No. 121 is not expected to have a material impact on the Company's results of operations in 1996. VULNERABILITY FROM CONCENTRATION At December 31, 1995, the Company did not have a material concentration of financial instruments in a single investee, industry or geographic location. Also at December 31, 1995, the Company did not have a concentration of (1) business transactions with a particular customer, lender or distributor, (2) revenues from a particular product or service, (3) sources of supply of labor or services used in the business, or (4) a market or geographic area in which business is conducted that makes it vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a serious impact to the Company's financial condition, except for the market and geographic concentration described in the following paragraph. The Company writes nonstandard automobile insurance primarily in California and Florida. As a result, the Company is always at risk that there could be significant losses arising in certain geographic areas. The Company protects itself from such events by purchasing catastrophe insurance. USE OF ESTIMATES The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. F-35 148 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVESTMENTS: Investments are summarized as follows (dollars in thousands):
UNREALIZED ESTIMATED AMORTIZED ------------------ MARKET COST GAIN LOSS VALUE --------- ------ ------- --------- DECEMBER 31, 1994 Fixed maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies.......... $ 25,312 $ 31 $ (767) $ 24,576 Obligations of states and political subdivisions.................................. 30,567 380 (680) 30,267 Corporate securities............................. 39,969 292 (1,244) 39,017 -------- ------ ------- -------- Total fixed maturities................... 95,848 703 (2,691) 93,860 -------- ------ ------- -------- Equity securities: Preferred stocks................................. 713 32 -- 745 Common stocks.................................... 5,616 1,201 (422) 6,395 -------- ------ ------- -------- 6,329 1,233 (422) 7,140 Short-term investments............................. 5,538 -- -- 5,538 Other investments.................................. 808 -- -- 808 -------- ------ ------- -------- Total investments........................ $ 108,523 $1,936 $(3,113) $ 107,346 ======== ====== ======= ========
UNREALIZED ESTIMATED AMORTIZED ------------------ MARKET COST GAIN LOSS VALUE --------- ------ ------- --------- DECEMBER 31, 1995 Fixed maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies.......... $ 28,612 $1,057 $ -- $ 29,669 Obligations of states and political subdivisions.................................. 24,595 1,251 (15) 25,831 Corporate securities............................. 41,070 2,988 (2) 44,056 -------- ------ ------- -------- Total fixed maturities................... 94,277 5,296 (17) 99,556 Equity securities: Preferred stocks................................. 713 25 -- 738 Common stocks.................................... 5,193 2,370 (231) 7,332 -------- ------ ------- -------- 5,906 2,395 (231) 8,070 Short-term investments............................. 8,462 -- -- 8,462 Other investments.................................. 274 -- -- 274 -------- ------ ------- -------- Total investments........................ $ 108,919 $7,691 $ (248) $ 116,362 ======== ====== ======= ========
F-36 149 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVESTMENTS (CONTINUED): The amortized cost and estimated market value of fixed maturities at December 31, 1995 and 1994, by contractual maturity, are shown in the table which follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty (dollars in thousands):
1995 1994 ------------------ -------------------- ESTIMATED AMORTIZED ESTIMATED AMORTIZED FAIR COST FAIR VALUE COST VALUE ------- ---------- ------- -------- Maturity: Due in one year or less............. $ 5,514 $ 5,521 $ 2,508 $ 2,510 Due after one year through five years............................ 20,403 20,086 31,166 32,164 Due after five years through ten years............................ 33,522 32,550 33,012 35,338 Due after ten years................. 36,409 35,703 27,591 29,544 ------- ------- ------- ------- Total............................ $95,848 $ 93,860 $94,277 $99,556 ======= ======= ======= =======
Gains and losses realized on sales of investments are as follows (dollars in thousands):
1993 1994 1995 ------ ------ ------ Gross gains realized on fixed maturities......... $3,040 $ 779 $1,442 Gross losses realized on fixed maturities........ 95 1,270 322 Gross gains realized on equity securities........ 637 694 507 Gross losses realized on equity securities....... 28 457 256
An analysis of net investment income for the years ended December 31, 1993, 1994, and 1995 follows (dollars in thousands):
1993 1994 1995 ------ ------ ------ Fixed maturities................................. $7,939 $6,691 $6,630 Equity securities................................ 461 538 603 Short-term investments........................... 141 106 68 ------ ------ ------ Total investment income........................ 8,541 7,335 7,301 Investment expenses.............................. 371 311 208 ------ ------ ------ Net investment income............................ $8,170 $7,024 $7,093 ====== ====== ======
Investments with an approximate market value of $17,384,000 and $2,366,000 (approximate amortized cost of $16,907,000 and $2,362,000) as of December 31, 1995 and 1994, respectively, were on deposit in the United States and Canada. The deposits are required by law to support certain reinsurance contracts, performance bonds and outstanding loss liabilities on assumed business. In May 1990, Superior entered into a limited partnership agreement with AMEV Venture Management ("AVM"), an AMEV affiliate. The Limited Partnership, AMEV Venture III, is an investment pool which is managed by AVM as a general partner. The purpose of the pool is to make speculative investments in small business, with the partners sharing in the profits/losses resulting from the pool. Superior committed to an investment of $2,000,000 which is approximately 8% of the total pool. This investment is carried at cost and included in, "other investment". As of May, 1996, the Company had disposed of its remaining interest in this investment. F-37 150 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. DEFERRED POLICY ACQUISITION COSTS: Policy acquisition costs are capitalized and amortized over the life of the policies. Policy acquisition costs are those costs directly related to the issuance of insurance policies including commissions and underwriting expenses net of reinsurance commission income on such policies. Policy acquisition costs deferred and the related amortization charged to income were as follows (dollars in thousands):
1993 1994 1995 -------- -------- -------- Balance, beginning of year................. $ 9,174 $ 8,926 $ 9,004 Costs deferred during year................. 23,561 23,029 17,606 Amortization during year................... (23,809) (22,951) (19,036) -------- -------- -------- Balance, end of year....................... $ 8,926 $ 9,004 $ 7,574 ======== ======== ========
4. PROPERTY AND EQUIPMENT: Property and equipment at December 31 are summarized as follows (dollars in thousands):
1995 1994 1995 ACCUMULATED 1995 NET COST DEPRECIATION NET ---- ------ ------------ ---- Office furniture and equipment... $ 62 $1,099 $ 723 $376 Automobiles...................... -- 20 20 -- Computer equipment............... 295 1,086 765 321 Leasehold improvements........... -- 6 6 -- ---- ------ ------ ---- $357 $2,211 $1,514 $697 ==== ====== ====== ====
Accumulated depreciation at December 31, 1994 was approximately $1,370,000. Depreciation expense related to property and equipment for the years ended December 31, 1995, 1994 and 1993 was approximately $214,000, $185,000 and $128,000, respectively. F-38 151 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES: Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows (dollars in thousands):
1993 1994 1995 ------- ------- ------- Balance at January 1.......................... $57,164 $52,610 $54,577 Less reinsurance recoverables................. 361 68 1,099 ------- ------- ------- Net balance at January 1.................... 56,803 52,542 53,478 ------- ------- ------- Incurred related to: Current year................................ 92,619 91,064 77,266 Prior years................................. (6,717) 1,314 (4,923) ------- ------- ------- Total incurred...................... 85,902 92,378 72,343 ------- ------- ------- Paid related to: Current year................................ 57,929 56,505 48,272 Prior years................................. 32,234 34,937 31,424 ------- ------- ------- Total paid.......................... 90,163 91,442 79,696 ------- ------- ------- Net balance at December 31.......... 52,542 53,478 46,125 Plus reinsurance recoverables on unpaid losses...................................... 68 1,099 987 ------- ------- ------- Balance at December 31........................ $52,610 $54,577 $47,112 ======= ======= =======
The foregoing reconciliation shows that redundancies of approximately $4,923,000 and $6,717,000 in the December 31, 1994 and 1992 liabilities, respectively, emerged in the following year. These redundancies resulted from lower than anticipated losses resulting from a change in settlement costs relating to those estimates. The reconciliation shows that a deficiency of approximately $1,314,000 in the December 31, 1993 liability emerged in the following year. This deficiency resulted from higher than anticipated losses resulting primarily from a change in the settlement cost of loss reported in 1990. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. Case liabilities (and costs of related litigation) have been established when sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, incurred but not reported liabilities have been established to cover additional exposure on both known and unasserted claims. Those liabilities are reviewed and updated continually. 6. INCOME TAXES: For the year ended December 31, 1995, the Company will file a consolidated federal income tax return with its former subsidiaries owned by Fortis, Inc. An intercompany tax sharing agreement between the Company and its subsidiaries provided that income taxes will be allocated based upon the percentage that each subsidiary's separate return tax liability bears to the total amount of tax liability calculated for all members of the group in accordance with the Internal Revenue Code of 1986, as amended. Intercompany tax payments are remitted at such times as estimated taxes would be required to be made to the Internal Revenue F-39 152 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED): Service. A reconciliation of the differences between federal tax computed by applying the federal statutory rate of 35% to income before income taxes and the income tax provision is as follows (dollars in thousands):
1993 1994 1995 ------ ------- ------ Computed income taxes at statutory rate......... $4,743 $(2,896) $2,024 Dividends received deduction.................... (118) (69) (53) Tax-exempt interest............................. (1,136) (866) (538) Proration....................................... 188 140 89 Other........................................... 304 (109) 127 ------ ------- ------ Income tax expense (benefit).................... $3,981 $(3,800) $1,649 ====== ======= ======
As described in Note 1, the Company adopted SFAS No. 109 effective in 1993. The effect on years prior to 1993 of changing to this method was a benefit of approximately $1,389,000 and is reflected in the consolidated statement of operations as the cumulative effect of a change in accounting principle. The current or deferred tax consequences of a transaction are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable currently or in future years. The method of accounting for income taxes prior to SFAS No. 109 provided that deferred taxes, once recorded, were not adjusted for changes in tax rates. The net deferred tax asset at December 31, 1995 and 1994 is comprised of the following (dollars in thousands):
1994 1995 ------ ------ Deferred tax assets: Unpaid losses and loss adjustment expenses.............. $1,848 $1,454 Unearned premiums....................................... 3,122 2,873 Allowance for doubtful accounts......................... 109 175 Unrealized losses on investments........................ 412 -- Salvage and subrogation................................. 694 541 Other................................................... 751 257 ------- ------- Net deferred tax asset.......................... 6,936 5,300 ------- ------- Deferred tax liabilities: Deferred policy acquisition costs....................... 3,151 2,651 Unrealized gain on investments.......................... -- 2,605 ------- ------- 3,151 5,256 ------- ------- Net deferred tax asset.......................... $3,785 $ 44 ======= =======
The Company is required to establish a "valuation allowance" for any portion of its deferred tax assets which is unlikely to be realized. No valuation allowance was established as of December 31, 1995 or 1994 on the deferred tax assets, since management believes it is more likely than not that the Company will realize the benefit of its deferred tax assets. Federal income tax attributed to the Company has been examined through 1993. In the opinion of management, the Company has adequately provided for the possible effects of future assessments related to prior years. F-40 153 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. RETIREMENT AND OTHER EMPLOYEE BENEFITS: As part of the sale of the Company, as described in Note 14, the Company withdrew from all of the plans mentioned below and paid Fortis approximately $557,000 to assume the related liabilities. Superior participated in a non-contributory defined benefit pension plan ("the Pension Plan") administered by Fortis, Inc., covering substantially all employees who were at least 21 years of age and who had one year of service with Superior. The Pension Plan provided benefits payable to participants on retirement or disability and to beneficiaries of participants in the event of death. The benefits were based on years of service and the employee's compensation during such years of service. The Company's funding policy was to contribute annually at least the amount required to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. Contributions were intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The net periodic pension cost allocated to Superior under the Pension Plan for 1993, 1994 and 1995 was approximately $206,000, $186,000 and $119,000, respectively. In 1993, pension expense includes a one-time accrual for implementation of SFAS 106 of approximately $81,000. Superior also participated in a contributory profit sharing plan ("the Profit Sharing Plan") sponsored by Fortis, Inc. This Profit Sharing Plan covered all employees with one year of service to the Company and provided benefits payable to participants on retirement or disability and to beneficiaries of participants in the event of death. The amount expensed for the Profit Sharing Plan for 1993, 1994 and 1995 was approximately $252,000, $381,000 and $146,000, respectively. In addition to retirement benefits, the Company participated in other health care and life insurance benefit plans ("postretirement benefits") for retired employees, sponsored by Fortis, Inc. Health care benefits, either through a Fortis-sponsored retiree plan for retirees under age 65 or through a cost offset for individually purchased Medigap policies for retirees over age 65, were available to employees who retired on or after January 1, 1993, at age 55 or older, with 15 or more years of service. Life insurance, on a retiree pay all basis, was available to those who retired on or after January 1, 1993. Both the retiree medical and retiree life programs were implemented in 1993. The Company made contributions to these plans as claims were incurred; no claims were incurred during 1993, 1994 or 1995. In 1993, the NAIC issued new rules that required the projected future cost of providing postretirement benefits, such as health care and life insurance, be recognized as an expense as employees render service instead of when the benefits are paid. As required, Superior complied with the new rules beginning in 1995 and elected to record these costs on a prospective basis. The effect of this accounting change on the financial statements of the Company was not material. 8. REINSURANCE: The Company limits the maximum net loss that can arise from a large risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain levels of risks with other insurers or reinsurers. Superior has a casualty excess of loss treaty which covers losses in excess of $100,000 up to a maximum of $2,000,000. Superior maintains both auto and property catastrophe excess reinsurance. Superior's first automobile casualty excess contains limits of $200,000 excess of $100,000, its second casualty excess contains limits of $700,000 excess of $300,000 and its third casualty excess has a limit of $1,000,000 excess of $1,000,000. Further, Superior's first layer of property catastrophe excess reinsurance covers 95% of $500,000 excess of $500,000 with an annual limit of $1,000,000 and its second layer or property catastrophe excess reinsurance covers 95% of $2,000,000 excess of $1,000,000 with an annual limit of $4,000,000. F-41 154 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. REINSURANCE (CONTINUED): The Company remains contingently liable with respect to reinsurance, which would become an ultimate liability of the Company in the event that such reinsuring companies might be unable, at some later date, to meet their obligations under the reinsurance agreements. In 1993, 1994 and 1995, 100% of amounts recoverable from reinsurers are with Prudential Re, which maintains an A.M. Best rating of A. Company management believes amounts recoverable from reinsurers are collectible. Amounts recoverable from reinsurers relating to unpaid losses and loss adjustment expenses were approximately $1,099,000 and $987,000 as of December 31, 1994 and 1995, respectively. Reinsurance activity for 1993, 1994 and 1995, which includes reinsurance with related parties, is summarized as follows (dollars in thousands):
DIRECT ASSUMED CEDED NET ------- ------- ----- -------- 1993 Premiums written..................................... $88,877 $26,783 $ 366 $115,294 Premiums earned.................................... 87,618 31,183 665 118,136 Incurred losses and loss adjustment expenses....... 64,228 21,896 222 85,902 Commission expenses................................ 13,700 4,570 -- 18,270 1994 Premiums written..................................... $92,540 $20,366 $ 391 $112,515 Premiums earned.................................... 89,755 23,437 355 112,837 Incurred losses and loss adjustment expenses....... 73,181 20,244 1,047 92,378 Commission expenses................................ 14,165 3,192 -- 17,357 1995 Premiums written..................................... $84,840 $ 9,916 $ 686 $ 94,070 Premiums earned.................................... 84,641 13,592 619 97,614 Incurred losses and loss adjustment expenses....... 63,462 8,777 (104) 72,343 Commission expenses................................ 12,314 1,324 -- 13,638
The Company has entered into a quota share reinsurance arrangement with Pafco General Insurance Company ("Pafco"), a wholly owned subsidiary of the Company's ultimate parent, Symons International Group, Inc. ("Registrant"), 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. For purposes of filing the Company's consolidated financial statements in the Registration Statement of the Registrant, this transaction has not been reflected in the Company's consolidated financial statements as of and for the six-month period ended F-42 155 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. REINSURANCE (CONTINUED): June 30, 1996 since this transaction had no net impact on the Registrant's consolidated financial position or results of operations. The amounts related to this reinsurance are as follows (dollars in thousands): BALANCE SHEET: Receivables......................................................... $9,232 Reinsurance recoverables............................................ 4,972 Deferred policy acquisition costs................................... 1,820 Federal income tax receivable....................................... 406 Losses and loss adjustment expenses................................. 8,740 Unearned premiums................................................... 8,755 STATEMENT OF OPERATIONS: Assumed premiums written............................................ 13,874 Assumed premiums earned............................................. 5,328 Loss and loss adjustment expenses................................... 3,768 Policy acquisition and general and administrative expenses.......... 2,625
9. RELATED-PARTY TRANSACTIONS: The Company and its subsidiaries have entered into transactions with various related parties including transactions with its affiliated companies and Fortis, Inc. The following transactions occurred with related parties in the years ended December 31, 1993, 1994, and 1995 (dollars in thousands):
1993 1994 1995 ----- ----- ----- Management fees charged by Fortis................... $ 832 $ 842 $ 729 Reinsurance with affiliated companies, net: Assumed premiums earned........................... 8,321 9,092 7,786 Assumed losses and loss adjustment expenses incurred....................................... 8,480 6,266 5,847 Assumed commissions............................... 1,337 1,755 1,112
10. EFFECTS OF STATUTORY ACCOUNTING PRACTICES AND DIVIDEND RESTRICTIONS: Under state of Florida insurance regulations, the maximum amount of dividends Superior, Superior American and Superior Guaranty can pay to their stockholders without prior approval of the Insurance Commissioner of the State of Florida is limited. The maximum amount of dividends which Superior can pay to its stockholders during 1996 is approximately $4,900,000. The maximum amount of dividends which Superior American can pay to its stockholder during 1996 is approximately $320,000. The maximum amount of dividends which Superior Guaranty can pay to its stockholder during 1996 is approximately $277,000. 11. REGULATORY MATTERS: Superior, Superior American and Superior Guaranty, domiciled in Florida, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Florida Department of Insurance ("FDOI"). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Superior, Superior American and Superior Guaranty utilize no significant permitted practices. F-43 156 SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. REGULATORY MATTERS (CONTINUED): The NAIC has promulgated risk-based capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks, such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. The RBC information is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized control level RBC (the "company action level") requires no corrective actions by Superior, Superior American, Superior Guaranty, or regulators. As of December 31, 1995, all three company's RBC level were in excess of the company action level. 12. LEASES: The Company has certain commitments under long-term operating leases for its home and sales offices. Rental expense under these commitments was $800, $483 and $1,012 for 1993, 1994 and 1995, respectively. Future minimum lease payments required under these noncancelable operating leases are as follows (dollars in thousands): 1996........................................................ $ 948 1997........................................................ 921 1998........................................................ 440 1999........................................................ 350 2000 and thereafter......................................... 58 ------ Total............................................. $2,717 ======
13. CONTINGENCIES: The Company, and its subsidiaries, are named as defendants in various lawsuits relating to their business. Legal actions arise from claims made under insurance policies issued by the Company and its subsidiaries. These actions were considered by the Company in establishing its loss liabilities. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. The increase in number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in increased assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. The Company recognizes its obligations for guaranty fund assessments when it receives notice that an amount is payable to a guaranty fund. The ultimate amount of these assessments may differ from that which has already been assessed. 14. SUBSEQUENT EVENT (UNAUDITED): On May 1, 1996, the Symons International Group Incorporated entered into an agreement ("Agreement") with GS Capital Partners II, L.P. to create a company, GGS Management Holdings, Inc. ("GGS Holdings") to be owned 52% by Symons and 48% by investment funds associated with Goldman, Sachs & Co. In connection with the above transaction, GGS Holdings acquired all of the outstanding shares of common stock of the Company and its wholly owned subsidiaries, Superior American and Superior Guaranty, for cash of approximately $66,389,000. F-44 157 - --------------------------------------------------------- - --------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Organizational Structure of SIG and Its Principal Subsidiaries.................... 2 Prospectus Summary.......................... 3 Risk Factors................................ 7 The Company................................. 18 Use of Proceeds............................. 20 Dividend Policy............................. 20 Dilution.................................... 21 Capitalization.............................. 22 Unaudited Pro Forma Consolidated Statements of Operations............................. 23 Selected Consolidated Historical Financial Data of Symons International Group, Inc....................................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company................. 30 Selected Consolidated Historical Financial Data of Superior Insurance Company........ 44 Management's Discussion and Analysis of Financial Condition and Results of Operations of Superior.................... 45 Business.................................... 49 Management.................................. 78 Certain Relationships and Related Transactions.............................. 86 Securities Ownership of Management and Goran..................................... 96 Description of Capital Stock................ 98 Shares Eligible for Future Sale............. 100 Underwriting................................ 101 Legal Matters............................... 102 Experts..................................... 102 Available Information....................... 103 Glossary of Selected Insurance and Certain Defined Terms............................. 104 Index to Financial Statements............... F-1
------------------------ UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - --------------------------------------------------------- - --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- 3,000,000 SHARES SYMONS LOGO SYMONS INTERNATIONAL GROUP, INC. COMMON STOCK ------------------------ PROSPECTUS ------------------------ ADVEST, INC. MESIROW FINANCIAL, INC. , 1996 --------------------------------------------------------- --------------------------------------------------------- 158 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1). Blue Sky Legal Services and Registration Fees..................... $ 25,000 Nasdaq Listing Fee NASD Fee....................................... 4,640 Securities and Exchange Commission Registration Fee............... 14,276 Legal Services and Disbursements -- Issuer's counsel.............. 325,000 Auditing and Accounting Services.................................. 450,000 Transfer Agent Fee................................................ Printing and engraving costs...................................... Postage........................................................... Other expenses.................................................... ------- TOTAL(2)................................................ $ =======
- --------------- (1) Costs represented by salaries and wages of regular employees and officers of the Registrant are excluded. (2) All the above items, except the SEC Registration Fee, Nasdaq Listing Fee and NASD Fee, are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Chapter 37 of the Indiana Business Corporation Law, as amended (the "ICBL"), grants to each corporation broad powers to indemnify directors, officers, employees or agents against liabilities and expenses incurred in certain proceedings if the conduct in question was found to be in good faith and was reasonably believed to be in the corporation's best interests. The indemnification rights provided by the Registrant's articles of incorporation and by-laws generally provide the maximum indemnification protection available under law to the directors and officers of the Registrant, subject to certain restrictions on such indemnification in the event of the occurrence of certain changes of control and subject to restrictions on indemnification for liabilities incurred by directors and officers who unsuccessfully defend actions brought against them by or in right of the corporation. Directors, officers employees or agents of the Registrant who also are directors, officers, employees or agents of Goran receive similar indemnification protection under Goran's by-laws. In addition, Goran carries directors and officers insurance policies. Pursuant to the provisions of the Underwriting Agreement among the Registrant, Goran and the Underwriters, the Underwriters severally agree to indemnify the Registrant, its directors, its officers who signed the Registration Statement and its controlling persons against any and all loss, liability, claim, damage or expense, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement and prospectus (or any amendment thereto), including filings made under Rule 430A and Rule 434 of the Securities Act of 1933, if applicable, or any preliminary prospectus (or any amendment and supplement thereto) (collectively, the "Documents") in reliance upon and in conformity with written information furnished to the Registrant by such Underwriter through Advest, Inc. or Mesirow Financial, Inc. expressly for use in the Documents. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant was incorporated on March 30, 1987. The Registrant is a wholly-owned, direct subsidiary of Goran Capital Inc. ("Goran") and will remain so until consummation of the Offering. The original issuance of 1,000 shares of Common Stock to Goran upon the Registrant's incorporation did not involve any public offering and was exempt from registration under section 4(2) of the Securities Act of 1933, as amended ("Securities Act"). S-1 159 Effective immediately upon the filing of the Restated Articles of Incorporation of the Registrant with the Secretary of State of the State of Indiana on July 29, 1996, the Board of Directors of the Registrant declared a 7,000-to-1 stock split whereby each outstanding share of Common Stock will be converted into 7,000 shares of Common Stock, such stock split to be payable to Goran as the Registrant's sole shareholder immediately prior to consummation of the Offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The exhibits furnished with this Registration Statement are listed beginning on page E-l. (b) The following financial statement schedules of the Registrant are included in the Registration Statement beginning on page S-4: Report of Independent Accountants Schedule I -- Summary of Investments -- Other than Investments in Related Parties 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
ITEM 17. UNDERTAKINGS. (1) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of an action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (3) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. S-2 160 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on September 23, 1996. SYMONS INTERNATIONAL GROUP, INC. By: /s/ ALAN G. SYMONS -------------------------------------- Alan G. Symons, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ---------------------------------------------------- ------------------ ------------------- (1) Principal Executive Officer: /s/ ALAN G. SYMONS Chief Executive ----------------------------------------------- Officer Alan G. Symons (2) Principal Financial and Accounting Officer: /s/ GARY P. HUTCHCRAFT* Vice President ----------------------------------------------- Chief Financial Gary P. Hutchcraft Officer (3) The Board of Directors: /s/ G. GORDON SYMONS* Director ----------------------------------------------- G. Gordon Symons /s/ ALAN G. SYMONS Director ----------------------------------------------- Alan G. Symons /s/ DOUGLAS H. SYMONS* Director ----------------------------------------------- Douglas H. Symons /s/ JOHN J. McKEATING* Director ----------------------------------------------- John J. McKeating ----------------------------------------------- Director Robert C. Whiting /s/ JAMES G. TORRANCE* Director ----------------------------------------------- James G. Torrance /s/ DAVID R. DOYLE* ----------------------------------------------- Director David R. Doyle *By: /s/ ALAN G. SYMONS ----------------------------------------------- Alan G. Symons, Attorney-in-Fact
September 23, 1996 161 Board of Directors and Stockholder of Symons International Group, Inc. and Subsidiaries In connection with our audits of the consolidated balance sheets of Symons International Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, changes in stockholder's equity and cash flows for the three years in the period ended December 31, 1995, which financial statements are included in the registration statement, we have also audited the financial statement schedules listed in Item 16 herein. In our opinion, these financial statement schedules, 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 herein. COOPERS & LYBRAND L.L.P. Indianapolis, Indiana March 18, 1996 S-4 162 SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES AS AT DECEMBER 31, 1995 (IN THOUSANDS)
ESTIMATED MARKET AMOUNT ON TYPE OF INVESTMENT COST VALUE BALANCE SHEET - ------------------------------------------------------- ------- --------- ------------- Fixed maturities: Bonds: Government and government agencies................ $10,978 $11,040 $11,040 States and municipalities......................... 1,142 1,198 1,198 Public utilities.................................. 328 328 328 All other corporate bonds......................... 364 365 365 ------- ------- ------- Total fixed maturities....................... 12,812 12,931 12,931 Equity securities: Common stocks........................................ 4,318 4,134 4,134 Preferred stocks..................................... 100 97 97 ------- ------- ------- Total equity securities...................... 4,418 4,231 4,231 Mortgage loans on real estate........................ 2,920 2,920 2,920 Real estate.......................................... 487 487 487 Other long-term investments.......................... 50 50 50 Short-term investments............................... 5,283 5,283 5,283 ------- ------- ------- Total investments............................ $25,970 $25,902 $25,902 ======= ======= =======
S-5 163 SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT AS OF DECEMBER 31, 1994 AND 1995 (IN THOUSANDS) ASSETS
1994 1995 ------- ------- Assets: Investments in and advances to related parties......................... $13,306 $18,589 Cash and cash equivalents.............................................. 0 0 Deferred income taxes.................................................. 0 52 Property and equipment................................................. 194 337 Other.................................................................. 274 57 Intangible Assets...................................................... 88 0 ------- ------- Total Assets................................................... $13,862 $19,035 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Payables to affiliates................................................. $ 7,870 $ 8,671 Federal income tax payable............................................. 176 0 Line of credit and notes payable....................................... 1,250 0 Other.................................................................. 311 829 ------- ------- Total Liabilities.............................................. 9,607 9,500 ------- ------- Stockholder's equity: Common Stock, no par, 7,000,000 shares authorized, issued and outstanding......................................................... 1,000 1,000 Additional paid-in capital............................................. 3,130 3,130 Unrealized loss on investments (net of deferred taxes of $260 in 1994, and $23 in 1995).................................................... (504) (45) Retained Earnings...................................................... 629 5,450 ------- ------- Total Stockholder's equity..................................... 4,255 9,535 ------- ------- Total liabilities and stockholder's equity..................... $13,862 $19,035 ======= =======
S-6 164 SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 (IN THOUSANDS)
1993 1994 1995 ------ ------ ------ Net investment income............................................ $ 20 $ 37 $1,522 Net realized investment losses................................... -- (8) (52) Other income..................................................... 8,873 8,533 7,626 ------ ------ ------ Total revenue.......................................... 8,893 8,562 9,096 Expenses: Policy acquisition and general and administrative expenses....... 7,935 7,528 7,891 Interest expense................................................. 763 874 621 ------ ------ ------ Total expenses......................................... 8,698 8,402 8,512 Income before taxes and minority interest........................ 195 160 584 Provision for income taxes: Current Year................................................... 220 176 293 Prior Year..................................................... 76 (70) -- ------ ------ ------ Provision for income taxes....................................... 296 106 293 Net income before equity in net income of subsidiaries........... (101) 54 291 Equity in net income of subsidiaries............................. (222) 2,063 4,530 ------ ------ ------ Net income for the period........................................ $ (323) $2,117 $4,821 ====== ====== ======
S-7 165 SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 (IN THOUSANDS)
1993 1994 1995 ------- ------- ------- Net income....................................................... $ (323) $ 2,117 $ 4,821 Cash flows from operating activities: Adjustments to reconcile net cash provided by (used in) operations: Equity in net income (losses) of subsidiaries.................. 222 (2,063) (4,530) Depreciation of property and equipment......................... 83 91 37 Net realized capital loss...................................... -- 8 (52) Amortization of intangible assets.............................. 252 169 88 Net changes in operating assets and liabilities: Federal income taxes recoverable (payable)..................... (122) 206 (176) Other assets................................................... (120) (70) 216 Other liabilities.............................................. 326 (1,060) 518 ------- ------- ------- Net cash provided from (used in) operations...................... 318 (602) 922 Cash flow used in investing activities: Purchase of property and equipment............................... (139) (58) (179) ------- ------- ------- Net cash used in investing activities............................ (139) (58) (179) Cash flows provided by (used in) financing activities: Repayment of loans............................................... (2,000) (1,750) (1,250) Contributed capital.............................................. 1,600 -- -- Loans from related parties....................................... 200 2,410 507 ------- ------- ------- Net cash provided by (used in) financing activities.............. (200) 600 (743) Increase (decrease) in cash and cash equivalents................. (21) -- -- ------- ------- ------- Cash and cash equivalents -- beginning of year................... 21 -- -- ------- ------- ------- Cash and cash equivalents -- end of year......................... $ -- $ -- $ -- ======= ======= =======
S-8 166 SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT 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. S-9 167 SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES SCHEDULE IV -- REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
PERCENTAGE ASSUMED CEDED OF AMOUNT PROPERTY AND LIABILITY DIRECT FROM OTHER TO OTHER NET ASSUMED INSURANCE PREMIUMS AMOUNT COMPANIES COMPANIES AMOUNT TO NET - --------------------------------------------- -------- ---------- --------- ------- ---------- Year ended December 31, 1995................. $123,381 $1,253 $71,187 $53,447 2.3% Year ended December 31, 1994................. $102,178 956 67,995 $35,139 2.7% Year ended December 31, 1993................. $ 88,847 89 57,176 $31,760 0.3%
S-10 168 SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND OTHER FROM AT END DESCRIPTION OF PERIOD EXPENSES(1) ACCOUNTS RESERVES OF PERIOD - ---------------------------------------- ---------- ---------- ----------- ---------- --------- YEAR ENDED DECEMBER 31, 1993 Allowance for doubtful accounts......... $ 345 $1,397 -- $ 563(2) $ 1,179 YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful accounts......... $1,179 (86) -- (116)(2) $ 1,209 YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful accounts......... $1,209 2,523 -- 2,805(2) $ 927
- --------------- (1) In 1993, the Company began to direct bill policyholders rather than agents for premiums. Therefore, bad debt expenses in 1993 increased accordingly. 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, 1993, 1994 and 1995 was adequate. (2) Uncollectible accounts written off, net of recoveries. S-11 169 SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING PROPERTY -- CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
LOSSES AND LOSS ADJUSTMENT EXPENSES RESERVES INCURRED PAID AMORTIZATION DEFERRED FOR LOSSES RELATED TO LOSSES OF DEFERRED POLICY AND LOSS NET --------------- AND LOSS POLICY ACQUISITION ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT PRIOR ADJUSTMENT ACQUISITION PREMIUMS COSTS EXPENSES PREMIUMS PREMIUMS INCOME YEARS YEARS EXPENSES COSTS WRITTEN ----------- ---------- -------- -------- ---------- ------- ----- ---------- ------------ -------- Year Ended December 31, 1995... $ 2,379 $ 59,421 $17,497 $49,641 $1,173 $35,184 $ 787 $ 31,075 $7,150 $124,634 Year Ended December 31, 1994... $ 1,479 $ 29,269 $14,416 $32,126 $1,241 $26,268 $ 202 $ 26,995 $4,852 $103,134 Year Ended December 31, 1993... $ 752 $ 54,143 $ 8,060 $31,428 $1,489 $23,931 $1,149 $ 27,109 $8,962 $88,936
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. S-12 170 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ----------- ---------------------------------------------------------------------------- -----
1 Form of Underwriting Agreement, dated , 1996, among the Registrant, Goran Capital Inc., Advest, Inc. and Mesirow Financial, Inc..... ----- 3.1 Registrant's Restated Articles of Incorporation............................. *** 3.2 Registrant's Restated Code of Bylaws........................................ *** 4.1 Article V -- "Number, Terms and Voting Rights of Shares" of the Registrant's Restated Articles of Incorporation, incorporated by reference to the Registrant's Articles of Incorporation filed 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, incorporated by reference to the Registrant's Restated Code of Bylaws filed hereunder as Exhibit 3.2 5 Opinion of Barnes & Thornburg re legality of the securities being registered.................................................................. ** 10.1 Stock Purchase Agreement among Goran Capital Inc., Registrant, Fortis, Inc. and Interfinancial, Inc. dated January 31, 1996............................. * 10.2(1) Stock Purchase Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Goran Capital Inc. and Registrant dated January 31, 1996........................................................................ * 10.2(2) First Amendment to 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............................................. ----- 10.2(3) Second Amendment to 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............................................. ----- 10.2(4) Third Amendment to 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 , 1996..... ----- 10.3(1) Stockholder Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Goran Capital Inc. dated April 30, 1996........................................................................ * 10.3(2) Amended and Restated Stockholder Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Goran Capital Inc. and Registrant dated September , 1996......................................... ----- 10.4 Registration Rights Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Goran Capital Inc. and Registrant dated April 30, * 1996........................................................................ 10.5 Management Agreement among Superior Insurance Company, Superior American Insurance Company, Superior Guaranty Insurance Company and GGS Management, *** Inc. dated April 30, 1996................................................... 10.6 Management Agreement between Pafco General Insurance Company and Registrant dated May 1, 1987, as assigned to GGS Management, Inc. effective April 30, *** 1996........................................................................ 10.7 Administration Agreement between IGF Insurance Company and Registrant dated *** February 26, 1990, as amended............................................... 10.8 Agreement between IGF Insurance Company and Registrant dated November 1, *** 1990........................................................................ 10.9 Subordinated Promissory Note of IGF Holdings, Inc. dated April 29, 1996..... ----- 10.10(1) Promissory Note of IGF Holdings, Inc. dated April 29, 1996.................. ----- 10.10(2) Commercial Guaranty of Symons International Group, Ltd. dated April 29, 1996........................................................................ ----- 10.10(3) Intercreditor and Subordination Agreement between IGF Holdings, Inc. and Union Federal Savings Bank of Indianapolis dated April 29, 1996............. -----
E-1 171
EXHIBIT NO. DESCRIPTION PAGE - ----------- ---------------------------------------------------------------------------- ----- 10.10(4) Commercial Pledge and Security Agreement between IGF Holdings, Inc. and Union Federal Savings Bank of Indianapolis dated April 29, 1996............. ----- 10.10(5) Pledge Agreement between IGF Holdings, Inc. and Pafco General Insurance Company dated April 29, 1996................................................ ----- 10.11(1) Credit Agreement between GGS Management, Inc., various Lenders and The Chase Manhattan Bank (National Association), as Administrative Agent, dated April * 30, 1996.................................................................... 10.11(2) Pledge Agreement between GGS Management Holdings, Inc. and Chase Manhattan Bank., N.A. dated April 30, 1996............................................ ----- 10.11(3) Pledge Agreement between GGS Management, Inc. and Chase Manhattan Bank., N.A. dated April 30, 1996................................................... ----- ** 10.12(1) Promissory Note of Registrant to Goran Capital Inc.......................... ** 10.12(2) Promissory Note of Registrant to Granite Reinsurance Company Ltd............ ** 10.13 Registration Rights Agreement between Goran Capital, Inc. and Registrant dated ....................................................... ** 10.14(1) License, Improvement and Support Agreement between Tritech Financial Systems, Inc. and Registrant dated August 30, 1995.......................... ** 10.14(2) License of Computer Software between Tritech Financial Systems, Inc. and Registrant dated August 30, 1995............................................ ** 10.15(1) Agreement among Cliffstan Investments, Inc., Pafco General Insurance Company and Gage North Holdings, Inc. dated September 1, 1989....................... 10.15(2) Purchase of Promissory Note and Assignment of Security Agreement between ** Pafco General Insurance Company and Granite Reinsurance Company, Ltd., dated September 30, 1992.......................................................... ** 10.15(3) Guarantee of Alan G. Symons dated April 22, 1994............................ ** 10.15(4) Share Pledge Agreement between Symons International Group, Ltd. and Pafco General Insurance Company dated April 22, 1994.............................. ** 10.16(1) Employment Agreement between GGS Management Holdings, Inc. and Alan G. Symons dated ................................................ ** 10.16(2) Employment Agreement between GGS Management Holdings, Inc. and Douglas H. Symons dated ................................................ 10.17(1) Employment Agreement between IGF Insurance Company and Dennis G. Daggett effective February 1, 1996.................................................. ----- 10.17(2) Employment Agreement between IGF Insurance Company and Thomas F. Gowdy effective February 1, 1996.................................................. ----- ** 10.18 Employment Agreement between Superior Insurance Company and Roger C. Sullivan, Jr. dated ......................................... ** 10.19 Employment Agreement between Goran Capital, Inc. and Gary P. Hutchcraft dated ....................................................... ** 10.20 Goran Capital, Inc. Stock Option Plan....................................... 10.21 GGS Management Holdings, Inc. 1996 Stock Option Plan........................ ----- ** 10.22 Registrant's 1996 Stock Option Plan......................................... ** 10.24 Registrant's Retirement Savings Plan........................................ 10.25 Insurance Service Agreement between Mutual Service Casualty Company and IGF ** Insurance Company dated May 20, 1996........................................ 10.26 Amended and Restated Trust Indenture between Goran Capital Inc. and Montreal ** Trust Company of Canada dated December 29, 1992............................. ** 10.27 Reinsurance Agreements by and between Registrant and Affiliates.............
E-2 172
EXHIBIT NO. DESCRIPTION PAGE - ----------- ---------------------------------------------------------------------------- ----- 21 Subsidiaries of the Registrant.............................................. *** 23.1 Consent of Coopers & Lybrand L.L.P.......................................... ----- 23.2 Consent of Barnes & Thornburg (contained in Exhibit 5). 24 Power of Attorney (included on page S-3 of the Registration Statement). 27 Financial Data Schedules (to be filed electronically)....................... -----
- --------------- * Incorporated by reference as an Exhibit to the Current Report on Form 8-K of Goran Capital Inc. originally filed as of May 14, 1996 and amended as of July 15, 1996. ** To be filed by amendment. *** Previously filed as an Exhibit to this Registration Statement. E-3 EX-1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1 DRAFT 9/6/93 3,000,000 SHARES (PLUS 450,000 SHARES TO COVER OVERALLOTMENTS, IF ANY) SYMONS INTERNATIONAL GROUP, INC. COMMON STOCK UNDERWRITING AGREEMENT __________ __, 1996 ADVEST, INC. MESIROW FINANCIAL, INC. As Representatives (the "Representatives") of the Several Underwriters Named in Schedule I Hereto c/o Advest, Inc. 90 State House Square Hartford, CT 06103 Dear Sirs: Symons International Group, Inc., an Indiana corporation (the "Company") and a wholly owned subsidiary of Goran Capital Inc., a Canadian federally chartered corporation ("Parent"), proposes, subject to the terms and conditions stated herein, to sell to the Underwriters (the "Underwriters") named in Schedule I hereto an aggregate of Three Million (3,000,000) shares (the "Company Shares") of the Company's Common Stock, no par value ("Common Stock"). In addition, in order to cover overallotments in the sale of the Company Shares, the Underwriters may, at the Underwriters' election and subject to the terms and conditions stated herein, purchase ratably in proportion to the amounts set forth opposite their respective names in Schedule I hereto, up to Four Hundred Fifty Thousand (450,000) additional shares of Common Stock from the Company (such additional shares of Common Stock, the "Optional Shares"). The Company Shares and the Optional Shares are referred to collectively herein as the "Shares." Each of the Company and Parent, intending to be legally bound, hereby confirms its agreement with the Underwriters as follows: 1. Representations and Warranties of the Company and Parent. (a) Each of the Company and Parent, and each of the subsidiaries of the Company listed in Exhibit A hereto, to the 2 extent that the following representations and warranties relate directly to any or all of such subsidiaries, jointly and severally represent and warrant to, and agree with, each of the Underwriters that: (i) A registration statement on Form S-1 (File No. 333-09129) with respect to the Shares, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (A) if such registration statement, as it may have been amended, has become effective under the Act and information has been omitted therefrom in accordance with Rule 430A under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement) with such changes or insertions as are required by Rule 430A or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Representatives, or (B) if such registration statement, as it may have been amended, has not become effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been provided to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including (i) all financial statements, schedules and exhibits thereto, (ii) all documents (or portions thereof) incorporated by reference therein, and (iii) any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion included in such registration statement or any amendment or post-effective amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement at the time it was or is declared effective), including all documents (or portions thereof) incorporated by reference therein; and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be so filed, such term means the prospectus included in the Registration Statement, in either case, including all documents (or portions thereof) incorporated by reference therein. As used herein, any reference to any statement or information as being "made," "included," "contained," "disclosed" or "set forth" in any Preliminary Prospectus, a Prospectus or any amendment or supplement thereto, or the Registration Statement or any amendment thereto (or other similar references) shall refer both to information and statements actually appearing in such document as well as information and statements incorporated by reference therein. -2- 3 (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued and no proceeding for that purpose has been instituted or threatened by the Commission or the securities authority of any state or other jurisdiction. If the Registration Statement has become effective under the Act, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceeding for that purpose has been instituted or threatened or, to the best knowledge of the Company, contemplated by the Commission or the securities authority of any state or other jurisdiction. (iii) When any Preliminary Prospectus was filed with the Commission it (A) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, and at each Time of Delivery (as hereinafter defined), it (A) contained and will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not and will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and at each Time of Delivery, the Prospectus, as amended or supplemented at any such time, (A) contained and will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not and will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (iii) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you specifically for use therein. It is understood that the statements set forth in each Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto (W) in -3- 4 the last paragraph of the cover page, (X) on the inside cover page with respect to stabilization and passive market making, (Y) under the section entitled "Underwriting" regarding the Underwriters and the underwriting arrangements, and (Z) under the section entitled "Legal Matters" regarding the identity of the counsel for the Underwriters, constitute the only written information furnished to the Company by or on behalf of any Underwriter through you specifically for use in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus and any amendment or supplement thereto, as the case may be. (iv) The descriptions in the Registration Statement and the Prospectus of laws, statutes, regulations, legal and governmental proceedings, contracts and other documents are accurate in all material respects; and there are no laws, statutes, regulations, or legal or governmental proceedings required to be described in the Registration Statement or the Prospectus that are not described as required and no contracts or documents of a character that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. (v) Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has full power and authority (corporate and other) to own or lease its properties and conduct its business as described in the Prospectus. Each of the Company and Parent has full power and authority (corporate and other) to enter into this Agreement and to perform its obligations hereunder. Each of the Company and its subsidiaries is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole (a "Material Adverse Event"). (vi) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the descriptions of the Common Stock contained in the Prospectus. None of the issued shares of capital stock of the Company or any of its subsidiaries has been issued or is owned or held in violation of any statutory (or to the knowledge of the Company, any other) preemptive rights of shareholders, and no person or entity (including any holder of outstanding shares of capital stock of the Company or its subsidiaries) has any statutory (or to the knowledge of the -4- 5 Company, any other) preemptive or other rights to subscribe for any of the Shares. None of the capital stock of the Company has been issued in violation of applicable federal or state securities laws. (vii) All of the issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company or a subsidiary of the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, defects, shareholders' agreements, voting agreements, proxies, voting trusts, equities or claims of any nature whatsoever. Other than the subsidiaries listed on Exhibit 21 to the Registration Statement and the equity securities held in the investment portfolios of such subsidiaries (the composition of which is not materially different than the disclosures in the Prospectus as of specific dates), the Company does not own, directly or indirectly, any capital stock or other equity securities of any other corporation or any ownership interest in any partnership, joint venture or other association. (viii) Except as disclosed in the Prospectus, there are no outstanding (A) securities or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (ix) Since the date of the most recent audited financial statements included in the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as disclosed in or contemplated by the Prospectus and other than pursuant to claims made by insureds in the ordinary course of business under policies issued by the Company's subsidiaries. (x) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) neither the Company nor any of its subsidiaries has incurred any liabilities or obligations, direct or contingent, or entered into any transactions, not in the ordinary course of business, that are material to the Company and its subsidiaries, (B) the Company has not purchased any of its outstanding capital stock or declared, paid or otherwise made any dividend or distribution of any kind on its capital stock, -5- 6 (C) there has not been any change in the capital stock, long-term debt or short-term debt of the Company or any of its subsidiaries, and (D) there has not been any material adverse change, or any development involving a prospective material adverse change, in or affecting the financial position, results of operations or business of the Company and its subsidiaries, in each case other than as disclosed in or contemplated by the Prospectus. (xi) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement (or any such right has been effectively waived) or any securities being registered pursuant to any other registration statement filed by the Company under the Act. (xii) Neither the Company nor any of its subsidiaries is, or with the giving of notice or passage of time or both would be, in violation of its Articles of Incorporation or Bylaws or in default in any material respect under any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or to which any of their respective properties or assets are subject. (xiii) The Company and its subsidiaries have good and marketable title in fee simple to all real property, if any, and good title to all personal property owned by them, in each case free and clear of all liens, security interests, pledges, charges, encumbrances, mortgages and defects, except such as are disclosed in the Prospectus or such as do not constitute a Material Adverse Event and do not interfere with the use made or proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company or any of its subsidiaries are held under valid, subsisting and enforceable leases, with such exceptions as are disclosed in the Prospectus or are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary. (xiv) Neither the Company nor Parent requires any consent, approval, authorization, order or declaration of or from, or registration, qualification or filing with, any court or governmental agency or body in connection with the sale of the Shares or the consummation of the transactions contemplated by this Agreement in order for the Company to be permitted to increase the capital and surplus of the Company's insurance company subsidiaries as contemplated in the "Use of Proceeds" section of the Prospectus, the registration of the Shares under -6- 7 the Act (which, if the Registration Statement is not effective as of the time of execution hereof, shall be obtained as provided in this Agreement) and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such as may be required under state securities or blue sky laws in connection with the offer, sale and distribution of the Shares by the Underwriters. (xv) Other than as disclosed in the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation (including without limitation, any insurance regulatory proceeding) pending or, to the best of the Company's or Parent's knowledge, as the case may be, threatened in which the Company or any of its subsidiaries or Parent is a party or of which any of their respective properties or assets are the subject which, if determined adversely to the Company or any such subsidiary or Parent, would individually or in the aggregate constitute a Material Adverse Event. Neither the Company nor any of its subsidiaries nor Parent is in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate constitute a Material Adverse Event, and neither the Company nor any of its subsidiaries nor Parent is required to take any action in order to avoid any such violation or default. (xvi) To the best of the Company's knowledge, Coopers & Lybrand L.L.P., who have certified certain financial statements of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus, are independent public accountants as required by the Act, the Exchange Act and the respective rules and regulations of the Commission thereunder. (xvii) The consolidated financial statements and schedules (including the related notes) of the Company and its consolidated subsidiaries included in the Registration Statement, the Prospectus and/or any Preliminary Prospectus were prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved and fairly present the financial position and results of operations of the Company and its subsidiaries, on a consolidated basis, at the dates and for the periods presented. The selected financial data set forth under the captions "Summary Company Consolidated Financial Data," "Summary Superior Consolidated Financial Data," "Selected Consolidated Historical Financial Data of Symons International Group, Inc.," "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company," "Selected Consolidated Historical Financial Data of Superior Insurance Company" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Superior" in the Prospectus fairly present, on the basis stated in the Prospectus, the information included therein, and have -7- 8 been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The supporting notes and schedules included in the Registration Statement, the Prospectus and/or any Preliminary Prospectus fairly state in all material respects the information required to be stated therein in relation to the financial statements taken as a whole. The unaudited interim consolidated financial statements included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of Rule 10-01 of Regulation S-X under the Act. (xviii) This Agreement has been duly authorized, executed and delivered by each of the Company and Parent, and, assuming due execution by the Representatives of the Underwriters, constitutes the valid and binding agreement of each of the Company and Parent, enforceable against the Company and Parent in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles and except as the enforceability of rights to indemnity and contribution under this Agreement may be limited under applicable securities laws or the public policy underlying such laws. (xix) The sale of the Shares and the performance of this Agreement and the consummation of the transactions herein contemplated will not (with or without the giving of notice or the passage of time or both) (A) conflict with any term or provision of the articles of incorporation or bylaws, or other organizational documents, of the Company or Parent, (B) result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Company or Parent is a party or to which any of their respective properties or assets are subject, (C) conflict with or violate any provision of the governing instruments of the Company or Parent or any law, statute, rule or regulation or any order, judgment or decree of any court or governmental agency or body having jurisdiction over the Company or Parent or any of the properties or assets of the Company or Parent or (D) result in a breach, termination or lapse of the corporate power and authority of the Company or Parent to own or lease and operate its assets and properties and conduct its business as described in the Prospectus. (xx) When the Shares have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and non-assessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The certificates representing the Shares are in proper legal form under, and conform in all respects to the requirements of, the Indiana -8- 9 Business Corporation Law, as amended. Neither the filing of the Registration Statement nor the offering or sale of Shares as contemplated by this Agreement gives any security holder of the Company any rights for or relating to the registration of any shares of Common Stock or any other capital stock of the Company, except such as have been satisfied or waived. (xxi) The Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, a Preliminary Prospectus, the Prospectus and other material, if any, permitted by the Act. (xxii) Neither the Company nor any of its officers, directors or affiliates nor Parent has (A) taken, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company or Parent to facilitate the sale or resale of the Shares or (B) since the filing of the Registration Statement (1) sold, bid for, purchased or paid anyone any compensation for soliciting purchases of, the Shares or (2) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company or Parent. (xxiii) Neither the Company, any of its subsidiaries, nor any director, officer, employee or other person associated with or acting on behalf of the Company or any such subsidiary has, directly or indirectly, violated any provision of the Foreign Corrupt Practices Act of 1977, as amended. (xxiv) The operations of the Company and its subsidiaries with respect to any real property currently leased or owned or by any means controlled by the Company or any subsidiary (the "Real Property") are in compliance in all material respects with all federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Laws"), and the Company and its subsidiaries have not violated any Laws in a way which would give rise to a Material Adverse Event. Except as disclosed in the Prospectus, there is no pending or, to the best of the Company's knowledge, threatened claim, litigation or any administrative agency proceeding, nor has the Company or any subsidiary received any written or oral notice from any governmental entity or third party, that: (A) alleges a material violation of any Laws by the Company or any subsidiary or (B) alleges the Company or any subsidiary is a liable party under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq. or any state superfund law. -9- 10 (xxv) The Company and each of its subsidiaries owns or has the right to use patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles"); and, to the best knowledge of the Company, neither the Company nor any subsidiary has infringed or is infringing, and neither the Company nor any subsidiary has received notice of infringement with respect to, asserted Intangibles of others. (xxvi) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a comparable cost, except as disclosed in the Prospectus. The foregoing representation is not intended to and does not relate to any reinsurance contracts, agreements or treaties to which the Company or any of its subsidiaries is a party. (xxvii) Each of the Company and its subsidiaries makes and keeps accurate books and records reflecting its assets and maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of the Company's consolidated financial statements in accordance with generally accepted accounting principles and to maintain accountability for the assets of the Company, (C) access to the assets of the Company and each of its subsidiaries is permitted only in accordance with management's authorization and (D) the recorded accountability for assets of the Company and each of its subsidiaries is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxviii) The Company and its subsidiaries have filed all foreign, federal, state and local tax returns that are required to be filed by them and have paid all taxes shown as due on such returns as well as all other taxes, assessments and governmental charges that are due and payable; and no material deficiency with respect to any such return has been assessed or proposed. (xxix) Except for such plans that are expressly disclosed in the Prospectus, the Company and its subsidiaries do not have any employee benefit plan, profit sharing plan, employee pension benefit plan or employee welfare benefit plan or deferred -10- 11 compensation arrangements ("Plans") that are subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder ("ERISA"). All Plans that are subject to ERISA are in compliance with ERISA in all material respects, and, to the extent required by the Internal Revenue Code of 1986, as amended (the "Code"), are in compliance with the Code in all material respects. Neither the Company nor any subsidiary has any employee pension benefit plan that is subject to Part 3 of Subtitle B of Title I of ERISA or any defined benefit plan or multi-employer plan. The Company does not maintain retired life and retired health insurance plans that are employee welfare benefit plans providing for continuing benefit or coverage for any employee or any beneficiary of any employee after such employee's termination of employment, except as required by Section 4980B of the Code. No fiduciary or other party in interest with respect to any of the Plans has caused any of such Plans to engage in a prohibited transaction as defined in Section 406 of ERISA. As used in this subsection, the terms "defined benefit plan," "employee benefit plan," "employee pension benefit plan," "employee welfare benefit plan," "fiduciary" and "multi-employer plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA. (xxx) No material labor dispute exists with the Company's or any of its subsidiary's employees, and no such labor dispute is threatened. The Company has no knowledge of any existing or threatened labor disturbance by the employees of any of its principal agents, suppliers, contractors or customers that would give rise to a Material Adverse Event. (xxxi) Each contract or other instrument (however characterized or described) to which the Company or any subsidiary is a party or by which any of its properties or business is bound or affected and which is material to the conduct of the Company's business as described in the Prospectus has been duly and validly executed by the Company or such subsidiary, and, to the knowledge of the Company, by the other parties thereto. Each such contract or other instrument is in full force and effect and is enforceable against the parties thereto in accordance with its terms, and the Company and each of its subsidiaries are not, and to the knowledge of the Company, no other party is, in default thereunder, nor has any event occurred that, with the lapse of time or the giving of notice, or both, would constitute a default under any such contract or other instrument. All necessary consents under such contracts or other instruments to disclosure in the Prospectus with respect thereto have been obtained. (xxxii) The Company and its subsidiaries have received all permits, licenses, franchises, authorizations, registrations, qualifications and approvals (collectively, "Permits") of governmental or regulatory authorities (including, without limitation, state and/or other insurance regulatory -11- 12 authorities) as may be required of them to own their properties and conduct their businesses in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; and the Company and its subsidiaries have fulfilled and performed all of their material obligations with respect to such Permits, and no event has occurred which allows or, after notice or lapse of time or both, would allow revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, such Permits contain no restrictions that materially affect the ability of the Company and its subsidiaries to conduct their businesses. (xxxiii) The Company and each of its subsidiaries have filed, or has had filed on its behalf, on a timely basis, all materials, reports, documents and information, including but not limited to annual reports and reports of examination with each applicable insurance regulatory authority, board or agency, which are required to be filed by it, except where the failure to have timely filed such materials, reports, documents and information would not constitute a Material Adverse Event. (xxxiv) Neither Parent nor the Company nor any of the Company's subsidiaries is an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and, if the Company conducts its business as set forth in the Registration Statement and the Prospectus, will not become an "investment company" and will not be required to register under the Investment Company Act. (xxxv) To the best knowledge of the Company, none of the officers, directors or shareholders holding 5% or more of any class of the Company's capital stock are affiliated with any member of the National Association of Securities Dealers, Inc. (the "NASD"). Any certificate signed by any officer of the Company or any subsidiary in such capacity and delivered to the Representatives or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company or such subsidiary to the several Underwriters as to the matters covered thereby. 2. Purchase and Sale of Shares. (a) Subject to the terms and conditions herein set forth, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of ________ Dollars and ________ cents ($_____) per share (the "Per -12- 13 Share Price"), the number of Company Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Shares to be sold by the Company as set forth in the first paragraph of this Agreement by a fraction, the numerator of which is the aggregate number of Company Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto, and the denominator of which is the aggregate number of Company Shares to be purchased by the several Underwriters hereunder. (b) The Company hereby grants to the Underwriters the right to purchase at their election in whole or in part from time to time up to Four Hundred Fifty Thousand (450,000) Optional Shares, at the Per Share Price, for the sole purpose of covering overallotments in the sale of the Company Shares. Any such election to purchase Optional Shares may be exercised by written notice from the Representatives to the Company, given from time to time within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as hereinafter defined) or, unless you otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. In the event you elect to purchase all or a portion of the Optional Shares, the Company agrees to furnish or cause to be furnished to you the certificates, letters and opinions, and to satisfy all conditions, set forth in Section 7 hereof at each Subsequent Time of Delivery (as hereinafter defined). (c) In making this Agreement, each Underwriter is contracting severally, and not jointly, and except as provided in Sections 2(b) and 9 hereof, the agreement of each Underwriter is to purchase only that number of shares specified with respect to that Underwriter in Schedule I hereto. No Underwriter shall be under any obligation to purchase any Optional Shares prior to an exercise of the option with respect to such Shares granted pursuant to Section 2(b) hereof. 3. Offering by the Underwriters. Upon the authorization by you of the release of the Shares, the several Underwriters propose to offer the Shares for sale upon the terms and conditions disclosed in the Prospectus. 4. Delivery of Shares; Closing. (a) Certificates in definitive form for the Shares to be purchased by each Underwriter hereunder, and in such denominations and registered in such names as you may request upon at least 48 hours' prior notice to the Company, shall be delivered by or on behalf of the Company, to you for the account of such Underwriter, against payment by such Underwriter on its behalf of the purchase price therefor by (at the Representatives' -13- 14 election) wire transfer of immediately available funds to such accounts as the Company (as the case may be) shall designate in writing, or by official bank check or checks (payable in next day funds), payable to the order of the Company in next-day available funds. The closing of the sale and purchase of the Shares shall be held at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York 10019, except that physical delivery of such certificates shall be made at the office of The Depository Trust Company, 55 North Water Street, New York, New York 10041. The time and date of such delivery and payment shall be, with respect to the Company Shares, at 10:00 a.m., New York, New York time, on the third (3rd) full business day after this Agreement is executed or at such other time and date as you and the Company may agree upon in writing, and, with respect to the Optional Shares, at 10:00 a.m., New York, New York time, on the date specified by you in the written notice given by you of the Underwriters' election to purchase all or part of such Optional Shares, or at such other time and date as you and the Company may agree upon in writing. Such time and date for delivery of the Company Shares is herein called the "First Time of Delivery," such time and date for delivery of any Optional Shares, if not the First Time of Delivery, is herein called a "Subsequent Time of Delivery," and each such time and date for delivery is herein called a "Time of Delivery." The Company will make such certificates available for checking and packaging at least 24 hours prior to each Time of Delivery at the office of The Depository Trust Company, 55 North Water Street, New York, New York 10041 or at such other location specified by you in writing at least 48 hours prior to such Time of Delivery. 5. Covenants of the Company. The Company and the Parent covenant and agree with each of the Underwriters that: (i) The Company will use its best efforts to cause the Registration Statement, if not effective prior to the execution and delivery of this Agreement, to become effective. If the Registration Statement has been declared effective prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by you, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifth business day after the date on which the Registration Statement is declared effective. The Company will advise you promptly of any such filing pursuant to Rule 424(b). The Company will file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering, sale and distribution of the Shares. -14- 15 (ii) The Company will not file with the Commission the prospectus or the amendment referred to in the second sentence of Section 1(a)(i) hereof, any amendment or supplement to the Prospectus or any amendment to the Registration Statement unless you have received a reasonable period of time to review any such proposed amendment or supplement and consented to the filing thereof and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective as promptly as possible. Upon the request of the Representatives or counsel for the Underwriters, the Company will promptly prepare and file with the Commission, in accordance with the rules and regulations of the Commission, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the several Underwriters and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective as promptly as possible. If required, the Company will file any amendment or supplement to the Prospectus with the Commission in the manner and within the time period required by Rule 424(b) under the Act. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence to the Representatives of each such filing or effectiveness. (iii) The Company will advise you promptly after receiving notice or obtaining knowledge of (A) when any post-effective amendment to the Registration Statement is filed with the Commission, (B) the receipt of any comments from the Commission concerning the Registration Statement, (C) when any post-effective amendment to the Registration Statement becomes effective, or when any supplement to the Prospectus or any amended Prospectus has been filed, (D) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any part thereof or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (E) the suspension of the qualification of the Shares for offer or sale in any jurisdiction or of the initiation or threatening of any proceeding for any such purpose, (F) any request made by the Commission or any securities authority of any other jurisdiction for amending the Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order or suspension and, if any such stop order or suspension is issued, to obtain the withdrawal thereof as promptly as possible. (iv) If the delivery of a prospectus relating to the Shares is required under the Act at any time prior to the expiration of nine months after the date of the Prospectus and if -15- 16 at such time any events have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any reason it is necessary during such same period to amend or supplement the Prospectus, the Company will promptly notify you and upon your request (but at the Company's expense) prepare and file with the Commission an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance and will furnish without charge to each Underwriter and to any dealer in securities as many copies of such amended or supplemented Prospectus as you may from time to time reasonably request. If the delivery of a prospectus relating to the Shares is required under the Act at any time nine months or more after the date of the Prospectus, upon your request but at the expense of such Underwriter, the Company will prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act. (v) The Company promptly from time to time will take such action as you may reasonably request to qualify the Shares for offering and sale under the securities or blue sky laws of such jurisdictions as you may request and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction. (vi) The Company will promptly provide you, without charge, (A) three manually executed copies of the Registration Statement as originally filed with the Commission and of each amendment thereto, including all exhibits and all documents or information incorporated by reference therein, (B) for each other Underwriter a conformed copy of the Registration Statement as originally filed and of each amendment thereto, without exhibits but including all documents or information incorporated by reference therein and (C) so long as a prospectus relating to the Shares is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as you may reasonably request. (vii) As soon as practicable, but in any event not later than the last day of the thirteenth month after the effective date of the Registration Statement, the Company will make generally available to its security holders an earnings statement of the Company and its subsidiaries, if any, covering a period of at least 12 months beginning after the effective date of the Registration Statement (which need not be audited) -16- 17 complying with Section 11(a) of the Act and the rules and regulations thereunder. (viii) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, the Company and Parent will not, without your prior written consent, offer, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exercisable or exchangeable for shares of Common Stock, except as provided in Section 2. (ix) During the period of three years after the effective date of the Registration Statement, the Company will furnish to you and, upon request, to each of the other Underwriters, without charge, (A) copies of all reports or other communications (financial or other) furnished to shareholders and (B) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission, the National Association of Securities Dealers, Inc. or any national securities exchange. (x) Prior to the termination of the underwriting syndicate contemplated by this Agreement, neither the Company nor any of its officers, directors or affiliates nor Parent will (A) take, directly or indirectly, any action designed to cause or to result in, or that might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Shares or (B) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of, the Shares. (xi) If at any time during the period beginning on the date the Registration Statement becomes effective and ending on the later of (A) the date 30 days after such effective date and (B) the date that is the earlier of (1) the date on which the Company first files with the Commission a Quarterly Report on Form 10-Q after such effective date and (2) the date on which the Company first issues a quarterly financial report to shareholders after such effective date, (x) any publication or event relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such publication or event necessitates an amendment of or supplement to the Prospectus), or (y) any rumor relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor necessitates an amendment of or supplement to the Prospectus), the Company will consult with you concerning the necessity of a press release or other public statement, and, if the Company determines that a press release or other public -17- 18 statement is necessary, the Company will forthwith prepare and consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such publication, event or rumor. (xii) The Company will comply with the Act, the Exchange Act and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Shares for as long as may be necessary to complete the distribution of the Shares as contemplated hereby. (xiii) In case of any event, at any time within the period during which a prospectus is required to be delivered under the Act, as a result of which any Preliminary Prospectus or the Prospectus, as then amended or supplemented, would contain an untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or, if it is necessary at any time to amend any Preliminary Prospectus or the Prospectus to comply with the Act or any applicable securities or blue sky laws, the Company promptly will prepare and file with the Commission, and any applicable state securities commission, an amendment, supplement or document that will correct such statement or omission or effect such compliance and will furnish to the several Underwriters such number of copies of such amendment(s), supplement(s) or document(s) as the Representatives may reasonably request. For purposes of this subsection, the Company will provide such information to the Representatives, the Underwriters' counsel and counsel to the Company as shall be necessary to enable such persons to consult with the Company with respect to the need to amend or supplement the Registration Statement, any Preliminary Prospectus or the Prospectus or file any document, and shall furnish to the Representatives and the Underwriters' counsel such further information as each may from time to time reasonably request. (xiv) The Company will use its best efforts to maintain the qualification or listing of the shares of Common Stock (including, without limitation, the Shares) on the Nasdaq National Market. 6. Expenses. The Company will pay all costs and expenses incident to the performance of the obligations of the Company under this Agreement, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated pursuant to Section 10 hereof, including, without limitation, all costs and expenses incident to (i) the printing of and mailing expenses associated with the Registration Statement, the Preliminary Prospectus and the Prospectus and any amendments or supplements thereto, this Agreement, the Agreement among Underwriters, the underwriters' questionnaire submitted to -18- 19 each of the Underwriters by the Representatives in connection herewith, the power of attorney executed by each of the Underwriters in favor of Advest, Inc. in connection herewith, the Dealer Agreement and related documents (collectively, the "Underwriting Documents") and the preliminary Blue Sky memorandum relating to the offering prepared by LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Underwriters (collectively with any supplement thereto, the "Preliminary Blue Sky Memorandum"); (ii) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation and, if applicable, filing of the Registration Statement (including all amendments thereto), any Preliminary Prospectus, the Prospectus and any amendments and supplements thereto, the Underwriting Documents and the Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing documents to the Underwriters; (iv) the filing fees of the Commission and the NASD relating to the Shares; (v) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Shares, including transfer agent's and registrar's fees; (vi) the qualification of the Shares for offering and sale under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters (and local counsel therefor) relating thereto; (vii) any listing of the Shares on the Nasdaq National Market; (viii) any expenses for travel, lodging and meals incurred by the Company and any of its officers, directors and employees in connection with any meetings with prospective investors in the Shares; (ix) the costs of advertising the offering, including, without limitation, with respect to the placement of "tombstone" advertisements in publications selected by the Representatives; and (x) all other costs and expenses reasonably incident to the performance of the Company's obligations hereunder that are not otherwise specifically provided for in this Section 6. 7. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder to purchase and pay for the Shares to be delivered at each Time of Delivery shall be subject, in their discretion, to the accuracy of the representations and warranties of each of the Company and Parent contained herein as of the date hereof and as of such Time of Delivery, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by each of the Company and Parent of its covenants and agreements hereunder, and to the following additional conditions precedent: (a) If the registration statement as amended to date has not become effective prior to the execution of this Agreement, such registration statement shall have been declared effective not later than 11:00 a.m., Hartford, Connecticut time, on the date of this Agreement or such later date and/or time as shall have been consented to by you in writing. The Prospectus and any amendment or supplement thereto shall have been filed -19- 20 with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing and in accordance with Section 5(a) of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceedings for that purpose shall have been instituted, threatened or, to the knowledge of the Company, Parent or the Representatives, contemplated by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction. (b) All corporate proceedings and other matters incident to the authorization, form and validity of this Agreement, the Shares and the form of the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby, shall be satisfactory in all material respects to counsel to the Underwriters. (c) The Representatives shall have received copies of executed lock-up agreements from each of Parent, the Company and the Company's officers and directors who hold shares of Common Stock or who may be issued shares of Common Stock under an option plan or other arrangement to the effect that such individuals and entities will not offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock held by them for a period of 180 days after the date of the Prospectus without the written consent of Advest, Inc. (d) The Representatives shall have received at or prior to the First Time of Delivery from the Underwriters' counsel the Preliminary Blue Sky Memorandum, such memorandum to be in form and substance satisfactory to the Representatives. (e) LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Underwriters, shall have furnished to you such opinion or opinions, dated such Time of Delivery, with respect to the incorporation of the Company, the validity of the Shares being delivered at such Time of Delivery, the Registration Statement, the Prospectus, and other related matters as you may reasonably request, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (f) The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of any of the Shares. (g) You shall have received an opinion, dated such Time of Delivery, of Barnes & Thornburg, counsel for the Company, in form and substance satisfactory to you and your counsel, to the effect that: -20- 21 (i) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Indiana and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and to enter into this Agreement and perform its obligations hereunder. The Company is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases property, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. Parent has been duly incorporated, is validly existing as a federally chartered corporation in good standing under the laws of Canada and has the corporate power and authority to enter into this Agreement and perform its obligations hereunder. (ii) Each of the subsidiaries of the Company is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus. Each such subsidiary is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases property, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. (iii) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description of the Common Stock contained in the Prospectus. None of the issued shares of Common Stock of the Company or capital stock of any of its subsidiaries has been issued or is owned or held in violation of any statutory (or, to the knowledge of such counsel, any other) preemptive rights of shareholders, and no person or entity (including any holder of outstanding shares of Common Stock of the Company or capital stock of its subsidiaries) has any statutory (or, to the knowledge of such counsel, any other) preemptive or other rights to subscribe for any of the Shares. (iv) All of the issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and, to the best of such counsel's knowledge, are owned beneficially by the Company or its subsidiaries, free and clear of all liens, security interests, pledges, charges, encumbrances, -21- 22 shareholders' agreements, voting agreements, proxies, voting trusts, defects, equities or claims of any nature whatsoever (collectively, "Encumbrances"), including, without limitation, Encumbrances arising or resulting from any indenture, mortgage, deed of trust, loan agreement, lease or other agreement of or entered into by Parent. To the best of such counsel's knowledge, other than the subsidiaries listed on Exhibit 21 to the Registration Statement and the equity securities held in the investment portfolios of the Company and such subsidiaries, the Company does not own, directly or indirectly, any capital stock or other equity securities of any other corporation or any ownership interest in any partnership, joint venture or other association. (v) Except as disclosed in the Prospectus, there are, to the best of such counsel's knowledge, no outstanding (A) securities or obligations of Parent, the Company or any of the Company's subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from Parent, the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of Parent, the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (vi) When the Shares have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be duly authorized, validly issued and fully paid and nonassessable, the holders thereof will not be subject to personal liability solely by reason of being such holders and the Shares will conform to the description of the Common Stock contained in the Prospectus; the certificates evidencing the Shares will comply with all applicable requirements of Indiana law; and the Shares will have been listed on the Nasdaq National Market. (vii) To the best of such counsel's knowledge, there are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement (or any such right has been effectively waived) or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (viii) To the best of such counsel's knowledge, neither the Company nor any of its subsidiaries nor Parent is, or with the giving of notice or passage of time or both, would be, -22- 23 in violation of its Articles of Incorporation or Bylaws, in each case as amended to date, or, in default in any material respect under any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel to which the Company, any such subsidiary or Parent is a party or to which any of their respective properties or assets is subject. (ix) The sale of the Shares being sold at such Time of Delivery and the performance of this Agreement and the consummation of the transactions herein contemplated will not conflict with or violate any provision of the Articles of Incorporation or Bylaws of the Company, any of its subsidiaries or Parent, in each case as amended to date, or to the best of such counsel's knowledge, any existing law, statute, rule or regulation, or in any material respect, conflict with, or (with or without the giving of notice or the passage of time or both) result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel to which the Company, any such subsidiary or Parent is a party or to which any of their respective properties or assets is subject, or, conflict with or violate any order, judgment or decree known to such counsel, of any court or governmental agency or body having jurisdiction over the Company, any of its subsidiaries or Parent or any of their respective properties or assets, except with respect to any statute, rule or regulation of any regulatory authority imposing any obligation on the part of the Underwriters by way of their purchase of the Shares, as to which no opinion need be rendered. (x) To the best of such counsel's knowledge, no consent, approval, authorization, order or declaration of or from, or registration, qualification or filing with, any court or governmental agency or body is required for the sale of the Shares or the consummation of the transactions contemplated by this Agreement, except such as have been or will have been obtained and are or will be in effect, and except the registration of the Shares under the Act, the Exchange Act and such as may be required under state securities or blue sky laws in connection with the offer, sale and distribution of the Shares by the Underwriters. (xi) To the best of such counsel's knowledge and other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which the Company, any of its subsidiaries or Parent is a party or of which any of their respective properties or assets is the subject which, if determined adversely to the Company, any such subsidiary or Parent, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole; and, to the best of such counsel's knowledge, neither -23- 24 the Company nor any of its subsidiaries nor Parent is in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole, nor is the Company, any such subsidiary or Parent required to take any action in order to avoid any such violation or default. (xii) The statements in the Prospectus under "Business -- Regulation," "Business -- Legal Proceedings," "Description of Capital Stock" and "Shares Eligible for Future Sale" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations, or legal conclusions, are correct in all material respects. (xiii) This Agreement has been duly authorized, executed and delivered by each of the Company and Parent and, assuming due execution by the Representatives of the Underwriters, constitutes the valid and binding agreement of each of the Company and Parent, enforceable against each of the Company and Parent, in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles and except as the enforceability of rights to indemnity and contribution under this Agreement may be limited under applicable securities laws or the public policy underlying such laws. (xiv) Neither the Company nor any of its subsidiaries nor Parent is an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as amended, and, if the Company conducts its business as set forth in the Registration Statement and the Prospectus, will not become an "investment company" and will not be required to register under the Investment Company Act of 1940, as amended. (xv) All offers and sales of the Company's capital stock prior to the date hereof were at all relevant times duly registered or exempt from the registration requirements of the Act, and were duly registered or the subject of an available exemption from the registration requirements of the applicable state securities or blue sky laws, or any actions in respect thereof are barred by the applicable statutes of limitations. (xvi) To the best of such counsel's knowledge, the Company, each of its subsidiaries and Parent have received all permits, licenses, franchises, authorizations, registrations, -24- 25 qualifications and approvals (collectively, "permits") of governmental or regulatory authorities (including, without limitation, state and/or other insurance regulatory authorities) as may be required of them to own their properties and to conduct their businesses in the manner described in the Prospectus, subject to such qualification as may be set forth in the Prospectus; to the best of such counsel's knowledge, the Company and each of its subsidiaries have fulfilled and performed all of their material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time or both would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such permits, subject in each case to such qualifications as may be set forth in the Prospectus; and other than as described in the Prospectus, such permits contain no restrictions that materially affect the ability of the Company and its subsidiaries to conduct their businesses. (xvii) The Registration Statement and the Prospectus and each amendment or supplement thereto (other than the financial statements, the notes and schedules thereto and other financial data included therein, to which such counsel need express no opinion), as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the respective rules and regulations thereunder. The descriptions in the Registration Statement and the Prospectus of contracts and other documents are accurate and fairly present the information required to be shown; and such counsel do not know of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required. (xviii) Such counsel has been advised by the Division of Corporation Finance of the Commission that the Registration Statement has become effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of such counsel's knowledge, (A) no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and (B) no proceedings for that purpose have been instituted or threatened or are contemplated by the Commission. Such counsel shall also state that they have participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and representatives of and counsel to the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel has not passed upon or assumed any responsibility for the accuracy, -25- 26 completeness or fairness of the statements contained in the Registration Statement or the Prospectus, and although such counsel has not undertaken to verify independently the accuracy or completeness of the statements in the Registration Statement or the Prospectus and, therefore, would not necessarily have become aware of any material misstatement of fact or omission to state a material fact, on the basis of and subject to the foregoing, nothing has come to such counsel's attention to lead them to believe that the Registration Statement, or any further amendment thereto made prior to such Time of Delivery, on its effective date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, or any amendment or supplement thereto made prior to such Time of Delivery, as of its issue date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements, the notes and schedules thereto and other financial data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deem proper, on certificates of officers of the Company and Parent, and public officials and letters from officials of the NASD and on the opinions of other counsel reasonably satisfactory to you and your counsel as to matters which are governed by laws other than the laws of the State of Indiana and the Federal laws of the United States; provided that such counsel shall state in their opinion that they are so relying, and they are justified in relying on such other opinions. Copies of such certificates of officers of the Company and Parent and other opinions shall be addressed and furnished to the Underwriters and furnished to counsel for the Underwriters. (h) You shall have received from Coopers & Lybrand L.L.P., letters dated, respectively, the date hereof (or, if the Registration Statement has been declared effective prior to the execution and delivery of this Agreement, dated such effective date and the date of this Agreement) and each Time of Delivery, in form and substance satisfactory to you, which letters shall cover such matters as you shall request as well as: (i) confirming that they are independent certified public accountants (within the meaning of the Act) with respect to the Company and its subsidiaries; -26- 27 (ii) stating that, in their opinion, the financial statements, certain summary and selected consolidated financial and operating data, and any supplementary financial information and schedules audited by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act; and they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, and any supplementary financial information and schedules, selected financial data, and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, and, as indicated in their report thereon, copies of which have been furnished to the Representatives; (iii) stating that, on the basis of specified procedures, which included the procedures specified by the American Institute of Certified Public Accountants ("AICPA") for a review of interim financial information, as described in SFAS No. 71, Interim Financial Information (with respect to the latest unaudited consolidated financial statements of the Company included in the Registration Statement), a reading of the latest available unaudited interim consolidated financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the meetings of the shareholders and the Board of Directors of the Company and its subsidiaries, and audit and compensation committees of such Boards, if any, and inquiries to certain officers and other employees of the Company and its subsidiaries responsible for operational, financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention that would cause them to believe that (A) the unaudited consolidated financial statements included in the Registration Statement (1) do not comply in form in all material respects with the applicable accounting requirements of the Act or (2) any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available unaudited interim consolidated financial statements of the Company and a specified date not more than five business days prior to the date of such letter, there was any change in the capital stock and other items specified by the Representatives, increase in long-term debt, decrease in net current assets, total assets, investments or shareholders' equity of the Company and its subsidiaries, as compared with the amounts shown in the June 30, 1996 unaudited consolidated balance sheet of the Company included in the Registration Statement, or that for the periods from June 30, 1996 to the date of the latest available unaudited financial statements of the Company and to a specified date not more than five days prior to the date of the letter, there were any decreases, as compared to the corresponding periods in the prior year, in gross premiums -27- 28 written, net investment income, net realized capital gains, or total or per share amounts of net income, or other items specified by the Representatives, except in all instances for changes, decreases or increases which the Registration Statement discloses have occurred or may occur and except for such other changes, decreases or increases which the Representatives shall in their sole discretion accept; or (C) any other unaudited income statement data and balance sheet items included in the Registration Statement do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included or incorporated by reference in the Registration Statement; (iv) stating that, on the basis of a reading of the unaudited pro forma financial statements included in the Registration Statement and the Prospectus (the "pro forma financial statements"), carrying out certain specified procedures, inquiries of certain officials of the Company and its subsidiary, Superior Insurance Company who have responsibility for financial and accounting matters, and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing has come to their attention that would cause them to believe that the pro forma financial statements do not comply in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements; (v) stating that they have compared specific dollar amounts, numbers of shares, percentage of revenues and earnings statements and other numerical data and financial information pertaining to the Company and its subsidiaries set forth in the Registration Statement and all of the dollar amounts and percentages in the Registration Statement, in each case to the extent that such information is derived from the accounting records subject to the internal control structure, policies and procedures of the Company's and its subsidiaries' accounting system, or has been otherwise derived in a manner permitted by AICPA Statement on Auditing Standards No. 72 with the results obtained from the application of specific readings, inquiries and other appropriate procedures (which procedures do not constitute an audit in accordance with generally accepted auditing standards) set forth in the letter and with the accounting records of the Company and its subsidiaries, and found them to be in agreement. In the event that the letters referred to in this Section 7(h) set forth any changes, decreases or increases in the items identified by you, it shall be a further condition to the -28- 29 obligations of the Underwriters that (i) such letters shall be accompanied by a written explanation by the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary and (ii) such changes, decreases or increases do not, in your sole judgment, make it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date of such letter. (i) Since the date of the latest audited financial statements included in the Prospectus and except pursuant to claims made by insureds in the ordinary course of business under policies of insurance issued by the Company's subsidiaries which claims are reasonably consistent with the Company's historical claims experience, neither the Company nor any of its subsidiaries shall have sustained (i) any loss or interference with their respective businesses from fire, explosion, flood, hurricane or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as disclosed in or contemplated by the Prospectus, or (ii) any change, or any development involving a prospective change (including, without limitation, a change in management or control of the Company), in or affecting the position (financial or otherwise), results of operations, net worth or business prospects of the Company and its subsidiaries, otherwise than as disclosed in or contemplated by the Prospectus, the effect of which, in either such case, is in your sole judgment so material and adverse as to make it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date hereof. (j) Subsequent to the date hereof, there shall not have occurred any of the following: (i) any suspension or limitation in trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or in the Common Stock of the Company by the Commission or the National Association of Securities Dealers Automated Quotation National Market System (except for suspensions or limitations that last only a portion of one business day); (ii) a moratorium on commercial banking activities in New York, Indiana or Connecticut declared by either federal or state authorities; or (iii) any outbreak or escalation of hostilities involving the United States, declaration by the United States of a national emergency or war or any other national or international calamity or emergency if the effect of any such event specified in this clause (iii) in your sole judgment makes it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date hereof. -29- 30 (k) The Company shall have furnished to you at such Time of Delivery certificates of the chief executive and chief financial officers of the Company satisfactory to you, as to the accuracy in all material respects of the respective representations and warranties of the Company herein at and as of such Time of Delivery with the same effect as if made at such Time of Delivery, as to the performance by the Company of all of their respective obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates of such officers as to such matters as you may reasonably request. (l) The representations and warranties of each of the Company and Parent in this Agreement and in the certificates delivered by each of the Company and Parent pursuant to this Agreement shall be true and correct in all material respects when made and on and as of each Time of Delivery as if made at such time, and each of the Company and Parent shall have performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by each of the Company and Parent at or before such Time of Delivery. (m) The Shares shall continue to be listed on the National Association of Securities Dealers Automated Quotation National Market System. (n) The Representatives shall have received copies of executed lock-up agreements from each of Parent, Parent's principal shareholders and Parent's officers and directors who hold shares of common stock of Goran or securities convertible into or exchangeable or exercisable for common stock of Goran to the effect that such individuals and entities will not offer, sell, contract to sell, or otherwise dispose of, any such shares of or securities convertible into or exchangeable or exercisable for common stock of Goran for a period of 180 days after the date of the Prospectus without the prior written consent of Advest, Inc. 8. Indemnification and Contribution. (a) Each of the Company and Parent agrees to jointly and severally indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company or Parent in Section 1(a) of this Agreement; (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (B) any -30- 31 application or other document, or amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"); or (iii) the omission of or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that neither the Company nor Parent shall be liable in any such case to the extent that any such loss, claim, damage, liability or action (i) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you expressly for use therein (which information is solely as set forth in Section 1(a)(iii) hereof) or (ii) is asserted by a person who purchased any of the Shares which are the subject thereof from an Underwriter and if a copy of the Prospectus (as amended or supplemented) which corrected the untrue statement or alleged untrue statement or omission or alleged omission which is the basis of the loss, claim, damage, liability or action for which indemnification is sought was not delivered or given to such person at or prior to the written confirmation of the sale to such person. Neither the Company nor Parent will, without the prior written consent of the Representatives of the Underwriters, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding (or related cause of action or portion thereof) in respect of which indemnification may be sought hereunder (whether or not any Underwriter is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Underwriter from all liability arising out of such claim, action, suit or proceeding (or related cause of action or portion thereof). (b) Each Underwriter, severally but not jointly, agrees to indemnify and hold harmless the Company and Parent against any losses, claims, damages or liabilities to which the Company and Parent may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact -31- 32 contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through you expressly for use therein; and will reimburse the Company and Parent for any legal or other expenses reasonably incurred by the Company and Parent in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party); provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party and such indemnified party shall have the right to select separate counsel to defend such action on behalf of such indemnified party. After such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence or (ii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. -32- 33 Nothing in this Section 8(c) shall preclude an indemnified party from participating at its own expense in the defense of any such action so assumed by the indemnifying party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and Parent on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and Parent on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and Parent on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and Parent bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and Parent on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Parent and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares -33- 34 underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company and Parent under this Section 8 shall be in addition to any liability which the Company and Parent may otherwise have and shall extend, upon the same terms and conditions, and to each officer, director and employee of the Underwriters and to each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and Parent and to each person, if any, who controls the Company or Parent within the meaning of the Act or the Exchange Act. 9. Default of Underwriters. (a) If any Underwriter defaults in its obligation to purchase Shares at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty- six (36) hours after such default by any Underwriter you do not arrange for the purchase of such Shares, the Company shall be entitled to a further period of thirty-six (36) hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone a Time of Delivery for a period of not more than seven (7) days in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus that in your opinion may thereby be made necessary. The cost of preparing, printing and filing any such amendments shall be paid for by the Underwriters. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. -34- 35 (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you or the Company as provided in subsection (a) above, if any, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made. 10. Termination. (a) This Agreement may be terminated with respect to the Company Shares or any Optional Shares in the sole discretion of the Representatives by notice to the Company given prior to the First Time of Delivery or any Subsequent Time of Delivery, respectively, in the event that (i) any condition to the obligations of the Underwriters set forth in Section 7 hereof has not been satisfied, or (ii) the Company shall have failed, refused or been unable to deliver such party's respective Shares or the Company or Parent shall have failed, refused or been unable to perform all obligations and satisfy all conditions on their respective parts to be performed or satisfied hereunder at or prior to such Time of Delivery, in either case other than by reason of a default by any of the Underwriters. If this Agreement is terminated pursuant to this Section 10(a), the Company [and/or Parent] will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in Section 9(a), the aggregate number of such Shares which remains unpurchased exceeds one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in Section 9(b) to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to a Subsequent Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. -35- 36 11. Survival. The respective indemnities, agreements, representations, warranties and other statements of the Company, Parent and their officers and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person referred to in Section 8(e) or the Company, Parent or any officer or director or controlling person of the Company or Parent referred to in Section 8(e), and shall survive delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 12. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed, delivered or telegraphed and confirmed in writing to you in care of Advest, Inc., 90 State House Square, Hartford, CT 06103, Attention: David Minot (with a copy to LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, NY 10019, Attention: Robert S. Rachofsky, Esquire); and if sent to the Company, shall be mailed, delivered or telegraphed and confirmed in writing to Symons International Group, Inc., 4720 Kingsway Drive, Indianapolis, IN 46205, Attention: Alan G. Symons (with a copy to Barnes & Thornburg, 11 South Meridian Street, Indianapolis, IN 46205, Attention: Catherine Bridge, Esquire). 13. Representatives. You will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by you jointly or by Advest, Inc. will be binding upon all the Underwriters. 14. Binding Effect. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company, Parent and to the extent provided in Sections 8 and 10 hereof, the officers, directors and employees and controlling persons referred to therein and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to any provisions regarding conflicts of laws. 16. Counterparts. This Agreement may be executed by any one or more of the parties hereto in any number of -36- 37 counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. If the foregoing is in accordance with your understanding of our agreement, please sign and return to us one of the counterparts hereof, and upon the acceptance hereof by Advest, Inc., on behalf of each of the Underwriters, this letter will constitute a binding agreement among the Underwriters, Parent and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in the Agreement among Underwriters, a copy of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, SYMONS INTERNATIONAL GROUP, INC. By: ----------------------------------- Name: Alan G. Symons Title: Chief Executive Officer GORAN CAPITAL INC. By: ----------------------------------- Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first written above at Hartford, Connecticut. ADVEST, INC. MESIROW FINANCIAL, INC. By: ADVEST, INC. By: ----------------------------------- Name: Phil M. Skidmore Title: Group Vice President Director Investment Banking On behalf of each of the Underwriters -37- 38 JOINDER Each of the subsidiaries of the Company, intending to be legally bound, hereby joins this Agreement for purposes of Sections 1 and 8 hereof. IGF HOLDINGS, INC. By: ----------------------------------- Title IGF INSURANCE COMPANY By: ----------------------------------- Title GGS MANAGEMENT HOLDINGS, INC. By: ----------------------------------- Title PAFCO GENERAL INSURANCE COMPANY By: ----------------------------------- Title SUPERIOR INSURANCE COMPANY By: ----------------------------------- Title 39 SCHEDULE I
Number of Optional Shares to be Total Number Purchased if of Company Shares Maximum Option Underwriter to be Purchased Exercised ----------- --------------- -------------- Advest, Inc. Mesirow Financial, Inc. ------------- -----------
40 EXHIBIT A SUBSIDIARIES IGF Holdings, Inc. IGF Insurance Company GGS Management Holdings, Inc. GGS Management, Inc. Pafco General Insurance Company Superior Insurance Company Superior American Insurance Company Superior Guaranty Insurance Company Standard Plan, Inc. EX-10.2(2) 3 1ST AMEND TO STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.2(2) FIRST AMENDMENT TO THE STOCK PURCHASE AGREEMENT FIRST AMENDMENT TO THE STOCK PURCHASE AGREEMENT (as defined below), dated as of March 28, 1996, by and among GGS MANAGEMENT HOLDINGS, INC., a Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("GSCP"), GORAN CAPITAL INC., a Canadian corporation ("Goran"), and SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation and a wholly-owned subsidiary of Goran ("SIG"). WHEREAS, on January 31, 1996, the Company, GSCP, Goran and SIG entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which, among other things, (i) GSCP agreed to purchase for $20,000,000 in cash 479,975 shares of Company Common Stock (capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Stock Purchase Agreement) and (ii) SIG agreed to contribute to the Company all of the issued and outstanding shares of capital stock of Pafco, which was contemplated to have, as of the Closing Date, a Book Value of $14,000,000; and WHEREAS, the Company, GSCP, Goran and SIG desire to amend the Stock Purchase Agreement and Exhibit J thereto to reflect that (i) GSCP will purchase 479,975 shares of Company Common Stock for $21,200,000 in cash and (ii) that Pafco is contemplated to have, as of the Closing Date, a Book Value of $15,300,000. NOW, THEREFORE, the parties hereto agree to as follows: 1. Amendment to the Stock Purchase Agreement. The following Sections of the Stock Purchase Agreement are hereby amended as follows: (a) Section 1.2 is hereby amended to substitute "$21,200,000" for the reference therein to "$20,000,000." (b) Sections 1.7(a) and (b) are hereby amended to substitute "$15,300,000" for the references therein to "$14,000,000." (c) Section 9.2(f)(i) is hereby amended to substitute "$21,200,000" for the reference therein to "$20,000,000" and to substitute "$44,166,667" for the reference therein to "$41,666,667." 2 2. Amendment to the Stock Option Plan. The form of Stock Option Plan attached as Exhibit J to the Stock Purchase Agreement is hereby amended to substitute "$44.17" for each reference therein to "$41.67." 3. Miscellaneous. Except as expressly set forth in this Amendment, the Stock Purchase Agreement and the Exhibits thereto shall otherwise remain unchanged and in full force and effect and remain binding upon the parties hereto. 2 3 IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written. GGS MANAGEMENT HOLDINGS, INC. By: /s/ ALAN G. SYMONS ---------------------------------------- Name: Alan G. Symons Title: President GS CAPITAL PARTNERS II, L.P. By:GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner By: /s/ TERENCE O'TOOLE ---------------------------------------- Name: Terence O'Toole Title: Vice President GORAN CAPITAL INC. By: /s/ ALAN G. SYMONS ---------------------------------------- Name: Alan G. Symons Title: President SYMONS INTERNATIONAL GROUP, INC. By: /s/ ALAN G. SYMONS --------------------------------------- Name: Alan G. Symons Title: Treasurer 3 EX-10.2(3) 4 2ND AMEND TO STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.2(3) SECOND AMENDMENT TO THE STOCK PURCHASE AGREEMENT SECOND AMENDMENT TO THE STOCK PURCHASE AGREEMENT (as defined below), dated as of April 30, 1996, by and among GGS MANAGEMENT HOLDINGS, INC., a Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("GSCP"), GORAN CAPITAL INC., a Canadian corporation ("Goran"), and SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation and a wholly-owned subsidiary of Goran ("SIG"). WHEREAS, on January 31, 1996, the Company, GSCP, Goran and SIG entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"); WHEREAS, on March 28, 1996, the Company, GSCP, Goran and SIG entered into the First Amendment to the Stock Purchase Agreement pursuant to which the parties amended certain provisions of the Stock Purchase Agreement and Exhibit J thereto; and WHEREAS, the Company, GSCP, Goran and SIG desire to further amend the Stock Purchase Agreement and to amend Exhibit H, Exhibit I and Exhibit N thereto to reflect certain agreements reached by the parties. NOW, THEREFORE, the parties hereto agree to as follows: 1. Amendment to the Stock Purchase Agreement. The Stock Purchase Agreement is hereby amended as follows: 1.1 Section 4.15(a) is hereby amended as follows: (a) by deleting "(the "IGF Amount")"; (b) by deleting "the greater of book value or the statutory surplus of IGF as of December 31,1995, as set forth on the audited financial statements of Pafco as of December 31, 1995, (b)" and substituting therefor "$7,500,000 and"; (c) by deleting the first reference to "the IGF Amount" therein and substituting therefor "$3,475,269"; (d) by deleting "(c)" and substituting therefor "(b)"; 2 (e) by deleting the second reference to "the IGF Amount" therein and substituting therefor "$10,975,269"; (f) by deleting "(with respect to clause (c), with an accompanying agreement, which shall include a pledge agreement with terms similar to the terms of the Pledge Agreement (as defined in 9.2(j)), providing Pafco with a fully perfected first security interest in all of the issued and outstanding shares of capital stock of IGF, to secure payment of such note) or such other assets as shall be reasonably acceptable to Pafco"; and (g) by deleting the last sentence thereof and substituting therefor "An "IGF or SIG Company Sale" shall mean (i) a sale or public offering of any shares of a capital stock of IGF, IGF Holdings or SIG (pursuant to a merger or consolidation of IGF, IGF Holdings or SIG with, or sale of such stock to, another person or entity) or (ii) a sale of any assets of IGF, IGF Holdings or SIG not in the ordinary course of business consistent with past practice." 1.2 Each reference in the Stock Purchase Agreement to an "IGF Company Sale" is hereby deleted and the term "IGF or SIG Company Sale" shall be substituted in each case therefor. 1.3 Section 4.15(c) is amended by adding, after "except as expressly contemplated by this Agreement", "and except as may be required pursuant to the Credit Agreement (the "Union Revolving Credit Agreement"), dated April __, 1996, between Union (as defined in Section 4.18) and IGF Holdings or pursuant to any agreement ancillary thereto, including the pledge agreement (the "Union Revolving Pledge Agreement"), dated April __, 1996, between Union and IGF Holdings, entered into by IGF Holdings as of the date of the Union Revolving Credit Agreement". 1.4 Section 4.18 is hereby amended by adding, after "Prior to", "or within 30 days after". 1.5 Section 5.10 is hereby amended and restated to read in its entirety as follows: "5.10. Post-Closing Public Announcements. The Goran Entities agree that, at all times after the Closing, they will not issue any press release or make any public statement with respect to this Agreement or the transactions contemplated hereby, or which makes reference to GSCP or any of its affiliates without obtaining the prior consent of GSCP as to the timing, content and wording thereof, except as required by applicable Law. In the event of any disclosure required by applicable Law, the Goran Entities will consult with GSCP as to the contents thereof prior to making such disclosure, if it is possible (consistent with the applicable legal requirements) to do so." 2 3 1.6 Section 9.2(c) is hereby amended by adding before the period at the end thereof the following parenthetical: "(it being understood that the dollar amount of a Loss suffered or incurred by Goran or SIG or GSCP, as the case may be, indirectly through their ownership of Company Common Stock, as a result of a Loss suffered or incurred directly by the Company or any of its subsidiaries, shall be the dollar amount of the Loss suffered or incurred directly by the Company or any of its subsidiaries (which in the case of a Loss resulting from the failure of IGF Holdings to pay to Pafco any amount of interest, principal or other amount owing pursuant to any IGF Holdings Note shall be not less than the amount failed to be paid by IGF Holdings) multiplied by, (a) in the case of GSCP, the Applicable Percentage at the time of the determination of such Loss and, (b) in the case of Goran or SIG, (x) one minus (y) the Applicable Percentage at the time of the determination of such Loss)" 1.7 Section 9.2(g) is hereby amended by adding at the end thereof the following paragraph: "Notwithstanding anything in this Agreement to the contrary, except with the prior consent of the GSCP, Goran and SIG shall not be entitled to issue any promissory note in respect of any indemnification obligation of Goran or SIG hereunder relating to, arising out of, or resulting from an Event of Default with respect to any IGF Holdings Note or Section 11.5 hereof (to the extent such Section relates to the IGF Holdings Note). In the event that in connection with any such indemnification obligation, the Company shall issue to GSCP shares of Company Common Stock pursuant to Section 9.2(f) hereof such that at any time Goran, SIG and their Affiliates hold, in the aggregate, less than 50.01% of the outstanding shares of Company Common Stock, then, notwithstanding anything in this Agreement to the contrary, in the event that Goran or SIG is thereafter required to indemnify and hold harmless any GSCP Indemnified Party, Goran and SIG shall not be entitled to indemnify and hold harmless such GSCP Indemnified Party by issuing any promissory note." 1.8 Section 9.2(j) is hereby amended by deleting "first". 1.9 Section 11.5 is amended by adding, after "the Pledge Agreement", "and the IGF Holdings Notes (it being understood that the joint and several guarantee of Goran and SIG of the obligations of IGF Holdings pursuant to the IGF Holdings Notes and the Pledge Agreement shall be unaffected by any invalidity, irregularity or unenforceability of any IGF Holdings Note or the Pledge Agreement (as a result of a bankruptcy of IGF Holdings or otherwise), the failure of Pafco to enforce its rights thereunder, or any subordination or "blockage" provision contained therein or in any agreement ancillary thereto)". 3 4 2. Amendment to the Exhibits to the Stock Purchase Agreement. 2.1 Exhibit H annexed to the Stock Purchase Agreement is hereby amended by substituting therefor Exhibit H annexed hereto. 2.2 Exhibit N annexed to the Stock Purchase Agreement is hereby amended by substituting therefor Exhibit N annexed hereto. 2.3 Subsection (a) of "Covenants" in Exhibit I annexed to the Stock Purchase Agreement is hereby amended by adding, after "the Pledge Agreement", "or the Union Revolving Pledge Agreement". 2.4 Subsection (f) of "Covenants" in Exhibit I annexed to the Stock Purchase Agreement is hereby amended by adding, after "other than", "$7,500,000 under the Union Revolving Credit Agreement and other than". 2.5 "Events of Default" in Exhibit I annexed to the Stock Purchase Agreement is hereby amended by adding the following subsection: (f) The occurrence of any default of event or default or breach of any provision of or under the Union Revolving Credit Agreement or any agreement ancillary thereto, including the Union Revolving Pledge Agreement. 3. Miscellaneous. Except as expressly set forth in this Amendment, the Stock Purchase Agreement and the Exhibits thereto shall otherwise remain unchanged and in full force and effect and remain binding upon the parties hereto. 4 5 IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written. GGS MANAGEMENT HOLDINGS, INC. By: /s/ Alan G. Symons ------------------------------------------- Name: Title: GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner By: /s/ Sanjay Patel ------------------------------------------ Name: Sanjay Patel Title: Vice President GORAN CAPITAL INC. By: /s/ Alan G. Symons ----------------------------------------- Name: Title: SYMONS INTERNATIONAL GROUP, INC. By: /s/ Alan G. Symons ----------------------------------------- Name: Title: 5 EX-10.2(4) 5 3RD AMEND TO STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.2(4) THIRD AMENDMENT TO THE STOCK PURCHASE AGREEMENT THIRD AMENDMENT TO THE STOCK PURCHASE AGREEMENT (as defined below), dated as of September 24, 1996, by and among GGS MANAGEMENT HOLDINGS, INC., a Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("GSCP"), GORAN CAPITAL INC., a Canadian corporation ("Goran"), SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation and a wholly-owned subsidiary of Goran ("SIG"), and PAFCO GENERAL INSURANCE COMPANY, an Indiana Corporation ("Pafco"). WHEREAS, as of January 31, 1996, the Company, GSCP, Goran and SIG entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"); WHEREAS, as of March 28, 1996, the Company, GSCP, Goran and SIG entered into the First Amendment to the Stock Purchase Agreement pursuant to which the parties amended certain provisions of the Stock Purchase Agreement and Exhibit J thereto; WHEREAS, as of April 30, 1996, the Company, GSCP, Goran and SIG entered into the Second Amendment to the Stock Purchase Agreement pursuant to which the parties amended certain provisions of the Stock Purchase Agreement and Exhibit H, Exhibit I and Exhibit N thereto; WHEREAS, on April 30, 1996, the Company, GSCP, Goran and SIG entered into a letter agreement (the "Letter Agreement") pursuant to which the parties (a) agreed that Section 1.7(b) of the Stock Purchase Agreement shall have no further force and effect and (b) acknowledged that Pafco had declared a dividend payable to SIG in the amount, if any, by which the Book Value of Pafco as reflected on the Closing Date Balance Sheet exceeded $15,300,000, as such excess amount shall have been adjusted pursuant to the terms of the Letter Agreement; WHEREAS, the parties hereto now desire to declare the Letter Agreement null and void and of no further force and effect, to cause SIG to relinquish all rights to payment in respect of any dividend declared by Pafco prior to the date hereof, and to amend certain provisions of the Stock Purchase Agreement; and 2 WHEREAS, simultaneously herewith the Company, GSCP, Goran and SIG are entering into an Amended and Restated Stockholder Agreement (the "Amended Stockholder Agreement"). NOW, THEREFORE, in consideration of the Company, GSCP, Goran and SIG executing and delivering the Amended Stockholder Agreement simultaneously herewith, and in respect of other consideration the validity and sufficiency of which is hereby acknowledged, the parties hereto agree to as follows: 1. Voidance of the Letter Agreement. The parties hereto agree and acknowledge that the Letter Agreement shall be null and void and of no further force and effect. 2. Relinquishment and Cancellation of Dividend. SIG hereby relinquishes any and all rights it may have to receive any payment in respect to any dividend declared by Pafco prior to the date hereof, and Pafco hereby cancels each such dividend. 3. Amendment of Stock Purchase Agreement. The Stock Purchase Agreement is hereby amended as follows: 3.1. Section 1.7(b) is hereby deleted in its entirety (except that any terms defined in Section 1.7(b) shall retain the meanings set forth therein whenever elsewhere used in the Stock Purchase Agreement). 3.2. Section 9.2(f) is hereby amended to read in its entirety as follows: "(f) In the event that a GSCP Indemnified Party shall at any time be entitled to be indemnified or held harmless for any Loss pursuant to this Agreement, such obligation shall be satisfied as follows: (i) If prior to the earlier of (x) an IGF Company Sale and (y) the first anniversary of the Closing Date, Goran or SIG shall issue to GSCP a promissory note in an amount (the "Note Amount") equal to the amount of such Loss (or, at GSCP's election, in lieu of Goran or SIG issuing such note to GSCP, (1) Goran or SIG shall issue a promissory note to the Company in such amount as is necessary for the GSCP Indemnified Party to be fully indemnified and held harmless for such Loss, or (2) subject to paragraph (g) below, the Company shall issue to GSCP a number of shares of Company Common Stock such that after issuing such shares GSCP and its Affiliates, in the aggregate, will own the Applicable Percentage of the Investment Company Common Stock). The "Applicable Percentage" shall mean (a) $21,200,000 divided by, (b) the Total Investment less (i) the Note Amount, (ii) in the case of an issuance of shares of Company Stock pursuant to Section 9.2(f)(ii), the Section 9.2(f)(ii) Loss Amount (as 2 3 defined in Section 9.2(f)(ii)), or (iii) in the case of an issuance of shares of Company Common Stock pursuant to Section 9.2(i), the amount owing pursuant to a promissory note issued by Goran or SIG and not paid in full when due. The "Total Investment" means $44,166,667 less (a) the aggregate amount of all Note Amounts and Excess Amounts which, in lieu of Goran or SIG issuing a promissory note or paying cash to the Company pursuant to Section 9.2(f)(i) or Section 9.2(f)(ii), respectively, the Company issued shares of Company Common Stock to GSCP and (b) the aggregate amount owed pursuant to all promissory notes issued by Goran or SIG pursuant to Section 9.2 and not paid in full when due and in respect of which the Company issued shares of Company Common Stock to GSCP. "Investment Company Common Stock" shall mean the shares of Company Common Stock held as of the Closing and any shares of Company Common Stock issued pursuant to Section 9.2 hereof, in each case, as adjusted as appropriate to reflect stock dividends paid, stock splits effected or other similar transactions, by the Company. (ii) If after the earlier of (x) an IGF Company Sale and (y) the first anniversary of the Closing Date, Goran or SIG shall pay to GSCP in cash an amount equal to such Loss (the "Section 9.2(f)(ii) Loss Amount") (or, at GSCP's election, in lieu of Goran or SIG paying to GSCP such amount of cash, (1) Goran or SIG shall contribute to the Company in such amount as is necessary for the GSCP Indemnified Party to be fully indemnified and held harmless for such Loss or, (2) if such amount is not contributed to the Company, the Company shall issue to GSCP a number of shares of Company Common Stock such that after issuing such shares GSCP and its Affiliates, in the aggregate, will own the Applicable Percentage of the Investment Company Common Stock)." 4. Miscellaneous. Except as expressly set forth in this Amendment, the Stock Purchase Agreement, as amended, and the Exhibits thereto shall otherwise remain unchanged and in full force and effect and remain binding upon the parties hereto. 3 4 IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written. GGS MANAGEMENT HOLDINGS, INC. By: /s/ Alan G. Symons ------------------------------------------- Name: Alan Symons Title: President GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner By: /s/ Terence M. O'Toole ------------------------------------------- Name: Terence M. O'Toole Title: Vice President GORAN CAPITAL INC. By: /s/ Alan G. Symons ------------------------------------------- Name: Alan Symons Title: President SYMONS INTERNATIONAL GROUP, INC. By: /s/ Douglas H. Symons ------------------------------------------- Name: Douglas H. Symons Title: President PAFCO GENERAL INSURANCE COMPANY By: /s/ Douglas H. Symons ------------------------------------------- Name: Douglas H. Symons Title: President 4 EX-10.3(2) 6 STOCKHOLDER AGREEMENT 1 EXHIBIT 10.3(2) AMENDED AND RESTATED STOCKHOLDER AGREEMENT BY AND AMONG GGS MANAGEMENT HOLDINGS, INC., GS CAPITAL PARTNERS II, L.P., SYMONS INTERNATIONAL GROUP, INC. AND GORAN CAPITAL INC. DATED AS OF SEPTEMBER 24, 1996 2 TABLE OF CONTENTS SECTION 1. Certain Definitions ......................................... 1 "Acceleration Event" ................................................. 1 "Affiliate" .......................................................... 2 "Beneficially Own" or "Beneficial Ownership" ......................... 2 "Company Sale" ....................................................... 2 "Credit Agreement" ................................................... 2 "Equity Securities" .................................................. 2 "Goran Stock" ........................................................ 2 "Group" .............................................................. 2 "Initial Public Offering" ............................................ 2 "Other Stockholders," ................................................ 3 "Person" ............................................................. 3 "Proportionate Percentage" ........................................... 3 "Public Sale" ........................................................ 3 "Registration Rights Agreement" ...................................... 3 "Sell" ............................................................... 3 "Selling Stockholder" ................................................ 4 "Stockholders" ....................................................... 4 "Subsidiary" ......................................................... 4 "Termination Date" ................................................... 4 SECTION 2. Corporate Governance. ....................................... 4 2.1. Board of Directors. ............................................ 4 2.2. Management. .................................................... 6 2.3. Actions Requiring Special Approval ............................. 7 SECTION 3. Limitations on Sales of Stock by Stockholders. .............. 9 3.1. Transfer Restriction ........................................... 9 3.2. Rights of First Offer .......................................... 10 3.3. Tag-Along Rights ............................................... 11 3.4. Procedures...................................................... 13 3.5. Transferees .................................................... 13 SECTION 4. Company Sale ................................................ 14 SECTION 5. Representations and Warranties .............................. 14
-i- 3 SECTION 6. Miscellaneous................................................ 15 6.1. No Inconsistent Agreements; Further Assurances ................. 15 6.2. Legends ........................................................ 15 6.3. Termination .................................................... 16 6.4. Severability ................................................... 16 6.5. Governing Law .................................................. 17 6.6. Successors and Assigns ......................................... 17 6.7. Notices ........................................................ 17 6.8. Amendments ..................................................... 18 6.9. Headings ....................................................... 19 6.10. Remedies ....................................................... 19 6.11. No Third Party Beneficiaries ................................... 19 6.12. Guarantee ...................................................... 19 6.13. Entire Agreement ............................................... 19 6.14. Newsub ......................................................... 19 6.15. Counterparts ................................................... 19
-ii- 4 AMENDED AND RESTATED STOCKHOLDER AGREEMENT AMENDED AND RESTATED STOCKHOLDER AGREEMENT, dated as of September 24, 1996, by and between GGS MANAGEMENT HOLDINGS, INC., a Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("GSCP"), SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation ("SIG"), and GORAN CAPITAL INC., a Canadian corporation ("Goran"), and the other parties that may be listed on Schedule A hereto. W I T N E S S E T H : WHEREAS, the Company, GSCP, Goran and SIG are parties to that certain Stock Purchase Agreement, dated as of January 31, 1996 (the "Stock Purchase Agreement"), as amended, pursuant to which GSCP purchased from the Company shares of Common Stock, par value $.01 per share, of the Company ("Stock"); WHEREAS, on April 30, 1996, the Company, GSCP, Goran and SIG entered into a Stockholder Agreement (the "Original Agreement") establishing certain rights and obligations with respect to the management of the Company and the ownership of shares of Stock; and WHEREAS, the Company, GSCP, Goran and SIG now desire to amend and restate the Original Agreement to reflect certain agreements they have reached with respect to the management of the Company. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and obligations hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. Certain Definitions. As used herein, the following terms shall have the following meanings (capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Stock Purchase Agreement): "Acceleration Event" shall mean either (i) the third separate occasion on which GSCP in good faith proposes to the Board an equity financing or acquisition transaction which the Board does not approve, or (ii) any time at which Alan G. Symons, family members of Alan G. Symons (including, without limitation, G. Gordon Symons), and entities controlled by Alan G. Symons and such family members no longer have voting control of either SIG or Goran (it being understood that Alan G. Symons and such family members (x) shall be deemed to have voting control of Goran only for so long as either (a) in the aggregate they hold directly or indirectly in excess of 40% of the Goran Stock or (b)(i) in the aggregate they hold directly or 5 indirectly in excess of 25% of the Goran Stock and (ii) no other holder or "group" (as such term is defined in the Securities Exchange Act of 1934, as amended) of holders holds in excess of 10% of the Goran Stock, and (y) shall be deemed to have voting control of SIG only for so long as (a) Goran holds directly in excess of 50% of the SIG Stock and (b) Alan G. Symons and family members of Alan G. Symons have voting control of Goran). "Affiliate" shall mean with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. "Beneficially Own" or "Beneficial Ownership" shall have the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended. "Company Sale" shall mean a merger or consolidation of the Company and any other Person, a sale or transfer of all or substantially all of the assets or capital stock of the Company to another Person, or any other similar business combination transaction or series of transactions. "Credit Agreement" shall mean the Credit Agreement, dated April 30, 1996, between GGS Management, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company ("GGS Sub"), the banks party hereto and The Chase Manhattan Bank (National Association), as administrative agent. "Equity Securities" shall mean (i) Stock and (ii) all securities convertible into, or exchangeable or exercisable for, shares of Stock. "Goran Stock" shall mean the outstanding capital stock at any time of Goran the holders of which are entitled to vote generally in the election of directors of Goran. "Group" shall mean two or more Persons who agree to act together for the purpose of acquiring, holding, voting or disposing of Stock. "Initial Public Offering" shall mean an underwritten public offering of Stock which (i) is effected pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the "Securities Act"), (ii) involves Equities Securities representing, on a fully-diluted basis, at least 20% of all issued and outstanding Stock of the Company, and (iii) generates net proceeds to the sellers in such underwritten public offering of at least $25,000,000. -2- 6 "Other Stockholders," with respect to any Selling Stockholder, shall mean the Stockholders other than the Selling Stockholder (provided, however, that GSCP and its Affiliates shall be considered collectively as one Other Stockholder for all purposes under Section 5 hereof). "Person" shall mean any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivisions thereof, and any Group. "Proportionate Percentage" shall mean, as to each Stockholder, the quotient obtained (expressed as a percentage) by dividing (A) the number of shares of Stock owned by such Stockholder on the first day of the Acceptance Period (as defined in Section 3.2(a)) or the Tag-Along Offer Period (as defined in Section 3.3(a)), as the case may be, by (B) the aggregate number of shares of Stock owned on the first day of the Acceptance Period or the Tag-Along Offer Period, as the case may be, by all Stockholders who deliver Acceptance Notices to purchase Subject Stock (as defined in Section 3.2(a)) or who elect to Sell Stock to a Tag-Along Offeror (as defined in Section 3.3(a)). "Public Sale" shall mean a Sale pursuant to a bona fide underwritten public offering pursuant to an effective registration statement filed under the Securities Act or a Sale pursuant to Rule 144 under the Securities Act. "Registration Rights Agreement" shall mean the Registration Rights Agreement, dated April 30, 1996, between the Company, GSCP, SIG and Goran. "Sell", as to any Stock, shall mean to sell, or in any other way directly or indirectly transfer, assign, distribute, encumber or otherwise dispose of, such Stock, either voluntarily or involuntarily; and the terms Sale and Sold shall have meanings correlative to the foregoing. "Selling Stockholder" shall mean any Stockholder who proposes to Sell shares of Stock pursuant to Section 3.2 or 3.3 hereof. "SIG Stock" shall mean the outstanding capital stock at any time of SIG the holders of which are entitled to vote generally in the election of directors of SIG. -3- 7 "Stockholders" shall mean the parties to this Agreement (other than the Company) and any other person who executes and agrees to be bound by the terms of this Agreement. "Subsidiary" shall mean, with respect to any Person, (i) any corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, directly or indirectly, or (ii) the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. "Termination Date" shall mean the earliest of (i) the date of consummation of an Initial Public Offering, (ii) the date of consummation of a Company Sale and (iii) the tenth anniversary of the date hereof. SECTION 2. Corporate Governance. 2.1. Board of Directors. (a) Members. The Board of Directors of the Company (the "Board") shall consist of five members, of whom two shall be designated by GSCP (such persons being so designated, and their successors, being referred to herein as the "GSCP Designees") and three shall be designated by SIG (such persons being so designated, and their successors, being referred to herein as the "SIG Designees"). Notwithstanding the foregoing, in the event that (x) at any time SIG and its Affiliates shall own less than 25% of the then issued and outstanding shares of Stock by reason of the issuance by the Company of shares of Stock to GSCP or its Affiliates in satisfaction of the indemnification obligations of Goran and SIG pursuant to the Stock Purchase Agreement (the date on which such condition occurs being referred to as the "Indemnity Date"), or (y) at any time (i) SIG, Goran or the Company shall be in violation of any term or provision of this Agreement, or (ii) the Company or GGS-Sub shall remain in violation of any covenant contained in the Credit Agreement or in any agreement ancillary thereto (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 Credit Agreement (whether or not such event of default is waived), the size of the Board shall be forthwith reduced (such reduction, a "Board Reduction") to four members. In the event of a Board Reduction, so long as the Indemnity Date has not occurred, SIG shall be entitled to designate only two directors (and there shall be only two SIG Designees) and GSCP shall be entitled to designate two directors (and there shall be two GSCP Designees), and after the occurrence of the Indemnity Date, SIG shall be entitled to designate only one director (and there shall be only one SIG Designee), and GSCP shall -4- 8 be entitled to designate three directors (and there shall be three GSCP Designees). At each meeting of the stockholders of the Company held for the purpose of electing directors, GSCP and SIG, respectively, shall cause the GSCP Designees and the SIG Designees to be elected as directors. (b) Vacancies. Each of the GSCP Designees and SIG Designees shall hold office until his death, resignation or removal or until his successor shall have been duly elected and qualified. If any GSCP Designee shall cease to serve as a director of the Company for any reason, the vacancy resulting thereby shall be filled by another person designated by GSCP. If any SIG Designee shall cease to serve as a director of the Company for any reason (other than pursuant to Section 2.1(a)), the vacancy resulting thereby shall be filled by another person designated by SIG. In the event that at any time there exists vacancies on the Board such that there is either no GSCP Designee or no SIG Designee, no action may be taken by the Board until such vacancy is filled. (c) Removal. No GSCP Designee may be removed from office except by GSCP and no SIG Designee may be removed from office except by SIG (except pursuant to Section 2.1(a)). GSCP shall have the right to remove any GSCP Designee, and SIG shall have the right to remove any SIG Designee, with or without cause, at any time. (d) Quorum Requirements. The quorum (the "Required Quorum") which shall be required for action to be taken by the Board (other than an adjournment of any meeting of the Board) shall be, prior to a Board Reduction, a majority of the members of the Board, including at least one GSCP Designee. After a Board Reduction, prior to the Indemnity Date, the Required Quorum shall be one GSCPDesignee and one SIG Designee. After the Indemnity Date, the Required Quorum shall be any two directors. Directors participating by telephone conference in any meeting of the Board shall be considered in determining whether a quorum of directors is present. (e) Voting Requirements. 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 be taken by the Board with the approval of at least one GSCP Designee and one SIG Designee, After the Indemnity Date, action may be taken by the Board with the approval of a majority of the entire Board. (f) Committees. The Company shall cause a GSCP Designee designated by GSCP to be appointed to each of the committees of the Board as may be requested at any time or from time to time by GSCP. -5- 9 (g) Chairman of the Board. GSCP shall have the right to designate the Chairman of the Board. (h) Directors' Indemnification. The Company's Certificate of Incorporation and By-Laws shall, to the fullest extent permitted by law, provide for indemnification of, and advancement of expenses to, and limitation of the personal liability of, the directors of the Company or such other person or persons, if any, who, pursuant to a provision of such Certificate of Incorporation, exercise or perform any of the powers or duties otherwise conferred or imposed upon such directors, which provisions shall not be amended, repealed or otherwise modified in any manner adverse to the directors until at least six years following the Termination Date. (i) Expenses. The Company shall, promptly after receipt of satisfactory evidence therefor, reimburse each member of the Board for his reasonable travel and other out-of-pocket expenses incurred to attend meetings of the Board or of any committees thereof. (j) Access to Information. The Company shall cause its management at all times to provide to the GSCP Designees all information made available to the SIG Designees. 2.2. Management. (a) Chief Executive Officer. Subject to the provisions of this Agreement and the Employment Agreement, dated the date hereof, between the Company and Alan G. Symons, Alan G. Symons shall be the Chief Executive Officer of the Company. (b) Appointment of Management. All management members of the Company (other than the Chief Executive Officer) shall be designated by, their compensation shall be determined by, and they may be removed, promoted or demoted by, the Chief Executive Officer of the Company; provided, however, that (i) the designation of, setting of compensation for, or removal, promotion or demotion of, any person who will earn compensation from the Company and its Subsidiaries of $100,000 or more per annum shall be subject to the prior approval of the Board and (ii) the GSCP Designees shall have the right at any time to designate a Chief Operating Officer of the Company, to remove any person so designated, with or without cause, at any time, and to designate successors thereto. The Chief Operating Officer of the Company shall be required to report directly to the Board. 2.3. Actions Requiring Special Approval. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, take any of the following actions without first obtaining approval of such action by the Board and at least one -6- 10 GSCP Designee (except to the extent otherwise specifically provided for in this Agreement, the Stock Purchase Agreement or the Registration Rights Agreement): (a) (x) consolidate or merge with or into any other Person, or enter into any other similar business combination transaction, (y) purchase, acquire or obtain any capital stock or other proprietary interest, directly or indirectly, in any other entity or all or a substantial portion of the business or assets of another Person or enter or commit to enter into any joint ventures or partnerships or establish any non-wholly-owned subsidiaries, in each case, where the consideration paid by, or the contribution or investment of, the Company and all of its Subsidiaries taken together (including assumed liabilities) is in excess of $1,000,000 in the aggregate in cash or assets, or (z) voluntarily liquidate, dissolve or windup; (b) offer any type of insurance other than non-standard automobile insurance (other than insurance policies issued by the Company or any of its Subsidiaries on behalf of IGF Insurance Company or SIG - Florida in compliance with Section 5.7 of the Stock Purchase Agreement) or expand into new lines of business; (c) sell, lease, transfer or otherwise dispose of any asset or group of assets, for aggregate consideration (as to the Company and all of its Subsidiaries taken together), in excess of $1,000,000 (excluding asset sales effected in the ordinary course of business pursuant to and in accordance with the Company's or any of its Subsidiary's investment policies); (d) enter into any transaction with a director or officer of Goran (or any relative or Affiliate of any such Person) or with any Affiliate of Goran (provided, however, that the Company and any of its Subsidiaries may enter into reinsurance arrangements with Granite Reinsurance Company Ltd. ("GraniteRe") so long as (i) each such arrangement is on arm's length market terms and (ii) with respect to each such arrangement, GraniteRe posts cash collateral in an amount equal to the total liabilities assumed by GraniteRe pursuant thereto, pursuant to written collateral arrangements in form and substance satisfactory to the Board); (e) enter into one or more agreements to reinsure a substantial portion of the Company's or any of its Subsidiary's liabilities; (f) adopt or change the reserve policy or the investment policy of the Company or any of its Subsidiaries; (g) create, incur, assume or suffer to exist any indebtedness of the Company or any of its Subsidiaries for borrowed money (which shall include for purposes hereof capitalized lease obligations and guarantees or other contingent obligations for indebtedness for borrowed money) in an aggregate amount (as to the -7- 11 Company and all of its Subsidiaries taken together) in excess of $1,000,000 excluding such indebtedness that exists as of the date hereof; (h) mortgage, encumber, create, incur or suffer to exist, liens on its assets, in an aggregate amount (as to the Company and all of its Subsidiaries taken together) in excess of $1,000,000 (excluding liens on assets that exist as of the date hereof); (i) redeem, repurchase or otherwise acquire any outstanding shares of its capital stock or any other of its outstanding securities or debt for borrowed money (including capital leases) (except for indebtedness to the extent it becomes due in accordance with its terms and except for the repayment of indebtedness in an aggregate amount (as to the Company and all of its Subsidiaries taken together) of up to $1,000,000); (j) make or commit to make (with respect to the Company and all of its Subsidiaries taken together) any one capital expenditure in an amount in excess of $1,000,000, or make or commit to make capital expenditures (with respect to the Company and all of its Subsidiaries taken together) in any year in an aggregate amount in excess of the amount contemplated by the Company's business plan; (k) issue or sell any Equity Securities or any shares of capital stock of any of the Company's Subsidiaries; (l) enter into, adopt or amend any employment contract or benefit plan, policy or arrangement (other than non-material changes to the Company's health, life and non-contributory 401(k) plans); (m) amend its Certificate of Incorporation or By-laws, including, without limitation, any change in the number of directors comprising its Board of Directors; (n) amend, modify or waive any provision of this Agreement, the Stock Purchase Agreement or the agreements ancillary thereto or the Credit Agreement, or become a party to any agreement which by its terms restricts the Company's or any of its Subsidiary's, or any Stockholder's, performance of the terms of any of such agreements; (o) change its independent certified accountants or actuaries; (p) register any securities under the Securities Act or grant any registration rights therefor; or -8- 12 (q) agree or otherwise commit to take any of the actions set forth in the foregoing subparagraphs (a) through (p). Notwithstanding any other provision of this Agreement or the Stock Purchase Agreement, approval of the Board hereunder will not be required with respect to any obligation of the Company set forth in the Stock Purchase Agreement or any agreement ancillary thereto (the "Ancillary Agreements") and, if such approval by the Board is required by law, the SIG Designees and the GSCP Designees shall cause such approval to be provided, and the Stockholders, the SIG Designees and the GSCP Designees shall cause the Company to take such actions as may be necessary for the Company to meet its obligations under the Stock Purchase Agreement and the Ancillary Agreements. Notwithstanding any other provision of this Agreement, the GSCP Designees (in that the consent or vote of the SIG Designees) may cause the Company, or may cause the Company to cause Newsub to cause Pafco General Insurance Company ("Pafco"), to take any action under the Pledge Agreement, dated the date, hereof, by IGF Holdings, Inc. in favor of Pafco. [Notwithstanding any other provision of this Agreement, neither Goran, SIG nor the Company shall (and each shall cause its direct and indirect Subsidiaries and its Affiliates not to), without the prior written approval of GSCP, furnish to any employee of the Company or any of its direct or indirect Subsidiaries (whether in his capacity as an employee of the Company or of any of the Company's direct or indirect Subsidiaries or otherwise) (x) any "performance based" compensation the amount of which is determined in any part based on the performance of any entity other than the Company and its direct and indirect Subsidiaries, or (y) any stock options or equity securities of any entity other than the Company.] SECTION 3. Limitations on Sales of Stock by Stockholders. 3.1. Transfer Restriction. Except as set forth on Schedule 3.1, no Stockholder shall Sell any Stock (whether owned on the date hereof or acquired hereafter) for a period of two years from the date hereof (the "Mandatory Holding Period"); provided, however, that (i) the foregoing restriction shall not apply to (x) any Sale of Stock to an Affiliate of such Stockholder, (y) any Sale that is a Public Sale or (z) a Company Sale pursuant to Section 4, and (ii) the foregoing restriction shall not apply to GSCP in the event that an Acceleration Event occurs. 3.2. Rights of First Offer. In addition to (and not in limitation of) any other restrictions on Sales of Stock contained in this Agreement, and subject to -9- 13 Section 3.2(e), any Sale by a Stockholder shall be solely for cash consideration and shall be consummated only in accordance with the following procedures: (a) The Selling Stockholder shall first deliver to each Other Stockholder a written notice (an "Offer Notice"), which shall (i) state such Selling Stockholder's intention to sell Stock to one or more Persons, the amount of Stock to be sold (the "Subject Stock"), the proposed purchase price therefor and a summary of the other material terms and conditions of the proposed Sale and (ii) offer to each such Other Stockholder the option to acquire all or any portion of such Subject Stock upon the terms and subject to the conditions of the proposed Sale as set forth in the Offer Notice (the "Offer"); provided, however, that the Offer may provide that such Offer will be revoked if less than all of the Subject Stock will be purchased by Other Stockholders pursuant to this Section 3.2 (an Offer with such qualifications being referred to herein as a "Conditional Offer"). Each Other Stockholder shall have the right, for a period of 45 days after receipt of an Offer Notice (the "Acceptance Period"), by written notice to the Selling Stockholder (an "Acceptance Notice"), to accept all or any portion of the Subject Stock so offered, at the purchase price and on the terms stated in the Offer Notice. Each Acceptance Notice must specify the number of shares of Subject Stock which the Other Stockholder wishes to purchase pursuant to the Offer (such number of shares being referred to herein as the "Specified Shares" with respect to each Acceptance Notice, and the "Aggregate Specified Shares" with respect to all of the Acceptance Notices taken together). (b) In the event of a Conditional Offer, the Selling Stockholder shall not be obligated to sell any Subject Stock to any Other Stockholders pursuant to this Section 3.2 if the number of Aggregate Specified Shares is less than the number of shares of Subject Stock, and the Selling Stockholder shall be free to Sell the Subject Stock, at any time within 90 days after expiration of the Acceptance Period (the "Sale Period"), at a price not less than the price, and on terms not more favorable to the purchaser thereof than the terms, stated in the Offer Notice. (c) In the event of an Offer which is not a Conditional Offer (or in the event of a Conditional Offer where the number of Aggregate Specified Shares equals or exceeds the number of shares of Subject Stock), the Selling Stockholder shall sell to each Other Stockholder who delivered an Acceptance Notice a number of shares of Subject Stock which is equal to such Other Stockholder's number of Specified Shares, and the Selling Stockholder shall be free to sell any remaining unsold shares of Subject Stock, at any time during the Sale Period, at a price not less than the price, and on terms not more favorable to the purchaser thereof than the terms, set forth in the Offer Notice. (d) In the event that the number of Aggregate Specified Shares exceeds the number of shares of Subject Stock, then the Subject Stock shall be -10- 14 allocated among such Other Stockholders as follows: (i) First, each such Other Stockholder shall be entitled to purchase a number of shares of Subject Stock equal to the lesser of the number of such Other Stockholder's Specified Shares or such Other Stockholder's Proportionate Percentage of Subject Stock; (ii) Second, if any Subject Stock remains unallocated ("Remaining Shares"), each Other Stockholder whose number of Specified Shares exceeded the number of shares of Subject Stock allocated to it pursuant to (i) above (the amount of such excess being referred to herein as the "Excess Amount") (each, an "Oversubscribed Stockholder") shall be entitled to purchase a number of Remaining Shares equal to the lesser of the Excess Amount and such Oversubscribed Stockholder's Proportionate Percentage (treating only Oversubscribed Stockholders as Other Stockholders for these purposes) of the Remaining Shares; and (iii) Third, the process set forth in (ii) above shall be repeated with respect to any Subject Stock not allocated for purchase, until all shares of Subject Stock are allocated for purchase. (e) The requirements of this Section 3.2 shall not apply to (i) any Sale of Stock by a Stockholder to an Affiliate of such Stockholder, (ii) any Sale of Stock which is a Public Sale or (iii) a Company Sale pursuant to Section 4. 3.3. Tag-Along Rights. In addition to (and not in limitation of) any other restrictions on Sales of Stock contained in this Agreement, and subject to Section 3.3(d), no Stockholder may, in any transaction or series of transactions, Sell Stock representing more than 20% of the then issued and outstanding Stock to another Person, except in accordance with the following procedures: (a) The Selling Stockholder shall first deliver to each Other Stockholder a written notice (a "Tag-Along Notice"), which shall (i) specifically identify the proposed transferee of the Stock (the "Tag-Along Offeror"), the amount of Stock proposed to be Sold (the "Tag-Along Subject Stock"), the purchase price therefor and a summary of the other material terms and conditions of the proposed Sale, and (ii) contain an offer (the "Tag-Along Offer") from the Tag-Along Offeror to each such Other Stockholder to purchase from the Stockholders (including the Selling Stockholder and the Other Stockholders), in the aggregate, up to the number of shares of Tag-Along Subject Stock, upon the terms and subject to the conditions of the proposed Sale as set forth in the Tag-Along Notice. The Tag-Along Offer may be accepted in whole or in part at the option of each of the Stockholders. Acceptance of a Tag-Along Offer, in whole or in part, shall be made by delivery of a written notice (a "Tag-Along Acceptance Notice") to the Tag-Along Offeror within 15 days after receipt of the Tag-Along Notice (the "Tag-Along Offer Period"), setting forth the maximum number of shares of Stock that such Stockholder elects to Sell pursuant thereto (such number of shares being referred to herein as the "Specified Tag-Along Shares" with respect to each -11- 15 Tag-Along Acceptance Notice, and the "Aggregate Specified Tag-Along Shares" with respect to all of the Tag-Along Acceptance Notices taken together). (b) In the event that the Aggregate Specified Tag-Along Shares exceed the number of shares of Tag-Along Subject Stock, each Stockholder (including the Selling Stockholder and each Other Stockholder who delivers a Tag-Along Acceptance Notice) shall be entitled to Sell Stock to the Tag-Along Offeror pursuant to this Section 3.3, as follows: (i) First, each Stockholder shall be entitled to Sell a number of shares of Stock equal to the lesser of the number of such Stockholder's Specified Tag-Along Shares or such Stockholder's Proportionate Percentage of Tag-Along Subject Stock; (ii) Second, if any Tag-Along Subject Stock remains unallocated ("Remaining Tag-Along Shares"), each Stockholder whose number of Specified Tag-Along Shares exceeded the number of shares of Stock Sold pursuant to (i) above (the amount of such excess being referred to herein as the "Excess Tag-Along Amount") (each, a "Remaining Tag-Along Stockholder") shall be entitled to Sell to the Tag-Along Offeror a number of shares of Stock equal to the lesser of the Excess Amount and such Remaining Tag-Along Stockholder's Proportionate Percentage (treating only Remaining Tag-Along Stockholders as Stockholders for these purposes) of the Remaining Tag Along Shares; and (iii) Third, the process set forth in (ii) above shall be repeated with respect to any Tag-Along Stock not sold to the Tag-Along Offeror, until all specified Tag-Along Shares are so Sold. (c) No Other Stockholder who delivers an Acceptance Notice with respect to a proposed Sale of Stock by a Selling Stockholder shall have the right to deliver a Tag-Along Acceptance Notice with respect to such proposed Sale of Stock. (d) The requirements of this Section 3.3 shall not apply to (i) any Sale of Stock by a Stockholder to an Affiliate of such Stockholder, (ii) any Sale of Stock which is a Public Sale or (iii) a Company Sale pursuant to Section 4. 3.4. Procedures. (a) All Sales of Subject Stock to Other Stockholders pursuant to an Offer Notice, or of Tag-Along Subject Stock to a Tag-Along Offeror pursuant to a Tag-Along Notice, shall be consummated on the later of (i) a mutually satisfactory business day within 30 days after the expiration of the Acceptance Period or the Tag-Along Acceptance Period, as the case may be, or (ii) the fifth business day following the expiration or termination of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of all other necessary governmental approvals, including, without limitation, insurance regulatory approvals, applicable to such Sale, or at such other time and/or place as the parties to such Sale may agree. The delivery of certificates or other instruments evidencing such Subject -12- 16 Stock, or Tag-Along Subject Stock, as the case may be, duly endorsed for transfer, shall be made on such date against payment of the purchase price for such Stock. (b) If a Selling Stockholder sells Subject Stock during the Sale Period, or sells Tag-Along Subject Stock to a Tag-Along Offeror, the Selling Stockholder shall promptly notify the Other Stockholders, as to (i) the number of shares of Stock, if any, that the Selling Stockholder owns after such Sale, (ii) the number of shares of Stock that the Selling Stockholder has Sold, (iii) the terms of such Sale and (iv) the name of the owner(s) of any shares of Stock Sold. (c) In the event that Subject Stock is not Sold by the Selling Stockholder during the Sale Period, the right of the Selling Stockholder to Sell such unsold Stock shall expire and the obligations of Section 3.2 shall be reinstated upon expiration of the Sale Period. 3.5. Transferees. Any transferee of Stock (other than a transferee pursuant to a Public Sale or a Company Sale) who is not (immediately prior to the time of such transfer) a Stockholder shall, upon consummation of, and as a condition to, such Sale, (A) execute, and agree to be bound by the terms of, this Agreement and shall thereafter be listed as a party on Schedule A hereto and deemed a Stockholder for purposes of this Agreement and (B) execute and deliver a certificate, in form and substance reasonably satisfactory to the Company, to the effect that (i) such Person is purchasing the Stock for its own account, for investment and not with a view to the distribution thereof and (ii) such Sale is otherwise being made in compliance with all applicable federal and state laws (including, without limitation, federal and state securities laws and "blue sky" laws). Upon the Sale by GSCP of all of its Stock, any transferees thereof (to the extent the rights are assigned by GSCP) shall have all of the rights of GSCP under this Agreement, but excluding (x) the right pursuant to Section 2.2(b) to designate or remove the Chief Operating Officer of the Company and (y) the right pursuant to Section 2.1(f) to designate the Chairman of the Board. SECTION 4. Company Sale. Notwithstanding any other provision of this Agreement, in the event that (i) the Termination Date has not occurred within five years from the date hereof, (ii) an Acceleration Event occurs or (iii) Mr. Alan G. Symons ceases to be employed as the Chief Executive Officer of the Company for any reason whatsoever, GSCP shall have the right to provide to SIG, at any time or from time to time thereafter, a written notice (a "Company Sale Notice"), which shall state GSCP's intention to seek to effect a Company Sale and shall offer to SIG the opportunity to provide to GSCP, within 30 days after receipt of the Company Sale Notice, a written notice (a "SIG Purchase Notice") to the effect that SIG wishes to acquire or combine with the Company in a Company Sale transaction. The SIG Purchase Notice shall include the proposed purchase price and other material terms and conditions of the Company Sale being -13- 17 proposed by SIG, with such specificity as is necessary for GSCP, in its reasonable discretion, to be able to compare such terms and conditions with those which may be proposed by other potential bidders. After delivery of a Company Sale Notice, GSCP may conduct such sale process to seek to effect a Company Sale as GSCP shall determine in its sole discretion, and GSCP is hereby authorized to execute on behalf of the Company and the Stockholders an agreement with respect to any Company Sale which contains terms and conditions acceptable to GSCP in its sole discretion (any such agreement being referred to herein as the "Company Sale Agreement"); provided, however, that (i) for a period of 180 days after receipt of a SIG Purchase Notice, GSCP may not effect a Company Sale with any Person on terms which, in the aggregate, are less favorable to the Stockholders than the terms set forth in the SIG Purchase Notice, (ii) any Company Sale effected by GSCP must provide that each Stockholder will receive the same consideration per share of Stock owned by it, and (iii) GSCP may not effect a Company Sale pursuant to which the Company will be acquired by or combined with any Affiliate of GSCP. Upon delivery of a SIG Purchase Notice, SIG will be obligated to effect a Company Sale on the terms and conditions set forth therein if, within 90 days after delivery of the SIG Purchase Notice, GSCP accepts such terms and conditions by written notice to SIG. SECTION 5. Representations and Warranties. Each party hereto represents and warrants to the other parties hereto as follows: (i) It has full power and authority to execute, deliver and perform its obligations under this Agreement. (ii) This Agreement has been duly and validly authorized, executed and delivered by it, and constitutes a valid and binding obligation of it, enforceable against it in accordance with its terms. (iii) The execution, delivery and performance of this Agreement by it does not (x) violate, conflict with, or constitute a breach of or default under its organizational documents, if any, or any material agreement to which it is a party or by which it is bound or (y) violate any law, regulation, order, writ, judgment, injunction or decree applicable to it. (iv) Except for (i) the approval of the Department of Insurance of the State of Indiana and (ii) expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, no consent or approval of, or filing with, any governmental or regulatory body is required to be obtained or made by it in connection with the transactions contemplated hereby. (v) It is not a party to any agreement which is inconsistent with the rights of any party hereunder or otherwise conflicts with the provisions hereof. -14- 18 SECTION 6. Miscellaneous. 6.1. No Inconsistent Agreements; Further Assurances. Neither the Company nor any Stockholder shall take any action or enter into any agreement which is inconsistent with the rights of any party hereunder or otherwise conflicts with the provisions hereof. Each Stockholder agrees to vote all shares of Stock of the Company Beneficially Owned by it (including, without limitation, any shares of Stock of another Stockholder with respect to which it has voting control, whether as a result of a voting trust or otherwise), and to take all necessary action within its control, to cause the provisions of this Agreement to be effected (including, without limitation, voting to approve a Company Sale Agreement and a Company Sale effected by GSCP pursuant to Section 4). Each Stockholder agrees not to vote any Stock, take any action by written consent, or take any other action as a stockholder of the Company, to take or approve any corporate action or transaction by the Company not previously approved by the Board. At any time and from time to time after the date hereof, the parties agree to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and to otherwise carry out the intent of the parties hereunder. 6.2. Legends. Each certificate representing shares of Common Stock shall bear a legend containing the following words: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH SUCH ACT." "IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN THE STOCKHOLDER AGREEMENT DATED AS OF HOLDING COMPANY, 1995 BY AND AMONG GGS MANAGEMENT HOLDINGS, INC. AND THE PARTIES THERETO, A COPY OF WHICH IS ON FILE IN THE OFFICE OF GGS MANAGEMENT HOLDINGS, INC." -15- 19 The requirement that the above securities legend be placed upon certificates evidencing any such securities shall cease and terminate upon the earliest of the following events: (i) when such shares are transferred in an underwritten public offering, (ii) when such shares are transferred pursuant to Rule 144 under the Securities Act or (iii) when such shares are transferred in any other transaction if the seller delivers to the Company an opinion of its counsel, which counsel and opinion shall be reasonably satisfactory to the Company, or a "no-action" letter from the staff of the Securities and Exchange Commission, in either case to the effect that such legend is no longer necessary in order to protect the Company against a violation by it of the Securities Act upon any sale or other disposition of such shares without registration thereunder. The requirement that the above legend regarding the Stockholder Agreement be placed upon certificates evidencing any such securities shall cease and terminate upon the termination of this Agreement. Upon the occurrence of any event requiring the removal of a legend hereunder, the Company, upon the surrender of certificates containing such legend, shall, at its own expense, deliver to the holder of any such shares as to which the requirement for such legend shall have terminated, one or more new certificates evidencing such shares not bearing such legend. 6.3. Termination. This Agreement shall terminate on the Termination Date, except with respect to the Company's obligations pursuant to Section 2.1(g), which shall terminate pursuant to its terms. 6.4. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement. 6.5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the United States of America located in the County of New York, for any action, proceeding or investigation in any court or before any governmental authority ("Litigation") arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any Litigation relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in this Agreement shall be effective service of process for any Litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any Litigation arising out of this Agreement or the transactions contemplated hereby in the courts of the United States of America located in the County of New York, and hereby -16- 20 further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such Litigation brought in any such court has been brought in an inconvenient forum. 6.6. Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors, assigns, heirs and personal representatives. No Stockholder shall have the right to assign its rights and obligations under this Agreement without the consent of the other Stockholders; provided, however, that GSCP may assign its rights and obligations hereunder, in whole or in part, to any Affiliate of GSCP. Upon any permitted assignment, such assignee shall have and be able to exercise all rights of the assigning Stockholder, to the extent so assigned. 6.7. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or by telecopy, nationally-recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties: (i) if to the Company, to: GGS MANAGEMENT HOLDINGS, INC. c/o Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Telecopy: (317) 259-6395 Attention: Mr. Alan G. Symons with copies to each of GSCP, SIG and Goran. (ii) if to GSCP, to: GS Capital Partners II, L.P. 85 Broad Street New York, New York 10004 Telecopy: (212) 902-3000 Attention: Mr. Michael A. Pruzan with a copy to: -17- 21 Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Telecopy: (212) 859-8585 Attention: Gail Weinstein, Esq. (iii) if to SIG or Goran, to: Goran Capital Inc. Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Telecopy: (317) 259-6395 Attention: David L. Bates, Esq. All such notices, requests, consents and other communications shall be deemed to have been given when received. 6.8. Amendments. The terms and provisions of this Agreement may be modified or amended, or any of the provisions hereof waived, temporarily or permanently, only pursuant to the written consent of the Company, GSCP and SIG. 6.9. Headings. The headings of the Sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. 6.10. Remedies. Without intending to limit the remedies available to any party hereto, each party (i) acknowledges that breach of this Agreement will result in irreparable harm for which there is no adequate remedy at law, and (ii) agrees that any party seeking to enforce this Agreement shall be entitled to injunctive relief or other equitable remedies upon any such breach. 6.11. No Third Party Beneficiaries. Nothing in this Agreement is intended to or shall create any third party beneficiary rights in any person or entity (other than the GSCP Designees and the Goran Designees under Section 2.1(h)). 6.12. Guarantee. Goran hereby guarantees all of the representations and warranties, covenants, agreements, commitments and obligations of SIG hereunder. 6.13. Entire Agreement. This Agreement, the Stock Purchase Agreement and the Ancillary Agreements (and the other writings referred to herein or therein or delivered pursuant hereto or thereto which form a part hereof or thereof) contain the entire agreement among the parties hereto with respect to the subject matter hereof and -18- 22 supersede all prior and contemporaneous agreements and understandings with respect thereto. 6.14. Newsub. The parties agree that they will cause a Stockholder Agreement by and between GGS Management, Inc. and the Company to be entered into promptly after the date hereof, substantially in the form of this Agreement, but with GGS Management, Inc. substituted for the Company. 6.15. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. -19- 23 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. GGS MANAGEMENT HOLDINGS, INC. By: /s/ Alan G. Symons ------------------------------------ Name: Alan G. Symons Title: President GS CAPITAL PARTNERS II, L.P. By: GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner By: /s/ Terence M. O'Toole ------------------------------------ Name: Terence M. O'Toole Title: Vice President SYMONS INTERNATIONAL GROUP, INC. By: /s/ Alan G. Symons ------------------------------------ Name: Alan G. Symons Title: Chief Executive Officer GORAN CAPITAL INC. By: /s/ Alan G. Symons ------------------------------------ Name: Alan G. Symons Title: President -20- 24 SCHEDULE A EX-10.9 7 SUBORDINATED PROMISSORY NOTE 1 EXHIBIT 10.9 THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO ANY FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN VIOLATION OF ANY FEDERAL OR STATE SECURITIES LAWS AND THIS NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFERS SET FORTH IN THE AGREEMENT REFERRED TO BELOW. IGF Holdings, Inc. SUBORDINATED PROMISSORY NOTE $3,475,269.00 Indianapolis, Indiana April 29, 1996 FOR VALUE RECEIVED, IGF Holdings, Inc. ("IGF Holdings"), hereby promises to pay to Pafco General Insurance Company ("Pafco"), or its registered assigns, the principal sum of Three Million Four Hundred Seventy-Five Thousand, Two Hundred Sixty-Nine Dollars ($3,475,269) on the earlier of (i) November 30, 1996, or (ii) a IGF or SIG Company Sale (as defined in the Agreement referred to below), together with accrued but unpaid interest, computed on the basis of the actual number of days elapsed over a 360-day year, on the unpaid principal balance hereof until paid in full at the rate per annum of 1.00 percentage point over the Index described below from the date hereof until October 1, 1996 and thereafter until the entire principal balance is paid in full at the rate of 2.00 percentage points over the Index described below, payable in cash quarterly in arrears on July 1, 1996 and October 1, 1996. IGF Holdings may pay without penalty or premium all or a portion of the amount owed hereunder earlier than it is due, but only with the prior written consent of Union Federal (as hereinafter defined). The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Wall Street Journal Prime Rate (the "Index"). If the Index becomes unavailable during the term of this loan, Pafco may designate a substitute Index after notice to IGF Holdings. The interest rate change will not occur more often than each day. The Index currently is 8.250% per annum. The interest rate or rates to be applied to the unpaid principal balance of this Note will be the rate or rates set forth above. NOTICE: Under no circumstances, will the interest rate on this Note be more than the maximum rate allowed by applicable law. All payments of principal (including any prepayments or redemptions), interest and premium (if any) hereunder shall be made by IGF Holdings in lawful money of the United States of America in immediately available funds (or at the written request of Pafco or any successor holder of this Note, by certified or bank check) not later than 12:00 noon, Indiana time, on the date each such payment is due, by crediting such account in such bank as Pafco or any successor holder of this Note may designate in writing to IGF Holdings. This Note is issued pursuant to a Stock Purchase Agreement, dated as of January 31, 1996, as amended (the "Agreement"), by and among Newco Holdings Company, GS Capital Partners II, L.P., Goran Capital, Inc. and Symons International Group, Inc., and Pafco or any successor holder of this Note is entitled to the benefits thereof and may enforce the agreements of IGF Holdings contained therein and 2 exercise the remedies provided for thereby or otherwise available in respect thereof or of any of the other Purchaser Documents. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement and the Exhibits attached thereto. Neither this reference to the Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of IGF Holdings to pay the principal of and interest on this Note as provided herein. If an Event of Default shall occur and be continuing, the unpaid balance of the principal of this Note may be declared due and payable in the manner and with the effect provided in the Agreement. IGF Holdings and all endorsers of this Note hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default, or enforcement of this Note, assent to any and all extensions or postponements of the time of payment or any other indulgence to any substitution, exchange, or release of collateral, and/or to the addition or release of any other party or person primarily or secondarily liable, and generally waive all suretyship defenses and defenses in the nature thereof. IGF Holdings and all endorsers of this Note hereby waive any and all rights they may have to reduce the amount of principal and interest owing pursuant to this Note to satisfy any obligation or liability of Pafco or its assigns. IGF Holdings will pay all costs and expenses of collection, including Attorneys' fees and court costs, incurred or paid by the holder hereof enforcing this Note or the obligations evidenced hereby, to the extent permitted by law, all as provided in the Agreement. It is expressly understood and agreed that this Subordinated Promissory Note shall be subordinated to that certain Promissory Note issued by IGF Holdings, Inc. to Union Federal Savings Bank of Indianapolis, Indiana ("Union Federal") in the principal amount of Seven Million Five Hundred Thousand ($7,500,000) pursuant to the terms of a certain Intercreditor and Subordination Agreement entered into as of April 29, 1996 by and among IGF Holdings, Pafco and Union Federal. Further this Note is secured by and entitled to the benefits of a Pledge Agreement, dated April 29, 1996 between IGF Holdings and Pafco. This Note is being delivered and shall take effect as a sealed instrument and shall be governed by and construed in accordance with the laws of the State of New York. Pafco has the right to request that IGF Holdings substitute for this Note any number of notes with terms identical to the terms of this Note (other than the principal amount hereof) in an aggregate amount for all such substitute notes equal to the principal amount of this Note. Executed under seal as of the date first above written. Witness: IGF Holdings, Inc. By: /s/ Bruce Dwyer By: /s/ Douglas H. Symons Douglas H. Symons, Title: Vice President & CFO Vice President EX-10.10(1) 8 PROMISSORY NOTE 1 EXHIBIT 10.10(1) PROMISSORY NOTE Borrower: IGF Holdings, Inc. (TIN: ) Lender: Union Federal Savings Bank 4720 Kingsway Drive of Indianapolis Indianapolis, IN 46205 Private Banking Department 45 N. Pennsylvania Suite 600 Indianapolis, IN 46204 Principal Amount: $7,500,000.00 Date of Note: April 29, 1996 PROMISE TO PAY. IGF Holdings, Inc. ("Borrower") promises to pay to Union Federal Savings Bank of Indianapolis ("Lender"), or order, in lawful money of the United States of America, the principal amount of Seven Million Five Hundred Thousand & 00/100 Dollars ($7,500,000.00), together with interest on the unpaid principal balance from April 29,1996, until paid in full. PAYMENT. Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in accordance with the following payment schedule: 2 consecutive quarterly interest payments, beginning July 1, 1996, with interest calculated on the unpaid principal balances at an interest rate of 0.00 percentage points over the index described below; 17 consecutive quarterly interest payments, beginning January 1, 1997, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the Index described below; 15 consecutive quarterly principal payments of $468,750.00 each, beginning April 1, 1997, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the Index described below; and 1 principal payment of $468,750.00 on January 1, 2001, with interest calculated on the unpaid principal balances at an interest rate of 1.000 percentage points over the Index described below. This estimated final payment is based on the assumption that all payments will be made exactly as scheduled and that the Index does not change; the actual final payment will be for all principal and accrued interest not yet paid, together with any other unpaid amounts under this Note. Interest on this Note is computed on a 30/360 simple interest basis; that is, with the exception of odd days in the first payment period, monthly interest is calculated by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by a month of 30 days. Interest for the odd days is calculated on the basis of the actual days to the next full month and a 360-day year. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. DEMAND FEATURE. In the event of an Initial Public Offering (IPO) of the stock of Borrower or Symons International Group, Inc., or a secondary offering of Goran Capital, Inc., all outstanding principal and accrued unpaid interest on this Note shall become due and payable. In the event there is no Initial Public Offering or secondary offering as contemplated above, then with respect to that certain Subordinated Promissory Note from Borrower to Pafco General Insurance Company dated April 29, 1996, and subject to the Subordination and Intercreditor Agreement of the same date, Borrower hereby agrees that payment in full of the Subordinated Promissory Note will be made from the proceeds from a capital infusion. Should Borrower fail to demonstrate the infusion of capital for the express purpose of payment of the Subordinated Promissory Note, then the entire balance of principal together with the accrued, unpaid interest shall become due and payable November 29, 1996. Further, the failure to make a payment due under the Subordinated Promissory Note from Borrower to Pafco General Insurance Company dated the date hereof within thirty (30) days of the date such payment is due will constitute an event of default under this Agreement for all purposes under this Agreement. Such an event of default will not be waived by the Lender, all Indebtedness hereunder will become automatically due and payable and the Lender will exercise its rights and remedies under the Commercial Pledge and Security Agreement, dated the date hereof, with respect to the shares of IGF Insurance Company. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the The Wall Street Journal Prime Rate (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. The Index currently is 8.250% per annum. The interest rate or rates to be applied to the unpaid principal balance of this Note will be the rate or rates set forth above in the "Payment" section. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (a) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (b) increase Borrower's payments to cover accruing interest, (c) increase the number of Borrower's payments, and (d) continue Borrower's payments at the same amount and increase Borrower's final payment. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower making fewer payments. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. 2 Page 2 LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note by 2.000 percentage points. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Note will be repaid under all circumstances without relief from any Indiana or other valuation and appraisement laws. This Note has been delivered to Lender and accepted by Lender in the State of Indiana. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Marion County, the State of Indiana. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Note shall be governed by and construed in accordance with the laws of the State of Indiana. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $19.00 if Borrower makes a payment on Borrowers loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided on this paragraph. COLLATERAL. This Note is secured by Security Agreements from IGF Holdings, Inc., Borrower, and Symons International Group LTD, Grantor, to Lender dated April 29, 1996. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: IGF Holdings, Inc. By: /s/ Douglas H. Symons Douglas H. Symons, Vice President EX-10.10(2) 9 COMMERCIAL GUARANTY 1 EXHIBIT 10.10(2) COMMERCIAL GUARANTY Borrower: IGF Holdings, Inc. (TIN: ) Lender: Union Federal Savings Bank 4720 Kingsway Drive of Indianapolis Indianapolis, IN 46205 Private Banking Department 45 N. Pennsylvania Suite 600 Indianapolis, IN 46204 Guarantor: Symons International Group, LTD 212 King Street West Toronto, ON AN 46 AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited. CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, Symons International Group, LTD ("Guarantor") absolutely and unconditionally guarantees and promises to pay to Union Federal Savings Bank of Indianapolis ("Lender") or its order, in legal tender of the United States of America, the Indebtedness (as that term is defined below) of IGF Holdings, Inc. ("Borrower") to Lender on the terms and conditions set forth in this Guaranty. Under this Guaranty, the liability of Guarantor is unlimited and the obligations of Guarantor are continuing. DEFINITIONS. The following words shall have the following meanings when used in this Guaranty: Borrower. The word "Borrower" means IGF Holdings, Inc. Guarantor. The word "Guarantor" means Symons International Group, LTD. Guaranty. The word "Guaranty" means this Guaranty made by Guarantor for the benefit of Lender dated April 29, 1996. Indebtedness. The word "Indebtedness" is used in its most comprehensive sense and means and includes any and all of Borrower's liabilities, obligations, debts, and indebtedness to Lender, now existing or hereinafter incurred or created, including, without limitation, all loans, advances, interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease obligations, other obligations, and liabilities of Borrower, or any of them, and any present or future judgments against Borrower, or any of them; and whether any such Indebtedness is voluntarily or involuntarily incurred, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined; whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor or surety; whether recovery on the Indebtedness may be or may become barred or unenforceable against Borrower for any reason whatsoever; and whether the Indebtedness arises from transactions which may be voidable on account of infancy, insanity, ultra vires, or otherwise. Lender. The word "Lender" means Union Federal Savings Bank of Indianapolis, its successors and assigns. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and continuous for so long as this Guaranty remains in force. Guarantor intends to guarantee at all times the performance and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of all Indebtedness. Accordingly, no payments made upon the Indebtedness will discharge or diminish the continuing liability of Guarantor in connection with any remaining portions of the Indebtedness or any of the Indebtedness which subsequently arises or is thereafter incurred or contracted. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied and all other obligations of Guarantor under this Guaranty shall have been performed in full. If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written notice of revocation must be mailed to Lender, by certified mail, at the address of Lender listed above or such other place as Lender may designate in writing. Written revocation of this Guaranty will apply only to advances or new Indebtedness created after actual receipt by Lender of Guarantor's written revocation. For this purpose and without limitation, the term "new Indebtedness" does not include Indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or not due and which later becomes absolute, liquidated, determined or due. This Guaranty will continue to bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior to receipt of Guarantor's written notice of revocation, including any extensions, renewals, substitutions or modifications of the Indebtedness. All renewals, extensions, substitutions, and modifications of the Indebtedness granted after Guarantor's revocation, are contemplated under this Guaranty and, specifically will not be considered to be new Indebtedness. This Guaranty shall bind the estate of Guarantor as to Indebtedness created both before and after the death or incapacity of Guarantor, regardless of Lender's actual notice of Guarantor's death. Subject to the foregoing, Guarantor's executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation received by Lender from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. It is anticipated that fluctuations may occur in the aggregate amount of Indebtedness covered by this Guaranty, and it is specifically acknowledged and agreed by Guarantor that reductions In the amount of Indebtedness, even to zero dollars ($0.00), prior to written revocation of this Guaranty by Guarantor shall not constitute a termination of this Guaranty. This Guaranty is binding upon Guarantor and Guarantor's heirs, successors and assigns so long as any of the guaranteed Indebtedness remains unpaid and even though the Indebtedness guaranteed may from time to time be zero dollars ($0.00). GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before or after any revocation hereof, without notice or demand and without lessening Guarantor's liability under this Guaranty, from time to time: (a) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (b) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be for longer than the original loan term; (c) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (d) to release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (e) to determine how, when and what application of payments and credits shall be made on the Indebtedness; (f) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (g) to sell, transfer, assign, or grant participations in all or any part of the Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (a) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (b) this Guaranty is executed at Borrower's request and not at the request of Lender; (c) Guarantor has full power, right and authority to enter into this Guaranty; (d) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (e) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein; (f) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present the financial condition of Guarantor as of the dates the financial information is provided; (g) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition; (h) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (i) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (j) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any 2 Page 2 facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender (a) to continue lending money or to extend other credit to Borrower; (b) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations; (c) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (d) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (e) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (f) to pursue any other remedy within Lender's power; or (g) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever. If now or hereafter (a) Borrower shall be or become insolvent, and (b) the Indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor of Lender and Borrower, and their respective successors, any claim or right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws. Guarantor also waives any and all rights or defenses arising by reason of (a) any "one action" or "anti-deficiency" law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or completion of any foreclosure action, either judicially or by exercise of a power of sale; (b) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness; (c) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrowers liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any collateral for the Indebtedness; (e) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced there is outstanding Indebtedness of Borrower to Lender which is not barred by any applicable statute of limitations; or (f) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness. If payment is made by Borrower, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower's trustee in bankruptcy or to any similar person under any federal or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of enforcement of this Guaranty. In addition to the waivers set forth above, Guarantor expressly waives, to the extent permitted by Indiana law, all relief under any Indiana or other valuation and appraisement laws. Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy. LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff against the moneys, securities or other property of Guarantor given to Lender by law, Lender shall have, with respect to Guarantor's obligations to Lender under this Guaranty and to the extent permitted by law, a contractual possessory security interest in and a right of setoff against, and Guarantor hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's right, title and interest in and to, all deposits, moneys, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Lender, whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise, excluding however all IRA, Keogh, and trust accounts. Every such security interest and right of setoff may be exercised without demand upon or notice to Guarantor. No security interest or right of setoff shall be deemed to have been waived by any act or conduct on the part of Lender or by any neglect to exercise such right of setoff or to enforce such security interest or by any delay in so doing. Every right of setoff and security interest shall continue in full force and effect until such right of setoff or security interest is specifically waived or released by an instrument in writing executed by Lender. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be prior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary or 3 Page 3 appropriate to perfect, preserve and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: Amendments. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Guaranty has been delivered to Lender and accepted by Lender in the State of Indiana. If there is a lawsuit, Guarantor agrees upon Lenders request to submit to the jurisdiction of the courts of Marion County, State of Indiana. Lender and Guarantor hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Guarantor against the other. This Guaranty shall be governed by and construed in accordance with the laws of the State of Indiana. Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court. Notices. All notices required to be given by either party to the other under this Guaranty shall be in writing, may be sent by telefacsimilie, and, except for revocation notices by Guarantor, shall be effective when actually delivered or when deposited with a nationally recognized overnight courier, or when deposited in the United States mail, first class postage prepaid, addressed to the party to whom the notice is to be given at the address shown above or to such other addresses as either party may designate to the other in writing. All revocation notices by Guarantor shall be in writing and shall be effective only upon delivery to Lender as provided above in the section titled "DURATION OF GUARANTY." If there is more than one Guarantor, notice to any Guarantor will constitute notice to all Guarantors. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor's current address. Interpretation. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them. The words "Guarantor," "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. If a court of competent jurisdiction finds any provision of this Guaranty to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances, and all provisions of this Guaranty in all other respects shall remain valid and enforceable. If any one or more of Borrower or Guarantor are corporations or partnerships, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, or agents acting or purporting to act on their behalf, and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty. Waiver. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED APRIL 29,1996. GUARANTOR: Symons International Group, LTD By: /s/ Douglas H. Symons Douglas H. Symons, Vice President 4 Page 4 CORPORATE ACKNOWLEDGMENT STATE OF INDIANA ) ) SS COUNTY OF MARION ) On this 29th day of April, 1996, before me, the undersigned Notary Public, personally appeared Douglas H. Symons, Vice President of Symons International Group, LTD, and known to me to be an authorized agent of the corporation that executed the Commercial Guaranty and acknowledged the Guaranty to be the free and voluntary act and deed of the corporation, by authority of its Bylaws or by resolution of its board of directors, for the uses and purposes therein mentioned, and on oath stated that he or she is authorized to execute this Guaranty and in fact executed the Guaranty on behalf of the corporation. By /s/ [Signature Illegible] Residing at 7060 N. Park, Marion County Notary Public in and for the State of Indiana My commission expires Sept. 15, 1999 EX-10.10(3) 10 INTERCREDITOR AGREEMENT 1 EXHIBIT 10.10(3) INTERCREDITOR AND SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT is entered into as of April 29, 1996 among IGF Holdings, Inc. ("Borrower"), whose address Is 4720 Kingsway Drive, Indianapolis, IN 46205; Union Federal Savings Bank of Indianapolis ("Lender"), whose address is 45 N. Pennsylvania, Suite 600, Indianapolis, IN 46204; and Pafco General Insurance Company ("Creditor"), whose address Is 4720 Kingsway Drive, Indianapolis, IN 46205. RECITALS. Borrower is indebted to Creditor in the aggregate amount of $3,500,000.00. This amount is the total indebtedness of every kind from Borrower to Creditor. Borrower and Creditor each want Lender to provide financial accommodations to Borrower in the form of a term loan in the amount of $7,500,000.00. Borrower and Creditor each represent and acknowledge to Lender that Creditor will benefit as a result of these financial accommodations from Lender to Borrower, and Creditor acknowledges receipt of valuable consideration for entering into this Agreement. Based on the representations and acknowledgments contained in this Agreement, Creditor and Borrower agree with Lender as follows: DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Intercreditor and Subordination Agreement, as this Intercreditor and Subordination Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Intercreditor and Subordination Agreement from time to time. Borrower. The word "Borrower" means IGF Holdings, Inc. Creditor. The word "Creditor" means Pafco General Insurance Company. Lender. The word "Lender" means Union Federal Savings Bank of Indianapolis, its successors and assigns. Security interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or lien retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract or otherwise. Subordinated Indebtedness. The words "Subordinated Indebtedness" mean and include without limitation all amounts outstanding under the terms of that certain promissory note dated as of April 29, 1996 in the 2 aggregate principal amount of $3,500,000.00 from Borrower to Creditor. The term "Subordinated Indebtedness" is used in its broadest sense and includes without limitation all principal, all interest, all costs and attorney's, fees, and all sums paid for the purpose of protecting the rights of a holder of security (such as a secured party paying for insurance on collateral if the owner fails to do so). Superior Indebtedness. The words "Superior Indebtedness" mean and include without limitation all amounts outstanding under the terms of that certain promissory note dated as of April 29, 1996 in the aggregate principal amount of $7,500,000.00 from the Borrower to the Lender. The term "Superior Indebtedness" is used in its broadest sense and includes without limitation all principal, all interest all costs and attorney fees and all sums paid for the purpose of protecting Lender's rights in security (such as paying for insurance on collateral if the owner fails to do so). SUBORDINATION. All Subordinated Indebtedness of Borrower to Creditor is and shall be subordinated in all respects to the prior payment and satisfaction in full of all Superior Indebtedness of Borrower to Lender. If Creditor holds one or more Security Interests, whether now existing or hereafter acquired, in any of Borrower's property, Creditor also subordinates all its Security Interests to all Security Interests held by Lender, whether the Lender's Security Interest or Interests exist now or are acquired later. The Creditor hereby agrees not to take any action to foreclose or otherwise realize upon any property in which the Lender maintains an Security Interest before the earlier of (a) a Proceeding, (b) payment in full of the Superior Indebtedness, or (c) the commencement by the Lender of the exercise of its remedies with respect to the property in which the Lender maintains a Security Interest, or (d) ninety (90) days after the occurrence of both (i) an "event of default" under the terms of the Superior Indebtedness, and (ii) a payment default under these Subordinated Indebtedness. As used herein, the term "Proceeding" means the making of an assignment for the benefit of creditors of the Borrower; the voluntary or involuntary dissolution, winding up, total or partial liquidation, reorganization, bankruptcy, insolvency, receivership, or marshalling of assets or liabilities of the Borrower; or any other statutory, common law or other contractual proceeding or arrangement for the postponement or adjustment of all or substantial part of the liabilities of the Borrower. PAYMENTS TO CREDITOR. Except as provided below, Borrower will not make and Creditor will not accept, at any time while any Superior Indebtedness is owing to Lender, (a) any payment upon any Subordinated Indebtedness, (b) any advance, transfer, or assignment of assets to Creditor in any form whatsoever that would reduce at any time or in any way the amount at Subordinated Indebtedness, or (c) any transfer of any assets as security for the Subordinated Indebtedness. Notwithstanding the foregoing, Borrower may make payments of principal and interest to Creditor in accordance with the terms of the Subordinated Indebtedness if and only if at the time of making such payment and immediately after giving effect thereto no "event of default" with respect to the Superior Indebtedness or the documents or instruments executed in connection therewith, or an event which, with the giving of notice or the lapse of time, or both, -2- 3 would become such an event of default, shall occur or have occurred and be continuing unremedied or unwaived in a writing signed by Lender in which Lender expressly consents to resumption of such payments on the Subordinated Indebtedness. Creditor may not accelerate any amounts owed to Creditor without Lender's prior written consent. In the event of any distribution, division, or application, whether partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of Borrower's assets, or the proceeds of Borrowers assets, in whatever form, to creditors of Borrower or upon any indebtedness of Borrower, whether by reason of the liquidation, dissolution or other winding-up of Borrower, or by reason of any execution, sale, receivership, insolvency, or bankruptcy proceeding, assignment for the benefit of creditors, proceedings for reorganization, or readjustment of Borrower or Borrower's properties, then and in such event (a) the Superior Indebtedness shall be paid in full before any payment is made upon the Subordinated Indebtedness, and (b) all payments and distributions, of any kind or character and whether in cash, property, or securities, which shall be payable or deliverable upon or in respect of the Subordinated Indebtedness shall be paid or delivered directly to Lender for application in payment of the amounts then due on the Superior Indebtedness until the Superior Indebtedness shall have been paid in full. Should any payment, distribution, security, or proceeds thereof be received by Creditor at any time on the Subordinated Indebtedness contrary to the terms of this Agreement, Creditor immediately will deliver the same to Lender in precisely the form received (except for the endorsement or assignment of Creditor where necessary), for application on or to secure the Superior Indebtedness, whether it is due or not due, and until so delivered the same shall be held in trust by Creditor as property of Lender. In the event Creditor fails to make any such endorsement or assignment, Lender, or any of its officers on behalf of Lender, is hereby irrevocably authorized by Creditor to make the same. CREDITOR'S NOTES. Creditor or Borrower shall mark any note or other instrument evidencing Subordinated Indebtedness with a notation indicating that the debt evidenced thereby is subordinated under the terms of this Agreement. Creditor shall not assign, pledge or otherwise transfer any such note or instrument without the prior written approval of Lender, unless the person or entity to whom the note or instrument is otherwise assigned, pledged or transferred agrees in writing to be bound by the terms of this Agreement. Creditor shall notify Lender within five business days after such assignment, pledge or transfer of the name and address of the assignee, pledgee or transferee. COLLATERAL AGENT. Creditor hereby appoints Lender as its agent to hold shares of common stock in IGF Insurance Company identified on Schedule A hereto (the "Pledged Shares"), in which both Lender and Creditor have obtained a Security Interest. The sole purpose of this appointment shall be to permit Creditor to perfect its security interest in the Pledged Shares. The Lender's only duty in its capacity as collateral agent for Creditor shall be to hold the Pledged Shares for its own account and the account of the Creditor. It is agreed that the duties of the Lender in its capacity as collateral agent are only as set -3- 4 forth herein and that it shall incur no liability whatever in connection with its acting as collateral agent. After the repayment of the Superior Indebtedness or the release of Lender's Security Interest in the Pledged Shares, the Lender may resign and be discharged from its duties as collateral agent hereunder by giving notice in writing of such resignation and delivering the Pledged Shares to the Creditor. Upon the resignation of the Lender from its capacity as collateral agent for Creditor, Creditor shall hold the Pledged Shares on its own behalf. Lender's acceptance of the appointment as collateral agent for Creditor shall in no way impair or restrict its ability to deal with the Pledged Shares as contemplated under that certain Pledge Agreement dated as of April 29, 1996 between Lender and Borrower. Creditor hereby agrees to indemnify and hold harmless Lender against any damages, costs or expenses incurred by Lender as a result of its acting as collateral agent for Creditor with respect to the Pledged Shares. CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and warrants to Lender that: (a) no representations or agreements of any kind have been made to Creditor which would limit or qualify in any way the terms of this Agreement; (b) this Agreement is executed at Borrower's request and not at the request of Lender; (c) Lender has made no representation to Creditor as to the creditworthiness of Borrower; and (d) Creditor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's, financial condition. Creditor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Creditor's risks under this Agreement, and Creditor further agrees that Lender shall have no obligation to disclose to Creditor information or material acquired by Lender in the course of its relationship with Borrower. CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (a) to make, extend, renew, or modify any loan to Borrower or to grant any other financial accommodations to Borrower whatsoever, (b) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Superior Indebtedness or of any nonpayment related to any Security Interests, or notice of any action or non-action on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Superior Indebtedness; (c) to resort for payment or to proceed directly or at once against any person, including Borrower; (d) to proceed directly against or exhaust any Security Interests held by Lender from Borrower, any other guarantor, or any other person; (e) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (f) to pursue any other remedy within Lender's power; or (g) to commit any act or omission of any kind, at any time, with respect to any matter whatsoever. LENDER'S RIGHTS. Lender may take or omit any and all actions with respect to the Superior Indebtedness or any Security Interests for the Superior Indebtedness without affecting whatsoever any of Lender's rights under this Agreement. In particular, without limitation, Lender may, without notice of any kind to -4- 5 Creditor, (a) alter, compromise, renew, extend, accelerate, or otherwise change the time for payment or other terms of the Superior Indebtedness or any part thereof, including increases and decreases of the rate of interest on the Superior Indebtedness; (b) take and hold Security Interests for the payment of the Superior Indebtedness, and exchange, enforce, waive, and release any such Security Interests, with or without the substitution of new collateral; (c) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorses, or guarantors on any terms or manner Lender chooses; (d) determine how, when and what application of payments and credits, shall be made on the Superior Indebtedness; (e) apply such security and direct the order or manner of sale thereof, as Lender in its discretion may determine; and (f) assign this Agreement in whole or in part. DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this Agreement shall remain in full force and effect. In the event of a corporate reorganization or corporate arrangement of Borrower under the provisions of the Bankruptcy Code, as amended, this Agreement shall remain in full force and effect and the court having jurisdiction over the reorganization or arrangement is hereby authorized to preserve such priority and subordination in approving any such plan of reorganization or arrangement. Any default by Borrower under the terms of the Subordinated Indebtedness also shall be a default under the terms of the Superior Indebtedness to Lender. DURATION AND TERMINATION. This Agreement will take effect when received by Lender, without the necessity of any acceptance by Lender, in writing or otherwise, and will remain in full force and effect until Creditor shall notify Lender in writing at the address shown above to the contrary. Any such notice shall not affect the Superior Indebtedness owed Lender by Borrower at the time of such notice, nor shall such notice affect Superior Indebtedness thereafter granted in compliance with a commitment made by Lender to Borrower prior to receipt of such notice, nor shall such notice affect any renewals of or substitutions for any of the foregoing. Such notice shall affect only indebtedness of Borrower to Lender arising after receipt of such notice and not arising from financial assistance granted by Lender to Borrower in compliance with Lender's obligations under a commitment. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Indiana. If there is a lawsuit, Creditor and Borrower agree upon Lender's request to submit to the jurisdiction of the courts of Marion County, State of Indiana. Lender, Creditor and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender, Creditor or Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana. No provision contained in this Agreement shall be construed (a) as requiring Lender to grant to Borrower or to Creditor any financial -5- 6 assistance or other accommodations, or (b) as limiting or precluding Lender from the exercise of Lender's own judgment and discretion about amounts and times of payment in making loans or extending accommodations to Borrower. Amendments. This Agreement constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless made in writing and signed by Lender, Borrower, and Creditor. Attorneys' Fees; Expenses. Creditor and Borrower agree to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Creditor and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or Injunction), appeals, and any anticipated post-judgment collection services. Creditor and Borrower also shall pay all court costs and such additional fees as may be directed by the court. Successors. This Agreement shall extend to and bind the respective heirs, personal representatives, successors and assigns of the parties to this Agreement, and the covenants of Borrower and Creditor respecting subordination of the Subordinated Indebtedness in favor of Lender shall extend to, include, and be enforceable by any transferee or endorsee to whom Lender may transfer any or all of the Superior Indebtedness. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Creditor, shall constitute a waiver of any of Lender's rights or of any of Creditor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. -6- 7 BORROWER AND CREDITOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS INTERCREDITOR AND SUBORDINATION AGREEMENT, AND BORROWER AND CREDITOR AGREE TO ITS TERMS. THIS AGREEMENT IS DATED AS OF APRIL 29, 1996. BORROWER: IGF Holdings, Inc. By: /s/ Douglas H. Symons Douglas H. Symons, Vice President CREDITOR: Pafco General Insurance Company By: /s/ Douglas H. Symons Douglas H. Symons, President LENDER: Union Federal Savings Bank of Indianapolis By: /s/ Christopher K. Stark -7- EX-10.10(4) 11 COMMERCIAL PLEDGE AND SECURITY AGREEMENT 1 EXHIBIT 10.10(4) COMMERCIAL PLEDGE AND SECURITY AGREEMENT Borrower: IGF Holdings, Inc. (TIN: ) Lender: Union Federal Savings Bank 4720 Kingsway Drive of Indianapolis Indianapolis, IN 46205 Private Banking Department 45 N. Pennsylvania Suite 600 Indianapolis, IN 46204 THIS COMMERCIAL PLEDGE AND SECURITY AGREEMENT is entered into between IGF Holdings, Inc. (referred to below as "Grantor"); and Union Federal Savings Bank of Indianapolis (referred to below as "Lender"). GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement: Agreement. The word "Agreement" means this Commercial Pledge and Security Agreement, as this Commercial Pledge and Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Pledge and Security Agreement from time to time. Collateral. The word "Collateral" means the following specifically described property, which Grantor has delivered or agrees to deliver (or cause to be delivered or appropriate book-entries made) immediately to Lender, together with all Income and Proceeds as described below: 29614.000 shares of IGF Insurance Company Common Stock, which is all of the issued and outstanding common stock of IGF Insurance Company 2494000.000 shares of IGF Insurance Company Preferred Stock, which is all of the issued and outstanding preferred stock of IGF Insurance Company Stock In addition, the word "Collateral" includes all property of Grantor, in the possession of, or subject to the control of, Lender (or in the possession of, or subject to the control of, a third party subject to the control of Lender), whether now or hereafter existing and whether tangible or intangible in character, including without limitation each of the following: (a) All property to which Lender acquires title or documents of title. (b) All property assigned to Lender. (c) All promissory notes, bills of exchange, stock certificates, bonds, investment property, savings passbooks, time certificates of deposit, insurance policies, and all other instruments and evidences of an obligation. (d) All records relating to any of the property described in this Collateral section, whether in the form of a writing, microfilm, microfiche, or electronic media. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means IGF Holdings, Inc., as successors and assigns. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. Income and Proceeds. The words "Income and Proceeds" mean all present and future income, proceeds, earnings, increases, and substitutions from or for the Collateral of every kind and nature, including without limitation all payments, interest, profits, distributions, benefits, rights, options, warrants, dividends, stock dividends, stock splits, stock rights, regulatory dividends, distributions, subscriptions, monies, claims for money due and to become due, proceeds of any insurance on the Collateral, shares of stock of different par value or no par value issued in substitution or exchange for shares included in the Collateral, and all other property Grantor is entitled to receive on account of such Collateral, including accounts, documents, instruments, chattel paper, investment property, and general intangibles. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means Union Federal Savings Bank of Indianapolis, its successors and assigns. Note. The word "Note" means the note or credit agreement dated April 29, 1996, in the principal amount of $7,500,000.00 from IGF Holdings, Inc. to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the note or credit agreement. Obligor. The word "Obligor" means and includes without limitation any and all persons or entities obligated to pay money or to perform some other act under the Collateral. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security interest in and hereby assigns, conveys, delivers, pledges, and transfers all of Grantor's right, title and interest in and to Grantor's accounts with Lender (whether checking, savings, or some other account), including all accounts held jointly with someone else and all accounts Grantor may open in the future, excluding, however, all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all Indebtedness against any and all such accounts. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. Grantor represents and warrants to Lender that: Ownership. Grantor is the lawful owner of the Collateral free and clear of all security interests, liens, encumbrances and claims of others 2 Page 2 except as disclosed to and accepted by Lender in writing prior to execution of this Agreement. Right to Pledge. Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral. Binding Effect. This Agreement is binding upon Grantor, as well as Grantor's heirs, successors, representatives and assigns, and is legally enforceable in accordance with its terms. No Further Assignment. Grantor has not, and will not, sell, assign, transfer, encumber or otherwise dispose of any of Grantor's rights in the Collateral except as provided in this Agreement. No Defaults. There are no defaults existing under the Collateral, and there are no offsets or counterclaims to the same. Grantor will strictly and promptly perform each of the terms, conditions, covenants and agreements contained in the Collateral which are to be performed by Grantor, if any. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO COLLATERAL. Lender may hold the Collateral until all the Indebtedness has been paid and satisfied and thereafter may deliver the Collateral to any Grantor. Lender shall have the following rights in addition to all other rights it may have by law: Maintenance and Protection of Collateral. Lender may, but shall not be obligated to, take such steps as it deems necessary or desirable to protect, maintain, insure, store, or care for the Collateral, including payment of any liens or claims against the Collateral. Lender may charge any cost incurred in so doing to Grantor. Income and Proceeds from the Collateral. Lender may receive all Income and Proceeds and add it to the Collateral. Grantor agrees to deliver to Lender immediately upon receipt, in the exact form received and without commingling with other property, all Income and Proceeds from the Collateral which may be received by, paid, or delivered to Grantor or for Grantor's account, whether as an addition to, in discharge of, in substitution of, or in exchange for any of the Collateral. Application of Cash. At Lender's option, Lender may apply any cash, whether included in the Collateral or received as Income and Proceeds or through liquidation, sale, or retirement, of the Collateral, to the satisfaction of the Indebtedness or such portion thereof as Lender shall choose, whether or not matured. Transactions with Others. Lender may (a) extend time for payment or other performance, (b) grant a renewal or change in terms or conditions, or (c) compromise, compound or release any obligation, with any one or more Obligors, endorsers, or Guarantors of the Indebtedness as Lender deems advisable, without obtaining the prior written consent of Grantor, and no such act or failure to act shall affect Lender's rights against Grantor or the Collateral. All Collateral Secures Indebtedness. All Collateral shall be security for the Indebtedness, whether the Collateral is located at one or more offices or branches of Lender and whether or not the office or branch where the Indebtedness is created is aware of or relies upon the Collateral. Collection of Collateral. Lender, at Lenders option may, but need not, collect directly from the Obligors on any of the Collateral all Income and Proceeds or other sums of money and other property due and to become due under the Collateral, and Grantor authorizes and directs the Obligors, if Lender exercises such option, to pay and deliver to Lender all Income and Proceeds and other sums of money and other property payable by the terms of the Collateral and to accept Lender's receipt for the payments. Power of Attorney. Grantor irrevocably appoints Lender as Grantor's attorney-in-fact, with full power of substitution, (a) to demand, collect, receive, receipt for, sue and recover all Income and Proceeds and other sums of money and other property which may now or hereafter become due, owing or payable from the Obligors in accordance with the terms of the Collateral; (b) to execute, sign and endorse any and all Instruments, receipts, checks, drafts and warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and in the place and stead of Grantor, execute and deliver Grantor's release and acquittance for Grantor; (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in Lender's own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable; and (e) to execute in Grantor's name and to deliver to the Obligors on Grantor's behalf, at the time and in the manner specified by the Collateral, any necessary instruments or documents. Perfection of Security Interest. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral. When applicable law provides more than one method of perfection of Lender's security interest, Lender may choose the method(s) to be used. Upon request of Lender, Grantor will sign and deliver any writings necessary to perfect Lender's security interest. If the Collateral consists of investment property for which no certificate has been issued, Grantor agrees, at Lender's option, either to request issuance of an appropriate certificate or to execute appropriate instructions on Lender's forms instructing the issuer, transfer agent, mutual fund company, or broker, as the case may be, to record on its books or records, by book-entry or otherwise, Lender's security interest in the Collateral. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any instalment payments to become due during either (i) the term of any applicable insurance policy or, (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable care in the physical preservation and custody of the Collateral in Lender's possession, but shall have no other obligation to protect the Collateral or its value. In particular, but without limitation, Lender shall have no responsibility for (a) any depreciation in value of the Collateral or for the collection or protection of any Income and Proceeds from the Collateral, (b) preservation of rights against parties to the Collateral or against third persons, (c) ascertaining any maturities, calls, conversions, exchanges, offers, tenders, or similar matters relating to any of the Collateral, or (d) informing Grantor about any of the above, whether or not Lender has or is deemed to have knowledge of such matters. Except as provided above, Lender shall have no liability for depreciation or deterioration of the Collateral. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, 3 Page 3 purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Deterioration of Collateral Value. The market value of the Collateral falls below $7,500,000.00, and Grantor does not, by the close of business on the next business day after Lender has sent written notice to Grantor of the deterioration, either (a) reduce the amount of the Indebtedness to the amount required by Lender or (b) increase the cash value of Collateral to the amount required by Lender by lodging with Lender additional collateral security acceptable to Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes incompetent. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender, in good faith, deems itself insecure. Right to Cure. If any default, other than a Default on Indebtedness, is curable and if Grantor has not been given a prior notice of a breach of the same provision of this Agreement, it may be cured (and no Event of Default will have occurred) if Grantor, after Lender sends written notice demanding cure of such default, (a) cures the default within fifteen (15) days; or (b), if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Declare all Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor. Collect the Collateral. Collect any of the Collateral and, at Lender's option and to the extent permitted by applicable law, retain possession of the Collateral while suing on the Indebtedness. Sell the Collateral. Sell the Collateral, at Lender's discretion, as a unit or in parcels, at one or more public or private sales. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender shall give or mail to Grantor, or any of them, notice at least ten (10) days in advance of the time and place of any public sale, or of the date after which any private sale may be made. Grantor agrees that any requirement of reasonable notice is satisfied if Lender mails notice by ordinary mail addressed to Grantor, or any of them, at the last address Grantor has given Lender in writing. If a public sale is held, there shall be sufficient compliance with all requirements of notice to the public by a single publication in any newspaper of general circulation in the county where the Collateral is located, setting forth the time and place of sale and a brief description of the property to be sold. Lender may be a purchaser at any public sale. Under all circumstances, the Indebtedness will be repaid without relief from any Indiana or other valuation and appraisement laws. Dealing with Collateral. Register any or all investment property in Lender's sole name or in the name of its broker, agent, or nominee. Remove any or all Collateral from Brokerage Accounts. Exercise all rights of Lender under any control agreement relating to investment property. Exercise any voting, conversion, registration, purchase, or other rights of a holder of any Collateral (and any reasonable expense in that connection shall be an expense of preserving the value of the Collateral). Collect, with or without legal action, any notes, checks or other instruments for the payment of money that are included in the Collateral and compromise or settle with any obligor. Sell Securities. Sell any securities included in the Collateral in a manner consistent with applicable federal and state securities laws, notwithstanding any other provision of this or any other agreement. If, because of restrictions under such laws, Lender is or believes it is unable to sell the securities in an open market transaction, Grantor agrees that Lender shall have no obligation to delay sale until the securities can be registered, and may make a private sale to one or more persons or to a restricted group of persons, even though such sale may result in a price that is less favorable than might be obtained in an open market transaction, and such a sale shall be considered commercially reasonable. If any securities held as Collateral are "restricted securities" as defined in the Rules of the Securities and Exchange Commission (such as Regulation D or Rule 144) or state securities departments under state "Blue Sky" laws, or if Grantor is an affiliate of the issuer of the securities, Grantor agrees that neither Grantor nor any member of Grantor's family will sell or dispose of any securities of such issuer without obtaining Lenders prior written consent. Foreclosure. Maintain a judicial suit for foreclosure and sale of the Collateral. Transfer Title. Effect transfer of title upon sale of all or part of the Collateral. For this purpose, Grantor irrevocably appoints Lender as its attorney-in-fact to execute endorsements, assignments and instruments in the name of Grantor and each of them (if more than one) as shall be necessary or reasonable. Other Rights and Remedies. Have and exercise any or all of the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, at law, in equity, or otherwise. Application of Proceeds. Apply any cash which is part of the Collateral, or which is received from the collection or sale of the Collateral, to reimbursement of any expenses, including any costs for registration of securities, commissions incurred in connection with a sale, attorney fees as provided below, as provided below, and court costs, whether or not there is a lawsuit and including any fees on appeal, incurred by Lender in connection with the collection and sale of such Collateral and to the payment of the Indebtedness of Grantor to 4 Page 4 Lender, with any excess funds to be paid to Grantor as the interests of Grantor may appear. Grantor agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Collateral to the Indebtedness. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Indiana. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Marion County, the State of Indiana. Lender and Grantor hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Grantor against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimilie, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current addresses). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS PLEDGE AND SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED APRIL 29, 1996. GRANTOR: IGF Holdings, Inc. By: /s/ Douglas H. Symons Douglas H. Symons, Vice President EX-10.10(5) 12 IGF PLEDGE AGREEMENT 1 EXHIBIT 10.10(5) PLEDGE AGREEMENT PLEDGE AGREEMENT, dated as of April 29, 1996, made by IGF Holdings, Inc. ("Pledgor"), in favor of Pafco General Insurance Company ("Pafco" or "Pledgee"): WHEREAS, pursuant to the Stock Purchase Agreement (the "Stock Purchase Agreement"), dated January 31, 1996, by and among GS Capital Partners II, L.P. ("GSCP"), Goran Capitol Inc. ("Goran"), Symons International Group, Inc. ("SIG") and GGS Management Holdings, Inc. (the "Company"), Goran and SIG have agreed to cause Pledgor to issue to Pafco, a wholly owned subsidiary of the Company, the IGF Holdings Notes; WHEREAS, Pledgor, an Affiliate of Goran and SIG, owns all the issued and outstanding shares of capital stock of IGF Insurance Company ("IGF") (such shares, together with all stock certificates, options or rights of any value or nature whatsoever that may be issued or granted by IGF to Pledgor while this Agreement is in effect, being referred to herein as the "Pledged Stock"); WHEREAS, pursuant to the Stock Purchase Agreement, Goran and SIG have agreed to cause Pledgor to pledge the Pledged Stock to Pledgee to secure any and all obligations of Pledgor under the IGF Holdings Notes (the "Secured Obligations"); and WHEREAS, it is a condition to GSCP's willingness to enter into the Stock Purchase Agreement that Pledgor shall have executed this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce GSCP to enter into the Stock Purchase Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Stock Purchase Agreement shall have such defined meanings when used herein. 2. Pledge. Pledgor hereby pledges, assigns, hypothecates, transfers, and delivers to Union Federal Savings Bank of Indianapolis ("Union"), the collateral agent of Pafco pursuant to an Intercreditor and Subordination Agreement (the "Intercreditor Agreement"), dated April 29, 1996, between Pledgor, Union and Pafco, all the Pledged Stock (together with appropriate undated stock powers duly executed in blank), and hereby grants to Pledgee a lien on, and security interest in, the Pledged Stock and in all Proceeds (as defined below) thereof as collateral security for (i) the prompt and complete payment and performance when due (whether during any performance period thereof or therefor or at the stated maturity, by acceleration or otherwise) of all the Secured Obligations. "Proceeds" means all "proceeds" as defined in Section 9-306(1) of the New York 2 Uniform Commercial Code (the "Code") and shall, in any event, include, without limitation, all dividends, distributions or other income from the Pledged Stock, and any and all collections on the foregoing or distributions with respect to the foregoing. 3. Stock Dividends, Distributions, etc. If, while this Agreement is in effect, Pledgor shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), option or rights, whether as an addition to, in substitution of, or in exchange for, any shares of any Pledged Stock, or otherwise, Pledgor agrees to accept the same as Pledgee's agent and to hold the same in trust on behalf of and for the benefit of Pledgee and to deliver the same forthwith to Pledgee (or, if required by the Intercreditor Agreement, to Union as collateral agent for Pledgee) in the exact form received, with the endorsement of Pledgor when necessary, and/or appropriate undated stock powers duly executed in blank, to be held by Pledgee (or, if required by the Intercreditor Agreement, to Union as collateral agent for Pledgee), subject to the terms hereof, as additional collateral security for the Secured Obligations. Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution or winding up of IGF shall be paid over forthwith to Pafco (or, if required by the Intercreditor Agreement, by Union as collateral agent for Pafco) to be held by Pafco (or, if required by the Intercreditor Agreement, by Union as collateral agent for Pafco) as additional collateral security for the Secured Obligations; and in case any distribution of capital shall be made on or in respect of the Pledged Stock or any property shall be distributed upon or with respect to the Pledged Stock pursuant to the recapitalization or reclassification of the capital of IGF, the property so distributed shall be delivered to Pafco (or, if required by the Intercreditor Agreement, by Union as collateral agent for Pledgee) as additional collateral security for the Secured Obligations. All sums of money and property so paid or distributed in respect of the Pledged Stock which are received by Pledgor shall, until paid or delivered to Pafco (or, if required by the Intercreditor Agreement, to Union as collateral agent for Pafco), be held by Pledgor as Pafco's agent (and in trust on their behalf and for its benefit) as additional collateral security for the Secured Obligations. 4. Collateral. The Pledged Stock and all other property at any time pledged to Pledgee hereunder (whether described herein or not) and all income therefrom and Proceeds thereof, are referred to herein collectively as the "Collateral". 5. Cash Dividends; Voting Rights. Unless a Triggering Event (as defined below) shall have occurred, Pledgor shall be entitled to receive all cash dividends paid in respect of the Pledged Stock, to vote the Pledged Stock and to give consents, waivers and ratification in respect of the Pledged Stock; provided, however, that no vote shall be cast or consent, waiver or ratification given or action taken which would impair the Collateral or be inconsistent with or violate any provision of this Agreement or the Stock Purchase Agreement. 6. Rights of Pledgee. If a Triggering Event shall have occurred, (a) any or all shares or other securities included in the Collateral held by Pafco (or, if required by the Intercreditor Agreement, by Union as collateral agent for Pafco) hereunder may, without notice, be registered in the name of Pafco or its nominee (or, if required by the Intercreditor Agreement, in the name of Union as collateral agent for Pafco), and (b) Pafco or its nominee (or, if required by the Intercreditor Agreement, Union, as collateral agent for Pafco) may 2 3 thereafter, after notice to Pledgor, exercise all voting and corporate rights at any meeting of any corporation or other entity issuing any of the shares or other securities included in the Pledged Stock and exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any shares or other securities included in the Pledged Stock as if it were the sole and absolute owner thereof, including, without limitation, the right to exchange at its discretion, any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other readjustment of any corporation or other entity issuing any of such shares or other securities or upon the exercise by any such issuer or Pafco of any right, privilege or option pertaining to any shares or other securities included in the Pledged Stock, and in connection therewith, to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon such 3 4 terms and conditions as it may determine, all without liability, but Pafco shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible to Pledgor for any failure to do so or delay in so doing. 7. Remedies. If any portion of the Secured Obligations shall at any time become, or shall be declared, due and payable (or if any stay or legal bar to such Secured Obligations becoming or being declared due and payable is in effect, if but for the operation of such stay or legal bar such obligations would have become, or could have been declared, due and payable by their terms) and remain unpaid for a period of five business days from the date upon which such portion of the Secured Obligations shall have become, or shall have been declared (or would have so become, or could have so been declared), due and payable (a "Triggering Event"), subject to the terms of the Intercreditor Agreement, Pafco shall have the sole right to exercise in addition to all other rights and remedies granted in this Agreement and in any other instrument or agreement evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, subject to the terms of the Intercreditor Agreement, Pafco shall have the right to, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Pledgor or any other person or entity (all and each of which demands, advertisements and/or notices are hereby expressly waived), forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or forthwith sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Pafco's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, with the right to Pafco, upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in Pledgor, which right or equity is hereby expressly waived or released. Pledgor hereby expressly agrees and acknowledges that, subject to the requirements of the Intercreditor Agreement, Pafco shall first, deduct from the net proceeds ("Sale Proceeds") of any such collection, recovery, receipt, appropriation, realization or sale, all reasonable costs and expenses 4 5 of every kind incurred therein or incidental to the care, safekeeping or otherwise of any and all of the Collateral or in any way relating to the rights of Pledgees hereunder, including reasonable attorney's fees and legal expenses; and second, apply any remaining Sale Proceeds as payment in respect of the full outstanding principal amount and all accrued interest and other amounts owing pursuant to the IGF Holdings Notes (Pledgor remaining liable for any Secured Obligations remaining unpaid after such application); and third, any remaining Sale Proceeds shall be paid over to Pledgor. Pledgor agrees that Pafco need not give more than ten days' notice of the time and place of any public sale or of the time after which a private sale or other intended disposition is to take place and that such notice is reasonable notification of such matters. No notification need be given to Pledgor if it has signed after default a statement renouncing or modifying any right to notification of sale or other intended disposition. Pledgor shall be liable if the proceeds of any sale or other disposition of the Collateral are insufficient to pay all amounts owing pursuant to the Secured Obligations and the fees and expenses of any attorneys employed by Pafco to collect such amounts. All waivers by Pledgor of rights (including rights to notice) and all rights and remedies afforded Pafco herein, and all other provisions of this Agreement, are expressly made subject to any applicable mandatory provisions of Law limiting, or imposing conditions (including conditions as to reasonableness) upon, such waivers or the effectiveness thereof or any such rights and remedies. Any sale or other disposition of the Collateral shall be in compliance with all provisions of applicable Law (including applicable securities Laws and applicable provisions of the Code). 8. Representations, Warranties and Covenants. Pledgor represents and warrants that (a) Pledgor is the legal record and beneficial owner of, and has good title to, the Pledged Stock, subject to no Encumbrance, except the lien and security interest created by this Agreement and by the Commercial Pledge and Security Agreement (the "Commercial Pledge Agreement"), dated as of the date hereof, between Pledgor and Union; (b) the shares of Pledged Stock listed on Schedule I hereto constitute all the issued and outstanding shares of the capital stock of IGF; (c) Pledgor has full power, authority and legal right to pledge all the Pledged Stock and the other Collateral pursuant to this Agreement; (d) this Agreement has been duly authorized, executed and delivered by Pledgor and constitutes a legal, valid and binding obligation of the Pledgor enforceable in accordance with its terms; (e) all the shares of the Pledged Stock have been duly and validly issued, are fully paid and non-assessable; and (f) the pledge, assignment and delivery of the Pledged Stock and the 5 6 other Collateral pursuant to this Agreement creates a valid lien on, and a security interest in, such shares of the Pledged Stock and the other Collateral, respectively, and the Proceeds thereof, subject to no prior or pari passu Encumbrance or to any agreement granting to any third party a security interest in the property or assets of Pledgor which would include the Pledged Stock or any item of the other Collateral except for the lien granted to Union pursuant to the Commercial Pledge Agreement. Pledgor covenants and agrees that it will defend Pledgee's right and security interest in and to the Pledged Stock and the other Collateral and the Proceeds thereof against the claims and demands of all persons whomsoever except for any claim or demand made by Union pursuant to the Commercial Pledge Agreement; and covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to Pledgees as Collateral hereunder and will likewise defend Pledgee's right thereto and security interest therein. 9. No Disposition, etc. Without the prior written consent of Pafco, Pledgor agrees that, except as contemplated by the Intercreditor Agreement or the Commercial Pledge Agreement, it will not sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, nor will it create, incur or permit to exist any Encumbrance with respect to any of the Collateral, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Agreement. Without the prior written consent of Pafco, Pledgor agrees that it will not vote to enable IGF to, and will not otherwise permit IGF to, issue any stock or other securities of any nature in addition to or in exchange or substitution for the Pledged Stock. 10. Realization on Collateral. (a) Pledgor recognizes that Pafco may be unable to effect a public sale of any or all of the Pledged Stock by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities Laws, but may be compelled to resort to one or more private sales thereof to a restricted group or purchasers who will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable 6 7 manner. Pafco shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Securities Act or under applicable state securities Laws, even if IGF would agree to do so. (b) Pledgor further agrees to do or cause to be done all such other acts and things as may be necessary to make such sale or sales of any portion or all of the Pledged Stock valid and binding and in compliance with any and all applicable Laws of any Governmental Authority, domestic or foreign, having jurisdiction over any such sale or sales, all at Pledgor's expense. Pledgor further agrees that a breach of any of the covenants contained in this Agreement will cause irreparable injury to Pledgee that there is no adequate remedy at Law in respect of such breach and, as a consequence, agrees that each and every covenant made by it contained in this Agreement shall be specifically enforceable against it, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants. Pledgor further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by Pledgee by reason of a breach of any of its covenants contained herein and, consequently, agrees that, if Pledgee shall sue for damages for breach, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Pledged Stock and other Collateral on the date Pledgee shall demand compliance with the covenants contained in this Agreement. 11. Further Assurances. Pledgee agrees that at any time and from time to time upon the written request of Pafco, it will execute and deliver such further documents and do such further acts and things as Pafco may reasonably request in order to effect the purposes of this Agreement. 12. Limitation on Duties Regarding Collateral. Pafco's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as Pafco deals with similar securities and property for its own account (it being acknowledged that the collateral may be held by Union, as collateral agent for Pafco pursuant to the terms of the Intercreditor Agreement). Neither Pafco nor its directors, officers, partners, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Pledgor or otherwise. 7 8 13. Powers Coupled with an Interest; Agency. All authorizations, assignments, designations and agencies contained herein with respect to the Collateral are irrevocable and powers coupled with an interest authorization. 14. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Paragraph Headings. The paragraph headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. No Waiver; Cumulative Remedies. Pledgee shall not by any act (except by a written instrument executed by Pledgee pursuant to Section 17 hereof) be deemed to have waived any right or remedy hereunder. No failure to exercise, nor any delay in exercising, on the part of Pledgee any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by Pledgee of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Pledgee would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by Law. 17. Waivers and Amendments; Successors and Assigns; Governing Law. This Agreement may be amended, supplemented or otherwise modified by written instrument executed by Pledgor and Pledgee. This Agreement shall be binding upon the successors and assigns of Pledgor and shall insure to the benefit of Pledgees and their respective successors and assigns. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF INDIANA (REGARDLESS OF THE LAWS THAT MIGHT BE APPLICABLE UNDER ANY PRINCIPLES OF CONFLICTS OF LAWS). 8 9 18. Irrevocable Authorization and Instruction to IGF. Pledgor hereby authorizes and instructs IGF to comply with any instruction received by IGF from Pledgee in writing in accordance with the terms of this Agreement, without any other or further instructions from Pledgor, and Pledgor agrees that IGF shall be fully protected in so complying. 9 10 IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly executed and delivered as of the day and year first above written. IGF HOLDINGS, INC. By: /s/ Douglas H. Symons Name: Douglas H. Symons Title: Vice President 10 11 SCHEDULE I Description of Pledged Stock Stock Percentage of Class of Stock Certificate No. No.of Shares Issued Shares Issuer IGF Insurance Preferred 2,494,000 100% Company Common 29,614 12 ACKNOWLEDGMENT AND CONSENT IGF Insurance Company ("IGF") hereby acknowledges receipt of the Pledge Agreement (the "Agreement"), dated April 29, 1996, made by IGF Holdings, Inc. in favor of Pafco General Insurance Company and GS Capital Partners II, L.P. and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. IGF agrees to notify GSCP promptly in writing of the occurrence of any of the events described in Section 4 of the Agreement. IGF further agrees that the terms of Sections 7 and 10 of the Agreement shall apply to it, mutatis, mutandis, with respect to all actions that may be required of it under or pursuant to Sections 7 and 10 of the Agreement. IGF INSURANCE COMPANY By: /s/ Douglas H. Symons, President ---------------------------------- EX-10.11(2) 13 GGS PLEDGE AGREEMENT 1 Exhibit 10.11(2) PLEDGE AGREEMENT PLEDGE AGREEMENT dated as of April 30, 1996 between GGS MANAGEMENT HOLDINGS, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Pledgor"); and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as administrative agent for the Banks party to the Credit Agreement referred to below (in such capacity, together with its successors in such capacity, the "Administrative Agent"). GGS Management, Inc., a Delaware corporation (the "Company"), certain lenders (the "Banks") and the Administrative Agent are parties to a Credit Agreement dated as of April 30, 1996 (as modified and supplemented and in effect from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Banks to the Company. To induce said Banks to enter into the Credit Agreement and to extend credit thereunder, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed to pledge and grant a security interest in the Collateral (as hereinafter defined) as security for the Secured Obligations (as hereinafter defined). Accordingly, the parties hereto agree as follows: Section 1. Definitions. Terms defined in the Credit Agreement are used herein as defined therein. In addition, as used herein: "Collateral" shall have the meaning ascribed thereto in Section 3 hereof. "Collateral Account" shall have the meaning ascribed thereto in Section 4.01 hereof. "Pledged Stock" shall have the meaning ascribed thereto in Section 3(a) hereof. "Secured Obligations" shall mean, collectively, (a) the principal of and interest on the Loans made by the Banks to, and the Notes held by the Banks of, the Company and all other amounts from time to time owing to the Banks or the Administrative Agent by the Company under the Loan Documents, (b) all amounts from time to time owing by the Company to any Bank under any Interest Rate Protection Agreement and (c) all obligations of the Pledgor to the Banks and the Administrative Agent hereunder. GGS Pledge Agreement 2 - 2 - "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect from time to time in the State of New York. Section 2. Representations and Warranties. The Pledgor represents and warrants to the Banks and the Administrative Agent that: 2.01 Corporate Existence. The Pledgor is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation. 2.02 Litigation. There are no legal or arbitral proceedings or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Pledgor) threatened against the Pledgor that, if adversely determined, is reasonably likely (either individually or in the aggregate) to have a material adverse effect on the making or performance by the Pledgor of this Agreement or the validity or enforceability thereof. 2.03 No Breach. None of the execution and delivery of this Agreement, the consummation of the transactions herein contemplated or compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Pledgor, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Pledgor is a party or by which is bound or to which it is subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Pledgor pursuant to the terms of any such agreement or instrument. 2.04 Corporate Action. The Pledgor has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement; the execution, delivery and performance by the Pledgor of this Agreement have been duly authorized by all necessary corporate action on its part; and this Agreement has been duly and validly executed and delivered by the Pledgor and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the GGS Pledge Agreement 3 - 3 - application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 2.05 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange are necessary for the execution, delivery or performance by the Pledgor of this Agreement or for the validity or enforceability hereof except for (i) filings and recordings in respect of the Liens created pursuant to this Agreement, (ii) the approval of the insurance department or similar insurance regulatory or administrative authority or agency of the state in which an Insurance Subsidiary is domiciled or licensed to do an insurance business (and any Subsidiary of such Insurance Subsidiary that is also an Insurance Subsidiary) as may be required in connection with a foreclosure on the shares pledged under this Agreement. 2.06 Taxes. From and after the Closing Date, the Pledgor and its Subsidiaries will be members of an affiliated group of corporations eligible to file consolidated returns for Federal income tax purposes, of which the Pledgor will be the "common parent" (within the meaning of Section 1504 of the Code) of such group. As of the close of business on the Closing Date, the charges, accruals and reserves on the books of the Pledgor and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Pledgor, adequate. 2.07 Pledged Stock. (a) The Pledgor is the sole beneficial owner of the Collateral and no Lien exists or will exist upon the Collateral at any time (and no right or option to acquire the same exists in favor of any other Person), except for (i) Liens permitted under Section 8.05 of the Credit Agreement and (ii) the pledge and security interest in favor of the Administrative Agent for the benefit of the Banks created or provided for herein, which pledge and security interest, upon delivery of the Pledged Shares to the Administrative Agent and assuming continuous possession thereof by the Administrative Agent, and upon the filing of appropriate financing statements in the jurisdictions specified by the Uniform Commercial Code in the case of Collateral other than the Pledged Shares, will constitute a first priority perfected pledge and security interest in and to all of the Collateral. (b) The Pledged Stock represented by the certificates identified in Annex 1 hereto is, and all other Pledged Stock in which the Pledgor shall hereafter grant a security interest pursuant to Section 3 hereof GGS Pledge Agreement 4 - 4 - will be, duly authorized, validly existing, fully paid and non-assessable and none of such Pledged Stock is or will be subject to any contractual restriction, or any restriction under the charter or by-laws of the Company, upon the transfer of such Pledged Stock (except for any such restriction contained herein). (c) The Pledged Stock represented by the certificates identified in Annex 1 hereto constitutes all of the issued and outstanding shares of capital stock of any class of the Company beneficially owned by the Pledgor on the date hereof (whether or not registered in the name of the Pledgor) and said Annex 1 correctly identifies, as at the date hereof, the respective class and par value of the shares comprising such Pledged Stock and the respective number of shares (and registered owners thereof) represented by each such certificate. 2.08 Investment Company Act. The Pledgor is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 2.09 Public Utility Holding Company Act. The Pledgor is not a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 3. The Pledge. As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations, the Pledgor hereby pledges and grants to the Administrative Agent, for the benefit of the Banks as hereinafter provided, a security interest in all of the Pledgor's right, title and interest in, to and under the following Property, whether now owned by the Pledgor or hereafter acquired and whether now existing or hereafter coming into existence (all being collectively referred to herein as "Collateral"): (a) the shares of common stock of the Company represented by the certificates identified in Annex 1 hereto and all other shares of capital stock of whatever class of the Company, now or hereafter owned by the Pledgor, in each case together with the certificates evidencing the same (collectively, the "Pledged Stock"); (b) all shares, securities, moneys or property representing a dividend on any of the Pledged Stock, or representing a distribution or GGS Pledge Agreement 5 - 5 - return of capital upon or in respect of the Pledged Stock, or resulting from a split-up, revision, reclassification or other like change of the Pledged Stock or otherwise received in exchange therefor, and any subscription warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Stock; (c) without affecting the obligations of the Pledgor under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which the Company is not the surviving corporation, all shares of each class of the capital stock of the successor corporation (unless such successor corporation is the Pledgor itself) formed by or resulting from such consolidation or merger; (d) each Transaction Document; (e) the balance from time to time in the Collateral Account; and (f) all proceeds of and to any of the Property of the Pledgor described in the preceding clauses of this Section 3 (including, without limitation, all causes of action, claims and warranties now or hereafter held by the Pledgor in respect of any of the items listed above) and, to the extent related to any property described in said clauses or such proceeds, products and accessions, all books, correspondence, credit files, records, invoices and other papers. Section 4. Cash Proceeds of Collateral. 4.01 Collateral Account. The Administrative Agent may establish with Chase a cash collateral account (the "Collateral Account") in the name and under the control of the Administrative Agent into which there shall be deposited from time to time the cash proceeds of any of the Collateral required to be delivered to the Administrative Agent pursuant hereto and into which the Pledgor may from time to time deposit any additional amounts that it wishes to pledge to the Administrative Agent for the benefit of the Banks as additional collateral security hereunder. The balance from time to time in the Collateral Account shall constitute part of the Collateral hereunder and shall not constitute payment of the Secured Obligations until applied as hereinafter provided. Except as expressly provided in the next sentence, the Administrative GGS Pledge Agreement 6 - 6 - Agent shall remit the collected balance standing to the credit of the Collateral Account to or upon the order of the Pledgor as the Pledgor shall from time to time instruct. However, at any time following the occurrence and during the continuance of an Event of Default, the Administrative Agent may (and, if instructed by the Banks as specified in Section 10.03 of the Credit Agreement, shall) in its (or their) discretion apply or cause to be applied (subject to collection) the balance from time to time standing to the credit of the Collateral Account to the payment of the Secured Obligations in the manner specified in Section 4.09 hereof. The balance from time to time in the Collateral Account shall be subject to withdrawal only as provided herein. In addition to the foregoing, the Pledgor agrees that if the proceeds of any Collateral hereunder shall be received by it, the Pledgor shall as promptly as possible deposit such proceeds into the Collateral Account to the extent such proceeds are required to be delivered to the Administrative Agent pursuant hereto. Until so deposited, all such proceeds shall be held in trust by the Pledgor for and as the property of the Administrative Agent and shall not be commingled with any other funds or property of the Pledgor. 4.02 Investment of Balance in Collateral Account. Amounts on deposit in the Collateral Account shall be invested from time to time in such Permitted Investments as the Pledgor (or, after the occurrence and during the continuance of a Default, the Administrative Agent) shall determine, which Permitted Investments shall be held in the name and be under the control of the Administrative Agent, provided that (i) at any time after the occurrence and during the continuance of an Event of Default, the Administrative Agent may (and, if instructed by the Banks as specified in Section 10.03 of the Credit Agreement, shall) in its (or their) discretion at any time and from time to time elect to liquidate any such Permitted Investments and to apply or cause to be applied the proceeds thereof to the payment of the Secured Obligations in the manner specified in Section 6.09 hereof and (ii) if requested by the Pledgor, such Permitted Investments may be held in the name and under the control of one or more of the Banks (and in that connection each Bank, pursuant to Section 10.10 of the Credit Agreement has agreed that such Permitted Investments shall be held by such Bank as a collateral sub-agent for the Administrative Agent hereunder). Section 5. Covenants. The Pledgor agrees that, until the payment and satisfaction in full of the Secured Obligations and the expiration or termination of the Commitments of the Banks under the Credit Agreement: GGS Pledge Agreement 7 - 7 - 5.01 Litigation. The Pledgor will promptly give to each Bank (a) notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, affecting the Pledgor, except proceedings that, if adversely determined, would not (either individually or in the aggregate) have a material adverse effect on the making or performance by the Pledgor of this Agreement or the validity or enforceability thereof, (b) a copy of any written notice given by the Pledgor or any of its Subsidiaries to the Seller of any claim for damages resulting from breaches of the representations and warranties of the Sellers in the Superior Stock Purchase Agreement and (c) a copy of any written notice to arbitrate given or received by the Pledgor under Section 9.2 of the Superior Stock Purchase Agreement. 5.02 Corporate Existence, Etc. The Pledgor will: preserve and maintain its corporate existence and all of its material rights, privileges and franchises; comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could (either individually or in the aggregate) materially and adversely affect the making or performance by the Pledgor of this Agreement or the validity or enforceability thereof; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and permit representatives of any Bank or the Administrative Agent, during normal business hours, to examine, copy and make extracts from its books and records relating to the Collateral. Section 6. Further Assurances; Remedies. In furtherance of the grant of the pledge and security interest pursuant to Section 3 hereof, the Pledgor hereby agrees with each Bank and the Administrative Agent as follows: 6.01 Delivery and Other Perfection. The Pledgor shall: (a) if any of the shares, securities, moneys or property required to be pledged by the Pledgor under clauses (a), (b) and (c) of Section 3 hereof are received by the Pledgor, forthwith either (x) transfer and deliver to the Administrative Agent such shares or GGS Pledge Agreement 8 - 8 - securities so received by the Pledgor (together with the certificates for any such shares and securities duly endorsed in blank or accompanied by undated stock powers duly executed in blank), all of which thereafter shall be held by the Administrative Agent, pursuant to the terms of this Agreement, as part of the Collateral or (y) take such other action as the Administrative Agent shall deem necessary or appropriate to duly record the Lien created hereunder in such shares, securities, moneys or property in said clauses (a), (b) and (c); (b) give, execute, deliver, file and/or record any financing statement, notice, instrument, document, agreement or other papers that may be necessary or desirable (in the judgment of the Administrative Agent) to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Administrative Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including, without limitation, causing any or all of the Collateral to be transferred of record into the name of the Administrative Agent or its nominee (and the Administrative Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Administrative Agent will thereafter promptly give to the Pledgor copies of any notices and communications received by it with respect to the Collateral); (c) keep full and accurate books and records relating to the Collateral, and stamp or otherwise mark such books and records in such manner as the Administrative Agent may reasonably require in order to reflect the security interests granted by this Agreement; and (d) permit representatives of the Administrative Agent, upon reasonable notice, at any time during normal business hours to inspect and make abstracts from its books and records pertaining to the Collateral, and permit representatives of the Administrative Agent to be present at the Pledgor's place of business to receive copies of all communications and remittances relating to the Collateral, and forward copies of any notices or communications received by the Pledgor with respect to the Collateral, all in such manner as the Administrative Agent may require. 6.02 Other Financing Statements and Liens. Without the prior written consent of the Administrative Agent (granted with the authorization of the Banks as specified in Section 10.09 of the Credit Agreement), the Pledgor GGS Pledge Agreement 9 - 9 - shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Administrative Agent is not named as the sole secured party for the benefit of the Banks. 6.03 Preservation of Rights. The Administrative Agent shall not be required to take steps necessary to preserve any rights against prior parties to any of the Collateral. 6.04 Collateral. (1) The Pledgor will cause the Pledged Stock to constitute at all times 100% of the total number of shares of each class of capital stock of the Company then outstanding. (2) So long as no Event of Default shall have occurred and be continuing, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Pledged Stock for all purposes not inconsistent with the terms of this Agreement, the Credit Agreement, the Notes or any other instrument or agreement referred to herein or therein, provided that the Pledgor agrees that it will not vote the Collateral in any manner that is inconsistent with the terms of this Agreement, the Credit Agreement, the Notes or any such other instrument or agreement; and the Administrative Agent shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers that it is entitled to exercise pursuant to this Section 6.04(2). (3) Unless and until an Event of Default has occurred and is continuing, the Pledgor shall be entitled to receive, retain and use any dividends on the Pledged Stock paid in cash out of earned surplus and all proceeds of all other Collateral. (4) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not the Administrative Agent or any Bank exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement, the Credit Agreement, the Notes or any other agreement relating to such Secured Obligation, all dividends and other distributions on the Collateral shall be paid directly to the Administrative Agent and retained by it in the Collateral Account as part of the Collateral, subject to the terms of this Agreement, and, if the Administrative Agent shall so request in writing, the Pledgor agrees to execute GGS Pledge Agreement 10 - 10 - and deliver to the Administrative Agent appropriate additional dividend, distribution and other orders and documents to that end, provided that if such Event of Default is cured, any such dividend or distribution theretofore paid to the Administrative Agent shall, upon request of the Pledgor (except to the extent theretofore applied to the Secured Obligations), be returned by the Administrative Agent to the Pledgor. 6.05 Events of Default, Etc. During the period during which an Event of Default shall have occurred and be continuing, but subject to the provisions of Section 7.11 hereof: (a) the Administrative Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code (whether or not said Code is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted, including, without limitation, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Administrative Agent were the sole and absolute owner thereof (and the Pledgor agrees to take all such action as may be appropriate to give effect to such right); (b) the Administrative Agent in its discretion may, in its name or in the name of the Pledgor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; and (c) the Administrative Agent may, upon ten business days' prior written notice to the Pledgor of the time and place, with respect to the Collateral or any part thereof that shall then be or shall thereafter come into the possession, custody or control of the Administrative Agent, the Banks or any of their respective agents, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Administrative Agent deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is GGS Pledge Agreement 11 - 11 - required above or by applicable statute and cannot be waived), and the Administrative Agent or any Bank or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Pledgor, any such demand, notice and right or equity being hereby expressly waived and released. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 6.05 shall be applied in accordance with Section 6.09 hereof. The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at prices and on terms less favorable to the Administrative Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall not be deemed, for that reason alone, not to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the Company or issuer thereof to register it for public sale. 6.06 Deficiency. If the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 4.05 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Pledgor shall remain liable for any deficiency. 6.07 Removals, Etc. Without at least 30 days' prior written notice to the Administrative Agent, the Pledgor shall not (i) maintain any of its books and records with respect to the Collateral at any office or maintain GGS Pledge Agreement 12 - 12 - its principal place of business at any place other than at the address indicated beneath its signature hereto or (ii) change its name, or the name under which it does business, from the name shown on the signature pages hereto. 6.08 Private Sale. The Administrative Agent and the Banks shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 6.05 hereof conducted in a commercially reasonable manner. The Pledgor hereby waives any claims against the Administrative Agent or any Bank arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations, even if the Administrative Agent accepts the first offer received and does not offer the Collateral to more than one offeree. 6.09 Application of Proceeds. Except as otherwise herein expressly provided, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Administrative Agent under Section 4 hereof or this Section 6, shall be applied by the Administrative Agent: First, to the payment of the costs and expenses of such collection, sale or other realization, including reasonable out-of-pocket costs and expenses of the Administrative Agent and the fees and expenses of its agents and counsel, and all expenses incurred and advances made by the Administrative Agent in connection therewith; Next, to the payment in full of the Secured Obligations, in each case equally and ratably in accordance with the respective amounts thereof then due and owing or as the Banks holding the same may otherwise agree; and Finally, to the payment to the Pledgor, or its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining. As used in this Section 6, "proceeds" of Collateral shall mean cash, securities and other property realized in respect of, and distributions in kind of, Collateral, including any thereof received under any reorganization, GGS Pledge Agreement 13 - 13 - liquidation or adjustment of debt of the Pledgor or any issuer of or obligor on any of the Collateral. 6.10 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Administrative Agent while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default the Administrative Agent is hereby appointed the attorney-in-fact of the Pledgor for the purpose of carrying out the provisions of this Section 6 and taking any action and executing any instruments that the Administrative Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Administrative Agent shall be entitled under this Section 6 to make collections in respect of the Collateral, the Administrative Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor representing any dividend, payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. 6.11 Perfection. Prior to or concurrently with the execution and delivery of this Agreement, the Pledgor shall deliver to the Administrative Agent all certificates identified in Annex 1 hereto, accompanied by undated stock powers duly executed in blank. 6.12 Termination. When all Secured Obligations shall have been paid in full and the Commitments of the Banks under the Credit Agreement shall have expired or been terminated, this Agreement shall terminate, and the Administrative Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Pledgor. 6.13 Further Assurances. The Pledgor agrees that, from time to time upon the written request of the Administrative Agent, the Pledgor will execute and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request in order fully to effect the purposes of this Agreement. GGS Pledge Agreement 14 - 14 - Section 7. Miscellaneous. 7.01 No Waiver. No failure on the part of the Administrative Agent or any Bank to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any Bank of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 7.02 Notices. All notices, requests, consents and demands hereunder shall be in writing and telecopied or delivered to the intended recipient at the "Address for Notices" specified beneath its name on the signature pages hereof or, as to either party, at such other address as shall be designated by such party in a notice to the other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 7.03 Amendments, Etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Pledgor and the Administrative Agent (with the consent of the Banks as specified in Section 10.09 of the Credit Agreement). Any such amendment or waiver shall be binding upon the Administrative Agent and each Bank, each holder of any of the Secured Obligations and the Pledgor. 7.04 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Pledgor, the Administrative Agent, the Banks and each holder of any of the Secured Obligations (provided, however, that the Pledgor shall not assign or transfer its rights hereunder without the prior written consent of the Administrative Agent). 7.05 Captions. The captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 7.06 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the GGS Pledge Agreement 15 - 15 - same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. 7.07 Governing Law, Etc. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. The Pledgor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of the Supreme Court of the State of New York sitting in New York County (including its Appellate Division), and of any other appellate court in the State of New York, for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Pledgor hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. EACH OF THE PLEDGOR, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS E AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 7.08 Agents and Attorneys-in-Fact. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. 7.09 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the Banks in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 7.10 The Administrative Agent. As provided in Section 10 of the Credit Agreement, each Bank has appointed The Chase Manhattan Bank (National Association) as its agent for purposes of this Agreement. Following the payment in full of all Secured Obligations outstanding under the Credit Agreement and the termination or expiration of the Commitments thereunder, the provisions of said Section 10 shall be deemed to continue in full force and effect for the GGS Pledge Agreement 16 - 16 - benefit of the Administrative Agent under this Agreement. In that connection, following such payment in full and expiration and termination of the Commitments, the term "Majority Banks" (as defined in said Section 1.01) shall be deemed to refer to Banks holding Secured Obligations representing more than 50% of the aggregate Secured Obligations. 7.11 Certain Regulatory Requirements. The Administrative Agent hereby acknowledges that, in connection with any exercise by it of the rights and remedies afforded to it hereunder, it may be necessary to provide notice to and/or obtain the prior consent or approval of certain governmental authorities. Notwithstanding anything to the contrary contained herein, the Administrative Agent will not take any action pursuant to this Agreement which would constitute or result in any transfer of control over the Company, or any other action, if such action, in either case, requires notice to and/or the prior consent or approval of governmental authorities without first providing such notice and/or obtaining such consent or approval. Upon the exercise by the Administrative Agent of any power, right or privilege or remedy pursuant to this e Agreement which requires any consent, approval, recording, qualification or authorization of any governmental authority, the Pledgor will, and will cause the Company to, (a) execute and deliver, or cause the execution and delivery of, all applications, instruments or other documents and papers that the Administrative Agent may reasonably require to be obtained for such governmental consent, approval, recording, qualification or authorization, (b) use its best efforts otherwise to secure such governmental consent, approval, recording, qualification or authorization and (c) take no action inconsistent therewith. The Pledgor acknowledges that the Administrative Agent has no adequate remedy at law for the breach of any obligation of this Section 7.11, and that such obligations shall be enforceable by specific performance. GGS Pledge Agreement 17 - 17 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. GGS MANAGEMENT HOLDINGS, INC. By /s/ Alan G. Symons Title: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as Administrative Agent By /s/ J. David Parker, Jr. Title: Vice President GGS Pledge Agreement 18 ANNEX 1 PLEDGED STOCK [See Section 2(b) and (c)] Certificate Registered Issuer Nos. Owner Number of Shares GGS Management, C1 GGS Management 1,000 shares of Inc. Holding, Inc. common stock, par value $0.01 per share Annex 1 to GGS Guarantee and Pledge Agreement EX-10.11(3) 14 GGS MANAGEMENT PLEDGE AGREEMENT 1 EXHIBIT 10.11(3) PLEDGE AGREEMENT PLEDGE AGREEMENT dated as of April 30, 1996 between GGS MANAGEMENT, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as administrative agent for the Banks party to the Credit Agreement referred to below (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, certain lenders (the "Banks") and the Administrative Agent are parties to a Credit Agreement dated as of April 30, 1996 (as modified and supplemented and in effect from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Banks to the Company. To induce said Banks to enter into the Credit Agreement and to extend credit thereunder, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company has agreed to pledge and grant a security interest in the Collateral (as hereinafter defined) as security for the Secured Obligations (as so defined). Accordingly, the parties hereto agree as follows: Section 1. Definitions. Terms defined in the Credit Agreement are used herein as defined therein. In addition, as used herein: "Collateral" shall have the meaning ascribed thereto in Section 3 hereof. "Collateral Account" shall have the meaning ascribed thereto in Section 4.01 hereof. "Issuers" shall mean, collectively, (a) the respective corporations identified on Annex 1 hereto under the caption "Issuer" and (b) to the extent not otherwise identified on Annex 1 hereto, each other direct Subsidiary of the Company. "Pledged Stock" shall have the meaning ascribed thereto in Section 3(a) hereof. "Secured Obligations" shall mean, collectively, (a) the principal of and interest on the Loans made by the Banks to, and the Note(s) held by each Bank of, the Company and all other amounts from time to time owing to the Banks or the Administrative Agent by the Company under the Loan Documents, (b) all amounts from time to time owing by the Company to any Bank under any Interest Rate Protection Company Pledge Agreement 2 - 2 - Agreement and (c) all obligations of the Company to the Banks and the Administrative Agent hereunder. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect from time to time in the State of New York. Section 2. Representations and Warranties. The Company represents and warrants to the Banks and the Administrative Agent that: (a) The Company is the sole beneficial owner of the Collateral and no Lien exists or will exist upon the Collateral at any time (and no right or option to acquire the same exists in favor of any other Person), except for (i) Liens permitted under Section 8.05 of the Credit Agreement and (ii) the pledge and security interest in favor of the Administrative Agent for the benefit of the Banks created or provided for herein, which pledge and security interest, upon delivery of the Pledged Shares to the Administrative Agent and assuming continuous possession thereof by the Administrative Agent, and upon the filing of appropriate financing statements in the jurisdictions specified by the Uniform Commercial Code in the case of Collateral other than the Pledged Shares, will constitute a first priority perfected pledge and security interest in and to all of the Collateral. (b) The Pledged Stock represented by the certificates identified in Annex 1 hereto is, and all other Pledged Stock in which the Company shall hereafter grant a security interest pursuant to Section 3 hereof will be, duly authorized, validly existing, fully paid and non-assessable and none of such Pledged Stock is or will be subject to any contractual restriction, or any restriction under the charter or by-laws of the respective Issuer of such Pledged Stock, upon the transfer of such Pledged Stock (except for any such restriction contained herein or in the Credit Agreement). (c) The Pledged Stock represented by the certificates identified in Annex 1 hereto constitutes all of the issued and outstanding shares of capital stock of any class of the Issuers beneficially owned by the Company on the date hereof (whether or not registered in the name of the Company) and said Annex 1 correctly identifies, as at the date hereof, the respective Issuers of such Company Pledge Agreement 3 - 3 - Pledged Stock, the respective class and par value of the shares comprising such Pledged Stock and the respective number of shares (and registered owners thereof) represented by each such certificate. Section 3. The Pledge. As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations, the Company hereby pledges and grants to the Administrative Agent, for the benefit of the Banks as hereinafter provided, a security interest in all of the Company's right, title and interest in, to and under the following Property, whether now owned by the Company or hereafter acquired and whether now existing or hereafter coming into existence (all being collectively referred to herein as "Collateral"): (a) the shares of common stock of the Issuers represented by the certificates identified in Annex 1 hereto and all other shares of capital stock of whatever class of the Issuers, now or hereafter owned by the Company, in each case together with the certificates evidencing the same (collectively, the "Pledged Stock"); (b) all shares, securities, moneys or property representing a dividend on any of the Pledged Stock, or representing a distribution or return of capital upon or in respect of the Pledged Stock, or resulting from a split-up, revision, reclassification or other like change of the Pledged Stock or otherwise received in exchange therefor, and any subscription warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Stock; (c) without affecting the obligations of the Company under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which an Issuer is not the surviving corporation, all shares of each class of the capital stock of the successor corporation (unless such successor corporation is the Company itself) formed by or resulting from such consolidation or merger; (d) each Transaction Document; (e) the balance from time to time in the Collateral Account; 4 - 4 - (f) any and all contracts, agreements and other arrangements with respect to Net Billing Fees and Net Management Fees ("Accounts"); and (g) all other tangible and intangible Property of the Company, including, without limitation, all proceeds, products, accessions, rents, profits, income, benefits, substitutions and replacements of and to any of the Property of the Company described in the preceding clauses of this Section 3 (including, without limitation, all causes of action, claims and warranties now or hereafter held by the Company in respect of any of the items listed above and any proceeds of insurance thereon) and, to the extent related to any Property described in said clauses or such proceeds, products and accessions, all books, correspondence, credit files, records, invoices and other papers. Section 4. Cash Proceeds of Collateral. 4.01 Collateral Account. The Administrative Agent may establish with Chase a cash collateral account (the "Collateral Account") in the name and under the control of the Administrative Agent into which there shall be deposited from time to time the cash proceeds of any of the Collateral required to be delivered to the Administrative Agent pursuant hereto and into which the Company may from time to time deposit any additional amounts that it wishes to pledge to the Administrative Agent for the benefit of the Banks as additional collateral security hereunder. The balance from time to time in the Collateral Account shall constitute part of the Collateral hereunder and shall not constitute payment of the Secured Obligations until applied as hereinafter provided. Except as expressly provided in the next sentence, the Administrative Agent shall remit the collected balance standing to the credit of the Collateral Account to or upon the order of the Company as the Company shall from time to time instruct. However, at any time following the occurrence and during the continuance of an Event of Default, the Administrative Agent may (and, if instructed by the Banks as specified in Section 10.03 of the Credit Agreement, shall) in its (or their) discretion apply or cause to be applied (subject to collection) the balance from time to time outstanding to the credit of the Collateral Account to the payment of the Secured Obligations in the manner specified in Section 5.09 hereof. The balance from time to time in the Collateral Account shall be subject to withdrawal only as provided herein. In addition to the foregoing, the Company agrees that if the proceeds of any Collateral hereunder shall be received by it, the Company shall as promptly as Company Pledge Agreement 5 - 5 - possible deposit such proceeds into the Collateral Account to the extent such proceeds are required to be delivered to the Administrative Agent pursuant hereto. Until so deposited, all such proceeds shall be held in trust by the Company for and as the property of the Administrative Agent and shall not be commingled with any other funds or property of the Company. 4.02 Investment of Balance in Collateral Account. Amounts on deposit in the Collateral Account shall be invested from time to time in such Permitted Investments as the Company (or, after the occurrence and during the continuance of a Default, the Administrative Agent) shall determine, which Permitted Investments shall be held in the name and be under the control of the Administrative Agent, provided that (i) at any time after the occurrence and during the continuance of an Event of Default, the Administrative Agent may (and, if instructed by the Banks as specified in Section 10.03 of the Credit Agreement, shall) in its (or their) discretion at any time and from time to time elect to liquidate any such Permitted Investments and to apply or cause to be applied the proceeds thereof to the payment of the Secured Obligations in the manner specified in Section 5.09 hereof and (ii) if requested by the Company, such Permitted Investments may be held in the name and under the control of one or more of the Banks (and in that connection each Bank, pursuant to Section 10.10 of the Credit Agreement has agreed that such Permitted Investments shall be held by such Bank as a collateral sub-agent for the Administrative Agent hereunder). Section 5. Further Assurances; Remedies. In furtherance of the grant of the pledge and security interest pursuant to Section 3 hereof, the Company hereby agrees with each Bank and the Administrative Agent as follows: 5.01 Delivery and Other Perfection. The Company shall: (a) if any of the shares, securities, moneys or property required to be pledged by the Company under clauses (a), (b) and (c) of Section 3 hereof are received by the Company, forthwith either (x) transfer and deliver to the Administrative Agent such shares or securities so received by the Company (together with the certificates for any such shares and securities duly endorsed in blank or accompanied by undated stock powers duly executed in blank), all of which thereafter shall be held by the Administrative Agent, pursuant to the terms of this Agreement, as part of the Collateral or (y) take such other action as the Administrative Agent shall deem necessary or Company Pledge Agreement 6 - 6 - appropriate to duly record the Lien created hereunder in such shares, securities, moneys or property in said clauses (a), (b) and (c); (b) give, execute, deliver, file and/or record any financing statement, notice, instrument, document, agreement or other papers that may be necessary or desirable (in the judgment of the Administrative Agent) to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Administrative Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest, including, without limitation, causing any or all of the Collateral to be transferred of record into the name of the Administrative Agent or its nominee (and the Administrative Agent agrees that if any Collateral is transferred into its name or the name of its nominee, the Administrative Agent will thereafter promptly give to the Company copies of any notices and communications received by it with respect to the Collateral); (c) keep full and accurate books and records relating to the Collateral, and stamp or otherwise mark such books and records in such manner as the Administrative Agent may reasonably require in order to reflect the security interests granted by this Agreement; and (d) permit representatives of the Administrative Agent, upon reasonable notice, at any time during normal business hours to inspect and make abstracts from its books and records pertaining to the Collateral, and permit representatives of the Administrative Agent to be present at the Company's place of business to receive copies of all communications and remittances relating to the Collateral, and forward copies of any notices or communications received by the Company with respect to the Collateral, all in such manner as the Administrative Agent may require. 5.02 Other Financing Statements and Liens. Except as otherwise permitted under Section 8.05 of the Credit Agreement, without the prior written consent of the Administrative Agent (granted with the authorization of the Banks as specified in Section 10.09 of the Credit Agreement), the Company shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Administrative Agent is not named as the sole secured party for the benefit of the Banks. Company Pledge Agreement 7 - 7 - 5.03 Preservation of Rights. The Administrative Agent shall not be required to take steps necessary to preserve any rights against prior parties to any of the Collateral. 5.04 Collateral. (1) The Company will cause the Pledged Stock to constitute at all times 100% of the total number of shares of each class of capital stock of each Issuer then outstanding. (2) So long as no Event of Default shall have occurred and be continuing, the Company shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Pledged Stock for all purposes not inconsistent with the terms of this Agreement, the Credit Agreement, the Notes or any other instrument or agreement referred to herein or therein, provided that the Company agrees that it will not vote the Pledged Stock in any manner that is inconsistent with the terms of this Agreement, the Credit Agreement, the Notes or any such other instrument or agreement; and the Administrative Agent shall execute and deliver to the Company or cause to be executed and delivered to the Company all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Company may reasonably request for the purpose of enabling the Company to exercise the rights and powers that it is entitled to exercise pursuant to this Section 5.04(2). (3) Unless and until an Event of Default has occurred and is continuing, the Company shall be entitled to receive, retain and use any dividends on the Pledged Stock paid in cash out of earned surplus, the proceeds of Accounts and, subject to Sections 2.08(b) and 8.04 of the Credit Agreement, the proceeds of Dispositions of Collateral other than the Pledged Stock. (4) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not the Administrative Agent or any Bank exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement, the Credit Agreement, the Notes or any other agreement relating to such Secured Obligation, all dividends and other distributions on the Collateral shall be paid directly to the Administrative Agent and retained by it in the Collateral Account as part of the Collateral, subject to the terms of this Agreement, and, if the Administrative Agent shall so request in writing, the Company agrees to execute and deliver to the Administrative Agent appropriate additional dividend, distribution and other orders and documents to that end, provided that if such Company Pledge Agreement 8 - 8 - Event of Default is cured, any such dividend or distribution theretofore paid to the Administrative Agent shall, upon request of the Company (except to the extent theretofore applied to the Secured Obligations), be returned by the Administrative Agent to the Company. 5.05 Events of Default, Etc. During the period during which an Event of Default shall have occurred and be continuing, but subject to the provisions of Section 6.11 hereof: (a) the Administrative Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code (whether or not said Code is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted, including, without limitation, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Administrative Agent were the sole and absolute owner thereof (and the Company agrees to take all such action as may be appropriate to give effect to such right); (b) the Administrative Agent in its discretion may, in its name or in the name of the Company or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; and (c) the Administrative Agent may, upon ten business days' prior written notice to the Company of the time and place, with respect to the Collateral or any part thereof that shall then be or shall thereafter come into the possession, custody or control of the Administrative Agent, the Banks or any of their respective agents, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Administrative Agent deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is required above or by applicable statute and cannot be waived), and the Administrative Agent or any Bank or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at Company Pledge Agreement 9 - 9 - any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Company, any such demand, notice and right or equity being hereby expressly waived and released. The Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 5.05 shall be applied in accordance with Section 5.09 hereof. The Company recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Company acknowledges that any such private sales may be at prices and on terms less favorable to the Administrative Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall not be deemed, for that reason alone, not to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the respective Issuer or issuer thereof to register it for public sale. 5.06 Deficiency. If the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 5.05 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Company shall remain liable for any deficiency. 5.07 Removals, Etc. Without at least 30 days' prior written notice to the Administrative Agent, the Company shall not (i) maintain any of its books and records with respect to the Collateral at any office or maintain its principal place of business at any place other than at the address indicated Company Pledge Agreement 10 - 10 - beneath the signature of the Company to the Credit Agreement or (ii) change its name, or the name under which it does business, from the name shown on the signature pages hereto. 5.08 Private Sale. The Administrative Agent and the Banks shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 5.05 hereof conducted in a commercially reasonable manner. The Company hereby waives any claims against the Administrative Agent or any Bank arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations, even if the Administrative Agent accepts the first offer received and does not offer the Collateral to more than one offeree. 5.09 Application of Proceeds. Except as otherwise herein expressly provided, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Administrative Agent under Section 4 hereof or this Section 5, shall be applied by the Administrative Agent: First, to the payment of the costs and expenses of such collection, sale or other realization, including reasonable out-of-pocket costs and expenses of the Administrative Agent and the fees and expenses of its agents and counsel, and all expenses incurred and advances made by the Administrative Agent in connection therewith; Next, to the payment in full of the Secured Obligations, in each case equally and ratably in accordance with the respective amounts thereof then due and owing or as the Banks holding the same may otherwise agree; and Finally, to the payment to the Company, or its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining. As used in this Section 5, "proceeds" of Collateral shall mean cash, securities and other property realized in respect of, and distributions in kind of, Collateral, including any thereof received under any reorganization, liquidation or adjustment of debt of the Company or any issuer of or obligor on any of the Collateral. Company Pledge Agreement 11 - 11 - 5.10 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Administrative Agent while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default the Administrative Agent is hereby appointed the attorney-in-fact of the Company for the purpose of carrying out the provisions of this Section 5 and taking any action and executing any instruments that the Administrative Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Administrative Agent shall be entitled under this Section 5 to make collections in respect of the Collateral, the Administrative Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of the Company representing any dividend, payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. 5.11 Perfection. Prior to or concurrently with the execution and delivery of this Agreement, the Company shall deliver to the Administrative Agent all certificates identified in Annex 1 hereto, accompanied by undated stock powers duly executed in blank. 5.12 Termination. When all Secured Obligations shall have been paid in full and the Commitments of the Banks under the Credit Agreement shall have expired or been terminated, this Agreement shall terminate, and the Administrative Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Company. 5.13 Further Assurances. The Company agrees that, from time to time upon the written request of the Administrative Agent, the Company will execute and deliver such further documents and do such other acts and things as the Administrative Agent may reasonably request in order fully to effect the purposes of this Agreement. Company Pledge Agreement 12 - 12 - Section 6. Miscellaneous. 6.01 No Waiver. No failure on the part of the Administrative Agent or any Bank to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Administrative Agent or any Bank of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 6.02 Notices. All notices, requests, consents and demands hereunder shall be in writing and telecopied or delivered to the intended recipient at its "Address for Notices" specified pursuant to Section 11.02 of the Credit Agreement and shall be deemed to have been given at the times specified in said Section 11.02. 6.03 Amendments, Etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Company and the Administrative Agent (with the consent of the Banks as specified in Section 10.09 of the Credit Agreement). Any such amendment or waiver shall be binding upon the Administrative Agent and each Bank, each holder of any of the Secured Obligations and the Company. 6.04 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Company, the Administrative Agent, the Banks and each holder of any of the Secured Obligations (provided, however, that the Company shall not assign or transfer its rights hereunder without the prior written consent of the Administrative Agent). 6.05 Captions. The captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 6.06 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. 6.07 Governing Law, Etc. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. The Company Company Pledge Agreement 13 - 13 - hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of the Supreme Court of the State of New York sitting in New York County (including its Appellate Division), and of any other appellate court in the State of New York, for the purposes of all legal proceedings arising out of or relating to this Pledge Agreement or the transactions contemplated hereby. The Company hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. EACH OF THE COMPANY, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 6.08 Agents and Attorneys-in-Fact. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. 6.09 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the Banks in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 6.10 The Administrative Agent. As provided in Section 10 of the Credit Agreement, each Bank has appointed The Chase Manhattan Bank (National Association) as its agent for purposes of this Agreement. Following the payment in full of all Secured Obligations outstanding under the Credit Agreement and the termination or expiration of the Commitments thereunder, the provisions of said Section 10 shall be deemed to continue in full force and effect for the benefit of the Administrative Agent under this Agreement. In that connection, following such payment in full and expiration and termination of the Company Pledge Agreement 14 - 14 - Commitments, the term "Majority Banks" (as defined in said Section 1.01) shall be deemed to refer to Banks holding Secured Obligations representing more than 50% of the aggregate Secured Obligations. 6.11 Certain Regulatory Requirements. The Administrative Agent hereby acknowledges that, in connection with any exercise by it of the rights and remedies afforded to it hereunder, it may be necessary to provide notice to and/or obtain the prior consent or approval of certain governmental authorities. Notwithstanding anything to the contrary contained herein, the Administrative Agent will not take any action pursuant to this Agreement which would constitute or result in any transfer of control over any Issuer, or any other action, if such action, in either case, requires notice to and/or the prior consent or approval of governmental authorities without first providing such notice and/or obtaining such consent or approval. Upon the exercise by the Administrative Agent of any power, right or privilege or remedy pursuant to this Agreement which requires any consent, approval, recording, qualification or authorization of any governmental authority, the Company will, and will cause each Issuer to, (a) execute and deliver, or cause the execution and delivery of, all applications, instruments or other documents and papers that the Administrative Agent may reasonably require to be obtained for such governmental consent, approval, recording, qualification or authorization, (b) use its best efforts otherwise to secure such governmental consent, approval, recording, qualification or authorization and (c) take no action inconsistent therewith. The Company acknowledges that the Administrative Agent has no adequate remedy at law for the breach of any obligation of this Section 6.11, and that such obligations shall be enforceable by specific performance. Company Pledge Agreement 15 - 15 - IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered as of the day and year first above written. GGS MANAGEMENT, INC. By /s/ Alan G. Symons Title: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as Administrative Agent By /s/ J. David Parker, Jr. Title: Vice President Company Pledge Agreement 16 ANNEX 1 PLEDGED STOCK [See Section 2(b) and (c)] Certificate Registered Issuer Nos. Owner Number of Shares Pafco General 2 GGS Management, 10,000 shares of common Insurance Company Inc. stock, par value $125. Superior Insurance 3 and 4 GGS Management, 30,000 shares of Company Inc. common stock, par value $100. Annex 1 to Company Pledge Agreement EX-10.17(1) 15 DAGGETT EMPLOYMENT AGREEMENT 1 EXHIBIT 10.17(1) EMPLOYMENT AGREEMENT WHEREAS, IGF Insurance Company, an Indiana corporation, (the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to continue to employ Dennis G. Daggett ("You", "Your" or "Executive"), upon the terms and conditions hereinafter set forth; and WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the covenants and agreements set forth below, the parties agree as follows: 1. Employment 1.1 Term of Agreement. The Company agrees to employ Executive as President and Chief Operating Officer, effective as of February 1, 1996 and continuing for a period of thirty-six (36) months through January 31, 1999, unless such employment is terminated pursuant to Article III below; provided, however, that the term of this Agreement shall automatically be extended without further action of either party for additional one (1) year periods thereafter unless, not later than six (6) months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. If Company gives Executive such a notice of non-renewal, Executive's employment shall terminate as of the expiration date of this Agreement and such termination of employment shall be treated as a termination without cause under this Agreement. It is expressly understood and agreed that a notice of non-renewal issued by the Company shall not extinguish the Executive's non-competition obligations pursuant to Section 4 herein, and furthermore, the Company agrees that should termination pursuant to this Section apply, that the Executive, pursuant to the terms contained in Section 3.1 herein, shall receive his base salary for a further twelve (12) months, plus life and health benefits, from the date of such termination. 1.2 Terms of Employment. During the Term, You agree to be a full-time employee of the Company serving in the position of President and Chief Operating Officer of the Company and further agree to devote substantially all of Your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with Your position as President and Chief Operating Officer of the Company, to use Your best efforts to perform faithfully and efficiently such responsibilities. Executive shall perform such duties and responsibilities as may be determined from time to time by the Chairman and/or Chief Executive Officer of Goran Capital, Inc. ("Goran") and/or the Company and the Board of Directors of the Company, which duties shall be consistent with the position of President of the Company, which shall grant Executive authority, responsibility, title and standing comparable to that of the president and chief operating officer of a -1- 2 stock insurance company and which will not require Executive to relocate his principal place of residence from the metropolitan Des Moines, Iowa area. Nothing herein shall prohibit You from devoting Your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Your duties hereunder. 1.3 Director. The Board of Directors shall at their first meeting following the effective date of this Agreement appoint Executive as a Director of the Company to serve until his successor is duly qualified, elected and serving. The Company shall nominate Executive for election to the Board of Directors at the first annual meeting of shareholders of the Company which follows the effective date of this Agreement. If the Executive is not so appointed and so elected as a Director of the Company or if at any time during the term of this Agreement the Executive is not a Director serving as a member of the Board of Directors of the Company, then Company shall be in material breach of this Agreement and Executive may treat such breach as a termination without cause. Executive agrees to resign as a Director of the Company upon the termination or expiration of this Agreement. 2. Compensation, Benefits and Prerequisites 2.1 Salary. During the term of this Agreement, the Company shall pay Executive a salary at the minimum annual rate of One Hundred Eighty Thousand Dollars ($180,000). The salary shall be payable in twenty-six (26) equal installments. Company may increase this annual rate at its discretion but no reduction of Executive's then current rate of pay shall be made without his prior written consent. 2.2 Bonus. The Executive shall be eligible to participate in a bonus program as defined in Exhibit C (the "Bonus Arrangement") which is attached and incorporated herein by reference. All awards made to other Company employees pursuant to the Bonus Arrangement shall be at the sole discretion of the Compensation Committee of the Company's Board of Directors, which shall be comprised of four (4) members, two (2) of which shall be Company employees and two (2) of which shall be designated by the Company's shareholders. Should there be a stalemate then an outside member of the Board of Directors of Goran shall be asked to cast the final vote which final vote shall be determinative. In exercising its discretion, the Compensation Committee may make any award to any Company employee it shall deem appropriate; provided, however, that the Compensation Committee shall not grant any bonus award or authorize any payment of monies pursuant to this Section 2.2 that is in excess of one hundred fifty percent (150%) of the base salary received by any Company employee (during such individual's tenure as a Company employee) for any calendar year for which a bonus award is granted pursuant to this Section 2.2. The Compensation Committee shall only have discretion to award monies to the extent of the seven percent (7%) of the Company's statutory accounting basis pre-tax profits in excess of the Bonus Threshold as determined by the Bonus Arrangement in Exhibit C. -2- 3 2.3 Stock Option Plan. Should the Company enter into an Initial Public Offering, then the provisions of this Section 2.3 shall become operative; otherwise, stock options shall be granted solely at the discretion of the Company's Board of Directors. During the term of this Agreement, Executive shall receive stock options under a Plan which shall give Executive the opportunity to acquire up to (a) 1.25% of the total stock of the Company and relinquish all of his Goran options; or (b) .75% of the total stock of the Company and retain all of the Goran options granted; or (c) a sliding scale between (a) and (b). Such options, granted pursuant to this Section 2.3 and the Stock Option Plan, shall vest ratably over a five (5) year period from the date of granting at twenty percent (20%) per year. All such awards of stock options shall be made by the Compensation Committee of the Company's Board of Directors, with Executive not taking part in the deliberations or vote of the Compensation Committee concerning options to be granted to Executive. Even though such stock options shall vest ratably over a five (5) year period, no stock options granted pursuant to the provisions of this Section 2.3 and the Stock Option Plan shall be exercisable until after five (5) years from the date of grant of such option. The exercise price of any stock option granted pursuant to this Section 2.3 and the Stock Option Plan shall increase by ten percent (10%) on each anniversary of the date of grant of such option. The Company, or one of its affiliates ("Lender") will make available to Executive a loan facility (the "Stock Purchase Loan") whereby Executive may borrow up to Five Hundred Thousand Dollars ($500,000) at an interest rate of six percent (6%) per annum of the outstanding principle balance, calculated yearly. Any funds obtained by Executive pursuant to the Stock Purchase Loan shall only be used by Executive to purchase Company stock. Definitive documentation of the Stock Purchase Loan will provide for quarterly interest payments and no principle payments until the end of the five (5) year terms (the "Repayment Date") of the Stock Purchase Loan. At Executive's election, amounts otherwise payable as yearly interest payments may be added to the outstanding principle amount of the Stock Purchase Loan. The Stock Purchase Loan shall be secured by a perfected first security interest in all stock purchased with the proceeds of the Stock Purchase Loan ("Stock Purchase Loan Security"). In the event Executive shall elect to defer Stock Purchase Loan interest payments until the Repayment Date, in addition to the Stock Purchase Loan Security, Executive will grant Lender a perfected first security interest in all stock options granted to Executive pursuant to this Section 2.3 and the Stock Option Plan. 2.4 Goran Options. Goran shall make available to the Executive options for a total of Twenty Thousand (20,000) shares of Goran based on the market terms on the date that this Agreement is signed. Furthermore, Goran shall make available, upon completion of the next Public Offering of Goran/SIG common stock, options for a total amount of Twenty Thousand (20,000) shares of Goran at the market price of the next Public Offering. -3- 4 The Goran options so granted shall vest with Executive in accordance with the Stock Option Plan at the end of three (3) years from the date of granting of the options. 2.5 Employee Benefits. Executive shall be entitled to receive all benefits and prerequisites which are provided to other Executives of Company under the applicable Company plans and policies, and to future benefits and prerequisites made generally available to executive employees of the Company with duties and compensation comparable to that of Executive upon the same terms and conditions as other Company participants in such plans . A listing of such current benefit plans is attached hereto as Exhibit A. But in no event shall the cost to participate in the benefit plans be different than the obligations of other Presidents and Executive Vice Presidents of affiliates of the Goran Group of Companies. 2.6 Additional Prerequisites. During the term of this Agreement, Company shall provide Executive with: (a) Not less than four (4) weeks paid vacation during each calendar year. (b) A monthly motor vehicle allowance of Seven Hundred Fifty Dollars ($750). Further, Executive shall be reimbursed for his actual gasoline expenses in the utilization of the motor vehicle in furtherance of his duties under this Agreement or the business of the Company. Executive also shall be reimbursed for the costs of insuring himself and the Company for liability, damage, injury or loss arising out of or in connection with the use of such motor vehicle in the course of Executive's employment with the Company. (c) Monthly dues incurred by Executive at the country club of his choice located within reasonable geographic limits of the corporate offices of the Company, not to exceed Five Thousand Dollars ($5,000) per year. 2.7 Expenses. During the period of his employment hereunder, Executive shall be entitled to receive reimbursement from the Company (in accordance with the policies and procedures in effect for the Company's employees) for all reasonable travel, entertainment and other business expenses incurred by him in connection with his services hereunder. Executive shall be entitled to reimbursement of all reasonable travel expenses incurred by You for Your spouse to accompany You on any business trip where it is expected or appropriate that spouses will accompany the participants. 3. Termination of Executive's Employment 3.1 Termination of Employment and Severance Pay. Executive's employment under this Agreement may be terminated by either party at any time for any reason; provided, however, that if Executive's employment is terminated for any reason other than for cause, he shall receive, as severance pay, one (1) year's salary continuation from the Date of Termination, payable in twenty-six (26) bi-weekly installments with regular withholdings as if Executive was -4- 5 still an employee of the Company. Further, if Executive shall be terminated without cause, receipt of severance payments described in the preceding sentence are conditioned upon execution by Executive and the Company of that mutual Waiver and Release attached hereto as Exhibit B. 3.2 Cause. For purposes of this Article 3, "cause" shall mean only the following: (i) the committing of any act by Executive which would be considered a criminal offense (other than minor traffic violations) under the laws of either Indiana, Iowa or the United States of America; (ii) the failure by Executive to perform his material duties under this Agreement (excluding nonperformance resulting from Executive's disability) or disobedience to directives from those persons or bodies outlined in Section 1.2 which have the authority to determine and direct Executive's work and activities where such failure is not cured by Executive within fifteen (15) days of his receipt of written notification from Company specifying Executive's failure or breach and the steps the Executive must take to cure that failure or breach; however, during the fifteen (15) days the Company has the option to put the Executive on leave of absence with pay; or (iii) disability as provided in Section 3.3. 3.3 Disability. So long as otherwise permitted by law, if Executive has become permanently disabled from performing his duties under this Agreement, the Company's Chairman of the Board, may, in his discretion, determine that Executive will not return to work and terminate his employment as provided below. Upon any such termination for disability, Executive shall be entitled to such disability, medical, life insurance, and other benefits as may be provided generally for disabled employees of Company during the period he remains disabled. Permanent disability shall be determined pursuant to the terms of Executive's long term disability insurance policy provided by the Company. If Company elects to terminate this Agreement based on such permanent disability, such termination shall be for cause. 4. Non-Competition, Confidentiality and Trade Secrets 4.1 Noncompetition. In consideration of the Company's entering into this Agreement and the compensation and benefits to be provided by the Company to You hereunder, and further in consideration of Your exposure to proprietary information of the Company, You agree as follows: (a) Until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") You agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including, directly or indirectly, becoming an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the- counter securities market), officer, agent or director of, or otherwise participating in the management, operation, -5- 6 control or profits of (a) any firm or person engaged in the operation of a business engaged in the acquisition of insurance businesses or (b) any firm or person which either directly competes with a line or lines of business of the Company accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes or derives five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company. Notwithstanding any provision of this Agreement to the contrary, You agree that Your breach of the provisions of this Section 4.14.1(aa) shall permit the Company to terminate Your employment for cause. (b) If Your employment is terminated by You, or by reason of Your Disability, by the Company for cause, or pursuant to a notice of non-renewal as outlined in Section 1.1, then for two (2) years after the Date of Termination, You agree not to become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise to participate in the management, operation, control or profits of, any firm or person which directly competes with a business of the Company which at the Date of Termination produced any class of products or business accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes at which the Date of Termination derived five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes. (c) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 4.1 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company shall be entitled to an immediate injunction and restraining order (without the necessity of a bond) to prevent such breach or threatened or continued breach by You and any persons or entities acting for or with You, without having to prove damages, and to all costs and expenses (if a court or arbitrator determines that the Executive has breached the covenant not to compete in this Section 4.1, including reasonable attorneys' fees and costs, in addition to any other remedies to which the Company may be entitled at law or in equity. You and the Company agree that the provisions of this covenant not to compete are reasonable and necessary for the operation of the Company and its subsidiaries. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. 4.2 Confidentiality. You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other -6- 7 confidential information (as outlined in the Iowa Uniform Trade Secrets Act) relating to the Company or any of its affiliates, or any of their respective businesses or principals, and You confirm that such information is the exclusive property of the Company and its affiliates. You agree to hold as the Company's property all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, whether made by You or otherwise coming into Your possession and, on termination of Your employment, or on demand of the Company at any time, to deliver the same to the Company. Any ideas, processes, characters, productions, schemes, titles, names, formats, policies, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which You may conceive, create, organize, prepare or produce during the period of Your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its affiliates whether or not You should in fact execute an assignment thereof to the Company, but You agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. 5. Miscellaneous 5.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 5.2 Entire Agreement. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard to the employment of Executive or the obligations of the Company or the Executive. This Agreement supersedes all prior employment contracts and non-competition agreements between the parties. 5.3 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: IGF Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: Chief Executive Officer With a Copy to: Goran Capital, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: President and Chief Executive Officer -7- 8 If to Executive, to: Dennis G. Daggett 2882 106th Street Des Moines, Iowa 50322 or to such other addresses as one party may designate in writing to the other party from time to time. 5.4 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 5.5 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 5.6 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Iowa, without giving effect to conflict of law principles. 5.7 Headings. The headings of articles and sections herein are included solely for convenience and reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 5.8 Counterparts. This Agreement may be executed by either of the parties in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. 5.9 Survival. Company's obligations under Section 3.1 and Executive's obligations under Section 4 shall survive the termination and expiration of this Agreement in accordance with the specific provisions of those Paragraphs and Sections. 5.10 Arbitration. (a) Except for those provisions contained in Sections 4.1 and 4.2 hereof, any dispute or controversy arising under or in connection with this Agreement that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in, at Executive's election, Kansas City, Missouri; Chicago, Illinois or Indianapolis, Indiana, before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by You, or if -8- 9 such individuals cannot agree of the selection of the arbitrator, who shall be selected by the American Arbitration Association. (b) The parties agree to use their best efforts to cause (i) the two applicable individuals set forth in the preceding Paragraph 5.10(a) or, if applicable, the American Arbitration Association, to appoint the arbitrator within thirty (30) days of the date that a party notifies the other party that a dispute or controversy exists that necessitates the appointment of an arbitrator, and (ii) any arbitration hearing to be held within thirty (30) days of the date of selection of the arbitrator and, as a condition to his or her selection, such arbitrator must consent to be available for a meeting at such time. 5.11 Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by You and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. IGF INSURANCE COMPANY DENNIS G. DAGGETT ("Company") ("Executive") By: /s/ Alan G. Symons /s/ Dennis G. Daggett 4.9.96 Title: Director April 15-96 Attachments: Exhibit A: IGF Insurance Company's Current Benefit Plans Exhibit B: Severance Release Exhibit C: Bonus Arrangement Exhibit D: Stock Option Plan -9- EX-10.17(2) 16 GOWDY EMPLOYMENT AGREEMENT 1 EXHIBIT 10.17(2) EMPLOYMENT AGREEMENT WHEREAS, IGF Insurance Company, an Indiana corporation, (the "Company") considers it essential to its best interests and the best interests of its stockholders to foster the continuous employment of its key management personnel and, accordingly, the Company desires to continue to employ Thomas F. Gowdy ("You", "Your"or "Executive"), upon the terms and conditions hereinafter set forth; and WHEREAS, the Executive desires to continue to be employed by the Company, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the covenants and agreements set forth below, the parties agree as follows: 1. Employment 1.1 Term of Agreement. The Company agrees to employ Executive as Executive Vice President, effective as of February 1, 1996 and continuing for a period of thirty-six (36) months through January 31, 1999, unless such employment is terminated pursuant to Article III below; provided, however, that the term of this Agreement shall automatically be extended without further action of either party for additional one (1) year periods thereafter unless, not later than six (6) months prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement. If Company gives Executive such a notice of non-renewal, Executive's employment shall terminate as of the expiration date of this Agreement and such termination of employment shall be treated as a termination without cause under this Agreement. It is expressly understood and agreed that a notice of non-renewal issued by the Company shall not extinguish the Executive's non-competition obligations pursuant to Section 4 herein, and furthermore, the Company agrees that should termination pursuant to this Section apply, that the Executive, pursuant to the terms contained in Section 3.1 herein, shall receive his base salary for a further twelve (12) months, plus life and health benefits, from the date of such termination. 1.2 Terms of Employment. During the Term, You agree to be a full-time employee of the Company serving in the position of Executive Vice President of the Company and further agree to devote substantially all of Your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with Your position as Executive Vice President of the Company, to use Your best efforts to perform faithfully and efficiently such responsibilities. Executive shall perform such duties and responsibilities as may be determined from time to time by the Chairman and/or Chief Executive Officer of Goran Capital, Inc. ("Goran") and/or the Company and the Board of Directors of the Company, which duties shall be consistent with the position of Executive Vice President of the Company, which shall grant Executive authority, responsibility, title and standing comparable to that of the executive vice president of a stock insurance company and which -1- 2 will not require Executive to relocate his principal place of residence from the metropolitan Des Moines, Iowa area. Nothing herein shall prohibit You from devoting Your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Your duties hereunder. 1.3 Director. The Board of Directors shall at their first meeting following the effective date of this Agreement appoint Executive as a Director of the Company to serve until his successor is duly qualified, elected and serving. The Company shall nominate Executive for election to the Board of Directors at the first annual meeting of shareholders of the Company which follows the effective date of this Agreement. If the Executive is not so appointed and so elected as a Director of the Company or if at any time during the term of this Agreement the Executive is not a Director serving as a member of the Board of Directors of the Company, then Company shall be in material breach of this Agreement and Executive may treat such breach as a termination without cause. Executive agrees to resign as a Director of the Company upon the termination or expiration of this Agreement. 2. Compensation, Benefits and Prerequisites 2.1 Salary. During the term of this Agreement, the Company shall pay Executive a salary at the minimum annual rate of One Hundred Forty Thousand Dollars ($140,000). The salary shall be payable in twenty-six (26) equal installments. Company may increase this annual rate at its discretion but no reduction of Executive's then current rate of pay shall be made without his prior written consent. 2.2 Bonus. The Executive shall be eligible to participate in a bonus program as defined in Exhibit C (the "Bonus Arrangement") which is attached and incorporated herein by reference. All awards made to other Company employees pursuant to the Bonus Arrangement shall be at the sole discretion of the Compensation Committee of the Company's Board of Directors, which shall be comprised of four (4) members, two (2) of which shall be Company employees and two (2) of which shall be designated by the Company's shareholders. Should there be a stalemate then an outside member of the Board of Directors of Goran shall be asked to cast the final vote which final vote shall be determinative. In exercising its discretion, the Compensation Committee may make any award to any Company employee it shall deem appropriate; provided, however, that the Compensation Committee shall not grant any bonus award or authorize any payment of monies pursuant to this Section 2.2 that is in excess of one hundred fifty percent (150%) of the base salary received by any Company employee (during such individual's tenure as a Company employee) for any calendar year for which a bonus award is granted pursuant to this Section 2.2. The Compensation Committee shall only have discretion to award monies to the extent of the seven percent (7%) of the Company's statutory accounting basis pre-tax profits in excess of the Bonus Threshold as determined by the Bonus Arrangement in Exhibit C. -2- 3 2.3 Stock Option Plan. Should the Company enter into an Initial Public Offering, then the provisions of this Section 2.3 shall become operative; otherwise, stock options shall be granted solely at the discretion of the Company's Board of Directors. During the term of this Agreement, Executive shall receive stock options under a Plan which shall give Executive the opportunity to acquire up to (a) 1.25% of the total stock of the Company and relinquish all of his Goran options; or (b) .75% of the total stock of the Company and retain all of the Goran options granted; or (c) a sliding scale between (a) and (b). Such options, granted pursuant to this Section 2.3 and the Stock Option Plan, shall vest ratably over a five (5) year period from the date of granting at twenty percent (20%) per year. All such awards of stock options shall be made by the Compensation Committee of the Company's Board of Directors, with Executive not taking part in the deliberations or vote of the Compensation Committee concerning options to be granted to Executive. Even though such stock options shall vest ratably over a five (5) year period, no stock options granted pursuant to the provisions of this Section 2.3 and the Stock Option Plan shall be exercisable until after five (5) years from the date of grant of such option. The exercise price of any stock option granted pursuant to this Section 2.3 and the Stock Option Plan shall increase by ten percent (10%) on each anniversary of the date of grant of such option. The Company, or one of its affiliates ("Lender") will make available to Executive a loan facility (the "Stock Purchase Loan") whereby Executive may borrow up to Five Hundred Thousand Dollars ($500,000) at an interest rate of six percent (6%) per annum of the outstanding principle balance, calculated yearly. Any funds obtained by Executive pursuant to the Stock Purchase Loan shall only be used by Executive to purchase Company stock. Definitive documentation of the Stock Purchase Loan will provide for quarterly interest payments and no principle payments until the end of the five (5) year terms (the "Repayment Date") of the Stock Purchase Loan. At Executive's election, amounts otherwise payable as yearly interest payments may be added to the outstanding principle amount of the Stock Purchase Loan. The Stock Purchase Loan shall be secured by a perfected first security interest in all stock purchased with the proceeds of the Stock Purchase Loan ("Stock Purchase Loan Security"). In the event Executive shall elect to defer Stock Purchase Loan interest payments until the Repayment Date, in addition to the Stock Purchase Loan Security, Executive will grant Lender a perfected first security interest in all stock options granted to Executive pursuant to this Section 2.3 and the Stock Option Plan. 2.4 Goran Options. Goran shall make available to the Executive options for a total of Twenty Thousand (20,000) shares of Goran based on the market terms on the date that this Agreement is signed. Furthermore, Goran/SIG shall make available, upon completion of the next Public Offering of Goran/SIG common stock, options for a total amount of Twenty Thousand (20,000) shares of Goran at the market price of the next Public Offering. -3- 4 The Goran options so granted shall vest with Executive in accordance with the Stock Option Plan at the end of three (3) years from the date of granting of the options. 2.5 Employee Benefits. Executive shall be entitled to receive all benefits and prerequisites which are provided to other Executives of Company under the applicable Company plans and policies, and to future benefits and prerequisites made generally available to executive employees of the Company with duties and compensation comparable to that of Executive upon the same terms and conditions as other Company participants in such plans . A listing of such current benefit plans is attached hereto as Exhibit A. But in no event shall the cost to participate in the benefit plans be different than the obligations of other Presidents and Executive Vice Presidents of affiliates of the Goran Group of Companies. 2.6 Additional Prerequisites. During the term of this Agreement, Company shall provide Executive with: (a) Not less than four (4) weeks paid vacation during each calendar year. (b) A monthly motor vehicle allowance of Seven Hundred Fifty Dollars ($750). Further, Executive shall be reimbursed for his actual gasoline expenses in the utilization of the motor vehicle in furtherance of his duties under this Agreement or the business of the Company. Executive also shall be reimbursed for the costs of insuring himself and the Company for liability, damage, injury or loss arising out of or in connection with the use of such motor vehicle in the course of Executive's employment with the Company. (c) Monthly dues incurred by Executive at the country club of his choice located within reasonable geographic limits of the corporate offices of the Company, not to exceed Five Thousand Dollars ($5,000) per year. 2.7 Expenses. During the period of his employment hereunder, Executive shall be entitled to receive reimbursement from the Company (in accordance with the policies and procedures in effect for the Company's employees) for all reasonable travel, entertainment and other business expenses incurred by him in connection with his services hereunder. Executive shall be entitled to reimbursement of all reasonable travel expenses incurred by You for Your spouse to accompany You on any business trip where it is expected or appropriate that spouses will accompany the participants. 3. Termination of Executive's Employment 3.1 Termination of Employment and Severance Pay. Executive's employment under this Agreement may be terminated by either party at any time for any reason; provided, however, that if Executive's employment is terminated for any reason other than for cause, he shall receive, as severance pay, one (1) year's salary continuation from the Date of Termination, payable in twenty-six (26) bi-weekly installments with regular withholdings as if Executive was -4- 5 still an employee of the Company. Further, if Executive shall be terminated without cause, receipt of severance payments described in the preceding sentence are conditioned upon execution by Executive and the Company of that mutual Waiver and Release attached hereto as Exhibit B. 3.2 Cause. For purposes of this Article 3, "cause" shall mean only the following: (i) the committing of any act by Executive which would be considered a criminal offense (other than minor traffic violations) under the laws of either Indiana, Iowa or the United States of America; (ii) the failure by Executive to perform his material duties under this Agreement (excluding nonperformance resulting from Executive's disability) or disobedience to directives from those persons or bodies outlined in Section 1.2 which have the authority to determine and direct Executive's work and activities where such failure is not cured by Executive within fifteen (15) days of his receipt of written notification from Company specifying Executive's failure or breach and the steps the Executive must take to cure that failure or breach; however, during the fifteen (15) days the Company has the option to put the Executive on leave of absence with pay; or (iii) disability as provided in Section 3.3. 3.3 Disability. So long as otherwise permitted by law, if Executive has become permanently disabled from performing his duties under this Agreement, the Company's Chairman of the Board, may, in his discretion, determine that Executive will not return to work and terminate his employment as provided below. Upon any such termination for disability, Executive shall be entitled to such disability, medical, life insurance, and other benefits as may be provided generally for disabled employees of Company during the period he remains disabled. Permanent disability shall be determined pursuant to the terms of Executive's long term disability insurance policy provided by the Company. If Company elects to terminate this Agreement based on such permanent disability, such termination shall be for cause. 4. Non-Competition, Confidentiality and Trade Secrets 4.1 Noncompetition. In consideration of the Company's entering into this Agreement and the compensation and benefits to be provided by the Company to You hereunder, and further in consideration of Your exposure to proprietary information of the Company, You agree as follows: (a) Until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") You agree not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including, directly or indirectly, becoming an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the- counter securities market), officer, agent or director of, or otherwise participating in the management, operation, control or -5- 6 profits of (a) any firm or person engaged in the operation of a business engaged in the acquisition of insurance businesses or (b) any firm or person which either directly competes with a line or lines of business of the Company accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes or derives five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company. Notwithstanding any provision of this Agreement to the contrary, You agree that Your breach of the provisions of this Section 4.14.1(aa) shall permit the Company to terminate Your employment for cause. (b) If Your employment is terminated by You, or by reason of Your Disability, by the Company for cause, or pursuant to a notice of non-renewal as outlined in Section 1.1, then for two (2) years after the Date of Termination, You agree not to become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise to participate in the management, operation, control or profits of, any firm or person which directly competes with a business of the Company which at the Date of Termination produced any class of products or business accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes at which the Date of Termination derived five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes. (c) You acknowledge and agree that damages for breach of the covenant not to compete in this Section 4.1 will be difficult to determine and will not afford a full and adequate remedy, and therefore agree that the Company shall be entitled to an immediate injunction and restraining order (without the necessity of a bond) to prevent such breach or threatened or continued breach by You and any persons or entities acting for or with You, without having to prove damages, and to all costs and expenses (if a court or arbitrator determines that the Executive has breached the covenant not to compete in this Section 4.1, including reasonable attorneys' fees and costs, in addition to any other remedies to which the Company may be entitled at law or in equity. You and the Company agree that the provisions of this covenant not to compete are reasonable and necessary for the operation of the Company and its subsidiaries. However, should any court or arbitrator determine that any provision of this covenant not to compete is unreasonable, either in period of time, geographical area, or otherwise, the parties agree that this covenant not to compete should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable. -6- 7 4.2 Confidentiality. You shall not knowingly disclose or reveal to any unauthorized person, during or after the Term, any trade secret or other confidential information (as outlined in the Iowa Uniform Trade Secrets Act) relating to the Company or any of its affiliates, or any of their respective businesses or principals, and You confirm that such information is the exclusive property of the Company and its affiliates. You agree to hold as the Company's property all memoranda, books, papers, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, whether made by You or otherwise coming into Your possession and, on termination of Your employment, or on demand of the Company at any time, to deliver the same to the Company. Any ideas, processes, characters, productions, schemes, titles, names, formats, policies, adaptations, plots, slogans, catchwords, incidents, treatment, and dialogue which You may conceive, create, organize, prepare or produce during the period of Your employment and which ideas, processes, etc. relate to any of the businesses of the Company, shall be owned by the Company and its affiliates whether or not You should in fact execute an assignment thereof to the Company, but You agree to execute any assignment thereof or other instrument or document which may be reasonably necessary to protect and secure such rights to the Company. 5. Miscellaneous 5.1 Amendment. This Agreement may be amended only in writing, signed by both parties. 5.2 Entire Agreement. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard to the employment of Executive or the obligations of the Company or the Executive. This Agreement supersedes all prior employment contracts and non-competition agreements between the parties. 5.3 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: IGF Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: Chief Executive Officer With a Copy to: Goran Capital, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: President and Chief Executive Officer -7- 8 If to Executive, to: Dennis G. Daggett 2882 106th Street Des Moines, Iowa 50322 or to such other addresses as one party may designate in writing to the other party from time to time. 5.4 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 5.5 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 5.6 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Iowa, without giving effect to conflict of law principles. 5.7 Headings. The headings of articles and sections herein are included solely for convenience and reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 5.8 Counterparts. This Agreement may be executed by either of the parties in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. 5.9 Survival. Company's obligations under Section 3.1 and Executive's obligations under Section 4 shall survive the termination and expiration of this Agreement in accordance with the specific provisions of those Paragraphs and Sections. 5.10 Arbitration. (a) Except for those provisions contained in Sections 4.1 and 4.2 hereof, any dispute or controversy arising under or in connection with this Agreement that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in, at Executive's election, Kansas City, Missouri; Chicago, Illinois or Indianapolis, Indiana, before -8- 9 one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by You, or if such individuals cannot agree of the selection of the arbitrator, who shall be selected by the American Arbitration Association. (b) The parties agree to use their best efforts to cause (i) the two applicable individuals set forth in the preceding Paragraph 5.10(a) or, if applicable, the American Arbitration Association, to appoint the arbitrator within thirty (30) days of the date that a party notifies the other party that a dispute or controversy exists that necessitates the appointment of an arbitrator, and (ii) any arbitration hearing to be held within thirty (30) days of the date of selection of the arbitrator and, as a condition to his or her selection, such arbitrator must consent to be available for a meeting at such time. 5.11 Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by You and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. IGF INSURANCE COMPANY THOMAS F. GOWDY ("Company") ("Executive") By:/s/ Alan G. Symons /s/ Thomas F. Gowdy Title: Director April 15 96 4/9/96 Attachments: Exhibit A: IGF Insurance Company's Current Benefit Plans Exhibit B: Severance Release Exhibit C: Bonus Arrangement Exhibit D: Stock Option Plan EX-10.21 17 STOCK OPTION PLAN 1 EXHIBIT 10.21 GGS MANAGEMENT HOLDINGS, INC. 1996 STOCK OPTION PLAN (As Adopted April 30, 1996) 2 GGS MANAGEMENT HOLDINGS, INC. 1996 STOCK OPTION PLAN 1. Purpose. The purpose of the Plan is to strengthen GGS Management Holdings, Inc., a Delaware corporation (the "Company"), by providing an incentive to the officers and employees of the Company and its subsidiaries to devote their abilities and industry to the success of the Company's and its subsidiaries' business enterprise. It is intended that this purpose be achieved by providing an incentive, through the grant of Options (as hereinafter defined), to officers and employees of the Company and its subsidiaries, to work towards the long-term goals of the Company. 2. Definitions. For purposes of the Plan: 2.1."Agreement" means the written agreement between the Company and an Optionee evidencing the grant of an Option and setting forth the terms and conditions thereof. 2.2. "Board" means the Board of Directors of the Company. 2.3. "Change in Capitalization" means any increase or reduction in the number of Shares, or any change (including, but not limited to, a change in value) in the Shares or exchange of Shares for a different number or kind of shares or other securities of the Company, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise. 2.4."Code" means the Internal Revenue Code of 1986, as amended. 2.5. "Company" means Newco Holding Company. 2.6. "Company Sale" means a Company Sale (as defined in the Stockholder Agreement, dated the date hereof, among the Company, GS Capital Partners II, L.P., Goran Capital Inc. and Symons International Group, Inc. (the "Stockholder Agreement")) pursuant to Section 4 of the Stockholder Agreement. 1 3 2.7 "Effective Date" means the Closing Date (as defined in Stock Purchase Agreement), the date on which the Plan is first going into effect. 2.8. "Eligible Individual" means any officer or employee of the Company or a Subsidiary, or any consultant or advisor who is receiving cash compensation from the Company or a Subsidiary, designated by the Board as eligible to receive Options subject to the conditions set forth herein. 2.9. "Fair Market Value" on any date means the average of the high and low sales prices of the Shares on such date on the principal national securities exchange on which such Shares are listed or admitted to trading, or if such Shares are not so listed or admitted to trading, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to Shares on such date, the Fair Market Value shall be the value established by the Board in good faith. 2.10. "Initial Public Offering" means an underwritten public offering of Shares which (i) is effected pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, (ii) involves Shares and other securities convertible into, or exchangeable or exercisable for Shares, on a fully-diluted basis, representing at least 20% of all of the then issued and outstanding Shares, and (iii) generates net proceeds to the sellers in such underwritten public offering of at least $25,000,000. 2.11. "Option" means the right and option to acquire Shares granted pursuant to the Plan. 2.12. "Optionee" means a person to whom an Option has been granted under the Plan. 2.13. "Plan" means this Newco Holding Company 1996 Stock Option Plan. 2.14. "Pooling Transaction" means an acquisition of or by the Company or a Subsidiary in a transaction which is intended to be treated as a "pooling of interests" under generally accepted accounting principles. 2.15. "Shares" means the common stock, par value $.01 per share, of the Company. 2 4 2.16. "Subsidiary" means any corporation which is a subsidiary corporation (within the meaning of Section 424(f) of the Code) with respect to the Company. 2.17. "Vested Option" means an option to the extent it has become vested and exercisable pursuant to Section 5.4(a) hereof, notwithstanding Section 5.4(b) hereof. 3. Administration. 3.1 The Plan shall be administered by the Board. The Board shall have the right to appoint a committee thereof to administer the Plan. No member of the Board shall be liable to any Eligible Individual, Optionee or other person having any interest in the Plan for any action, failure to act, determination or interpretation made in good faith with respect to the Plan or any transaction hereunder. 3.2 Subject to the express terms and conditions set forth herein, the Board shall have the exclusive power (at any time and from time to time) to: (a) determine the number of Options to be granted under the Plan and those Eligible Individuals to whom an Option shall be granted and to prescribe the terms and conditions (which need not be identical) of each such Option, including the number of Shares subject to each Option, and to make any amendment or modification to any Agreement consistent with the terms of the Plan; (b) to construe and interpret the Plan and the Agreements granted hereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable so that the Plan complies with applicable law, and otherwise to make the Plan fully effective. All decisions and determinations by the Board in the exercise of this power shall be final, binding and conclusive upon the Company, its Subsidiaries, the Optionees and all other persons having any interest therein; (c) to determine the duration and purposes for leaves of absence which may be granted to an Optionee on an individual basis without constituting a termination of employment for purposes of the Plan; (d) to exercise its discretion with respect to the powers and rights granted to it as set forth in the Plan; and 3 5 (e) generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan. 4. Shares Subject to the Plan. 4.1 The maximum number of Shares that may be made the subject of Options granted under the Plan is 111,111 (representing 10% of the Shares issued and outstanding on the Effective Date on a fully diluted basis assuming exercise of all Options granted under the Plan). Upon a Change in Capitalization, the maximum number of Shares shall be adjusted in number and kind pursuant to Section 7. The Company shall reserve for the purposes of the Plan, out of its authorized but unissued Shares or out of Shares held in the Company's treasury, or partly out of each, such number of Shares as shall be determined by the Board. 4.2 Upon the granting of an Option, the number of Shares available under Section 4.1 for the granting of further Options shall be reduced by the number of Shares in respect of which the Option is denominated. 4.3 Whenever any outstanding Option or portion thereof expires, is canceled or is otherwise terminated for any reason without having been exercised or payment having been made in respect of the entire Option, the Shares allocable to the expired, canceled or otherwise terminated portion of the Option may again be the subject of Options granted hereunder. 5. Option Grants. 5.1 Grants. (a) On the Effective Date, the Company shall grant an Option to each Eligible Individual listed on Schedule A hereto to acquire all or any part of that number of Shares as is set forth next to his or her name thereon. (b) At any time after the Effective Date, the Committee may, in its sole discretion, determine the Eligible Individuals to whom an Option shall be granted and prescribe the terms and conditions of each such Option consistent with the Plan. (c) The terms and conditions of each Option issued hereunder shall be set forth in an Agreement. 5.2 Purchase Price.(a) Options Granted On the Effective Date. The price per Share at which an Optionee shall be entitled to purchase Shares 4 6 upon the exercise of an Option, or portion thereof, that is granted on the Effective Date, shall be as follows: (i) as to 50% of the Shares to be purchased, the exercise price shall be equal to $44.17 per Share, and (ii) as to the other 50% of the Shares to be purchased, the exercise price per Share shall be as follows during each of the following periods: Period Exercise Price From the Effective Date through the date $44.17 immediately preceding the first anniver- sary of the Effective Date From the first anniversary of the Effec- 1.1 x $44.17 tive Date through the date immediately preceding the second anniversary From the second anniversary of the (1.1)2 x $44.17 Effective Date through the date immedi- ately preceding the third anniversary From the third anniversary of the Effec- (1.1)3 x $44.17 tive Date through the date immediately preceding the fourth anniversary From the fourth anniversary of the Ef- (1.1)4 x $44.17 fective Date through the date immediate- ly preceding the fifth anniversary From the fifth anniversary of the Effec- (1.1)5 x $44.17 tive Date through the date immediately preceding the sixth anniversary From the sixth anniversary of the Effective (1.1)6 x $44.17 Date through the date immediately preceding the seventh anniversary From the seventh anniversary of the (1.1)7 x $44.17 Effective Date through the date immedi- ately preceding the eighth anniversary 5 7 From the eighth anniversary of the Ef- fective Date through the date immediate- (1.1)8 x $44.17 ly preceding the ninth anniversary From the ninth anniversary of the Effec- (1.1)9 x $44.17 tive Date through the date immediately preceding the tenth anniversary (b) Options Granted After the Effective Date. The price per Share at which an Optionee shall be entitled to purchase Shares upon the exercise of an Option, or portion thereof, that is granted after the Effective Date, shall be determined by the Board in its sole discretion; provided, however, that the Board shall provide that (i) 50% of the Shares to be purchased shall have an exercise price per Share of a stated amount (the "Strike Price"), and (ii) 50% of the Shares to be purchased shall have an exercise price per Share during each of the following periods as follows: Period Exercise Price From the date of grant (the "Grant Strike Price Date") through the date day immediately preceding the first anniversary of the Grant Date From the first anniversary of the Grant 1.1 x the Strike Price Date through the date immediately pre- ceding the second anniversary (1.1)2 x the Strike Price From the second anniversary of the Grant Date through the date immediately preceding the third anniversary From the third anniversary of the Grant (1.1)3 x the Strike Price Date through the date immediately preceding the fourth anniversary From the fourth anniversary of the Grant (1.1)4 x the Strike Price Date through the date immediately preceding the fifth anniversary 6 8 From the fifth anniversary of the Grant (1.1)5 x the Strike Price Date through the date immediately preceding the sixth anniversary From the sixth anniversary of the Grant (1.1)6 x the Strike Price Date through the date immediately preceding the fifth anniversary From the seventh anniversary of the (1.1)7 x the Strike Price Grant Date through the date immediately preceding the sixth anniversary From the eighth anniversary of the Grant (1.1)8 x the Strike Price Date through the date immediately preceding the ninth anniversary From the ninth anniversary of the Grant (1.1)9 x the Strike Price Date through the date immediately preceding the tenth anniversary 5.3 Duration of Option. Options granted hereunder shall not be exercisable after the expiration of ten (10) years from the date of grant. 5.4 Vesting. Other than pursuant to the terms of any employment agreement entered into by the Company, subject to Sections 8 and 9 hereof, with respect to each Option granted pursuant to the Plan, such Option shall become vested and, subject to Section 5.4(b), immediately exerciseable, with respect to one-fifth of the shares subject to such Option, on each of the first, second, third, fourth and fifth anniversaries of the date of the grant of such Option, and such Option shall be exercisable, subject to Section 5.4(b), in whole or in part, at any time after and to the extent it has, become vested, but not later than the expiration of ten (10) years from the date of grant. (b) Notwithstanding anything in this Plan to the contrary, no Option shall be exercisable prior to the earlier of (x) an Initial Public Offering and (y) a Company Sale. 7 9 5.5 Transferability. No Option granted hereunder shall be transferable by the Optionee to whom granted other than by will or the laws of descent and distribution, and any attempted transfer of an Option by the Optionee shall be null and void and of no force and effect. An Option may be exercised during the lifetime of such Optionee only by the Optionee or his or her guardian or legal representative. The terms of such Option shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Optionee. 5.6 Method of Exercise. The exercise of an Option shall be made only by a written notice delivered in person or by mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares to be purchased and accompanied by payment therefor and otherwise in accordance with the Agreement pursuant to which the Option was granted. The purchase price for any Shares purchased pursuant to the exercise of an Option shall be paid in full upon such exercise in cash. Notwithstanding the foregoing, the Committee may establish cashless exercise procedures which provide for the exercise of an Option and sale of the underlying Shares by a designated broker and delivery of the Shares by the Company to such broker. No fractional Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. After exercise of an Option, Optionee shall execute and become a party to the Stockholder Agreement, effective as of the date of such execution. 5.7 Rights of Optionees. No Optionee shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (i) the Option shall have been exercised pursuant to the terms thereof, (ii) the Company shall have issued and delivered the Shares to the Optionee, (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company, and (iv) the Optionee shall have executed the Stockholder Agreement. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such Shares, subject to such terms and conditions as may be set forth in the applicable Agreement. 5.8 Forfeiture. Except as otherwise determined by the Board, an Optionee shall forfeit all of his or her rights (a) with respect to any Options granted to him or her under the Plan that are not Vested Options, upon the termination of his or her employment with the Company for any reason whatsoever and (b) with respect to any Options granted to him or her under the Plan (whether or not Vested Options), upon the termination of his or her 8 10 employment with the Company for cause. The Board shall have absolute and complete discretion to determine when an Optionee's employment with the Company has been terminated. 6. Transferability of Shares. Subject to Section 13, Shares received upon the exercise of an Option shall not be transferable by an Optionee (or his or her beneficiary) except as permitted by and pursuant to the terms of the Stockholder Agreement. 7. Adjustment Upon Changes in Capitalization. (a) In the event of a Change in Capitalization, the Board shall conclusively determine the appropriate adjustments, if any, to the (i) maximum number and class of Shares with respect to which Options may be granted under the Plan and (ii) the number and class of Shares which are subject to outstanding Options granted under the Plan, and the purchase price therefor, if applicable. (b) If, by reason of a Change in Capitalization, an Optionee shall be entitled to exercise an Option with respect to new, additional or different shares of stock or securities, such new, additional or different shares shall thereupon be subject to all of the conditions and restrictions which were applicable to the Shares subject to the Option prior to such Change in Capitalization. 8. Effect of Certain Transactions. In the event of (i) the liquidation or dissolution of the Company or (ii) a merger or consolidation of the Company in which the Company is not the surviving corporation (a "Transaction"), all Options shall terminate; provided, however, that each Optionee shall be entitled, upon the occurrence of a Transaction, to receive in respect of each Share subject to any Vested Options such consideration as is provided for in the agreements relating to the Transaction. 9. Pooling Transactions. Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event of a Pooling Transaction the Board may take such actions which are specifically recommended by an independent accounting firm retained by the Company to the extent reasonably necessary in order to assure that the Pooling Transaction will qualify as such, including but not limited to (i) deferring the vesting, exercise, payment, settlement or lapsing of restrictions with respect to any Option, (ii) providing that the payment or settlement in respect of any Option be made in the form of cash, Shares or securities of a successor or acquiror of the Company, or a combination of the foregoing and (iii) providing for the extension of the term of any Option to the extent necessary to accommodate the foregoing. 9 11 10. Termination and Amendment of the Plan. The Plan shall terminate on the tenth anniversary of the Effective Date and no Options may be granted thereafter. The Board may sooner terminate the Plan and the Board may at any time and from time to time amend, modify or suspend the Plan; provided, however, that no such amendment, modification, suspension or termination shall impair or adversely alter any Options theretofore granted under the Plan, except with the consent of the Optionee, nor shall any amendment, modification, suspension or termination deprive any Optionee of any Shares which he or she may have acquired through or as a result of the Plan. 11. Non-Exclusivity of the Plan. The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 12. Limitation of Liability. As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to: (i) give any person any right to be granted an Option other than at the sole discretion of the Board; (ii) give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan; (iii) limit in any way the right of the Company to terminate the employment of any person at any time; or (iv) be evidence of any agreement or understanding, expressed or implied, that the Company will employ any person at any particular rate of compensation or for any particular period of time. 10 12 13. Regulations and Other Approvals; Governing Law. 13.1. Except as to matters of federal law, this Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of New York without giving effect to conflicts of law principles thereof. 13.2. The obligation of the Company to sell or deliver Shares with respect to Options granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Board. 13.3. The Board may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority, or to obtain for Eligible Individuals granted Options the tax benefits under the applicable provisions of the Code and regulations promulgated thereunder. 13.4. Each Option is subject to the requirement that, if at any time the Board determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of Shares, no Options shall be granted or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Board. 13.5. Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, and Rule 144 or other regulations thereunder. The Board may require any individual receiving Shares pursuant to an Option granted under the Plan, as a condition precedent to receipt of such Shares, to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under said Act or pursuant to an exemption applicable under the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. The certificates evidencing any of such Shares shall be appropriately amended to reflect their status as restricted securities as aforesaid. 11 13 14. Miscellaneous. 14.1 Multiple Agreements. The terms of each Option may differ from other Options granted under the Plan at the same time, or at some other time. The Board may also grant more than one Option to a given Eligible Individual during the term of the Plan, either in addition to, or in substitution for, one or more Options previously granted to that Eligible Individual. 14.2 Withholding of Taxes. At such times as an Optionee recognizes taxable income in connection with the receipt of Shares hereunder (a "Taxable Event"), the Optionee shall pay to the Company an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld by the Company in connection with the Taxable Event (the "Withholding Taxes") prior to the issuance of such Shares. In satisfaction of the obligation to pay Withholding Taxes to the Company, the Optionee may make a written election (the "Tax Election"), which may be accepted or rejected in the discretion of the Board, to have withheld a portion of the Shares then issuable to him or her having an aggregate Fair Market Value, on the date preceding the date of such issuance, equal to the Withholding Taxes. 12 14 SCHEDULE A Optionee Number of Shares Alan G. Symons Douglas G. Symons 13 EX-23.1 18 ACCOUNTANT'S CONSENT 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-09129) of our report dated March 18, 1996, except for Note 1.a., the second, third and fourth paragraphs in Note 6 and Note 18, as to which the date is July 29, 1996, and our report dated June 14, 1996, on our audits of the consolidated financial statements and consolidated financial statement schedules of Symons International Group, Inc. and Superior Insurance Company, Inc., respectively. We also consent to the reference to our firm under the captions "Selected Financial Data" and "Experts." COOPERS & LYBRAND L.L.P. Indianapolis, Indiana September 23, 1996 EX-27 19 FDS
7 0001013698 SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 12,931 12,931 12,931 4,231 2,920 487 28,854 2,311 54,136 2,379 110,516 59,421 17,497 0 0 5,811 1,000 0 0 8,535 110,516 49,641 1,173 (344) 2,174 35,971 7,150 831 7,444 2,619 4,825 (4) 0 0 4,821 0.69 0.69 16,727 35,184 787 21,057 10,018 21,623 787
-----END PRIVACY-ENHANCED MESSAGE-----