-----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, GposI5SKbqNt5gJCmtqlyrKgvxDJ+wlxWGaBR2KgK5LV9vzbb9E+RTnGbrNI1kYK ZxGu5vg92pWzdexe0zd5vQ== 0001013698-03-000011.txt : 20030613 0001013698-03-000011.hdr.sgml : 20030613 20030612201133 ACCESSION NUMBER: 0001013698-03-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030613 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29042 FILM NUMBER: 03742775 BUSINESS ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 BUSINESS PHONE: 3172596400 MAIL ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 10-K 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) ( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 2002 OR ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission File Number: 0-29042 SYMONS INTERNATIONAL GROUP, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1707115 (State or other jurisdiction of (I.R.S. Employer incorporation Identification No.) or organization) 4720 KINGSWAY DRIVE, INDIANAPOLIS, INDIANA 46205 (Address of Principal Executive Offices, Including Zip Code) Registrant's telephone number, including area code: (317) 259-6300 Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS -------------- Common Stock (no par value) Securities registered pursuant to Section 12(b) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (X) No( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).Yes ( ) No (X) The aggregate market value of the 1,865,925 shares of the Registrant's common stock held by non-affiliates as of June 3, 2003 was $55,828. The number of shares of common stock of the Registrant, without par value, outstanding as of April 28, 2003 was 10,385,399. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 are incorporated by reference in Parts II and IV hereof. Table of Contents ITEM PAGE - ---- ---- PART I 1. Business 4 2. Properties 21 3. Legal Proceedings 21 4. Submission of Matters to a Vote of Security Holders 23 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters 23 6. Selected Consolidated Financial Data 23 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 7A. Quantitative and Qualitative Disclosures about Market Risk 24 8. Financial Statements and Supplementary Data 24 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 PART III 10. Directors and Executive Officers of the Registrant 24 11. Executive Compensation 25 12. Security Ownership of Certain Beneficial Owners and Management 31 13. Certain Relationships and Related Transactions 32 14. Controls and Procedures 33 PART IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33 16. Signatures 41 PART I ITEM 1 - BUSINESS FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information herein contained relative to markets for the Company's products and/or trends in the Company's operations or financial results, as well as other statements including words such as "anticipate," "could," "feel(s)," "believes," "plan," "estimate," "expect," "should," "intend," "will," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) the effect on customers, agents, employees and others due to the Company's receipt of going concern opinions from its accountants; (ii) general economic conditions, including prevailing interest rate levels and stock market performance; (iii) factors affecting the Company's nonstandard automobile operations such as rate increase approval, policy renewals, new business written, and premium volume; and (iv) the factors described in this section and elsewhere in this report. OVERVIEW OF THE BUSINESS Symons International Group, Inc. (the "Company") owns insurance companies that underwrite and market nonstandard private passenger automobile insurance. The Company's principal insurance company subsidiaries are Pafco General Insurance Company ("Pafco") and Superior Insurance Company ("Superior"). The Company is a 73.8% owned subsidiary of Goran Capital Inc. ("Goran"). NONSTANDARD AUTOMOBILE INSURANCE Overview Pafco, Superior and Superior's subsidiaries, Superior Guaranty Insurance Company ("Superior Guaranty") and Superior American Insurance Company ("Superior American") are engaged in the writing of insurance coverage for automobile physical damage and liability policies. Nonstandard insureds are those individuals who are unable to obtain insurance coverage through standard market carriers due to factors such as poor premium payment history, poor driving experience, and type of vehicle. The Company offers several different policies, which are directed toward different classes of risk within the nonstandard market. Premium rates for nonstandard risks are higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Also, since the nonstandard automobile insurance business typically experiences a lower rate 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. Products The Company offers both liability and physical damage coverage in the insurance marketplace, with policies having terms from three to twelve months. Most nonstandard automobile insurance policyholders choose the basic limits of liability coverage which, though varying from state to state, generally is $25,000 per person and $50,000 per accident for bodily injury to others and in the range of $10,000 to $20,000 for damage to cars or other property. Where permitted, Superior offers a tiered product covering the full spectrum of automobile insurance customers from nonstandard to ultra-preferred. Marketing The Company's nonstandard automobile insurance business is concentrated in the states of Florida, California, Virginia, Georgia, Indiana and Nevada. The Company also has the ability to write nonstandard automobile insurance in 12 additional states. The Company selects states for expansion or withdrawal based on a number of criteria, including the size of the nonstandard automobile insurance market, state-wide loss results, competition, capitalization of its companies and the regulatory climate. The following table sets forth the geographic distribution of gross premiums written by the Company for the periods indicated sorted in descending order of 2002 volume.
Gross Premiums Written Years Ended December 31, (in thousands) State 2002 2001 2000 - ----------------------- -------- -------- -------- Florida . . . . . . . . $ 45,583 $ 49,162 $ 44,070 California. . . . . . . 20,891 34,287 32,480 Virginia. . . . . . . . 15,661 21,054 20,089 Colorado (1) . . . . . 7,988 10,112 6,938 Georgia . . . . . . . . 6,565 15,481 13,670 Indiana . . . . . . . . 4,861 6,275 12,804 Nevada. . . . . . . . . 1,493 1,980 3,707 Missouri. . . . . . . . 698 839 1,929 Tennessee . . . . . . . 676 1,696 9,794 Iowa. . . . . . . . . . 504 1,066 2,023 Kentucky. . . . . . . . 406 3,135 5,034 Pennsylvania (2) . . . 288 9,683 - Oklahoma. . . . . . . . 274 635 1,090 Arizona . . . . . . . . 169 1,111 4,484 Other states. . . . . . 204 2,972 15,310 -------- -------- -------- Total nonstandard auto. 106,261 159,488 173,422 Other property. . . . . 1,514 1,604 1,039 -------- -------- -------- Total . . . . . . . . . $107,775 $161,092 $174,461 ======== ======== ======== (1) During May 2003, the Company ceased writing business in Colorado. (2) All premiums in Pennsylvania were written by IGF, which has been precluded from writing other than renewal premium since July 30, 2001.
The Company markets its nonstandard products exclusively through independent agencies. The Company has several territory managers, each of whom resides in a specific marketing region and has access to the technology and software necessary to provide marketing, rating and administrative support to the agencies in his or her region. The Company aims to foster strong service relationships with its agents and customers. The Company has automated certain marketing, underwriting and administrative functions and has allowed on-line communication with its agency force. In addition to delivering prompt service while ensuring consistent underwriting, the Company provides state of the art point of sale rating software to its agents, which permits them to rate risks in their offices. All new business applications are electronically uploaded directly from the agents' office to the Company through this software. The Company's in-house developed point of sale product allows agents in most states to order motor vehicle, credit and other reports on line at the time of sale. Most of the Company's agents have limited authority to sell and bind insurance coverages in accordance with procedures established by the Company, which is a common practice in the nonstandard automobile insurance business. The Company promptly reviews all coverages bound by the agents and generally accepts coverages that fall within its stated underwriting criteria. The Company has the right within a specified time period to cancel any policy even if the risk falls within its underwriting criteria. The Company compensates its agents by paying a commission based on a percentage of premiums produced. The Company believes its four insurance companies licensed in various states allows it 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. Underwriting The Company utilizes many factors in determining its premium rates. Some of the characteristics used are type, age and location of the vehicle, number of vehicles per policyholder, number and type of convictions and accidents, limits of liability, deductibles, and, where allowed by law, credit, age, sex and marital status of the insured. The rate approval process varies from state to state. Some states allow filing and immediate use of rates, while others require approval by the state's insurance department prior to the use of the rates. 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%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on the combined ratio. In an effort to maintain and improve underwriting profits, the territory managers monitor loss ratios of the agencies in their regions and meet periodically with the agents in order to address any adverse trends in loss ratios or other profitability indicators. Claims The Company's nonstandard automobile insurance claims departments handle claims on a regional and local basis from claim offices in Indianapolis, Indiana; Atlanta, Georgia; Tampa and West Palm Beach, Florida; and Anaheim, California. The Company uses a combination of its own adjusters and independent appraisers and adjusters for estimating physical damage claims and limited elements of investigation. Claims settlement authority levels are established for each adjuster or manager based on the employee's ability and experience. Upon receipt, each claim is reviewed and assigned to an adjuster based on the type and severity of the claim. A home office supervisor or litigation manager monitors all claim-related litigation. The claims policy of the Company emphasizes prompt and fair settlement of meritorious claims, appropriate reserving for outstanding claims and controlling claims adjustment expenses. Reinsurance The Company follows the customary industry practice of reinsuring a portion of its risks. Insurance is ceded principally to reduce the Company's exposure on large individual risks and to provide protection against large losses, including catastrophic losses. Although reinsurance does not legally discharge the ceding insurer from its primary obligation to pay the full amount of losses incurred under policies reinsured, it does render the reinsurer liable to the insurer to the extent provided by the terms of the reinsurance treaty. As part of its internal procedures, the Company evaluates the financial condition of each prospective reinsurer before it cedes business to that carrier. Based on the Company's review of its reinsurers' financial health and reputation in the insurance marketplace, the Company believes its reinsurers are financially sound and that they can meet their obligations to the Company under the terms of the respective reinsurance treaties. In 2002, Pafco and Superior maintained casualty excess of loss reinsurance on their nonstandard automobile insurance business covering 35.0% of $700,000 of losses on an individual occurrence basis in excess of $300,000 up to a maximum of $3,000,000 at 100.0%. As of December 31, 2002, amounts recoverable from reinsurers relating to nonstandard automobile operations is as follows (in thousands):
Reinsurance Recoverables as of Reinsurers A.M. Best Rating (2) December 31, 2002(1) - -------------------------------------------------- -------------------- --------------------- National Union Fire Insurance Company Of Pittsburgh, PA. . . . . . . . . . . . . . . . . A++ $ 43,633 Gerling Global Reinsurance Corporation of America. B+ 1,197 Lloyds of London (Various Syndicates). . . . . . . Not Rated 2,271 Transatlantic Reinsurance Company. . . . . . . . . A++ 1,131 (1) Only recoverables greater than $200,000 are shown. Total nonstandard automobile reinsurance recoverables as of December 31, 2002 were approximately $47,044,000. (2) An A.M. Best Rating of "A++" is the highest of 15 ratings. An A.M. Best Rating "B+" is the fourth highest of 15 ratings.
Effective January 1, 2000, Pafco and Superior entered into an automobile quota share agreement with National Union Fire Insurance Company of Pittsburgh. The amount of cession for Pafco is variable up to a maximum of 60% or $10 million and for Superior is variable up to a maximum of 75% or $60 million for all new and renewal business. In 2002, Pafco and Superior ceded 71% of their nonstandard automobile gross written premiums under this treaty. On April 29, 1996, Pafco also entered into a 100% quota share reinsurance agreement with Granite Reinsurance Company Ltd. ("Granite Re"), a wholly owned subsidiary of Goran, (no A.M. Best rating), whereby all of Pafco's commercial business from 1996 and thereafter was ceded effective January 1, 1996. This agreement was in effect during 2002. Neither Pafco nor Superior has any facultative reinsurance with respect to its nonstandard automobile insurance business. Competition The Company competes with both large national and smaller regional companies in each state in which it operates. The Company's competitors include other companies that serve the agency market, as well as companies that sell insurance directly to consumers. 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 and specialty subsidiaries of a number of insurance groups, including AIG, Allstate, American Financial Group and GMAC. Generally, these competitors are larger and have greater financial resources than the Company. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Loss reserves are estimates, established at a given point in time based on facts then known, of an insurer's prediction of its exposure in connection with incurred losses. Loss adjustment expense ("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 loss 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 historically paid loss and LAE for similar claims. 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 loss reserve development table below illustrates the change over time of reserves established for loss and loss expenses as of the end of the various calendar years for the nonstandard automobile segment of the Company. The table includes the loss reserves acquired from the acquisition of Superior in 1996 and the related loss reserve development thereafter. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the reserve liability. The third section, reading down, shows the re-estimates of the original recorded reserve as of the end of each successive year which is a result of sound insurance reserving practices of addressing new emerging facts and circumstances which indicate that a modification of the prior estimate is necessary. The last section compares the latest re-estimated reserve to the reserve originally established, and indicates whether or not the original reserve was adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. The reserve for losses and loss expenses is an accumulation of the estimated amounts necessary to settle all outstanding claims as of the date for which the reserve is stated. The reserve and payment data shown below have been reduced for estimated subrogation and salvage recoveries. The Company does not discount its reserves for unpaid losses and loss expenses. No attempt is made to isolate explicitly the impact of inflation from the multitude of factors influencing the reserve estimates though inflation is implicitly included in the estimates. The Company regularly updates its reserve forecasts by type of claim as new facts become known and events occur which affect unsettled claims. The Company's insurance subsidiaries filed their annual statutory financial statements as of December 31, 2002 which included the Company's estimate of loss and loss reserve expense. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, it was determined that reserves for losses and loss adjustment expenses for Superior and Pafco should be increased. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the Insurance Department of Florida and the Indiana Department of Insurance, respectively. Activity in the liability for unpaid loss and loss adjustment expenses for nonstandard automobile insurance is summarized below, in thousands:
2002 2001 2000 ------- -------- --------- Balance at January 1,. . . . . . . . $81,142 $108,117 $152,455 Less reinsurance recoverables 30,600 23,252 13,527 ------- -------- --------- Net balance at January 1, . . 50,542 84,865 138,928 Incurred related to: Current year. . . . . . . . . 35,413 69,667 127,497 Prior years . . . . . . . . . 12,775 774 (14,118) ------- -------- --------- Total incurred. . . . . . . . 48,188 70,441 113,379 Paid related to: Current year. . . . . . . . . 19,211 46,973 85,334 Prior years . . . . . . . . . 36,374 57,791 82,108 ------- -------- --------- Total paid. . . . . . . . . . 55,585 104,764 167,442 Net balance at December 31,. . . . . 43,145 50,542 84,865 Plus reinsurance balance . . . . . . 24,059 30,600 23,252 ------- -------- --------- Balance at December 31,. . . . . . . $67,204 $ 81,142 $108,117 ======= ======== =========
Reserve estimates are regularly adjusted in subsequent reporting periods as new facts and circumstances emerge to indicate that a modification of the prior estimate is necessary. The adjustment, referred to as "reserve development," is inevitable given the complexities of the reserving process and is recorded in the statements of operations in the period when the need for the adjustment becomes known. The foregoing reconciliation indicates unfavorable development of $12,775,000 on the December 31, 2001 reserves. A portion of the 2001 reserve development was caused by a larger than normal number of previously closed claims that reopened in 2002. The remainder of the 2001 reserve development resulted from a higher than expected frequency and severity on nonstandard automobile claims. The anticipated effect of inflation is implicitly considered when estimating losses and loss adjustment expenses liabilities. While anticipated price increases due to inflation are considered in estimating the ultimate claims costs, increases in average claim severities is caused by a number of factors. Future severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, claims management practices and procedures and general economic trends. Anticipated severity trends are monitored relative to 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, reserves have been established to cover additional exposure on both known and unasserted claims.
Symons International Group, Inc. Nonstandard Automobile Insurance Only For The Years Ended December 31, (in thousands) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -------- -------- -------- -------- --------- --------- --------- --------- -------- --------- ------ Gross Reserves for Unpaid losses and LAE. . . . $27,403 $25,248 $71,748 $79,551 $101,185 $121,661 $141,260 $103,441 $79,047 $ 65,915 - --------------------------------------------------------------------------------------------------------------------------------- Deduct Reinsurance Recoverable. . 12,581 10,927 9,921 8,124 16,378 6,515 3,167 18,709 28,511 22,990 - --------------------------------------------------------------------------------------------------------------------------------- Reserve for Unpaid losses and LAE, net of reinsurance. . $17,055 14,822 14,321 61,827 71,427 84,807 114,829 138,093 84,732 50,536 42,925 - ------------------------------------------------------------------------------------------------------------------------------- Paid Cumulative as of: One Year Later. . . . . 10,868 8,875 7,455 42,183 59,410 62,962 85,389 81,444 57,696 36,291 - ------------------------------------------------------------------------------------------------------------------------------- Two Years Later. . . . . 15,121 11,114 10,375 53,350 79,319 89,285 111,042 107,534 79,316 - ------------------------------------------------------------------------------------------------------------------------------- Three Years Later. . . . . 16,855 13,024 12,040 58,993 86,298 98,469 121,907 118,316 -- - ------------------------------------------------------------------------------------------------------------------------------- Four Years Later. . . . . 17,744 13,886 12,822 61,650 89,166 102,854 127,390 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Five Years Later. . . . . 18,195 14,229 13,133 62,621 90,477 105,252 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Six Years Later. . . . . 18,408 14,330 13,375 63,031 91,345 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Seven Years Later. . . . . 18,405 14,426 13,418 63,534 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Eight Years Later. . . . . 18,460 14,386 13,648 -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Nine Years Later. . . . . 18,411 14,572 -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Ten Years Later. . . . . 18,420 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Liabilities re - -estimated as of: One Year Later. . . . . 17,442 14,788 13,365 59,626 82,011 97,905 131,256 124,012 85,538 63,014 - ------------------------------------------------------------------------------------------------------------------------------- Two Years Later. . . . . 18,103 13,815 12,696 60,600 91,743 104,821 128,302 121,480 93,483 - ------------------------------------------------------------------------------------------------------------------------------- Three Years Later. . . . . 18,300 14,051 13,080 63,752 91,641 104,551 127,885 126,321 -- - ------------------------------------------------------------------------------------------------------------------------------- Four Years Later. . . . . 18,313 14,290 13,485 63,249 91,003 105,012 131,087 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Five Years Later. . . . . 18,419 14,499 13,441 63,233 91,323 106,813 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Six Years Later. . . . . 18,533 14,523 13,592 63,373 91,874 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Seven Years Later. . . . . 18,484 14,584 13,652 63,781 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Eight Years Later. . . . . 18,508 14,574 13,727 -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Nine Years Later. . . . . 18,494 14,615 -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Ten Years Later. . . . . 18,457 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Net Cumulative (deficiency) or redundancy . . (1,402) 207 594 (1,954) (20,447) (22,006) (16,258) 11,772 (8,751) (12,478) - ------------------------------------------------------------------------------------------------------------------------------- Expressed as a percentage of unpaid losses and LAE. . . . . . (8.2%) 1.4% 4.1% (3.2%) (28.6%) (25.9%) (14.2%) 8.5% (10.3%) (24.7%) - ------------------------------------------------------------------------------------------------------------------------------- Revaluation of gross losses And LAE as of year-end 2002 - -------------------------------------------------------------------------------------------------------------------------------- Cumulative gross paid as of Year-end 2002 28,231 26,013 74,573 100,359 124,345 131,724 120,166 97,310 64,923 - ------------------------------------------------------------------------------------------------------------------------------ Gross liabilities Re estimated as of year-end 2002 28,280 26,101 74,857 100,925 126,303 137,704 130,453 115,537 98,478 - ------------------------------------------------------------------------------------------------------------------------------- Gross cumulative (deficiency) or redundancy (877) (853) (3,109) (21,374) (25,118) (16,043) 10,807 (12,096) (19,431) - -------------------------------------------------------------------------------------------------------------------------------
RATINGS A.M. Best has currently assigned a "B-" rating to Superior and a "C" rating to Pafco. A.M. Best's ratings are based upon a comprehensive review of a company's financial performance, which is supplemented by certain data, including responses to A.M. Best's questionnaires, telephone conferences 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 "C" ratings are A.M. Best's eighth and eleventh highest rating classifications, respectively, out of fifteen ratings. A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have, on balance, fair financial strength, operating performance and market profile when compared to the standards established by the A.M. Best Company" and "have an ability to meet their current obligations to policyholders, but their financial strength is vulnerable to adverse changes in underwriting and economic conditions". A "C" rating is awarded to insurers which, in A. M. Best's opinion, "have, on balance, weak financial strength, operating performance and market profile when compared to the standards established by the A.M. Best Company" and "have an ability to meet their current obligations to policyholders, but their financial strength is very vulnerable to adverse changes in underwriting and economic conditions". A.M. Best has currently assigned an "E" rating (Under Regulatory Supervision) to IGF reflecting the significant regulatory constraint resulting from the Consent Order entered into between IGF and the Indiana Department Of Insurance (see Regulation-" Regulatory Actions"). REGULATION General The Company's insurance businesses are subject to comprehensive, detailed regulation throughout the United States, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. The primary purpose of such regulations and supervision is the protection of policyholders and claimants rather than shareholders or other investors. Depending on whether an 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. The losses, adverse trends and uncertainties discussed in this report have been and continue to be matters of concern to the domiciliary and other insurance regulators of the Company's operating subsidiaries. (See "Regulatory Actions", "Risk- Based Capital Requirements", and "RISK FACTORS"). Regulatory Actions On June 6, 2001, IGF sold substantially all of its crop insurance assets to Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets and as a result of losses experienced by IGF in its crop insurance operations, the IDOI and IGF entered into a consent order (the "Consent Order") relating to IGF. IGF has discontinued writing new business and its operations are presently in run off. The IDOI has continued to monitor the status of IGF. The Consent Order prohibits IGF from taking any of the following actions without prior written consent of the IDOI: - - Sell or encumber any of its assets, property, or business in force; - - Disburse funds, except to pay direct unaffiliated policyholder claims and normal operating expenses in the ordinary course of business (which does not include payments to affiliates except for the reimbursement of costs of running IGF by the Company, and does not include payments in excess of $10,000); - - Lend its funds or make investments, except in specified types of investments; - - Incur debts or obligations, except in the ordinary course of business to unaffiliated parties; - - Merge or consolidate with another company; - - Enter into new, or amend existing, reinsurance agreements; - - Complete, enter into or amend any transaction or arrangement with an affiliate, and - - Disburse funds or assets to any affiliate. The Consent Order also requires IGF to provide the IDOI with monthly written updates and immediate notice of any material change regarding the status of litigation with Continental Casualty Company, statutory reserves, number of non-standard automobile insurance policies in-force by state, and reports of all non-claims related disbursements. IGF's failure to comply with the Consent Order could cause the IDOI to begin proceedings to have a rehabilitator or liquidator appointed for IGF or to extend the provisions of the Consent Order. Pafco has been subject to an agreed to order of the IDOI since February 17, 2000 that requires Pafco, among other matters, to: - - Refrain from doing any of the following without the IDOI's prior written consent: - Selling assets or business in force or transferring property, except in the ordinary course of business; - Disbursing funds, other than for specified purposes or for normal operating expenses and in the ordinary course of business (which does not include payments to affiliates, other than under written contracts previously approved by the IDOI, and does not include payments in excess of $10,000); - Lending funds; - Making investments, except in specified types of investments; - Incurring debt, except in the ordinary course of business and to unaffiliated parties; - Merging or consolidating with another company; or - Entering into new, or modifying existing, reinsurance contracts. - - Reduce its monthly auto premium writings, or obtain additional statutory capital or surplus, such that the ratio of gross written premium to surplus and net written premium to surplus does not exceed 4.0 and 2.4, respectively; and provide the IDOI with regular reports demonstrating compliance with these monthly writings limitations. - - Continue to comply with prior IDOI agreements and orders to correct business practices under which Pafco must provide monthly financial statements to the IDOI, obtain prior IDOI approval of reinsurance arrangements and affiliated party transactions, submit business plans to the IDOI that address levels of surplus and net premiums written, and consult with the IDOI on a monthly basis. Pafco's inability or failure to comply with any of the above conditions could result in the IDOI requiring further reductions in Pafco's permitted premium writings or in the IDOI instituting future proceedings against Pafco. Restrictions on premium writings result in lower premium volume. Management fees payable to Superior Group are based on gross written premium; therefore, lower premium volume results in reduced management fees paid by Pafco to Superior Group. In March 2000, Pafco agreed with the Iowa Department of Insurance ("IADOI") that it would not write any new non-standard business in Iowa, until such time as Pafco has reduced its overall non-standard automobile policy counts in the state or has: - - Increased surplus; or - - Has achieved a net written premium to surplus ratio of less than three to one; or - - Has surplus reasonable to its risk. Pafco has continued to service existing policyholders and renew policies in Iowa and provide policy count information on a monthly basis in conformance with IADOI requirements. Superior and Pafco provide monthly financial information to the departments of insurance in certain states in which they write business at the states' request. On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the "Notice") which principally addressed certain policy and finance fee payments by Superior to Superior Group. A formal administrative hearing to review the Notice and a determination that the order contemplated by the Notice not be issued was held in February 2001. The administrative law judge entered a recommended order on June 1, 2001 that was acceptable to the Company. On August 30, 2001, the FDOI rejected the recommended order and issued its final order which the Company believes improperly characterized billing and policy fees paid by Superior to Superior Group. On September 28, 2001, Superior filed an appeal of the final order to the Florida District Court of Appeal. On March 4, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida seeking court enforcement of the FDOI's final order. Superior filed a motion with the FDOI for stay of the FDOI's final order. Superior also filed a motion for stay with the District Court of Appeal, which was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a stay of the final order that was conditional upon the cessation of the payment of billing fees by Superior to Superior Group and the posting of a $15 million appeal bond. Superior did not agree to the conditions imposed by the FDOI's conditional stay. On May 6, 2002 Superior filed a motion with the District Court of Appeal seeking a stay of the final order pending Superior's appeal or, in the alternative, a consolidation of the FDOI's enforcement action with the pending appeal. On June 19, 2002, the District Court of Appeal entered an order which struck the FDOI's conditional requirement for the stay that Superior post a $15 million appeal bond. However, the order denied Superior's request to consolidate the appeal with the enforcement action. On September 26, 2002, the District Court of Appeal affirmed the final order of the FDOI. On October 31, 2002 the Circuit Court entered a final order which granted the FDOI's petition for enforcement of the FDOI's final order and which requires Superior to comply with the FDOI final order. In accordance with the FDOI's final order, Superior ceased payment of finance and service fees as of October 1, 2002 and has requested repayment from Superior Group of $15 million of finance and service fees paid from 1997 through 1999 and additional finance and service fees paid thereafter in the approximate amount of $20 million. Without the payment of finance and service fee income to Superior Group or an amendment to the management agreement or reallocation of operational responsibilities, Superior Group could not operate profitably. Accordingly, on October 1, 2002, Superior Group discontinued the provision of certain claims services to Superior. Superior provided a number of proposals to the FDOI in an effort to establish an acceptable repayment plan in accordance with the final order. None of the proposals were acceptable to the FDOI. On March 21, 2003 the FDOI filed a Motion for Enforcement of Final Order Granting Petition to Enforce Agency Action (the"Motion for Enforcement") in the Circuit Court which seeks to hold Superior in contempt for failing to obtain the immediate repayment of approximately $15 million from Superior Group. Superior Group presently does not have the ability to make a $15 million repayment, and Superior believes that this petition seeks to fashion a remedy not intended by the Circuit Court's Novemeber 1, 2002 order and contravenes the spirit of numerous discussion between the FDOI and Superior to resolve the issues during the pendency of Superior's appeal to the District Court of Appeal and the original enforcement action. Superior intends to vigorously defend the recent action brought by the FDOI. On May 7, 2003 a hearing was held on the Motion for Enforcement, and an order has not yet been issued. On September 10, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida for an order to show cause and notice of automatic stay which sought the appointment of a receiver for the purpose of rehabilitation of Superior. The court entered an order to show cause, temporary injunction and notice of automatic stay on September 13, 2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court entered an order that denied the FDOI's petition for appointment of a receiver. On November 8, 2002, the FDOI filed a motion for rehearing, which was denied on December 17, 2002. On November 20, 2002, the FDOI issued a notice and order to show cause which seeks to suspend or revoke Superior's certificate of authority principally based upon allegations that Superior did not comply with the FDOI's August 30, 2001 final order during the pendency of the appeal of the order to the District Court of Appeal. Superior believes that it has fully and timely complied with the final order and that the action brought by the FDOI is barred by res judicata. A formal administrative hearing to review the notice and a determination that the order or administrative action contemplated by the notice not be issued was held in May 2003. A recommended order has not been issued, which the FDOI may accept or reject. On October 9, 2001, the State Corporation Commission of Virginia ("Virginia Commission") issued an order to take notice regarding an order suspending Superior's license to write business in that state. An administrative hearing for a determination that the suspension order not be issued was held March 5, 2002. On May 3, 2002, the hearing examiner issued his report and recommended that Superior's license not be suspended and that Superior file its risk based capital plans and monthly and quarterly financial information with the Virginia Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission entered an order which adopted the findings of the hearing examiner, continued the matter until such time as the Bureau requests further action and requires the continued monitoring of the financial condition of Superior by the Bureau. On October 11, 2002, the Virginia Commission filed an administrative Rule to Show Cause. A hearing was scheduled for November 18, 2002 to determine whether Superior's license to transact insurance business in Virginia should be suspended. Because of Superior's improved financial condition, the Virginia Commission continued the hearing indefinitely. The nonstandard automobile insurance policies written in Virginia by Superior accounted for approximately 13.1% and 14.5% of the total gross written premiums of the Company in 2001 and in 2002, respectively. Insurance Holding Company Regulation The Company also is subject to laws governing insurance holding companies in Florida and Indiana, the domicilary states of its insurance company subsidiaries. These laws, among other things, (i) require the Company to file periodic information with state regulatory authorities including information concerning its capital structure, ownership, financial condition and general business operations; (ii) regulate certain transactions between the Company, its affiliates and IGF, Pafco, Superior, Superior American and Superior Guaranty (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 Pafco and IGF unless the Indiana Commissioner of Insurance ("Indiana Commissioner") upon application, has determined otherwise. In addition, any purchaser of 5% or more of the outstanding shares of common stock of the Company will be presumed to have acquired control of Superior unless the Florida Commissioner of Insurance ("Florida Commissioner"), upon application, has determined otherwise. Dividend payments by the Company's insurance subsidiaries are subject to restrictions and limitations under applicable law, and under those laws an insurance subsidiary may not pay dividends to the Company without prior notice to, or approval by, the subsidiary's domiciliary insurance regulator. As a result of regulatory actions taken by the IDOI with respect to Pafco and IGF, those subsidiaries may not pay dividends to the Company without prior approval by the IDOI (see "Recent Regulatory Developments" above). Further, payment of dividends may be constrained by business and regulatory considerations, and 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. Accordingly, there can be no assurance that the IDOI or the FDOI would permit any of the Company's insurance subsidiaries to pay dividends at this time or in the future (see "RISK FACTORS"). 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 Superior Group. The management agreement between the Company and Pafco was assigned to Superior Group and provides for an annual management fee equal to 15% of gross premiums. A similar management agreement with a management fee of 17% of gross premiums was entered into between Superior and Superior Group. There can be no assurance that either the IDOI or the FDOI will not in the future require a reduction in these management fees. In addition, neither Pafco nor IGF may engage in any transaction with an affiliate, including the Company, without the prior approval of the IDOI (see "Regulatory Actions " above). 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. IRIS ratios consist of twelve ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of five priority designations is assigned and the insurance department of the state of domicile is then responsible for follow-up action. Based on the December 31, 2002 statutory financials filed with the NAIC, Pafco had values outside of the acceptable ranges for five IRIS tests. These included the two-year overall operating ratio, the investment yield ratio, the change in surplus ratio, the liabilities and liquid assets ratio, and the estimated current reserve deficiency to policyholders' surplus ratio. Based on the December 31, 2002 statutory financials filed with the NAIC, Superior had values outside of the acceptable ranges for six IRIS tests. These included the surplus aid to policyholders' surplus ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, the one-year reserve development to policyholders' surplus ratio, and the two-year reserve development to policyholders' surplus ratio. As of December 31, 2002, IGF had values outside of the acceptable ranges for five IRIS tests. These included the change in net writings ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, and the agent's balances to policyholders' surplus ratio. Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. Indiana and Florida have substantially adopted the NAIC model law and Indiana directly, and Florida indirectly, have adopted the NAIC model formula. The RBC formula for property and casualty insurance companies measures four major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks; and (iv) off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus than that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC decreases. 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 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 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 that requires the relevant insurance commissioner to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. At the time of filing the annual statutory financial statements of the Company's insurance subsidiaries as of December 31, 2002, the RBC calculations for Pafco and Superior were in excess of 200% which concluded that no action is required. The RBC calculation for IGF as of December 31, 2002 was in excess of 100%, which is above the Authorized Control Level. (See "Regulatory Actions"). In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, it was determined that reserves for losses and loss adjustment expenses for Superior and Pafco should be increased. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the Insurance Department of Florida and the Indiana Department of Insurance, respectively. Based on the adjusted audited statutory financial statements, the surplus for Superior fell below 70% of the RBC amount and the surplus level for Pacfo was above 150% of the RBC amount. Guaranty Funds; Residual Markets The insurance company subsidiaries 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 insurance company subsidiaries in pools or funds to provide some types of insurance coverage that 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. Employees At March 1, 2003, the Company and its subsidiaries employed approximately 218 full and part-time employees. None of the Company's employees is represented by either unions or collective bargaining agreements. The Company believes that relations with its employees are excellent. RISK FACTORS The following factors, in addition to the other information contained in this report should be considered in evaluating the Company and its prospects. The Financial Condition of the Company Has Continued to Decline The Company reported losses from continuing operations of $(35,260,000) for the year 2002, $(30,736,000) for 2001 and $(71,384,000) for 2002. Results from continuing operations before the effects of income taxes, minority interest and amortization expense were losses of $(19,065,000) and $(15,759,000) for 2002 and 2001, respectively. Further, the deficit in shareholder's equity increased from $(144,012,000) at December 31, 2001 to $(178,879,000) at December 31, 2002. There can be no assurance that the Company can continue in business if these operating losses continue The Company's Accountants Have Issued Going Concern Opinions The Company's accountants have issued reports on their audits of the Consolidated Financial Statements of the Company as of December 31, 2001 and December 31, 2002 which express doubt as to the Company's ability to continue as a going concern given the recurring operating losses experienced by the Company over the past few years and the Company's net capital deficiency. Regulatory Actions May Affect the Company's Future Operations The Company's insurance company subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to extensive regulation and oversight by the IDOI, the FDOI and the insurance regulators of other states in which the insurance company subsidiaries write business. Moreover, the insurance company subsidiaries' losses, adverse trends and uncertainties discussed in this report have been and continue to be matters of concern to the domiciliary and other insurance regulators of the Company's insurance company subsidiaries and have resulted in enhanced scrutiny and regulatory action by several regulators including the FDOI's current proceding seeking to suspend or revoke Superior's Certificate of Authority. (See "Regulatory Actions" and "Risk-Based Capital Requirements"). The primary purpose of insurance regulation is the protection of policyholders rather than shareholders. Failure to resolve issues with the IDOI and the FDOI, and with other regulators, in a manner satisfactory to the Company could impair the Company's ability to execute its business strategy or cause the Company's subsidiaries to cease writing insurance or result in future regulatory actions or proceedings that could otherwise materially and adversely affect the Company's operations. The Company is Subject to a Number of Pending Legal Proceedings As discussed elsewhere in this report, in addition to regulatory actions, the Company is involved in a number of pending civil legal proceedings (see Part I - - Item 3, "Legal Proceedings"). Although the Company believes that many of the allegations of wrongdoing are without merit and intends to vigorously defend the claims brought against it, there can be no assurance that such proceedings will not have a material adverse effect on the Company's financial position or results of operations. Furthermore, the existence of these lawsuits diverts the time and attention of management, and they are expensive to defend. The Terms of the Trust Preferred Securities May Restrict The Company's Ability to Act The Company has issued through a wholly owned trust subsidiary $135 million aggregate principal amount in trust originated preferred securities ("Preferred Securities"). The Preferred Securities have a term of 30 years with annual interest at 9.5% paid semi-annually. The obligations of the Preferred Securities were expected to be funded from the Company's nonstandard automobile insurance management company. The Company elected to defer the semi-annual interest payments due in February and August 2000, 2001 and 2002 and the payment due in February 2003 and may continue to defer such payments for up to an aggregate of five years as permitted by the indenture for the Preferred Securities. All of the deferred interest (if all payments due in 2003 and 2004 are deferred) approximating $84 million will become due and payable in February 2005. Although there is no present default under the indenture that would accelerate the payment of the Preferred Securities, the indenture contains a number of covenants that may restrict the Company's ability to act in the future. These covenants include restrictions on the Company's ability to incur or guarantee debt, make certain payments to affiliates, repurchase its common stock, pay dividends on common stock or increase its level of certain investments other than investment-grade, fixed-income securities. There can be no assurance that compliance with these restrictions and other provisions of the indenture for the Preferred Securities will not adversely affect the cash flow of the Company. The Company May Not Be Able to Satisfy Its Obligations to the Holders of the Trust Preferred Securities The Company may continue to defer semi-annual interest payments for up to an aggregate of five (5) years as permitted by the indenture for the Preferred Securities. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. The Company relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the FDOI, have issued orders prohibiting the Company's subsidiaries from paying such fees to the Company. In the event such orders continue, the Company may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. Uncertain Pricing and Profitability One of the distinguishing features of the property and casualty industry is that its products are priced before losses are reported and final costs are known. 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 experience with such products' performance. The level of claims cannot be accurately determined for periods after the sale of policies, therefore reserves are estimated and these estimates are used to set price. If they are low, then resulting rates could be inadequate. 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 that require prior approval of rates, it may be more difficult for the Company to achieve premium rates that are commensurate with the Company's underwriting experience with respect to risks located in those states. 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 as to the amount of losses and LAE that will ultimately be incurred in the settlement of claims. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, it was determined that reserves for losses and loss adjustment expenses for Superior and Pafco should be increased. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the Insurance Department of Florida and the Indiana Department of Insurance, respectively and are included in this report. 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. Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE The reserve for unpaid losses and LAE reflected in this report is an estimate of amounts needed to pay reported and unreported claims and related loss adjustment expenses 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, provides 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 historical 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. Nature of Nonstandard Automobile Insurance Business The nonstandard automobile insurance business is affected by many factors that can cause fluctuation in the results of operations of this business. Many of these factors are not subject to the control of the Company. The size of the nonstandard market can be significantly affected by, among other factors, the underwriting capacity and underwriting criteria of standard automobile insurance carriers. In addition, an economic downturn in the states in which the Company writes business could result in fewer new car sales and less demand for automobile insurance. These factors, together with competitive pricing and other considerations, could result in fluctuations in the Company's underwriting results. Highly Competitive Business Nonstandard automobile insurance is a highly competitive business. Many of the Company's competitors have substantially greater financial 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 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 and companies that sell insurance directly to consumers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer, 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, assigned risk plans may provide nonstandard automobile insurance products at a lower price than private insurers. In addition, because the Company's insurance products are only marketed through independent insurance agencies, which represent more than one insurance company, the Company faces competition within each agency. Reliance on Independent Insurance Agents The Company markets and sells its insurance products through independent, non-exclusive insurance agents and brokers. The agents and brokers also sell competitors' insurance products. The Company's business depends, in part, on the marketing efforts of those agents and brokers and the Company must offer insurance products that meet the requirements of their customers. If those agents and brokers fail to market the Company's products successfully, the Company's business may be adversely impacted. 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 that 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 is subject, in large part, to prevailing market conditions beyond the control of such companies. The Company's ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends upon its ability to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position. Due to continuing market uncertainties regarding reinsurance capacity, no assurances can be given as to the Company's ability to maintain its current reinsurance facilities, which generally are subject to annual renewal. If the Company is unable to renew such facilities upon their expiration and is unwilling to bear the associated increase in net exposures, the Company may need to reduce the level of its underwriting commitments. ITEM 2 - PROPERTIES Headquarters The headquarters for the Company is located at 4720 Kingsway Drive, Indianapolis, Indiana. All corporate administration, accounting and management functions are contained at this location. Pafco is also located at 4720 Kingsway Drive, Indianapolis, Indiana in a building that is owned 100% by Pafco with no encumbrances. The building is an 80,000 square foot multilevel structure; approximately 50% of which is utilized by the Company, its subsidiaries and Goran. Superior Group leases office space in the building. Goran subleases office space in that building from Superior Group. The remaining space is leased to third parties at a price of approximately $10 per square foot per annum Superior Superior's operations are conducted at leased facilities in Atlanta, Georgia; Anaheim, California; and Tampa and West Palm Beach, Florida. Under a lease term that extends through 2003, Superior leases an office at 280 Interstate North Circle, N.W., Suite 500, Atlanta, Georgia. Superior leases an office located at 5483 West Waters Avenue, Suite 1200, Tampa, Florida for a lease term extending through December 2007. Superior occupies a leased office located at 1745 West Orangewood, Anaheim, California for a lease term extending through May 2006. Superior occupies a leased office at 4500 PGA Blvd., Suite 304A, West Palm Beach, Florida for a lease term extending through September 2003. Claims activities are performed in Atlanta, Indianapolis, Tampa, and Anaheim locations. Underwriting, customer service, and accounting and administration activities are performed at the headquarters location in Indianapolis, Indiana. The Company considers all of its properties suitable and adequate for its current operations. ITEM 3 - LEGAL PROCEEDINGS Superior Guaranty is a defendant in a case filed on November 26, 1996, in the Circuit Court for Lee County, Florida entitled Raed Awad v. Superior Guaranty Insurance Company, et al., Case No. 96-9151 CA LG. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The plaintiffs alleged that Superior Guaranty charged premium finance service charges in violation of Florida law. The parties have reached a class settlement which has been approved by the court which will not have a material effect on the financial condition of Superior Guaranty. As previously reported, IGF, which is a wholly owned subsidiary of the Company, had been a party to a number of pending legal proceedings and claims relating to agricultural production interruption insurance policies (the "AgPI Program") which were sold during 1998. All of the policies of insurance which were issued in the AgPI Program were issued by and under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota corporation with its principal place of business located in Arden Hills, Minnesota. Sales of this product resulted in large underwriting losses by IGF. Approximately $29 million was paid through December 31, 2002 in settlement of legal proceedings and policyholder claims related to the AgPI Program. All AgPI policyholder claims were settled during 2000. However, on January 12, 2001 a case was filed in the Superior Court of California, County of Fresno, entitled S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo & Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by four AgPI policyholders who had previously settled their AgPI claims pursuant to binding settlement agreements who now seek additional compensation by asserting through litigation that IGF and the third party carrier paid less than the policy limits they were promised when they purchased the policy and that each settling policyholder was forced to accept the lesser amount due to their economic duress - a legal theory recognized in California if certain elements can be established. The plaintiff's amended their complaint four times during 2002. A demurrer to the fourth amended complaint was filed by MSI and a motion to strike was filed by IGF, which were denied. IGF filed a motion for summary judgment to dismiss the claims in the plaintiff's fourth amended complaint on the basis that releases previously executed by the plaintiffs are binding, which was granted. The cross claims between the selling brokers and MSI and IGF remain pending. The trial is scheduled to begin in August 2003. Superior Guaranty is a defendant in a case filed on October 8, 1999, in the Circuit Court for Manatee County, Florida entitled Patricia Simmons v. Superior Guaranty Insurance Company, Case No. 1999 CA-4635. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The Plaintiff alleged that the defendant charged interest in violation of Florida law. The parties have settled the case in an amount that was not material to the financial condition of Superior Guaranty. The Company is a defendant in a case filed on February 23, 2000, in the United States District Court for the Southern District of Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are Goran, three individuals who were or are officers or directors of the Company or of Goran, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a class consisting of purchasers of the Company's stock or Goran's stock during the period February 27, 1998, through and including November 18, 1999. Plaintiffs allege, among other things, that defendants misrepresented the reliability of the Company's reported financial statements, data processing and financial reporting systems, internal controls and loss reserves in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The individual defendants are also alleged to be liable as "controlling persons" under Sec.20 (a) of the 1934 Act. As previously reported in the Company's September 30, 2002 Form 10-Q, the Company, Goran and the individual defendants entered into an agreement with the plaintiffs for settlement. The settlement is subject to certain terms and conditions and court approval. As previously reported, the Company and two of its subsidiaries, IGFH and IGF, were parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired certain crop insurance operations of CNA. The obligations of the Company, IGFH, IGF and CNA under the SAA are the subject of an action filed on June 4, 2001 and pending in United States District Court for the Southern District of Indiana, Indianapolis Division. Claims have also been asserted in the action against Goran, Granite Re, Pafco, Superior and certain members of the Symons family. Discovery is proceeding. Although the Company continues to believe that it has claims against CNA and defenses to CNA's claims which may offset or reduce amounts owing by the Company or its affiliates to CNA, there can be no assurance that the ultimate resolution of the claims asserted by CNA against the Company and its affiliates will not have a material adverse effect upon the Company's and its affiliates' financial condition or results of operations. Superior was a defendant in a case filed on May 8, 2001 in the United States District Court Southern District of Florida entitled The Chiropractic Centre, Inc. v. Superior Insurance Company, Case No. 01-6782. The case purported to be brought on behalf of a class consisting of healthcare providers improperly paid discounted rates on services to patients based upon a preferred provider contract with a third party. The plaintiff alleged that Superior breached a third party beneficiary contract, committed fraud and engaged in racketeering activity in violation of federal and Florida law by obtaining discounted rates offered by a third party with whom the plaintiff contracted directly. On September 30, 2002, the court issued an administrative order which dismissed the case. The court's order administratively closing the case could be temporary or permanent. Superior believes that the allegations of wrongdoing as alleged in the complaint were without merit and in the event the order is temporary, Superior intends to vigorously defend the claims brought against it. IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al., Case No. 102CC5135. Other parties named as defendants are Goran, Goran's subsidiaries, Symons International Group (Florida), Inc. and Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty, Pafco and three individuals who were or are officers or directors of the Company. Goran, Granite Re, Symons International Group (Florida), Inc, Superior Group Management, Superior, Superior American, Superior Guaranty and certain individual defendants have filed motions to dismiss for lack of personal jurisdiction which are pending. The case purports to be brought on behalf of an IGF insured seeking to recover alleged damages based on allegations of bad faith, negligent claims handling and breach of fiduciary duties with respect to a claim which arose from an accident caused by the IGF insured. IGF believes that the allegations of wrongdoing as alleged in the complaint are without merit and intends to vigorously defend the claims brought against it. See footnote 12, "Regulatory Matters", and footnote 13, "Commitment and Contingencies", to the Company's consolidated financial statements in Part II of this report, incorporated herein by reference, for additional legal matters. The Company's insurance subsidiaries are parties to other litigation arising in the ordinary course of business which the Company does not believe will have a material adverse effect upon the Company's and its affiliates financial conditions or results. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimate costs of litigation. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information regarding the trading market for the Company's common stock, the range of selling prices for each quarterly period since January 1, 2000, and the approximate number of holders of common stock as of December 31, 2002 and other matters is included under the caption "Market and Dividend Information" on page 42 of the 2002 Annual Report, included as Exhibit 13, which information is incorporated herein by reference. No securities were issued in the fourth quarter of 2002. DRAFT The following table sets forth certain information as of December 31, 2002 regarding securities of the Registrant authorized for issuance under the Company's equity compensation plans. As of December 31, 2002, all of the Company's equity compensation plans were approved by the Company's shareholders.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION NUMBER OF SECURITIES TO WEIGHTED-AVERAGE PLANS (EXCLUDING BE ISSUED UPON EXERCISE EXERCISE PRICE OF SECURITIES REFLECTED IN PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN (A)) ---------------------- -------------------- ----------------------- Equity compensation plans approved by shareholders 1,145,000 $ 0.5503 355,000 ---------------------- -------------------- ----------- Equity compensation plans not approved by shareholders . . . . . . -- -- -- ---------------------- -------------------- ----------- Total . . . . . . . . . . 1,145,000 $ 0.5503 355,000 - ------------------------- ---------------------- -------------------- -----------
The Company's Stock Option Plan provides it with the authority to grant nonqualified stock options and incentive stock options to officers and key employees of the Company and its subsidiaries and nonqualified stock options to non-employee directors of the Company and Goran. Options have been granted at an exercise price equal to the fair market value of the Company's stock at date of grant. All of the outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. ITEM 6 - SELECTED FINANCIAL DATA The data included on page 4 of the 2002 Annual Report, included as Exhibit 13, under "Selected Financial Data" is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2002 Annual Report on pages 5 through 14 included as Exhibit 13 is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The discussion entitled "Quantitative and Qualitative Disclosures About Market Risk" included in the 2002 Annual Report on pages 12 through 14 included as Exhibit 13 is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements in the 2002 Annual Report, included as Exhibit 13, and listed in Item 15 of this Report are incorporated herein by reference. ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF THE REGISTRANT The following table sets forth certain information as of April 30, 2003 regarding current directors of the Company: Name Age Director Since G. Gordon Symons 81 1987 Douglas H. Symons 50 1987 Terry W. Anker 37 2001 Michael D. Puckett 50 2002 G. Gordon Symons has been Chairman of the Board of Directors of the Company since its formation in 1987. Mr. Symons founded the predecessor to Goran, the 73.8% shareholder of the Company, 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 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. Mr. Symons is the father of Douglas H. Symons. Douglas H. Symons served as the Company's Chief Operating Officer from July 1996 until he became its Chief Executive Officer in November 1999. Mr. Symons also served as Chief Executive Officer of the Company from 1989 until July 1996. Mr. Symons has been a director of Goran since 1989 and served as Goran's Chief Operating Officer and Vice President from 1989 until May 31, 2002 when he became Chief Executive Officer and President. Mr. Symons is the son of G. Gordon Symons. Terry W. Anker is the chairman of the board of Anthology Companies, a holding company consisting of Keystone Lighting and Keystone's Light Lab, retail and wholesale residential lighting distribution businesses. Mr. Anker previously led the Marion County, Indiana Regulatory Review Commission, an organization charged with streamlining city-county government bureaucracy in Indianapolis, Indiana. Mr. Anker also developed the I.T.S. technology for electronic submission of court filings for HPS, Inc. Michael D. Puckett is President and Chief Executive Officer of CFG Wealth Management Services, Inc., an SEC Registered Investment Advisor authorized to transact business in all 50 states. Mr. Puckett is a Certified Financial Planner. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, as well as persons who own more than 10% of the outstanding common shares of the Company, to file reports of ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of copies of such forms received by it, or written representations from certain reporting persons that no reports were required for those persons, the Company believes that during 2002, all filing requirements applicable to its officers, directors and greater than 10% shareholders were met. EXECUTIVE OFFICERS OF THE REGISTRANT Presented below is certain information regarding the executive officers of the Company who are not also directors. Their respective ages and their respective positions with the Company are listed as follows: NAME AGE POSITION Bruce K. Dwyer 53 Chief Financial Officer Gregg F. Albacete 41 Vice President and Chief Information Officer of the Company David N. Hafling 55 Vice President and Chief Actuary of the Company Mr. Dwyer has served as interim Chief Financial Officer of the Company since September 2002. Mr. Dwyer also served as Chief Financial Officer of Goran and the Company in 1999 and 2000 and in a similar position in Goran from 1981 to 1996. Since 2000 Mr. Dwyer also has had a consulting practice which he also had from 1996 to 1999. Mr. Albacete has served as Vice President and Chief Information Officer of the Company since January 2000. Mr. Albacete served as Vice President and Chief Information Officer of Leader Insurance from December 1987 to January 2000. From March 1982 to February 1985 Mr. Albacete worked for Transport Insurance. Prior to March 1982, Mr. Albacete was a self-employed consultant. Mr. Hafling has served as Vice President and Chief Actuary of the Company since December 1998. Prior to joining the Company, Mr. Hafling spent 26 years with American States Insurance Company, with his last seven years as Senior Vice President-Actuary. He has been a fellow of the Casualty Actuarial Society since 1979 and is a member of the American Actuarial Society. ITEM 11 - EXECUTIVE COMPENSATION The following table shows the cash compensation paid by the Company or any of its subsidiaries and other compensation paid during the last three calendar years to the Company's Chief Executive Officer during 2002 and the Company's four other most highly paid executive officers during 2002 (the "named executive officers").
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION ------------------- LONG TERM COMPENSATION AWARDS SECURITIES ALL UNDERLYING OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION - ----------------------------- ------------------- -------- -------- -------- ------------- Douglas H. Symons . . . . . . 2002 $186,218 $ 25,368 0 $ 17,5261 Chief Executive Officer and . 2001 $375,000 $ 0 0 $ 1,6512 President . . . . . . . . . . 2000 $375,000 $ 0 210,000 $ 45,8463 ------------------- -------- -------- -------- ------------- 2002 $235,105 $ 0 0 $ 262,3715 Gene S. Yerant4 . . . . . . . 2001 $500,000 $ 912 0 $ 11,2236 Executive Vice President. . . 2000 $500,000 $250,000 0 $ 21,6357 ------------------- -------- -------- -------- ------------- Bruce Dwyer, Chief Financial Officer8. . . . . . . . . . . 2002 $ 0 $ 0 0 $ 6,5349 ------------------- -------- -------- -------- 2002 $152,367 $ 5,000 0 $ 1,9812 David N. Hafling. . . . . . . 2001 $135,230 $ 0 0 $ 1,7432 Vice President, Chief Actuary 2000 $118,846 $ 0 2,000 $ 3002 ------------------- -------- -------- -------- ------------- Gregg F. Albacete . . . . . . 2002 $196,226 $ 0 0 $ 1,9812 Vice President, Chief . . . . 2001 $184,875 $ 37,986 0 $ 1,7472 Information Officer. . . . . 2000 $175,000 $ 50,000 10,000 $ 19,32510 - ----------------------------- ------------------- -------- -------- -------- ------------- 1 Includes $1,981 of health and life insurance premiums and $15,545 for reimbursement of medical expenses. 2 Health and life insurance premiums. 3 Includes $43,510 of accrued vacation and $2,336 of health and life insurance premiums. 4 Mr. Yerant's employment terminated May 20, 2002. 5 Includes a severance payment of $250,000 and health, life and property insurance premiums of $12,371. 6 Includes $1,990 of health and life insurance premiums. 7 Includes $19,067 of relocation expenses and $2,568 of health and life insurance premiums. 8 Since October 2002, Mr. Dwyer has been serving as the Company's interim Chief Financial Officer. 9 Consulting fee. 10 Includes $17,362 of relocation expenses and $1,963 of health and life insurance premiums.
OPTION EXERCISES AND YEAR-END VALUES The following table shows unexercised stock options held by the Company's named executive officers at December 31, 2002. In addition, this table includes the number of shares covered by both exercisable and non-exercisable stock options. The closing OTC stock price as of December 31, 2002 was $.03, which was lower than the option exercise prices; therefore, there were no unexercised in-the-money options. There were no exercises of stock options by the named executive officers during 2002. AGGREGATED OPTION EXERCISES IN 2002 AND DECEMBER 31, 2002 OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT NAME DECEMBER 31, 2002 DECEMBER 31, 2002 ------------------------------------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- Douglas H. Symons 210,000 0 0 0 ----------- ------------- ----------- ------------- Gene S. Yerant. . 0 0 0 0 ----------- ------------- ----------- ------------- Alan G. Symons. . 0 0 0 0 ----------- ------------- ----------- ------------- David N. Hafling. 6,667 3,333 0 0 ----------- ------------- ----------- ------------- Gregg F. Albacete 6,667 3,333 0 0 ----------- ------------- ----------- ------------- Bruce Dwyer . . . 0 0 0 0 - ----------------- ----------- ------------- ----------- ------------- 11 Based on the December 31, 2002 closing OTC stock price which was $.03 per share.
STOCK OPTION GRANTS There were no grants of stock options to the Company's named executive officers in 2002. LONG TERM INCENTIVE PLAN AWARDS IN 2002 There were no long-term incentive plan awards to the Company's named executive officers in 2002. Report of the Compensation Committee The Committee regularly reviews the Company's executive compensation policies and practices and approves of the compensation of executive officers. The Committee's executive compensation policy is designed to attract, retain, and motivate highly talented individuals at the executive level of the organization. Executive compensation is based on the level of job responsibility, individual performance, and Company performance. Compensation also reflects the value of the job in the marketplace. To attract and retain highly skilled executives, the Company must remain competitive with the pay of other premier employers who compete with the Company for talent. The Committee believes that the Company's executive compensation program reflects these principles and gives executives strong incentives to maximize Company performance and therefore enhance shareholder value. The policy consists of both annual and long-term components, which should be considered together in assessing whether the policy is attaining its objectives. To align the interest of employees with those of shareholders, the Company provides employees the opportunity for equity ownership through the Plan. The Compensation Committee makes recommendations to the board for the award of stock options pursuant to the Plan. The objectives of the Plan are to align employee and shareholder long-term interests by creating a strong and direct link between employee compensation and shareholder return and to enable employees to develop and maintain a long-term ownership position in the Company's common stock. A total of 1,500,000 shares of the Company's common stock have been reserved for issuance under the Plan. As of April 17, 2003, 615,000 shares were available for grant of options pursuant to the Plan. There were no grants of options during 2002. The Company's total compensation program for officers includes base salaries, bonuses and the grant of stock options pursuant to the Plan. The Company's primary objective is to achieve above-average performance by providing the opportunity to earn above-average total compensation (base salary, bonus and value derived from stock options) for above-average performance. The program is designed to attract, motivate, reward and retain the management talent required to serve shareholder, customer and employee interests. The Company believes that this program also motivates the Company's officers to acquire and retain appropriate levels of stock ownership. It is the opinion of the Compensation Committee that the total compensation earned by Company officers during 2002 achieves these objectives and is fair and reasonable. The compensation of Douglas H. Symons, Chief Executive Officer of the Company, was approved by the Compensation Committee in March, 1999. Effective May 31, 2002, Goran Capital Inc. agreed to pay the salary of Douglas H. Symons. The Committee has reviewed the salary of Douglas H. Symons subsequent to the date he became Chief Executive Officer. The Compensation Committee has reviewed other compensation paid to Douglas H. Symons during 2002. Federal income tax law disallows corporate deductibility for "compensation" paid in excess of $1 million, unless such compensation is payable solely on account of achievement of an objective performance goal. As part of its on-going responsibilities with respect to executive compensation, the Compensation Committee will monitor this issue to determine what actions, if any, should be taken as a result of the limitation on deductibility. The Compensation Committee Terry W. Anker, Chairman Michael D. Puckett Douglas H. Symons Compensation Committee Interlocks and Insider Participation Prior to May 31, 2002, the Company's Compensation Committee consisted of Terry W. Anker, Robert C. Whiting and Douglas H. Symons. Mr. Whiting resigned as a director of the Company on May 31, 2002. Michael D. Puckett joined the Company's Compensation Committee on November 13, 2002. Neither Mr. Whiting nor Mr. Puckett has any interlocks reportable under Item 402(j)(3) 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 executive officer of Goran, the majority owner of the Company, since 1989. Douglas H. Symons is also an executive officer of each of the Company's subsidiaries. G. Gordon Symons, Chairman of the Company, is a director of each of the Company's subsidiaries and is empowered to determine the compensation of the executive officers of the Company's subsidiaries. Alan G. Symons was an executive officer and director of the Company and its subsidiaries until May 31, 2002. Compensation of Directors Directors of the Company who are not employees of the Company or its affiliates receive an annual retainer of $10,000. In addition, the Company reimburses its 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 receives a meeting fee of $1,000 for each committee meeting attended, with committee chairs receiving an additional $1,500 per quarter. EMPLOYMENT AGREEMENTS Certain of the Company's officers have entered into employment contracts with the Company or one of its subsidiaries. Douglas H. Symons, Chief Executive Officer of the Company, is subject to an employment agreement, with such agreement calling for a base salary of not less than $500,000 per year. This agreement became effective on May 31, 2002 and continues in effect for an initial period of two years. Upon the expiration of the initial two-year period, the term of the agreement is automatically extended from year to year thereafter and is cancelable upon six months' notice. This agreement contains customary restrictive covenants respecting confidentiality and non-competition during the term of employment and for a period of two years after the termination of the agreement. In addition to annual salary, Douglas H. Symons may earn a bonus in an amount ranging from 0 to 100% of base salary. At the discretion of the board, bonus awards may be greater than the amounts indicated if agreed upon financial targets are exceeded. Upon a change of control of the Company or Goran and in the event of a non-renewal of Douglas H. Symons' employment agreement, Douglas H. Symons is entitled to a severance amount equal to two years salary. On May 31, 2002 Douglas H. Symons became the Chief Executive Officer and President of Goran, and Goran approved the payment of Goran's and the Company's annual salary obligations under the employment agreement. The Company and Goran entered into an employment agreement with David N. Hafling under which he serves as Vice President and Chief Actuary of the Company. The agreement became effective on October 15, 2001 and continues until December 31, 2004. The agreement is automatically renewed for one year periods thereafter unless earlier terminated upon 60 days advance notice. The agreement provides that Mr. Hafling will receive a base salary of not less than $150,000 annually and an annual bonus of up to $30,000. The Company and Goran entered into an employment agreement with Gregg F. Albacete, Vice President and Chief Information Officer of the Company. The agreement became effective on January 26, 2000 for an initial term of three years and was automatically renewable for one-year periods thereafter unless sooner terminated. The agreement provided for a base salary of not less than $175,000 annually and an annual bonus of up to $75,000. This agreement terminated on January 31, 2003. The Company and Goran entered into an employment agreement with Gene S. Yerant under which he served as Executive Vice President of the Company and President of Superior Insurance Group, Inc., a subsidiary of the Company. The agreement became effective on January 10, 2000 and was terminated on May 20, 2002. The agreement provided for a base salary of $500,000 annually and a bonus of up to 100% of salary based upon achievement of certain performance objectives. Following the termination of the employment of Gene S. Yerant on May 20, 2002, the Company and Goran entered into an agreement with Mr. Yerant which provided for two separation payments of $250,000 each, both of which were paid as of January 31, 2003. The Company, Goran, and Granite Reinsurance Company Ltd. ("Granite Re"), a wholly-owned subsidiary of Goran, have entered into an employment agreement with G. Gordon Symons, Chairman of the Board of the Company, pursuant to which G. Gordon Symons is entitled to receive from Granite Re an annual sum of $150,000. Upon a change of control of the Company or Goran, G. Gordon Symons is entitled to a payment in the amount of $1,125,000. In the event Granite Re shall fail to pay the amounts due under the agreement, the Company and Goran become jointly and severally liable for such amounts. The Company, Goran, Granite Re, Goran Management Bermuda Ltd. ("Goran Bermuda") and G. Gordon Symons have entered into a consulting agreement, pursuant to which Goran Bermuda is entitled to receive from Granite Re an annual sum of $250,000. Upon a change of control of the Company or Goran, Goran Bermuda is entitled to a payment in the amount of $1,875,000. In the event Granite Re shall fail to pay the amounts due under the agreement, the Company and Goran become jointly and severally liable for such amounts. PERFORMANCE GRAPH The following performance graph compares the cumulative total shareholder return on the Company's common stock with Standard & Poor's 500 Stock Index and the Company's peer group for the years 1996 through 2002. Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that may incorporate future filings (including this proxy statement, in whole or in part), the preceding Compensation Committee and Audit Committee Reports and the stock price performance graph shall not be incorporated by reference in any such filings. Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that may incorporate future filings (including this proxy statement, in whole or in part), the preceding Compensation Committee and Audit Committee Reports and the stock price performance graph shall not be incorporated by reference in any such filings. [GRAPHIC OMITED] ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of April 21, 2003, the number and percentage of shares of common stock of the Company held by each person known to the Company to own beneficially more than five percent of the issued and outstanding common stock of the Company, and the ownership interests of each of the Company's directors and named executive officers, and all directors and executive officers of the Company as a group, in the common stock of the Company and in the common stock of the Company's 73.8% shareholder, Goran. Unless otherwise indicated in a footnote to the following table, each beneficial owner possesses sole voting and investment power with respect to the shares owned.
SYMONS INTERNATIONAL GROUP, INC. GORAN CAPITAL INC. -------------------------------- ------------------- AMOUNT AND AMOUNT AND NATURE OF NATURE OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF NAME OWNERSHIP CLASS OWNERSHIP CLASS - ---------------------------------------------------------------------------------------------------------- G. Gordon Symons1 . . . . . . . . . . 520,000 4.8% 2,375,524 42.1% -------------------------------- ------------------- ---------- Douglas H. Symons3. . . . . . . . . . 245,500 2.3% 311,455 5.7% -------- ---------------------- ------------------- ---------- Alan G. Symons2 . . . . . . . . . . . 72,691 * 568,065 10.5% -------------------------------- ------------------- ---------- Gene S. Yerant. . . . . . . . . . . . 0 0 0 0 -------------------------------- ------------------- ---------- David N. Hafling4 . . . . . . . . . . 10,000 * 3,333 * ---------- --------------------- ------------------- ---------- Gregg F. Albacete6. . . . . . . . . . 10,000 * 6,666 * -------------------------------- ------------------- ---------- Bruce Dwyer . . . . . . . . . . . . . 0 0 21,666 * ------------------------------- ------------------- ---------- - Terry W. Anker. . . . . . . . . . . . 0 0 0 0 -------------------------------- ------------------- ---------- Michael D. Puckett. . . . . . . . . . 0 0 0 0 -------------------------------- ------------------- ---------- Goran Capital Inc. 5. . . . . . . . . 7,666,283 73.8% 0 0 -------------------------------- ------------------- ---------- All executive officers and directors as a group (9 persons) . . . . . . . 858,191 7.7% 3,286,709 57.3% - ------------------------------------- -------------------------------- ------------------- ---------- * Less than 1% of class. 1 With respect to the shares of the Company, 10,000 shares are owned directly and 510,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. With respect to the shares of Goran, 479,111 shares are held by trusts of which Mr. Symons is the beneficiary, 1,646,413 of the shares indicated are owned by Symons International Group Ltd., of which Mr. Symons is the controlling shareholder, and 250,000 shares are subject to options exercisable within 60 days. 2 With respect to the shares of Goran, 387,215 are held by a trust over which Mr. Symons exercises limited direction, and 180,850 are owned directly. 3 With respect to shares of the Company, 35,500 shares are owned directly and 210,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. With respect to shares of Goran, 251,455 shares are owned directly and 60,000 shares are subject to options that are exercisable within 60 days. 4 With respect to shares of the Company 10,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. With respect to shares of Goran, 3,333 shares may be purchased pursuant to stock options exercisable within 60 days. 5 Goran's office address is 2 Eva Road, Suite 200, Toronto, Ontario Canada M9C 2A8. 6 With respect to shares of the Company 10,000 shares may be purchased pursuant to stock options that are exercisable within 60 days. With respect to shares of Goran, 6,666 shares may be purchased pursuant to stock options exercisable within 60 days.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has made the following personal loans to Alan G. Symons, who resigned as an executive officer and director of the Company on May 31, 2002, which were outstanding during 2002:
LARGEST LOAN BALANCE BALANCE AS OF DATE OF LOAN DURING 2002 MARCH 31, 2003 INTEREST RATE - -------------------- --------------------- --------------- -------------- February 24, 1988(2) $ 27,309 $ 27,309 None --------------------- --------------- -------------- March 19, 1998(3). . $ 15,293 $ 15,293 5.85% --------------------- --------------- -------------- October 28, 1999(5). $ 119,500 $ 121,125 6.50% - -------------------- --------------------- --------------- --------------
The Company has made the following personal loans to Douglas H. Symons, which were outstanding during 2002:
LARGEST LOAN BALANCE BALANCE AS OF DATE OF LOAN DURING 2002 MARCH 31, 2003 INTEREST RATE - --------------------- --------------------- --------------- -------------- February 24, 1988(1). $ 2,219 $ 2,219 None --------------------- --------------- -------------- Prior to 1997(1). . . $ 66,256 $ 66,256 None --------------------- --------------- -------------- September 29, 1999(4) $ 119,500 $ 121,125 6.5% --------------------- --------------- -------------- June 28, 2000(1). . . $ 80,000 $ 80,000 None --------------------- --------------- -------------- June 4, 2001(1) . . . $ 50,000 $ 50,000 None - --------------------- --------------------- --------------- -------------- (1) The loan by the Company represents an advance and does not bear interest. (2) The loans by the Company to Alan G. Symons in 1986 and 1988 were made to facilitate the purchase of common shares of the Company, are collateralized by a pledge of the common shares of the Company acquired, are payable on demand and are interest free. (3) The loan by SIG to Alan G. Symons on March 19, 1998 was made to satisfy obligations to third parties. Such loan was erroneously referred to in Goran's 2002 Proxy Statement as a loan by Goran. Such loan was secured by a pledge of his options to purchase shares in Superior Insurance Group Management, Inc. (formerly, GGS Management Holdings, Inc.), a subsidiary of the Corporation, and bore interest at the rate of 5.85% per year. The principal of the loan was repaid during 1999. The balance remaining represents interest on the loan. (4) The loan by the Company to Douglas H. Symons on September 29, 1999 was made to satisfy indebtedness to third parties. Such loan is unsecured, bears interest at the rate of 6.5% per year and is payable on demand. (5) The loan by the Company to Alan G. Symons on October 28, 1999 was made to satisfy indebtedness to third parities, is unsecured, bears interest at the rate of 6.5% and is payable on demand.
On December 28, 2001, Superior Insurance Group, Inc., a subsidiary of the Company, obtained a line of credit from Granite Reinsurance Company Ltd. ("Granite Re"), a wholly-owned subsidiary of Goran, in the amount of $2,500,000. On October 23, 2002, Superior Insurance Group, Inc. obtained an additional line of credit of up to $1,000,000 from Granite Re. Both of the loans bear interest at a rate equal to the prime rate plus 5 %. The total principal balance outstanding on the loans as of April 17, 2003 was $2,030,000. In 1997, the Company guaranteed a personal loan by an unrelated third party lender to Douglas H. Symons in the amount of $250,000. During 2002, the loan was renewed by the unrelated third party lender, and the Company did not renew its guarantee. Pafco General Insurance Company ("Pafco"), an insurance subsidiary of the Company, engaged in reinsurance transactions with Granite Re during 2002. Granite Re is a wholly owned subsidiary of Goran. On an ongoing basis, Pafco also reinsures with Granite Re non-automobile business written by Pafco and originated through Symons International Group (Florida), Inc., a subsidiary of Goran. Pafco did not cede premiums to Granite Re under this reinsurance agreement in 2002. Those reinsurance arrangements have been continued for 2003. During 2002, IGF paid $500,000 to Granite Re as consideration for an indemnity provided to a third party by Granite Re for the benefit of IGF. The Company paid $12,967 to Stargate Solutions Group, Inc. in 2002 for consulting and other services relative to the conversion to the Company's non-standard automobile operating system. Stargate Solutions Group, Inc., is owned by Kirk Symons, son of G. Gordon Symons and brother of Alan G. Symons and Douglas H. Symons. During 2002, the Company paid David G. Symons approximately $7,076 for legal services. David G. Symons is the son of Alan G. Symons. Superior Insurance Group, Inc., a wholly owned subsidiary of the Company, owns a less than 1% limited partnership interest in Monument Capital Partners I. The amount of the investment was $100,000. Larry S. Wechter, a director of the Company until August 12, 2002, is Managing Director and Chief Executive Officer of Monument Advisors, Inc. and Alan G. Symons, a director of the Company until May 31, 2002, is a director of Monument Advisors, Inc. Monument Advisors, Inc. is the general partner of Monument Capital Partners I. PART IV ITEM 14 - CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended), as of a date (the "Evaluation Date") within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company is timely gathered, analyzed and disclosed to such officers within the Company, as appropriate, to allow timely decisions regarding required disclosure in the Company's reports filed under the Securities Exchange Act of 1934, as amended. (b) Changes in internal controls. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the Evaluation Date. ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The documents listed below are filed as a part of this Report, except as otherwise indicated: 1. Financial Statements. The following described consolidated financial statements found on the pages of the 2002 Annual Report indicated below are incorporated into Item 8 of this Report by reference. Description of Financial Statement Item Location in 2002 Annual Report - ---------------------------------------- ------------------------------ Report of Independent Accountants Page 45 Consolidated Balance Sheets, December 31, 2002 and 2001 Page 17 Consolidated Statements of Operations, Years Ended December 31, 2002, 2001 and 2000 Page 18 Consolidated Statements of Changes In Shareholders' Equity (Deficit), Years Ended December 31, 2002, 2001 and 2000 Page 19 Consolidated Statements of Cash Flows, Years Ended December 31, 2002, 2001 and 2000 Page 20 Notes to Consolidated Financial Statements, Years Ended December 31, 2002, 2001 and 2000 Pages 21 through 44 2. Financial Statement Schedules. The following financial statement schedules are included beginning on page 27. Report of Independent Accountants Schedule II - Condensed Financial Information of Registrant Schedule IV - Reinsurance Schedule V - Valuation and Qualifying Accounts Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Operations 3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated herein by reference to the Index. 4. Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 2002. BOARD OF DIRECTORS AND SHAREHOLDERS OF SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES The audit referred to in our report dated May 9, 2003, relating to the consolidated financial statements of Symons International Group, Inc. and subsidiaries, which is incorporated in Item 8 of this Form 10-K by reference to the annual report to shareholders for the year ended December 31, 2002 included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits. In our opinion, such financial statement schedules present fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Grand Rapids, Michigan May 9, 2003 SYMONS INTERNATIONAL GROUP, INC. SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES. The information required by this schedule is included in Note 3 of Notes to Consolidated Financial Statements.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Company) Balance Sheets As of December 31, 2002 and 2001 (In thousands, except share data) 2002 2001 ---------- ---------- ASSETS Investments in and advances to related parties . . . . . $ 7,921 $ 25,509 Cash and cash equivalents. . . . . . . . . . . . . . . . - 267 Property and equipment . . . . . . . . . . . . . . . . . 26 40 Investments. . . . . . . . . . . . . . . . . . . . . . . 249 77 Other. . . . . . . . . . . . . . . . . . . . . . . . . . 85 - Intangible assets. . . . . . . . . . . . . . . . . . . . 4,205 4,376 ---------- ---------- Total Assets . . . . . . . . . . . . . . . . . . . . . . $ 12,486 $ 30,269 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accrued distributions on preferred securities. . . . . . $ 49,227 $ 33,203 Federal income tax payable . . . . . . . . . . . . . . . 4,326 1,639 Other. . . . . . . . . . . . . . . . . . . . . . . . . . 2,812 4,439 ---------- ---------- Total Liabilities. . . . . . . . . . . . . . . . . . . . 56,365 39,281 ---------- ---------- Mandatorily redeemable Preferred securities . . . . . . . . . . . . . . . . . . 135,000 135,000 ---------- ---------- Shareholders' Equity: Common stock, no par value, 100,000,000 shares Authorized, 10,385,399 and 10,385,399 issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . 38,136 38,136 Additional paid-in capital . . . . . . . . . . . . . . . 5,851 5,851 Unrealized loss on investments (net of deferred taxes of $nil in 2002 and 2001 . . . . . . . . . . . . . . . . . (2,220) (2,613) Retained earnings. . . . . . . . . . . . . . . . . . . . (220,646) (185,386) ---------- ---------- Total Shareholders' Deficit. . . . . . . . . . . . . . . (178,879) (144,012) ---------- ---------- Total Liabilities and Shareholders' Equity . . . . . . . $ 12,486 $ 30,269 ========== ==========
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT Statements of Operations For The Years Ended December 31, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 ---------- ---------- ---------- Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,675 $ 1,175 $ 600 Net investment income. . . . . . . . . . . . . . . . . . . . . 6,329 6,335 6,456 ---------- ---------- ---------- Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . 8,004 7,510 7,056 ---------- ---------- ---------- Expenses: Policy acquisition and general and administrative expenses 156 3,104 39,032 Interest expense . . . . . . . . . . . . . . . . . . . . . 171 - - ---------- ---------- ---------- Total expenses . . . . . . . . . . . . . . . . . . . . . . . . 327 3,104 39,032 ---------- ---------- ---------- Income before taxes and minority interest. . . . . . . . . . . 7,677 4,406 (31,976) Provisions for income taxes. . . . . . . . . . . . . . . . . . 2,687 1,542 1,393 ---------- ---------- ---------- Net income (loss) before minority interest . . . . . . . . . . 4,990 2,864 (33,369) Minority interest: Equity in consolidated subsidiaries. . . . . . . . . . . . (24,225) (20,950) (41,469) Distributions on preferred securities, net of tax. . . . . (16,025) (14,806) (13,587) ---------- ---------- ---------- Net loss for the period. . . . . . . . . . . . . . . . . . . . (35,260) (32,892) (88,425) Change in unrealized gains (losses) on securities. . . . . . . 393 1,325 960 Equity (deficit), beginning of year. . . . . . . . . . . . . . (144,012) (112,445) (24,980) ---------- ---------- ---------- Equity (deficit), end of year. . . . . . . . . . . . . . . . . $(178,879) $(144,012) $(112,445) ========== ========== ==========
SYMONS INTERNATIONAL GROUP, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT Statements of Cash Flow For The Years Ended December 31, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 --------- --------- --------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(35,260) $(32,892) $(88,425) Cash flows from operating activities: Adjustments to reconcile net cash provided by (used in) Operations: Equity in net loss of subsidiaries. . . . . . . . . 24,225 20,950 41,469 Accrued Distributions on Preferred Securities. . . . . . 16,025 14,806 13,587 Depreciation of property and equipment . . . . . . . 15 15 17 Amortization of intangible assets. . . . . . . . . . 171 171 34,977 Stock issuance from Demutualization. . . . . . . . . . . (175) - - Net changes in operating assets and liabilities: Other assets . . . . . . . . . . . . . . . . . . . . (85) - (210) Federal income taxes . . . . . . . . . . . . . . . . 2,687 (277) (1,853) Other liabilities. . . . . . . . . . . . . . . . . . (1,628) 3,582 622 --------- --------- --------- Net cash provided by (used in) operations. . . . . . . . 5,975 6,355 184 --------- --------- --------- Cash flows used in investing activities: Purchase of property and equipment . . . . . . . . . - (90) - --------- --------- --------- Net cash (used in) investing activities: . . . . . . . . - (90) - --------- --------- --------- Cash flows provided by financing activities: Contributions of capital or dividends received from Subsidiaries. . . . . . . . . . . . . . . . . . . (6,242) (6,033) (5,037) Loans (to)/from related parties. . . . . . . . . . . - (50) - --------- --------- --------- Net cash provided by (used in) financing activities. . . (6,242) (6,083) (5,037) --------- --------- --------- Increase (decrease) in cash and cash equivalents . . . . (267) 182 (4,853) Cash and cash equivalents - beginning of year. . . . . . 267 85 4,938 --------- --------- --------- Cash and cash equivalents - end of year. . . . . . . . . $ - $ 267 $ 85 ========= ========= =========
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 2002, 2001 and 2000 BASIS OF PRESENTATION The condensed financial information should be read in conjunction with the consolidated financial statements of Symons International Group, Inc. The condensed financial information includes the accounts and activities of the parent company which acts as the holding company for the insurance subsidiaries.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE IV - REINSURANCE For The Years Ended December 31, 2002, 2001 and 2000 (In thousands) PROPERTY AND LIABILITY INSURANCE 2002 2001 2000 --------- ---------- --------- Direct amount . . . . . . . . . . . $107,708 $ 159,821 $168,626 Assumed from other companies. . . . 67 1,271 5,835 Ceded to other companies. . . . . . (77,291) (105,158) (78,621) --------- ---------- --------- Net amounts . . . . . . . . . . . . $ 30,484 $ 55,934 $ 95,840 ========= ========== ========= Percentage of amount assumed to net 0.2% 2.3% 6.1%
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, 2002, 2001 and 2000 (In Thousands) 2002 2001 2000 Allowance for Allowance for Allowance for Doubtful Accounts Doubtful Accounts Doubtful Accounts ------------------ ------------------ ------------------ Additions: Balance at beginning of period. . $ 1,526 $ 1,940 $ 1,479 Charged to costs and expenses (1) 1,448 6,122 9,623 Charged to other accounts . . . . - - - Deductions from reserves. . . . . 2,730 6,536 9,162 ------------------ ------------------ ------------------ Balance at end of period. . . . . $ 244 $ 1,526 $ 1,940 ================== ================== ================== (1) The Company monitors the adequacy of its allowance for doubtful accounts monthly and believes the balance of such allowance at December 31, 2002, 2001 and 2000 was adequate.
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS For The Years Ended December 31, 2002, 2001 and 2000 (In thousands) CONSOLIDATED PROPERTY - CASUALTY ENTITIES Reserves For Unpaid Amorti- Claims zation of Deferred And Deferred Paid Claims Policy Claim Net Claims and Policy and Claim Acquisi- Adjust- Invest Adjustment Expenses Acqui- Adjust- tion ment Unearned Earned ment Incurred sition Ment Premium Year Costs Expense Premiums Premiums Income Related to: Costs Expense Written - ---- --------------------------------------------------------------------------------------------------------------- Current Prior Years Years ------- ------ 2000 6,454 108,117 62,386 137,706 10,074 127,497 (14,118) 37,453 167,442 174,461 2001 763 81,142 59,216 76,947 6,286 69,667 774 33,747 104,764 161,092 2002 - 67,204 35,797 37,662 4,139 35,413 12,775 19,624 55,585 107,775 Note: All amounts in the above table are net of the effects of reinsurance and related commission income, except for net investment income regarding which reinsurance is not applicable, premiums written liabilities for losses and loss adjustment expenses, and unearned premiums which are stated on a gross basis.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Symons International Group, Inc. /s/ Douglas H. Symons ------------------------ June 3, 2003 By: Douglas H. Symons President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on June 3 2003, on behalf of the Registrant in the capacities indicated: (1) Principal Executive Officer: /s/ Douglas H. Symons - ------------------------ Douglas H. Symons President and Chief Executive Officer (Principal Executive Officer) (2) Principal Financial Officer: /s/ Bruce K. Dwyer - --------------------- Bruce K. Dwyer Chief Financial Officer (3) The Board of Directors: /s/ G. Gordon Symons - ----------------------- G. Gordon Symons Chairman of the Board /s/ Douglas H. Symons - ------------------------ Douglas H. Symons Director /s/ Terry W. Anker - --------------------- Terry W. Anker Director /s/ Michael D. Puckett - ------------------------- Michael D. Puckett Director CERTIFICATE OF THE PRINCIPAL EXECUTIVE OFFICER OF SYMONS INTERNATIONAL GROUP, INC. I, Douglas H. Symons, certify that: 1. I have reviewed this annual report on Form 10-K of Symons International Group, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report. 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company, and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 3, 2003 By: /s/ Douglas H. Symons ------------------------ Douglas H. Symons Chief Executive Officer CERTIFICATE OF THE CHIEF FINANCIAL OFFICER OF SYMONS INTERNATIONAL GROUP, INC. I, Bruce K. Dwyer, certify that: 1. I have reviewed this annual report on Form 10-K of Symons International Group, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report. 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company, and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 3, 2003 By: /s/Bruce K. Dwyer ------------------- Bruce K. Dwyer Chief Financial Officer EXHIBIT INDEX REFERENCE TO SEQUENTIAL Regulation S-K Page --------------- ---- Exhibit No. Document Number -------------------- ------ 2.1 The Strategic Alliance Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998 is incorporated by reference to Exhibit 2.1 of the Registrant's 1997 Form 10-K. 2.2 The MPCI Quota Share Reinsurance Contract by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998 is incorporated by reference to Exhibit 2.2 of the Registrant's 1997 Form 10-K. 2.3 The MPCI Quota Share Reinsurance Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998 is incorporated by reference to Exhibit 2.3 of the Registrant's 1997 Form 10-K. 2.4 The Crop Hail Insurance Quota Share Contract by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998 is incorporated by reference to Exhibit 2.4 of the Registrant's 1997 Form 10-K. 2.5 The Crop Hail Insurance Quota Share Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998 is incorporated by reference to Exhibit 2.5 of the Registrant's 1997 Form 10-K. 2.6 The Crop Hail Insurance Services and Indemnity Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998 is incorporated by reference to Exhibit 2.6 of the Registrant's 1997 Form 10-K. 2.7 The Multiple Peril Crop Insurance Services and Indemnity Agreement by and between Continental Casualty Company and IGF Insurance Company, IGF Holdings, Inc. and Symons International Group, Inc. dated February 28, 1998 is incorporated by reference to Exhibit 2.7 of the Registrant's 1997 Form 10-K. 2.8 The Stock Purchase Agreement between IGF Holdings, Inc. and 1911 CORP, dated July 7, 1998 is incorporated by reference to Exhibit 2.9 of the Registrant's 1998 Form 10-K. 3.1 The Registrant's Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 3.2 Registrant's Restated Code of Bylaws, as amended, is incorporated by reference to Exhibit 1 of the Registrant's 1996 Form 10-K. 4.1(1) The Senior Subordinated Indenture between Symons International Group, Inc. as issuer and Wilmington Trust Company as trustee for SIG Capital Trust I dated August 12, 1997 is incorporated by reference to Exhibit 4 of the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 4.1(2) First Supplemental Senior Subordinated Indenture between Symons International Group, Inc. and Wilmington Trust Company Related to SIG Capital Trust I dated January 15, 1998 is incorporated by reference to Exhibit 4.3(2) of the Registrant's 1997 Form 10-K. 10.1 The Management Agreement among Superior Insurance Company, Superior American Insurance Company, Superior Guaranty Insurance Company and GGS Management, Inc. dated April 30, 1996 is incorporated by reference to Exhibit 10.5 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.2 The Management Agreement between Pafco General Insurance Company and Registrant dated May 1, 1987, as assigned to GGS Management, Inc. effective April 30, 1996, is incorporated by reference to Exhibit 10.6 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.3 The Administration Agreement between IGF Insurance Company and Registrant dated February 26, 1990, as amended, is incorporated by reference to Exhibit 10.7 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.4 The Agreement between IGF Insurance Company and Registrant dated November 1, 1990 is incorporated by reference to Exhibit 10.8 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.5 The Registration Rights Agreement between Goran Capital Inc. and Registrant dated May 29, 1996 is incorporated by reference to Exhibit 10.13 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.6* The Employment Agreement between Goran Capital Inc., Symons International Group, Inc. and Douglas H. Symons effective March 8, 1999 is incorporated by reference to Exhibit 10.5 of the Registrant's 2000 Form 10-K. 10.7* The Employment Agreement between Goran Capital Inc., Symons International Group, Inc. and David N. Hafling dated October 15, 2002 is incorporated by reference to Exhibit 10.7 to Registrant's 2001 Form 10-K. 10.8* The Employment Agreement between Symons International Group, Inc. and Mark A. Paul dated July 30, 2001is incorporated by reference to Exhibit 10.8 to Registrant's 2001 Form 10-K. 10.9 The GGS Management Holdings, Inc. 1996 Stock Option Plan is incorporated by reference to Exhibit 10.21 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.10 The Registrant's 1996 Stock Option Plan is incorporated by reference to Exhibit 10.22 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.11 The Registrant's Retirement Savings Plan is incorporated by reference to Exhibit 10.24 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.12 The Insurance Service Agreement between Mutual Service Casualty Company and IGF Insurance Company dated May 20, 1996 is incorporated by reference to Exhibit 10.25 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.13(2) The Crop Hail Quota Share Reinsurance Contract and Crop Insurance Service Agreement between Pafco General Insurance Company and IGF Insurance Company is incorporated by reference to Exhibit 10.27(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.13(3) The Automobile Third Party Liability and Physical Damage Quota Share Reinsurance Contract between IGF Insurance Company and Pafco General Insurance Company is incorporated by reference to Exhibit 10.27(3) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.13(5) The Standard Reinsurance Agreement between Federal Crop Insurance Corporation and IGF Insurance Company dated July 1, 1997 is incorporated by reference to Exhibit 10.13(6) to the Registrant's 1999 Form 10-K. 10.13(9) Amendment No. 1 to the 1998 Standard Reinsurance Agreement dated July 29, 1998 is incorporated by reference to Exhibit 10.18(8) to the Registrant's 1999 Form 10-K. 10.13(11) Quota Share Reinsurance Agreement between Superior Insurance Company and its Wholly -Owned Insurance Subsidiaries and National Union Fire Insurance Company of Pittsburgh, PA effective January 1, 2000 is incorporated by reference to Exhibit 10.13(11) to the Registrant's 2001 Form 10-K. 10.13(12) Quota Share Reinsurance Agreement between Pafco General Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA effective January 1, 2000 is incorporated by reference to Exhibit 10.13(12) to the Registrant's 2001 Form 10-K. 10.13(14) Addendum No. 2 to Quota Share Reinsurance Agreement effective January 1, 2000 between Superior Insurance Company and its Wholly-Owned Insurance Subsidiaries and National Union Fire Insurance Company of Pittsburgh, PA effective December 30, 2000 is incorporated by reference to Exhibit 10.13(14) to Registrant's 2001 Form 10-K. 10.13(15) Addendum No. 2 to Quota Share Reinsurance Agreement effective January 1, 2000 between Pafco General Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA effective December 30, 2000 is incorporated by reference to Exhibit 10.13(15) to Registrant's 2001 Form 10-K. 10.13(16) Addendum No. 3 to Quota Share Reinsurance Agreement effective January 1, 2000 between Superior Insurance Company and its Wholly-Owned Insurance Subsidiaries and National Union Fire Insurance Company of Pittsburgh, PA effective January 1, 2002. 10.13(17) Addendum No. 3 to Quota Share Reinsurance Agreement effective January 1, 2000 between Pafco General Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA effective January 1, 2002. 10.13(18) Addendum No. 4 to Quota Share Reinsurance Agreement effective January 1, 2000 between Superior Insurance Company and its Wholly-Owned insurance subsidiaries and National Union Fire Insurance Company of Pittsburgh, PA dated January 1, 2002. 10.13(19) Addendum No. 4 to Quota Share Reinsurance Agreement effective January 1, 2000 between Pafco General Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA effective January 1, 2002. 10.13(20) Addendum No. 5 to Quota Share Reinsurance Agreement effective January 1, 2000 between Superior Insurance Company and its Wholly-Owned insurance subsidiaries and National Union Fire Insurance Company of Pittsburgh, PA dated September 26, 2002. 10.14(1) The SIG Capital Trust I 9 % Trust Preferred Securities Purchase Agreement dated August 7, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 10.14(2) The Registration Rights Agreement among Symons International Group, Inc., SIG Capital Trust I and Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp. and Mesirow Financial, Inc. dated August 12, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 10.14(3) The Declaration of Trust of SIG Capital Trust 1 dated August 4, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 10.14(4) The Amended and Restated Declaration of Trust of SIG Capital Trust I dated August 12, 1997 is incorporated by reference in the Registrant's Registration Statement on Form S-4, Reg. No. 333-35713. 10.15* The Employment Agreement between Goran Capital Inc., Symons International Group, Inc. and Gene S. Yerant effective January 10, 2000 is incorporated by reference to Exhibit 10.15 of the Registrant's March 31, 2000 Form 10-Q. 10.16* The Employment Agreement between Symons International Group, Inc., Goran Capital Inc. and Gregg F. Albacete effective January 26, 2000 is incorporated by reference to Exhibit 10.16 of the Registrant's March 31, 2000 Form 10-Q. 10.17 The Asset Purchase Agreement by and among Acceptance Insurance Companies Inc., American Growers Insurance Company, American Agrisurance, Inc., Goran Capital Inc., Symons International Group, Inc., IGF Holdings, Inc. and IGF Insurance Company dated Mary 23, 2001 incorporated by reference to Exhibit 10.9 of the Registrant's June 30, 2001 Form 10-Q. 10.18 First Amendment to Asset Purchase Agreement by and among Acceptance Insurance Companies Inc. American Growers Insurance Company, American Agrisurance, Inc., Goran Capital Inc., Symons International Group, Inc., IGF Holdings, Inc. and IGF Insurance Company dated June 5, 2001 incorporated by reference to Exhibit 10.10 of the Registrant's June 30, 2001 Form 10-Q. 10.19 Assignment and Assumption Agreement by IGF Holdings, Inc. and IGF Insurance Company and Acceptance Insurance Companies Inc. dated May 23, 2001 incorporated by reference to Exhibit 10.11 of the Registrant's June 30, 2001 Form 10-Q. 10.20 IGF/Acceptance Retrocession Agreement by and between Acceptance Insurance Company and IGF Insurance Company dated May 23, 2001 incorporated by reference to Exhibit 10.13 of the Registrant's June 30, 2001 Form 10-Q. 10.21 Consulting and Non-competition Agreement by and between Symons International Group, Inc. and Acceptance Insurance Companies Inc. dated May 23, 2001 incorporated by reference to Exhibit 10.15 of the Registrant's June 30, 2001 Form 10-Q. 10.22* Addendum to Employment Agreement between Goran Capital Inc., Symons International Group, Inc. and G. Gordon Symons effective January 1, 1998 is incorporated by reference to Exhibit 10.23 of the Registrant's 2001 Form 10-K. 10.23* The Employment Agreement dated May 31, 2002 between Goran Capital Inc., Symons International Group, Inc. and Douglas H. Symons. 10.24* Addendum to Consulting Agreement dated January 1, 1998 by and between Goran Capital Inc., the Company, Granite Reinsurance Company Ltd., Goan Management Bermuda Ltd. and G. Gordon Symons. 13 2002 Annual Report of Symons International Group, Inc. 99.1 Certifcation pursuant to section 906 of the Sarbanes -Oxley Act of 2002 99.2 Certifcation pursuant to section 906 of the Sarbanes -Oxley Act of 2002 * Compensation Related Agreement EX-10.13(16) 3 doc3.txt Exhibit 10.13(16) ADDENDUM NO. 3 TO QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 BETWEEN SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDARIES (HEREAFTER CALLED THE "COMPANY" AND NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (HEREAFTER CALLED THE "REINSURER") It is understood and agreed that effective January 1st, 2002 the following articles are amended to read as follows: ARTICLE II TERM AND TERMINATION ---------- -------------------- The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard time, December 31, 2002. Either party may terminate effective on the first day of any calendar quarter with 60 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. ARTICLE IV QUOTA SHARE PARTICIPATION ---------- ------------------------- The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 70%. However, the maximum cession will be limited to $80,000,000 of new written premium (ie.not including in-force cession from December 31st, 2001) for the calendar year 2002. In the event this produces more than $80,000,000 for the calendar year, the dollar amount of cessions shall be reduced to $80,000,000 plus the cession of in-force business from December 31st, 2001. The average quota share percent applicable for the Company shall be the ratio of the adjusted dollar cession to the gross subject written premium for the Company for that year. Each quarter shall be adjusted by an equal pro-rata percent to produce the dollar cession applicable. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. That percent shall also apply to the in-force business at the beginning of the quarter. It is agreed that the cession for any one quarter, including the change in in-force, shall not exceed 35% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 35% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 35% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACOCUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION ---------- ---------------------- For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded and the Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 79% up to a maximum ceding commission of 31% at a 66% loss ratio. This calculation shall be from January 1st, 2001 to date for all business ceded effective in all calendar quarters including the in-force business from December 31st, 2000. For business in-force on December 31st, 2001 and with effective dates in 2002: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. This would be the sum of new written premiums in the quarter plus or minus the change in unearned premium ceded at the beginning of the quarter as the result of a change in the percent ceded. The Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 78.625% up to a maximum ceding commission of 31% at a 65.625 loss ratio. This calculation shall be from January 1st, 2002 to date of calculation. The first payment, if any, shall be made within 75 days of March 31st 2003. Subsequent payments due either party shall be made within 75 days of March 31st of all years subsequent to 2003 until all liabilities are finalized. ARTICLE VIII DEFINITIONS ------------ ----------- Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated loss adjustment expenses with dates of loss in the period being calculated, divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For business in-force on December 31st, 2001 and with effective dates in 2002: Loss fund shall mean paid losses from the end of the prior quarter to the settlement date. If that amount is not available for a partial month it shall be deemed to be pro-rata of the previous month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported. ARTICLE IX REPORTS AND ACCOUNTING ---------- ---------------------- For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company - debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premiums. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business in-force on December 31st, 2001 and effective in 2002: Within 75 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. New written premiums-credit Change in unearned premium cession - credit or debit (First quarter only: total unearned premium on December 31st, 2001.) Total written premium 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 4. Change in Loss Fund-credit or debit 5. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 6. Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar quarters. The Company shall provide a separate report for paid and outstanding losses for each accident quarter (ie. all losses with dates of loss in a calendar quarter). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. It is understood and agreed that effective January 1st, 2002 the following article is added to this agreement. ARTICLE VI-A INVESTMENT ALLOWANCE ------------ -------------------- For business in-force on December 31st 2001 and with effective dates in 2002: The Reinsurer will calculate notional investment income annually and pay the Company within 75 days of March 31 of the subsequent calendar year. The investment income shall equal the product of the average of the 1 year US Treasury bill rate times the Average Daily Cash Balance for the calendar year. The average US Treasury bill rate shall be the average of the rate on the last business day of each calendar quarter for the year applicable. Notwithstanding the foregoing no payment is due in the event the loss ratio is in excess of 78.625%. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representative: In:________________________________this_______day of_________________2002 SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDIARIES By:________________________________Title:____________________________ And in:_____________________________this______day of___________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. By:________________________________Title:______________ EX-10.13(17) 4 doc4.txt Exhibit 10.13(17) ADDENDUM NO. 3 TO QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 BETWEEN PAFCO GENERAL INSURANCE COMPANY (HEREAFTER CALLED THE "COMPANY") AND NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (HEREAFTER CALLED THE "REINSURER") It is understood and agreed that effective January 1st, 2002 the following articles are amended to read as follows: ARTICLE II TERM AND TERMINATION ---------- -------------------- The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard time, December 31, 2002. Either party may terminate effective on the first day of any calendar quarter with 60 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. ARTICLE IV QUOTA SHARE PARTICIPATION ---------- ------------------------- The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 75%. However, the maximum cession will be limited to $20,000,000 of new written premium (ie.not including in-force cession from December 31st, 2001) for the calendar year 2002. In the event this produces more than $20,000,000 for the calendar year, the dollar amount of cessions shall be reduced to $20,000,000 plus the cession of in-force business from December 31st, 2001. The average quota share percent applicable for the Company shall be the ratio of the adjusted dollar cession to the gross subject written premium for the Company for that year. Each quarter shall be adjusted by an equal pro-rata percent to produce the dollar cession applicable. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. That percent shall also apply to the in-force business at the beginning of the quarter. It is agreed that the cession for any one quarter, including the change in in-force, shall not exceed 35% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 35% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 35% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACOCUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION ---------- ---------------------- For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded and the Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 79% up to a maximum ceding commission of 31% at a 66% loss ratio. This calculation shall be from January 1st, 2000 to date for all business ceded effective in all calendar quarters including the in-force business from December 31st, 2000. For business in-force on December 31st, 2001 and with effective dates in 2002: The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. This would be the sum of new written premiums in the quarter plus or minus the change in unearned premium ceded at the beginning of the quarter as the result of a change in the percent ceded. The Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 78.625% up to a maximum ceding commission of 31% at a 65.625 loss ratio. This calculation shall be from January 1st, 2002 to date of calculation. The first payment, if any, shall be made within 75 days of March 31st 2003. Subsequent payments due either party shall be made within 75 days of March 31st of all years subsequent to 2003 until all liabilities are finalized. ARTICLE VIII DEFINITIONS ------------ ----------- Loss Ratio shall mean losses paid and outstanding, including IBNR and allocated loss adjustment expenses with dates of loss in the period being calculated, divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For business in-force on December 31st, 2001 and with effective dates in 2002: Loss fund shall mean paid losses from the end of the prior quarter to the settlement date. If that amount is not available for a partial month it shall be deemed to be pro-rata of the previous month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported. ARTICLE IX REPORTS AND ACCOUNTING ---------- ---------------------- For business effective prior to 2002, however, excluding business in-force on December 31st, 2001: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company - debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premiums. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business in-force on December 31st, 2001 and effective in 2002: Within 75 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. New written premiums-credit Change in unearned premium cession - credit or debit (First quarter only: total unearned premium on December 31st, 2001.) Total written premium 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 4. Change in Loss Fund-credit or debit 5. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 6. Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar quarters. The Company shall provide a separate report for paid and outstanding losses for each accident quarter (ie. all losses with dates of loss in a calendar quarter). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. It is understood and agreed that effective January 1st, 2002 the following article is added to this agreement. ARTICLE VI-A INVESTMENT ALLOWANCE ------------ -------------------- For business in-force on December 31st 2001 and with effective dates in 2002: The Reinsurer will calculate notional investment income annually and pay the Company within 75 days of March 31 of the subsequent calendar year. The investment income shall equal the product of the average of the 1 year US Treasury bill rate times the Average Daily Cash Balance for the calendar year. The average US Treasury bill rate shall be the average of the rate on the last business day of each calendar quarter for the year applicable. Notwithstanding the foregoing no payment is due in the event the loss ratio is in excess of 78.625%. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representative: In:________________________________this_______day of_________________2002 PAFCO GENERAL INSURANCE COMPANY By:________________________________Title:____________________________ And in:_____________________________this______day of___________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. By:________________________________Title:____________________________ EX-10.13(18) 5 doc5.txt Exhibit 10.13(18) ADDENDUM NO. 4 to QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 between SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDARIES (hereafter called the "Company") and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (hereafter called the "Reinsurer") It is understood and agreed that this addendum amends addendum Number 3 and effective January 1st, 2002 the following articles or parts thereof are amended to read as follows. ARTICLE II TERM AND TERMINATION The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31, 2002. Either party may terminate effective on the first day of any calendar month with 20 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. However, in the event the Company fails to pay the Reinsurer on or before October 15, 2002 for the monthly account statements from January through September 2002 this addendum is cancelled ab initio and the agreement is terminated as of the expiration date heretofore applicable which is December 31, 2001. ARTICLE IV QUOTA SHARE PARTICIPATION The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 75% for the year 2002. However, the maximum cession will be limited to $60,000,000 of written premium. In the event the quota share percent selected by the Company produces more than $60,000,000 for the calendar year, the dollar amount of written premium ceded shall be reduced to $60,000,000. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. It is agreed that the cession for any one quarter, shall not exceed 40% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 40% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 40% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACCOUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION For business effective prior to 2002. The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded and the Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 79% up to a maximum ceding commission of 31% at a 66% loss ratio. This calculation shall be from January 1st, 2001 to date for all business ceded effective in all calendar quarters including business effective in 2002 plus the in-force business. For business effective in 2002. The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. The Reinsurer shall allow the company a minimum and provisional ceding commission of 18% on such premium. The ceding commission slides 1 for 1 for each 1.0% decrease in the Loss Ratio below 78.625% up to a maximum ceding commission of 31% at a 65.625 loss ratio. This calculation shall be from January 1st, 2002 to date of calculation. The first payment, if any shall be made within 90 days of March 31, 2004. Subsequent payments due either party shall be made within 90 days of March 31 of all years subsequent to 2004 until all liabilities are finalized. ARTICLE VI-A INVESTMENT ALLOWANCE The Reinsurer will calculate a Notional Investment Allowance quarterly. The Investment Allowance shall equal the product of 24.75% of the one year US Treasury bill rate in effect on the first business day of each calendar quarter times the Average Daily Cash Balance. The Reinsurer will pay the Company the Investment Allowance within 90 days of March 31st, 2004 and subsequent balances, if any, within 90 days of each subsequent March 31st. Notwithstanding the foregoing, no payment is due in the event the Loss Ratio is in excess of 78.625%. ARTICLE VIII DEFINITIONS Loss Ratio shall mean: Losses paid and outstanding (including IBNR as determined by the Reinsurer), and allocated loss adjustment expense divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For business effective prior to 2002: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For business effective in 2002: Loss fund shall mean 66% of the paid losses for the prior month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, plus Investment Allowance from the prior quarter, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported ARTICLE IX REPORTS AND ACCOUNTING For business effective prior to 2002: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premium-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company-debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premium. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business effective in 2002: Within 20 days after the end of each calendar month, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums 2. Earned premiums-credit* 3. Commission-debit (Provisional commission 18% of earned premiums) 4. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 5. Change in Loss Fund-credit or debit 6. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 7. Unearned Premium * Written premiums minus change in Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar months. The Company shall provide a separate report for paid and outstanding losses for each accident month (ie. all losses with dates of loss in a calendar month). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representatives: In:__________________________________this_________day of__________________2002 SUPERIOR INSURANCE COMPANY By:___________________________________Title:_____________________________ And in:______________________________this__________day of__________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:___________________________________Title:_______________ EX-10.13(19) 6 doc6.txt Exhibit 10.13(19) ADDENDUM NO. 4 to QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 between PAFCO GENERAL INSURANCE COMPANY (hereafter called the "Company") and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (hereafter called the "Reinsurer") It is understood and agreed that this addendum amends addendum Number 3 and effective January 1st, 2002 the following articles or parts thereof are amended to read as follows. ARTICLE II TERM AND TERMINATION The agreement commences at 12:01 a.m. Eastern Standard Time, January 1, 2000 and shall remain in force until 11:59 p.m. Eastern Standard Time, December 31, 2002. Either party may terminate effective on the first day of any calendar month with 20 days advance written notice. The Reinsurer shall remain liable for loss under reinsured policies effective prior to the termination date. However, in the event the Company fails to pay the Reinsurer on or before October 15, 2002 for the monthly account statements from January through September 2002 this addendum is cancelled ab initio and the agreement is terminated as of the expiration date heretofore applicable which is December 31, 2001. ARTICLE IV QUOTA SHARE PARTICIPATION The aggregate quota share cession shall be at the option of the Company and subject to a maximum of 60% for the year 2002. However, the maximum cession will be limited to $10,000,000 of written premium. In the event the quota share percent selected by the Company produces more than $10,000,000 for the calendar year, the dollar amount of written premium ceded shall be reduced to $10,000,000. This limit can be increased by mutual agreement between the Reinsurer and the Company. The Company shall notify the Reinsurer prior to the last day of the calendar quarter of the quota share percent for that quarter. It is agreed that the cession for any one quarter, shall not exceed 40% of the total cession for the calendar year. In the event the declared percent cession for a calendar quarter produces premiums in excess of 40% of the premium ceded for the calendar year the cessions for that quarter shall be adjusted to the dollar amount that would equal 40% of the premium ceded for the year. The Reinsurer's liability for aggregate losses, including allocated loss adjustment expenses (and unallocated loss adjustment expenses where applicable under REPORTS AND ACCOUNTING), shall be limited to 97% of earned premium ceded for all business from January 1st, 2002 to the calculation date. ARTICLE VI PREMIUM AND COMMISSION The Company will pay the Reinsurer a premium equal to the pro rata share of premium applicable on all policies ceded. The Reinsurer shall allow the Company a minimum and provisional ceding commissions of 18% on such premium. The actual ceding commission shall be the combined sum of Section A and Section B as specified below subject to a minimum of 18% and a maximum of 31% of the combined sum of ceded premiums. The actual commission shall be the commission ratio times the ceded premium determined as follows: Section A: 97.000% minus actual loss ratio equals commission ratio Section B: 96.625% minus actual loss ratio equals commission ratio The above ratio shall be carried to three decimal places. The adjustment, if any on Section A shall be done quarterly with a debit or credit to the Funds Withheld Balance. The first adjustment and payment for Section B shall be made within 90 days of March 31, 2004. Subsequent adjustments and payments shall be made within 90 days of all years subsequent to 2004 until all liabilities are finalized. In the event the Section A or Section B commission ratio is less than 18% and the combined commission ratio is in excess of 18% the amount that would otherwise be debited to the Funds Withheld Balance shall be paid to the Reinsurer. ARTICLE VI-A INVESTMENT ALLOWANCE For Section B business: The Reinsurer will calculate a Notional Investment Allowance quarterly. The Investment Allowance shall equal the product of 24.75% of the one year US Treasury bill rate in effect on the first business day of each calendar quarter times the Average Daily Cash Balance. The Reinsurer will pay the Company the Investment Allowance within 90 days of March 31st, 2004 and subsequent balances, if any, within 90 days of each subsequent March 31st. Notwithstanding the foregoing, no payment is due in the event the Loss Ratio is in excess of 78.625%. ARTICLE VIII DEFINITIONS Section A shall mean: All business effective prior to January 1, 2002 and loss liabilities on that business. Section B shall mean: All business effective in 2002 and loss liabilities on that business. Loss Ratio shall mean: Losses paid and outstanding (including IBNR as determined by the Reinsurer), and allocated loss adjustment expense divided by earned premium for the period being calculated. Premium shall mean the premium charged the insured, net of return premium, however, uncollectable premium shall not be deemed a return premium. Allocated loss adjustment expenses shall be as defined under statutory accounting practices. Unallocated loss adjustment expenses shall be as defined under statutory accounting practices. For Section A business: Funds withheld balance shall mean: Previous Funds Withheld Balance, plus 97% of ceded written premium, minus ceding commission, minus ceded paid losses (including allocated loss adjustment expenses), minus ceded paid unallocated loss adjustment expenses, if applicable. For Section B business: Loss fund shall mean 66% of the paid losses for the prior month. Average Daily Cash Balance shall mean Cash payments received by the Reinsurer, plus Investment Allowance from the prior quarter, minus Cash payments paid by the Reinsurer, minus 3.375% of the total premiums reported ARTICLE IX REPORTS AND ACCOUNTING For business effective prior to 2002: Within 45 days after the end of each calendar quarter, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premium-credit 2. Commission-debit 3. Net losses (including allocated loss adjustment expenses) paid by the company-debit 4. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 5. Unearned Premium In the event the loss ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICIPATION AND LIMIT. The forgoing shall be a combined account for all business effective in all calendar quarters plus the in-force business. The Company shall report this information separately for all business effective in each calendar quarter plus a report for the in-force business. The Company will pay the Reinsurer 3% of the premium with the balance, if any, being held in a Funds Withheld Balance for subsequent payment of losses, commission adjustments and return premium. Amounts due the Company shall be withdrawn from the Funds Withheld Balance and if the Funds Withheld Balance is negative, the Reinsurer shall pay the amount due. For all business effective in 2002: Within 20 days after the end of each calendar month, the company shall furnish an account statement to the Reinsurer, for their share on the Business Covered including the following: 1. Written premiums 2. Earned premiums-credit* 3. Commission-debit (Provisional commission 18% of earned premiums) 4. Net losses (including allocated loss adjustment expenses) paid by the Company-debit 5. Change in Loss Fund-credit or debit 6. Reserve for outstanding losses including incurred but not reported (including allocated loss adjustment expenses). 7. Unearned Premium * Written premiums minus change in Unearned Premium In the event the Loss Ratio is in excess of 85%, the Reinsurer shall be liable for unallocated loss adjustment expenses equal to 1% of earned premium for each Loss Ratio point in excess of 85%, however, not in excess of 6% of earned premium. When applicable, the coverage for unallocated loss adjustment expenses shall be included in the maximum limit of 97% of earned premium ceded referred to in QUOTA SHARE PARTICPATION AND LIMIT. The forgoing shall be a combined account for all business ceded in all calendar months. The Company shall provide a separate report for paid and outstanding losses for each accident month (ie. all losses with dates of loss in a calendar month). The Company shall pay any credit balance with the account statement. The Reinsurer shall pay any debit balance within 30 days of receipt of the account statement. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representatives: In:__________________________________this_________day of__________________2002 PAFCO GENERAL INSURANCE COMPANY By:___________________________________Title:_____________________________ And in:______________________________this__________day of__________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:___________________________________Title:____________________________ EX-10.13(20) 7 doc7.txt Exhibit 10.13(20) ADDENDUM NO. 5 to QUOTA SHARE REINSURANCE AGREEMENT EFFECTIVE JANUARY 1ST 2000 between SUPERIOR INSURANCE COMPANY AND ITS WHOLLY-OWNED INSURANCE SUBSIDARIES (hereafter called the "Company") and NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. (hereafter called the "Reinsurer") Notwithstanding the condition of Article VII COMMUTATION it is understood and agreed that all liabilities emanating from losses on business effective prior to January 1st, 2002 are commuted effective September 30, 2002. The Reinsurer shall allow a payment equal to the amount of funds in the Funds Withheld Balance on September 30, 2002. The Company is granted permission to withdraw those funds and agrees to forever release and discharge the Reinsurer from any and all liabilities whether past, present or future on policies effective prior to January 1st, 2002. It is understood that no further reports are due to the Reinsurer for this business. IN WITNESS WHEREOF: the parties hereto have caused this Agreement to be executed by their authorized representative: In:_______________________________this___________day of__________________2002 SUPERIOR INSURANCE COMPANY By:_______________________________Title:______________________________ And in:____________________________this___________day of___________________2002 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA By:_______________________________Title:_____________________________ EX-10.23 8 doc8.txt 7 Exhibit 10.23 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into effective as of the 31st day of May, 2002 with respect to the following: Goran Capital Inc.("Goran"), and Symons International Group, Inc. ("SIG"), jointly and severally, and their respective subsidiaries (collectively, the "Company") consider 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 employ Douglas H. Symons ("Executive"), upon the terms and conditions hereinafter set forth; and 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 continue to employ ------------------- Executive as Chief Executive Officer and President of Goran Capital Inc. and Symons International Group, Inc. for an initial term of two (2) years, unless such employment is terminated pursuant to Section 3 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 ("Notice of Non-Renewal"). If Company gives Executive such a Notice of Non-Renewal, Executive's employment shall terminate as of the expiration date of this Agreement. 1.2 Terms of Employment. During the term of this Agreement as set --------------------- forth in Section 1.1, Executive agrees to be a full-time employee of the Company and further agrees to devote substantially all of Executive's working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with Executive's positions and to use Executive's 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 Board of Directors of the Company, which duties shall be consistent with the positions, which shall grant Executive authority, responsibility, title and standing comparable to Executive's positions in a stock insurance holding company of similar standing. Executive's primary place of work will be at the Company's U.S. headquarters in Indianapolis, Indiana, but it is understood and agreed that Executive's duties may require travel. In the event Executive is relocated to another Company location, the Company agrees to pay for the cost of Executive's move (including temporary lodging expenses) and to facilitate the sale of Executive's Indianapolis home so that Executive will be enabled to purchase a new home in Executive's new location that is comparable in price to Executive's existing home and have Executive's family join Executive at such new location within two (2) months of Executive's transfer or such other period as is reasonable considering market and location. Nothing herein shall prohibit Executive from devoting time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Executive's duties hereunder. 2. COMPENSATION, BENEFITS AND PREREQUISITES 2.1 Salary. Company shall pay Executive an annual salary, in equal ------ bi-weekly installments, in the amount of Five Hundred Thousand Dollars ($500,000). Executive's salary as payable pursuant to this Agreement may be increased from time to time as mutually agreed upon by Executive and the Company. Notwithstanding any other provision of this Agreement, Executive's salary paid by Company for any year covered by this Agreement shall not be less than such salary paid to Executive for the immediately preceding calendar year. All salary and bonus amounts paid to Executive pursuant to this Agreement shall be in U.S. dollars. 2.2 Bonus. The Company and Executive understand and agree that the ----- Company expects to achieve financial improvement during the term of this Agreement and that Executive will make a material contribution to that improvement which will require certain personal and familial sacrifices on the part of Executive. Accordingly, it is the desire and intention of the Company to reward Executive for the attainment of that improvement through bonus and other means (including, but not limited to, stock options, stock appreciation rights and other forms of incentive compensation). Therefore, the Company will pay Executive a lump-sum bonus (subject to normal withholdings) within thirty (30) business days from receipt by Company of its consolidated, annual audited financial statements in an amount which shall be determined in accordance with the following Bonus Table. All amounts used for calculation purposes in this section shall be based on the audited, consolidated financial statements of SIG (or any successor thereto), with such financial statements having been prepared in accordance with applicable generally accepted accounting principles, applied on a consistent basis with that of prior years. BONUS TABLE ----------- If Audited Net % of Annual Salary Income (as a % of Payable to Executive Budgeted Net Income) Is As Bonus - -------------------------- --------- Less Than 75% -0- 75% or more, but less than 85% 25% 85% or more, but less than 90% 30% 90% or more, but less than 95% 35% 95% or more, but less than 96% 50% 96% or more, but less than 97% 60% 97% or more, but less than 98% 70% 98% or more, but less than 99% 80% 99% or more, but less than 100% 90% 100% or more of budget 100% 2.3 Employee Benefits. Executive shall be entitled to receive all ------------------ benefits and perquisites which are provided to other executives of Company under the applicable Company plans and policies, and to future benefits and perquisites 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. 2.4 Additional Perquisites. During the term of this Agreement, Company ---------------------- shall provide Executive with: (a) Not less than five (5) weeks paid vacation during each calendar year. (b) A vehicle commensurate with Executive's position. (c) A golfing membership at various country clubs, or in the event of Executive's relocation, other comparable country club, including payment by the Company of all charges incurred by Executive at such club. (6) A resident membership at the social club of Executive's choice, or in the event of Executive's relocation, other comparable social club, including payment by the Company of all charges incurred by Executive at such club. 2.5 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. 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 -------- ------- by the Company for any reason other than for Cause (as such term is defined herein), Executive shall receive, as severance pay an amount equal to salary plus bonus as set forth herein. Executive shall receive one (1) years current salary paid in regular bi-weekly payments (the "Salary Continuation") plus a lump sum payment equal to one (1) years current salary (the "Lump Sum Payment") plus, for a period of two (2) years following the date of termination, an annual amount equal to the average of the bonus amounts earned by the Executive for the two (2) year period preceding the date of termination. The Lump Sum Payment shall be paid to Executive within five (5) business days of Executive's termination for any reason other than for Cause. Executive and his family shall continue to be covered by Company's health and dental plan for the period of two years for the date of termination of employment upon the same terms and conditions under which Executive and his family were covered at the time of his termination. Further, if Executive shall be terminated without Cause, receipt of Salary Continuation and the Lump Sum Payment described above is conditioned upon execution by Executive and the Company of a mutual waiver and release agreement substantially in the form of Exhibit A attached hereto. Further, Executive shall receive Salary Continuation and the Lump Sum Payment in accordance with this Section 3.1 if Executive shall terminate this Agreement due to a breach thereof by the Company or if Executive is directed by the Company (including, if applicable, any successor) to engage in any act or action constituting fraud or any unlawful conduct relating to the Company or its business as may be determined by application of applicable law. If Executive shall become entitled to receive Salary Continuation pursuant to this Section 3.1; (a) all stock options of SIG and Goran (including any subsidiary of either SIG or Goran) existing as of the date hereof previously granted Executive shall vest in full and become exercisable as of the date of Executive's termination; and (b) Executive shall have not less than one hundred eighty (180) days from the date of termination of his employment with Company in which to exercise any unexercised stock options previously granted to Executive. 3.2 Cause. For purposes of this Agreement including, but not limited ----- to, this Section 3, "Cause" shall mean: (a) the Executive being convicted in the United States of America, any State therein, or the District of Columbia, or in Canada or any Province therein (each, a "Relevant Jurisdiction"), of a crime for which the maximum penalty may include imprisonment for one year or longer (a "felony") or the Executive having entered against him or consenting to any judgment, decree or order (whether criminal or otherwise) based upon fraudulent conduct or violation of securities laws; (1) the Executive's being indicted for, charged with or otherwise the subject of any formal proceeding (criminal or otherwise) in connection with any felony, fraudulent conduct or violation of securities laws, in a case brought by a law enforcement or securities regulatory official, agency or authority in a Relevant Jurisdiction; (2) the Executive engaging in fraud, or engaging in any unlawful conduct relating to the Company or its business, in either case as determined under the laws of any Relevant Jurisdiction; or (3) the Executive breaching any provision of this Agreement. 3.3 Change of Control. Notwithstanding any other provisions of this ------------------- Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12) --- months of any such Change of Control, Executive (a) receives a Notice of Non-Renewal, (b) is terminated for any reason other than for Cause, or (c) Company (including its successors, if any) is in breach of this Agreement, then Executive shall receive the Lump Sum Payment plus his current salary (in bi-weekly payments) as severance pay until the expiration of fifty-two (52) weeks from Executive's Date of Termination. The receipt by Executive of payments pursuant to this Section 3.3 is specifically conditioned, and no payments pursuant to this Section 3.3 shall be made to Executive if he is, at the time of his Termination, in breach of any provision (specifically including, but not limited to, the provisions of this Agreement pertaining to non-competition and confidentiality) of this Agreement and, further, if such payments have already begun, the continuation of payments to Executive pursuant to this Section 3.3 shall cease at the time Executive shall fail to comply with the non-competition and confidentiality provisions of Article 4 herein. "Change of Control" shall mean the inability of the Symons family to cause the election of a majority of the members of the Board of Directors of either Goran, SIG or their respective successors. 3.4 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. 3.5 Indemnification. Executive shall be indemnified by Company to the --------------- maximum extent permitted by applicable law for actions undertaken for, or on behalf of, the Company and its subsidiaries. 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 Executive hereunder, and further in consideration of Executive's exposure to proprietary information of the Company, Executive agrees as follows: (2) Until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") Executive agrees 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 five percent (5%) 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 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. (b) If Executive's employment is terminated by Executive, or by reason of Executive's 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, Executive agrees not to become, directly or indirectly, an employee, consultant, owner (except for passive investments of not more than five percent (5%) 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 the Date of Termination. (c) Executive acknowledges and agrees 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 agrees 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 Executive and any persons or entities acting for or with Executive, 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. It is agreed 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. EXECUTIVE 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 INDIANA UNIFORM TRADE SECRETS ACT) RELATING TO THE COMPANY OR ANY OF ITS AFFILIATES, OR ANY OF THEIR RESPECTIVE BUSINESSES OR PRINCIPALS, AND EXECUTIVE CONFIRMS THAT SUCH INFORMATION IS THE EXCLUSIVE PROPERTY OF THE COMPANY AND ITS AFFILIATES. EXECUTIVE AGREES 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 EXECUTIVE OR OTHERWISE COMING INTO EXECUTIVE'S POSSESSION AND, ON TERMINATION OF EXECUTIVE'S 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 EXECUTIVE MAY CONCEIVE, CREATE, ORGANIZE, PREPARE OR PRODUCE DURING THE PERIOD OF EXECUTIVE'S 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 EXECUTIVE SHOULD IN FACT EXECUTE AN ASSIGNMENT THEREOF TO THE COMPANY, BUT EXECUTIVE AGREES 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: Symons International Group, Inc. Attention: Secretary 4720 Kingsway Drive Indianapolis, Indiana 46205 AND Goran Capital Inc. Attention: Secretary 4720 Kingsway Drive Indianapolis, Indiana 46205 If to Executive, to: Douglas H. Symons 7436 Glenvista Place Fishers, Indiana 46038 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 Due Authority. The Company represents and warrants that the -------------- execution of this Agreement and the performance by the Company of the terms and conditions of this Agreement have been duly and validly authorized by Company and, further, that no other authorization or consent is required to be obtained by Company for its performance hereunder. 5.6 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. 5.7 Governing Law. This Agreement shall be interpreted and enforced in ------------- accordance with the laws of the State of Indiana, without giving effect to conflict of law principles. 5.8 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. 5.9 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. 5.10 SURVIVAL. COMPANY'S OBLIGATIONS UNDER SECTIONS 3.1, 3.3 AND 3.5 -------- 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 AND THIS AGREEMENT IN ITS ENTIRETY SHALL BE BINDING UPON, AND INURE TO THE BENEFIT OF, THE SUCCESSORS AND ASSIGNS OF THE PARTIES HERETO. 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 Executive 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 this 25th day of April, 2003. SYMONS INTERNATIONAL GROUP, INC. By:_________________________________ Title:________________________________ GORAN CAPITAL INC. By:_________________________________ Title:_______________________________ DOUGLAS H. SYMONS ("EXECUTIVE") ___________________________________ EX-13 9 doc9.txt [GRAPHIC OMITED] [GRAPHIC OMITED] SYMONS INTERNATIONAL GROUP, INC. 2002 ANNUAL REPORT SYMONS INTERNATIONAL GROUP, INC. ANNUAL REPORT TO SHAREHOLDERS DECEMBER 31, 2002 CORPORATE PROFILE Symons International Group, Inc. owns insurance companies principally engaged in the sale of nonstandard automobile insurance. Superior Insurance Company of Tampa, Florida and Pafco General Insurance Company of Indianapolis, Indiana underwrite nonstandard automobile insurance in the United States. Nonstandard automobile insurance is marketed and sold through independent agents to drivers who are unable to obtain coverage from insurers at standard or preferred rates. The Company was previously engaged in the crop insurance business through its subsidiary, IGF Insurance Company. On June 6, 2001, the Company exited the crop insurance business when IGF Insurance Company sold its crop insurance operations to a third party. Accordingly, the financial statements included in this report reflect the results of the crop insurance segment as "discontinued operations". The common stock of Symons International Group, Inc. trades on the OTC Bulletin Board under the symbol "SIGC.OB".
TABLE OF CONTENTS PAGE - ------------------------------------------------------------------------------------- ---- Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Chairman's Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . 21 Reports of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . 45 Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Roster of Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . 47 Subsidiary and Branch Office Locations. . . . . . . . . . . . . . . . . . . . . . . . 48
FINANCIAL HIGHLIGHTS For the years ended December 31, (In thousands, except per share data) 2002 2001 2000 1999 1998 ---------- ---------- ---------- --------- --------- Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . $ 107,775 $ 161,092 $ 174,461 $236,401 $310,164 Net operating earnings (loss) from continuing operations (1) . . . . . . (16,047) (14,574) (18,997) (48,374) (335) Net earnings (loss) from discontinued operations . . . . . . . . . . . . - (2,156) (17,041) (15,373) (6,484) Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . (35,260) (32,892) (88,425) (80,816) (14,417) Basic operating earnings (loss) per share from continuing operations (1) (1.55) (1.40) (1.83) (4.66) (0.03) Basic earnings (loss) per share from discontinued operations. . . . . . - (0.21) (1.64) (1.48) (0.62) Basic earnings (loss) per share. . . . . . . . . . . . . . . . . . . . . (3.40) (3.17) (8.51) (7.78) (1.39) Shareholders' equity (deficit) . . . . . . . . . . . . . . . . . . . . . (178,879) (144,012) (112,445) (24,980) 61,995 Return on average equity (2) . . . . . . . . . . . . . . . . . . . . . . N/A N/A N/A N/A (20.5%) Book value (deficit) per share . . . . . . . . . . . . . . . . . . . . . (17.22) (13.87) (10.83) (2.41) 5.97 Market value per share . . . . . . . . . . . . . . . . . . . . . . . . . 0.03 0.07 0.36 1.44 7.25 (1) Operating earnings and per share amounts exclude amortization, interest, taxes, realized capital gains and losses, minority interest, and any extraordinary items. (2) Return on average equity cannot be calculated due to the accumulated deficit in shareholders' equity in 2002, 2001, 2000 and 1999.
SYMONS INTERNATIONAL GROUP, INC. [GRAPHIC OMITED] [GRAPHIC OMITED] CORPORATE STRUCTURE Chairman's Report to Shareholders May 27, 2003 Dear Fellow Shareholder: Despite a difficult market that permeated the insurance industry since September 11, 2001, we are seeing improvement in our company's operations as a result of key changes we have made. The company reached a pinnacle in its operations in the late 1990's. We were writing premiums in excess of $500 million and realizing pre-tax profits in excess of $20 million. The latter part of that era saw a change in the underwriting of insurance in those fields that we were most active, nonstandard auto insurance and crop insurance. The largest writer in the nonstandard field with premiums in the area of $10 billion decided in the latter half of the 90's that it would undertake a program of rate cutting to gain market share of the business. This forced other nonstandard insurers to reduce or hold the rates at levels that were not economical in an attempt to maintain business that would be otherwise lost. The results were that we, like others in the same field of insurance activity, struggled with increasing losses. This came at a time when the markets were unable to effectively increase rates to meet the added cost of deteriorating loss experience. We cut costs of operations in an effort to produce a profitable portfolio of this class of business. We took the dramatic step of releasing employees, including several of the top personnel in the company. We culminated these changes in 2002 by appointing Douglas Symons as Chief Executive Officer of Goran Capital Inc. Further, the company stopped writing business in jurisdictions where rates were inadequate and concentrated on renewing the business that was performing best. We received some help earlier on when the principal writer of nonstandard auto insurance decided that the loss of profits they encountered by their zeal to capture a larger share of the business was not favoring them. This return to a more normal market assisted us, and along with other changes we made, we now see improving results. We put the business of IGF on the block two years ago and sold it to a leading writer of this class of insurance. 2002 was their first full year with the business they acquired from us. They were hit with net losses that exceeded earned premiums by approximately $50 million, which is an indication of the feast or famine nature of the crop insurance business. It has been a hard grind over the past several years. Not only have we had to deal with the matters I mentioned, the insurance industry has been in turmoil since September 11, 2001 when terrorist losses exceeded $150 billion. We have reduced the number of staff from 342 to 209 and our marketing, claims, and accounting departments have been placed under new management. They are doing an admirable job and with the strong executive team Douglas has assembled, I am encouraged that we are on the road back to sensibility and profits. The Board of Directors have stuck with us through these trying times and I would be remiss if I did not thank them and congratulate the executives of the company and our employees for the brightening picture I feel they are bringing to us. G. Gordon Symons SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA SYMONS INTERNATIONAL GROUP, INC. The selected consolidated financial data presented below is derived from the consolidated financial statements of the Company and its subsidiaries for the years ended December 31. This information should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this report. All information is in thousands, except share, per share and ratio data.
2002 2001 2000 1999 1998 ---------- ---------- ---------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Gross Premiums Written. . . . . . . . . . . $ 107,775 $ 161,092 $ 174,461 $236,401 $310,164 Net Premiums Earned . . . . . . . . . . . . 37,662 76,947 137,706 249,094 264,022 Fee Income. . . . . . . . . . . . . . . . . 9,341 12,295 14,140 15,185 16,431 Net Investment Income . . . . . . . . . . . 4,139 6,286 10,074 12,242 12,098 Income (Loss) from Continuing Operations. . $ (35,260) $ (30,736) $ (71,384) $(65,443) $ (7,933) Income (Loss) from Discontinued Operations. - (2,156) (17,041) (15,373) (6,484) ---------- ---------- ---------- --------- --------- Net Income (Loss) . . . . . . . . . . . . . $ (35,260) $ (32,892) $ (88,425) $(80,816) $(14,417) ========== ========== ========== ========= ========= PER COMMON SHARE DATA: Basic Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . $ (3.40) $ (2.96) $ (6.87) $ (6.30) $ (.76) Basic Income (Loss) from Discontinued Operations . . . . . . . . . . . . . . . - (0.21) (1.64) (1.48) (.62) ---------- ---------- ---------- --------- --------- Basic Net Income (Loss) . . . . . . . . . . $ (3.40) $ (3.17) $ (8.51) $ (7.78) $ (1.38) ========== ========== ========== ========= ========= Basic Weighted Average Shares Outstanding . 10,385 10,385 10,385 10,385 10,402 ========== ========== ========== ========= ========= RATIOS: Loss and LAE Ratio (1). . . . . . . . . . . 127.9% 91.5% 82.3% 92.7% 82.5% Expense Ratio (2) . . . . . . . . . . . . . 30.1% 36.7% 38.8% 31.6% 22.2% ---------- ---------- ---------- --------- --------- Combined Ratio (3). . . . . . . . . . . . . 158.0% 128.2% 121.1% 124.3% 104.7% ========== ========== ========== ========= ========= CONSOLIDATED BALANCE SHEET DATA: Total Investments . . . . . . . . . . . . . $ 54,673 $ 107,027 $ 134,140 $201,887 $220,366 Total Assets. . . . . . . . . . . . . . . . 148,072 244,132 287,957 373,812 448,885 Loss and Loss Adjustment Expense Reserves . 67,204 81,142 108,117 152,455 134,024 Trust Preferred Securities. . . . . . . . . 135,000 135,000 135,000 135,000 135,000 Total Shareholders' Equity (Deficit). . . . (178,879) (144,012) (112,445) (24,980) 61,995 Book Value (Deficit) Per Share. . . . . . . (17.22) (13.87) (10.83) (2.41) 5.97 (1) Loss and LAE Ratio: The ratio of loss and loss adjustment expenses ("LAE") incurred during the period, as a percentage of premiums earned. (2) Expense Ratio: The ratio of policy acquisition, general and administrative expenses less billing fees, as a percentage of premiums earned. (3) Combined Ratio: The sum of the Loss and LAE Ratio and the Expense Ratio.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information herein contained relative to markets for the Company's products and/or trends in the Company's operations or financial results, as well as other statements including words such as "anticipate," "could," "feel(s)," "believes," "plan," "estimate," "expect," "should," "intend," "will," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) the effect on customers, agents, employees and others due to the Company's receipt of going concern opinions from its accountants; (ii) general economic conditions, including prevailing interest rate levels and stock market performance; (iii) factors affecting the Company's nonstandard automobile operations such as rate increase approval, policy renewals, new business written and premium volume; and (iv) the factors described in this section and elsewhere in this report. OVERVIEW Symons International Group, Inc. (the "Company") owns insurance companies that underwrite and market nonstandard private passenger automobile insurance. The Company's principal insurance company subsidiaries are Pafco General Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance Company ("IGF"). The Company is a 73.8% owned subsidiary of Goran Capital Inc. ("Goran"). THE COMPANY'S ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION The Company's accountants have issued reports on their audits of the Consolidated Financial Statements of the Company as of December 31, 2001 and December 31, 2002 which address doubt as to the Company's ability to continue as a going concern given the recurring operating losses experienced by the Company over the past few years and the Company's net capital deficiency. See - Liquidity and Capital Resources for a discussion of management's plans to address these matters. STRATEGIC ALIGNMENT As previously announced, in the fourth quarter of 2000, management initiated a strategic review of the Company's operations. This review resulted in a plan to divest the Company's crop insurance segment, allowing management to focus on nonstandard automobile insurance. In June 2001, the Company sold its crop segment and adopted a plan to wind-down the remaining crop segment obligations. Accordingly, financial results of the crop insurance segment are presented as discontinued operations in the Company's financial statements. Continuing operations of the Company consist of the single nonstandard automobile insurance segment. NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty"), and Superior American Insurance Company ("Superior American") are engaged in the writing of insurance coverage for automobile physical damage and liability policies for nonstandard risks. Nonstandard risk insureds are those individuals who are unable to obtain insurance coverage through standard market carriers due to factors such as poor premium payment history, driving experience or violations, particular occupation or type of vehicle. The Company offers several different policies that are directed towards different classes of risk within the nonstandard market. Premium rates for nonstandard risks are higher than for standard risks. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when the standard coverage becomes more restrictive. Nonstandard policies have relatively short policy periods and low limits of liability. Also, since the nonstandard automobile insurance business typically experiences lower rates of retention than standard automobile insurance, the number of new policyholders underwritten by nonstandard automobile insurance carriers each year is substantially greater than the number of new policyholders underwritten by standard carriers. RESULTS OF OPERATIONS OVERVIEW 2002 Compared to 2001 For the year 2002, the Company reported a loss on continuing operations of $(35,260,000) or $(3.40) per share (basic and diluted). Loss on continuing operations for the year 2001 was $(30,736,000) or $(2.96) per share (basic and diluted). Loss before income taxes and distributions on minority interest was $(19,236,000) and $(15,930,000) for 2002 and 2001, respectively. Operating earnings (loss) from continuing operations, measured as income/(loss) before amortization, interest, taxes, realized capital gains and losses and minority interest was $(16,047,000) or $(1.55) per share (basic and diluted) in 2002 and $(14,574,000) or $(1.40) per share in 2001 (basic and diluted). The loss from discontinued operations was nil and $(2,156,000) for 2002 and 2001, respectively. The Company is continuing to implement rate increases, improve underwriting actions and improve the claims department process and procedures to achieve profitability. A number of systems have been automated and service problems have been eliminated or significantly reduced. 2001 Compared To 2000 For the year 2001, the Company reported a loss on continuing operations of $(30,736,000) or $(2.96) per share (basic and diluted). Loss on continuing operations for the year 2000 was $(71,384,000) or $(6.87) per share (basic and diluted), which included a one-time write down of goodwill in the amount of $33,464,000. Loss before income taxes and distributions on minority interest was $(15,930,000) and $(59,946,000) for 2001 and 2000, respectively. Operating earnings (loss) from continuing operations, measured as income/(loss) before amortization, interest, taxes, realized capital gains and losses and minority interest was $(14,574,000) or $(1.40) per share (basic and diluted) in 2001 and $(18,997,000) or $(1.83) per share in 2000 (basic and diluted). The loss from discontinued operations was $(2,156,000) and $(17,041,000) for 2001 and 2000, respectively. Underwriting losses and operating costs in excess of original estimates contributed to the losses in 2001. YEARS ENDED DECEMBER 31, 2002 AND 2001 Gross Premiums Written Gross premiums written decreased 33.1% or $53,317,000 in 2002 from 2001 levels. Premium rate increases of approximately 11.0% were implemented throughout 2002 and were offset by a reduction in policies in force of 46.9%. The primary reasons for this decline were the Company's withdrawal from certain highly competitive markets, additional strict underwriting initiatives intended to increase profitability, and the regulatory and strategic actions accompanied with reduction in policies in force. Net Premiums Written Net premiums written represent the portion of premiums retained by the Company after consideration for risk sharing through reinsurance contracts. As a result of declines in surplus in the Company's insurance subsidiaries and to manage overall risk retention, in 2000 the Company entered into a reinsurance agreement to cede a portion of its gross written premiums to National Union Fire Insurance Company ("National") of Pittsburgh, Pennsylvania, an unrelated third party. During 2002, the Company ceded approximately 71.7% of its gross written premiums on new and renewal business to reinsurers under a quota share reinsurance contract that was effective January 1, 2000. Net Premiums Earned Net premiums earned decreased 51.1% or $39,285,000 for the year ended December 31, 2002 as compared to the same period in 2001. Premiums are earned ratably over the term of the underlying insurance contracts. The reduction in net premiums earned is reflective of the overall reduction in gross premiums written and the increase in ceded premiums. Fee Income Fee income is derived from installment billings and other services provided to policyholders. For the year ended December 31, 2002, fee income decreased 24.0% or $2,954,000. The reduction in fee income is attributed to the reduction of insurance policies in force of 46.9% and the overall decline in written premium. Net Investment Income Net investment income decreased 34.1% or $2,147,000 in 2002 as compared to 2001. This decrease is reflective of the decline in invested assets during a period of declining premiums, the liquidation of investments to pay prior year losses settled in 2002 and to settle the reinsurance payable to National. Furthermore, return on investments deteriorated due to a highly volatile market dominated by unfavorable economic conditions due to the worldwide recession. Net Realized Capital Losses Net realized capital losses were $(2,807,000) in 2002 as compared to net realized capital losses of $(1,185,000) in 2001. Capital losses resulted primarily from the continued liquidation of longer duration fixed income securities in 2002 in order to fund operational expenses, claim payments, reinsurance payments to National under unfavorable market conditions and permanent impairment of other than temporary investments. Losses and Loss Adjustment Expenses The loss and loss adjustment expense ("LAE") ratio for the Company for the year ended December 31, 2002, was 127.9% of net premiums earned as compared to 91.5% of net premiums earned for 2001. A portion of LAE, unallocated loss adjustment expense ("ULAE"), is not ceded as part of the quota share reinsurance contract mentioned above and accounts for approximately 5 points of the increased loss ratio in 2002 with the remainder of the increase due to adverse loss experience. Policy Acquisition and General and Administrative Expense The Company reduced policy acquisition and general and administrative expenses for the year 2002 to $20,677,000 from the 2001 level of $40,535,000, a reduction of approximately 49.0%. This reduction is reflective of the decline in gross written premiums, an increase in ceding commissions associated with the quota share reinsurance contract and overall operating expense reduction initiatives. As a percentage of gross premiums earned, the Company experienced a decrease in its operating expense ratio, net of fee income, from 36.7% in 2001 to 30.1% in 2002. Interest expense The Company obtained lines of credit from Granite Reinsurance Company Ltd. ("Granite Re"), a related party, in the amount of $2.5 million and $1.0 million in December 31, 2001 and October 2002, respectively. At December 31, 2002, a total of $2.98 million was outstanding. These line of credit notes bear interest at the rate of prime plus 5.25% for a total of 9.5% at December 31, 2002. Interest only payments are due monthly. The $2.5 million of the outstanding balance is due December 20, 2004 and the remaining balance of $480,000 is due on November 30, 2004. As of December 31, 2002 the interest expense on the lines of credit totaled $211,000. Amortization of Deferred Financing Costs Amortization expense totaled $171,000 for the years-ended December 2002 and 2001. Income Taxes At December 31, 2002 the Company's net deferred tax assets were fully offset by a 100% valuation allowance that resulted in no tax benefit in 2002. YEARS ENDED DECEMBER 31, 2001 AND 2000 Gross Premiums Written Gross premiums written decreased 7.7% or $13,369,000 in 2001 from 2000 levels. Premium rate increases of approximately 24.8% were implemented throughout 2001 that were offset by a reduction in policies in force of 23.3%. The decline in gross premiums also resulted from the Company exiting certain highly competitive markets and instituting other underwriting initiatives intended to increase profitability, which had the effect of reducing premium. Regulatory action in certain states also limited premiums written. Net Premiums Written Net premiums written represent the portion of premiums retained by the Company after consideration for risk sharing through reinsurance contracts. As a result of losses in the Company's insurance subsidiaries and to manage overall risk retention, the Company entered into a reinsurance agreement to cede a portion of its gross written premiums to a third party. During 2001, the Company ceded approximately 54% of its gross written premiums on new and renewal business to the reinsurers, under a quota share reinsurance contract that was effective January 1, 2000. In addition, the Company ceded a portion of its unearned premium reserve bringing the total cession to 79% in 2001. Net Premiums Earned Net premiums earned decreased 44.1% or $60,759,000 for the year ended December 31, 2001 as compared to the same period in 2000. Premiums are earned ratably over the term of the underlying insurance contracts. The reduction in net premiums earned is reflected of the overall reduction in gross premiums written and the increase in ceded premiums. Fee Income Fee income is derived from installment billings and other services provided to policyholders. For the year ended December 31, 2001, fee income decreased 13.0% or $1,845,000 as compared to the same period in 2000. The reduction in fee income was attributed to the reduction of insurance policies in force of 23.3% and the overall decline in written premium. Net Investment Income Net investment income decreased 37.6% or $3,788,000 in 2001 as compared to 2000. This decrease reflected the decline in invested assets during a period of declining premiums and the liquidation of investments to pay prior year losses settled in 2001. Furthermore, return on investments deteriorated due to a highly volatile market dominated by unfavorable economic conditions due to the worldwide recession and effects from the September 2001 terrorist attacks. Net Realized Capital Losses Net realized capital losses were $(1,185,000) in 2001 as compared to net realized capital losses of $(5,972,000) in 2000. Capital losses resulted from the liquidation of longer duration fixed income securities in 2001 in order to rebalance the investment activities in the portfolio. These transactions resulted in higher cash proceeds that were reinvested in shorter duration investment instruments. Capital losses were also realized due to the continued liquidation of investments to fund operations and claim payments under unfavorable market conditions. Losses and Loss Adjustment Expenses The loss and LAE ratio for the Company for the year ended December 31, 2001, was 91.5% of net premiums earned as compared to 82.3% of net premiums earned for 2000. A portion of LAE, ULAE, is not ceded as part of the quota share reinsurance contract mentioned above and accounts for approximately 4 points of the increased loss ratio in 2001 with the reminder of the increase due to adverse loss expense. Policy Acquisition and General and Administrative Expense The Company reduced policy acquisition and general and administrative expenses for the year 2001 to $40,535,000 from the 2000 level of $67,538,000, a reduction of approximately 40%. This reduction is reflected the decline in gross written premiums, an increase in ceding commissions associated with the quota share reinsurance contract and overall operating expense reduction initiatives. As a percentage of gross premiums earned, the Company experienced a decrease in its operating expense ratio, net of fee income, from 38.8% in 2000 to 36.7% in 2001. This decrease in the expense ratio is the result of reduced operating expense initiatives and an increase in ceding commissions earned under the quota share reinsurance contract. Amortization of Intangibles Amortization expense decreased nearly 100%, or $34,806,000, in 2001 as compared to 2000 as the goodwill was written to zero at December 31, 2000. Income Taxes At December 31, 2001 the Company's net deferred tax assets were fully offset by a 100% valuation allowance that resulted in no tax benefit in 2001. LIQUIDITY AND CAPITAL RESOURCES The primary source of funds available to the management and holding companies are fees from policyholders and management fees. Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged to Pafco policyholders, who elect to make their premium payments in installments, and managing general agent ("MGA") fees charged to Superior policyholders. Superior Group also receives management fees under its management agreement with its insurance subsidiaries. When the Florida Department of Insurance ("FDOI") approved the acquisition of Superior by Superior Group, it prohibited Superior from paying any dividends (whether extraordinary or not) for four years from the date of acquisition (May 1, 1996) without the prior written approval of the FDOI, which restriction expired in April 2000. As a result of regulatory actions taken by the Indiana Department of Insurance ("IDOI") with respect to Pafco and IGF, those subsidiaries may not pay dividends without prior approval by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of the Indiana Insurance Code, without the prior approval of the Indiana Insurance Commissioner. The management fees charged to Pafco, Superior and IGF are subject to review by the IDOI and FDOI. The nonstandard automobile insurance subsidiaries' primary source of funds is premiums, investment income and proceeds from the maturity or sale of invested assets. Such funds are used principally for the payment of claims, payment of claims settlement costs, operating expenses (primarily management fees), commissions to independent agents, premium taxes, dividends and the purchase of investments. There is variability in cash outflows because of uncertainties regarding settlement dates for liabilities for unpaid losses. Accordingly, the Company maintains investment programs intended to provide adequate funds to pay claims. During 2002 and 2001, due to reduced premium volume, the Company liquidated investments to pay claims. The Company historically has tried to maintain duration averages of 3.5 years. However, the reduction in new funds due to lower premium volume caused the Company to shorten the duration of its investments. The Company may incur additional costs in selling longer term bonds to pay claims, as claim payments tend to lag premium receipts. Due to the decline in premium volume, the Company experienced a reduction in its investment portfolio, but to date has not experienced any problems meeting its obligations for claims payments. The Company has obtained a revolving credit facility ("Facility") with Granite Reinsurance Company Ltd., a related party, in the amount of $2.5 million due December 20, 2004, and $1.0 million due November 30, 2004, in December 2001 and October 2002, respectively. The terms of the Facility call for monthly interest payments at the prime rate (as printed in the Wall Street Journal on the first business day of each month) plus 5.25% (the total rate was 9.5% at March 1, 2003) computed on an annual basis and not to exceed 18% per annum calculated on the average principal outstanding each month. On August 12, 1997, the Company issued through a wholly owned trust subsidiary $135 million aggregate principal amount in trust originated preferred securities (the "Preferred Securities"). The Preferred Securities have a term of 30 years with semi-annual interest payments of $6.4 million that commenced February 15, 1998. The Company may redeem the Preferred Securities in whole or in part 10 years after the issue date. The Company elected to defer the semi-annual interest payments due in February and August 2000, 2001, and 2002 and expects to continue this practice through 2003 and 2004. The payment due in February 2003 was deferred. The unpaid interest installment amounts accrue interest at 9.5%. The following table sets forth (in thousands) the obligations of the Company under the Preferred Securities and other contractual obligations as of December 31, 2002:
Contractual Obligations Payments due by Period - ----------------------- ---------------------- 1 - 3 3 - 5 Total Less than 1 year years years More than 5 years -------- ----------------- ------- ------- ------------------ Interest payments under the Preferred Securities. . . . . . . . . . . . . $378,929 - $96,779 $25,650 $ 256,500 -------- ----------------- ------- ------- ------------------ Principal payments under the Preferred Securities $135,000 - - - $ 135,000 -------- ----------------- ------- ------- ------------------ Principal & Interest under the Facility . . . . . $ 3,546 $ 283 $ 3,263 - - - ------------------------------------------------- -------- ----------------- ------- ------- ------------------
The Company may continue to defer semi-annual interest payments for up to an aggregate of five (5) years as permitted by the indenture for the Preferred Securities. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. The Company relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the FDOI, have issued orders prohibiting the Company's subsidiaries from paying such fees to the Company. In the event such orders continue, the Company may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. The trust indenture contains certain restrictive covenants based upon the Company's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization (EBITDA). If the Company's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Securities distributions) for the most recent four quarters, the following restrictions become effective: - - The Company may not incur additional indebtedness or guarantee additional indebtedness. - - The Company may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock or paying dividends in excess of a stated limitation. - - The Company may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply, as the Company's consolidated coverage ratio was (0.95) in 2002, and will continue to apply until the Company's consolidated coverage ratio complies with the terms of the trust indenture. The Company complied with these additional restrictions as of December 31, 2001 and 2002 and is in compliance as of May 9, 2003. Net cash used by operating activities in 2002 aggregated $(61,652,000) compared to $(21,966,000) in 2001 due to reduced cash provided by operations as a result of lower premium volumes and the reduced number of policies in force. The Company experienced, beginning in the fourth quarter of 2001 and continuing in January and February 2002, sustained adverse loss experience on a substantial portion of its new business written in certain markets. In late February and early March 2002, the Company commenced further analysis of loss ratios by individual agency and a review of claim settlement procedures. Based on this and other analysis, during 2002 the Company took a number of actions to improve the financial position and operating results of the Company including: - - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the insured must obtain a new policy at prevailing rates and underwriting guidelines; - - Terminated or placed on new business moratorium several hundred agents whose loss ratios were abnormally high when compared to the average for the remaining agents (these agents accounted for approximately 16% of the total gross written premium in 2001); - - Increased underwriting requirements in certain markets including higher down payments, new policy fees and shorter policy terms; - - Hired a new vice president of claims with significant auto claims experience to improve the claims function. The above actions were followed by: - Replacement of the president of the non-standard automobile business; - Consolidation of all underwriting activities, premium accounting and agency licensing to the Indianapolis, IN office from Atlanta, GA; - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria, VA; Glendale, CA; and Jacksonville, FL; - Replacement of the claims department national litigation manager; - Replacement of the marketing manager and the product manager; - Heavy focus on the improvement of process and customer service; and - Continued transition to an improved policy processing system. Shareholders' equity reflected a deficit of $(179) million at December 31, 2002, which does not reflect the statutory surplus upon which the Company conducts its various insurance operations. The Company's insurance subsidiaries, not including IGF, had statutory surplus of approximately $13.0 million as reflected in the Company's insurance subsidiaries annual statutory financial statements filed on March 1, 2003. Following the inclusion in the reserve amounts pursuant to the consulting actuary's analysis, the Company had statutory surplus of $3.0 million as of December 31, 2002. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, it was determined that reserves for losses and loss adjustment expenses for Superior and Pafco should be increased. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the FDOI and the IDOI, respectively. Given the financial position and loss experience of the Company over the past several years as described above, the Company's accountants have issued an opinion based on their audit of the December 31, 2002 Consolidated Financial Statements which includes an emphasis paragraph that addresses the question of whether or not the Company can continue as a going concern. The Company's plans to improve financial results are described above. EFFECTS OF INFLATION Due to the short time that claims are outstanding in the product lines the Company underwrites, inflation does not pose a significant risk to the Company. SIGNIFICANT ACCOUNTING POLICIES The Company's financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. Management believes that the following is the more critical judgment area in the application of our accounting policies that currently affect the Company's financial condition and results of operations. The reserve for losses and loss adjustment expenses includes estimates for reported unpaid losses and loss adjustment expenses, including a portion attributable to losses incurred but not reported. These reserves are not discounted. Reserves are established using individual case-basis evaluations 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 make reasonable provisions for unpaid loss and loss adjustment expense obligations, those provisions are necessarily based on estimates and are subject to 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 gross reserve for losses and loss adjustment expenses is reported net of anticipated receipts for salvage and subrogation. See Note 7 to the Consolidated Financial Statements for additional disclosure regarding the reserve for losses and loss adjustment expenses. The variation between the estimated loss and loss adjustment expenses and actual experience can be material. PRIMARY DIFFERENCES BETWEEN GAAP AND SAP The financial statements contained herein 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: (i) certain assets are excluded as "Nonadmitted Assets" under statutory accounting; (ii) costs incurred by the Company relating to the acquisition of new business are expensed for statutory purposes; (iii) the investment in wholly-owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method in which 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; (iv) fixed maturity investments are reported at amortized cost or market value based on their National Association of Insurance Commissioners ("NAIC") rating; (v) the liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes; (vi) deferred income taxes are recognized as specified by statutory guidance; and (vii) credits for reinsurance are recorded only to the extent considered realizable. NEW ACCOUNTING STANDARDS The NAIC adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which replaced the Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting effective January 1, 2001. The IDOI and the FDOI have adopted the Codification. The changes in statutory accounting practices resulting from codification that impacted the Company's insurance subsidiaries, among other things, limited the statutory carrying value of electronic data processing equipment and deferred tax assets in determining statutory surplus. In June 2001, the Financial Accounting Standards Board (the "Board") finalized FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In August 2001, the Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. These new standards were effective in 2002 and did not have a material impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148) which amends SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The Company has decided to continue to account for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and interpretations as permitted under SFAS 148. Accordingly, no compensation expense is recorded if the current market price of the underlying stock does not exceed the exercise price at the date of grant. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Insurance company investments must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications in federal, state and municipal obligations, corporate bonds, preferred and common securities, real estate mortgages and real estate. The investment portfolios of the Company at December 31, 2002 consisted of the following (in thousands):
2002 ------- Cost or Market TYPE OF INVESTMENT Amortized Cost Value -------------- ------- Fixed maturities: U. S. Treasury securities and other obligations of the United States government or agencies $17,814 $18,355 Obligations of states and political subdivisions 4,828 5,005 Corporate securities 13,043 13,368 ------- ------- Total fixed maturities 35,685 36,728 Common stocks 9,667 6,404 Short-term investments 8,495 8,495 Other invested assets 3,046 3,046 ------- ------- $56,893 $54,673 ======= =======
The following table sets forth the composition of the fixed maturity securities portfolio of the Company by time to maturity as of December 31 (in thousands):
2002 2001 ---- ---- Percent Total Percent Total Time to Maturity Market Value Market Value Market Value Market Value - ---------------------------------- -------------- -------------- ------------- ------------- 1 year or less . . . . . . . . . . $ 8,866 24.1 $ 7,998 10.2 More than 1 year through 5 years . 12,077 32.9 25,950 33.3 More than 5 years through 10 years 7,492 20.4 20,477 26.3 More than 10 years . . . . . . . . 3,288 9.0 4,091 5.3 -------------- -------------- ------------- ------------- 31,723 86.4 58,516 75.1 Mortgage-backed securities . . . . 5,005 13.6 19,380 24.9 -------------- -------------- ------------- ------------- Total. . . . . . . . . . . . . . . $ 36,728 100.0% $ 77,896 100.0% ============== ============== ============= =============
The following table sets forth the ratings assigned to the fixed maturity securities of the Company as of December 31 (in thousands):
2002 2001 ---- ---- Percent Total Percent Total Rating (1) Market Value Market Value Market Value Market Value - ----------------------------- -------------- -------------- ------------- ------------- Aaa or AAA. . . . . . . . . . $ 24,677 67.2% $ 51,754 66.4% Aa or AA. . . . . . . . . . . 971 2.6% 3,300 4.2% A . . . . . . . . . . . . . . 4,262 11.6% 9,242 11.9% Baa or BBB. . . . . . . . . . 5,479 14.9% 7,617 9.8% Ba or BB. . . . . . . . . . . 281 0.8% 4,883 6.3% Other below investment grade. 1,058 2.9% 1,100 1.4% -------------- -------------- ------------- ------------- Total . . . . . . . . . . . . $ 36,728 100% $ 77,896 100% ============== ============== ============= ============= (1) Ratings are assigned by Standard & Poor's Corporation, and when not available, are based on ratings assigned by Moody's Investors Service, Inc.
The investment results of the Company's continuing operations for the periods indicated are set forth below (in thousands):
Years Ended December 31, 2002 2001 2000 -------- --------- --------- Net investment income (1) . . . . . . . . . . . $ 4,139 $ 6,286 $ 10,074 Average investment portfolio (2). . . . . . . . $98,613 $123,859 $173,231 Pre-tax return on average investment portfolio. 4.2% 5.1% 5.8% Net realized gains (losses) . . . . . . . . . . $(2,807) $ (1,185) $ (5,972) (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.
If interest rates were to increase 10% from the December 31, 2002 levels, the decline in fair value of the fixed maturity securities would not significantly affect the Company's ability to meet its obligations to policyholders and creditors. MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT The Company's investment strategy is to invest available funds in a manner that will maximize the after-tax yield of the portfolio while emphasizing the stability and preservation of the capital base. The Company seeks to maximize the total return on investments through active investment management utilizing third-party professional administrators, in accordance with pre-established investment policy guidelines established and reviewed regularly by the board of directors of the Company. Accordingly, the entire portfolio of fixed maturity securities is available to be sold in response to changes in market interest rates; changes in relative values of individual securities and asset sectors, changes in prepayment risks, changes in credit quality, liquidity needs, as well as other factors. 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 diversified among industries, issuers and geographic locations. The Company's fixed maturity and common equity investments are substantially in public companies. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. For investment securities and debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity date. Additionally, the Company has assumed its available for sale securities are similar enough to aggregate those securities for presentation purposes.
Interest Rate Sensitivity - Principal Amount by Expected Maturity Average Interest Rate (Dollars in thousands) Cost or Amortized Cost Market -------------------------------------------------------------------- Value 2003 2004 2005 2006 2007 Thereafter Total 12/31/02 ------- ------- ------- ------- ------- ------------ --------- --------- ASSETS Available for sale. . $8,733 $4,428 $4,456 $4,728 $2,928 $ 10,412 $ 35,685 36,728 Average interest rate 6.80% 7.20% 6.45% 5.95% 5.95% 6.98% 6.25% 6.25% LIABILITIES Preferred securities. - - - - - $ 135,000 $135,000 $ 9,000 Average interest rate - - - - - 9.5% 9.5% 9.5% Credit Facility . . . - $2,980 - - - - $ 2,980 $ 2,980 Average interest rate - 9.5% - - - - 9.5% 9.5%
REVISED ESTIMATE OF LOSS RESERVES RECORDED IN PRIOR YEARS The Company revised its estimate of the loss reserves recorded in prior years. At end of 2001 the Company's net loss and loss adjustment expense reserves for nonstandard auto insurance were $50,542,000. As claims that occurred prior to year-end 2001 were reported, investigated and settled during 2002, the Company reevaluated and, as necessary, revised its estimates of loss reserves. Based on current information that reserve at the end of 2001 should have been $63,317,000. In part the reserve increase was the result of an unanticipated increase in claim frequency during the fourth quarter of 2001. Because of the normal lag between the occurrence of an accident and the reporting of that accident, the Company did not realize its claim frequency for the fourth quarter of 2001 had increased until those claims were reported during 2002. The Company believes that the frequency increase was caused by an increase in miles driven which resulted from (1) a significant decrease in the price of gasoline, (2) a reluctance of people to fly on commercial airlines because of the September 11, 2001 terrorist attacks, and (3) a general improvement in economic conditions. In addition, during 2002 Superior experienced an unusual number of reopened claims from older accident quarters. At year-end 2001 the Company believed that these claims were closed with no outstanding liability. In response to this unusual activity the Company took appropriate action to enhance its claims function. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, it was determined that reserves for losses and loss adjustment expenses for Superior and Pafco should increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets, were recorded in the 2002 audited statutory financial statements filed for Superior and Pafco with the Insurance Department of Florida and the Indiana Department of Insurance, respectively. In the statutory financial statements of the Company's insurance subsidiaries the estimates of gross assumed loss and loss adjustment expense reserves was $59,971,000 and net loss and loss adjustment expense reserves was $37,886,000. Following the adjustment pursuant to the consulting actuary's analysis, the revised estimates of gross loss and loss adjustment expense reserves is $67,204,000 and net loss and loss adjustment expense reserves is $43,145,000. These reserves are based on analysis of historical data. Based on actions taken to enhance the Company's claim function, management anticipates that the majority of claims will be adjusted and settled more quickly which will reduce the overall costs while those claims of a questionable nature will be investigated more thoroughly. Also, the Company is focusing on reducing defense costs and is negotiating more favorable rates from attorneys. Finally, the Company is taking steps to increase the amounts of salvage and subrogation it collects as an offset to paid losses while reducing the expenses associated with collecting those amounts. The business written by the Company did not expose it to highly uncertain exposures such as claims for asbestos-related illnesses, environmental remediation or product liability. The surplus lines insurance written by the Company also did not include these types of highly uncertain exposures.
CONSOLIDATED BALANCE SHEETS As of December 31, 2002 and 2001 (In thousands, except share data) 2002 2001 ---------- ---------- ASSETS Investments available for sale: Fixed maturities, at market . . . . . . . . . . . . . . . . . . . . . $ 36,728 $ 77,896 Equity securities, at market. . . . . . . . . . . . . . . . . . . . . 6,404 14,396 Short-term investments, at amortized cost, which approximates market. 8,495 13,266 Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . 3,046 1,469 ---------- ---------- Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,673 107,027 Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 654 3,385 Receivables, net of allowance of $244 and $1,526, respectively . . . . . . 26,594 44,688 Reinsurance recoverable on paid and unpaid losses, net . . . . . . . . . . 25,918 31,546 Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . 25,470 40,039 Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . - 763 Property and equipment, net of accumulated depreciation. . . . . . . . . . 7,069 9,890 Deferred securities issuance costs . . . . . . . . . . . . . . . . . . . . 4,204 4,376 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,490 2,418 ---------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,072 $ 244,132 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities: Loss and loss adjustment expense reserves . . . . . . . . . . . . . . $ 67,204 $ 81,142 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 35,797 59,216 Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . 17,171 58,226 Distributions payable on preferred securities . . . . . . . . . . . . 49,227 33,203 Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,125 3,625 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 13,827 17,136 Advances from related parties. . . . . . . . . . . . . . . . . . . . . . . 2,687 596 Net liabilities of discontinued operations. . . . . . . . . . . . . . 3,913 - ---------- ---------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,951 253,144 ---------- ---------- Minority interest: Company-obligated mandatorily redeemable preferred stock of trust subsidiary holding solely parent debentures . . . . . . . . . . 135,000 135,000 ---------- ---------- Shareholders' deficit: Common stock, no par value, 100,000,000 shares authorized, and 10,385,399 shares issued and outstanding in both 2002 and 2001. 38,136 38,136 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 5,851 5,851 Unrealized loss on investments available for sale . . . . . . . . . . (2,220) (2,613) Retained deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (220,646) (185,386) ---------- ---------- Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . . . (178,879) (144,012) ---------- ---------- Total liabilities and shareholders' deficit. . . . . . . . . . . . . . . . $ 148,072 $ 244,132 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2002, 2001 and 2000 (In thousands, except per share data) 2002 2001 2000 --------- ---------- --------- Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107,775 $ 161,092 $174,461 Less ceded premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,291) (105,158) (78,621) --------- ---------- --------- Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,484 $ 55,934 $ 95,840 ========= ========== ========= Net premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,662 $ 76,947 $137,706 Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,341 12,295 14,140 Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,139 6,286 10,074 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,675 874 - Net realized capital loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,807) (1,185) (5,972) --------- ---------- --------- Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,010 95,217 155,948 --------- ---------- --------- Expenses: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . 48,187 70,441 113,379 Policy acquisition and general and administrative expenses. . . . . . . . . 20,677 40,535 67,538 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 - - Amortization of deferred financing costs, and intangibles and impairment . 171 171 34,977 --------- ---------- --------- Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,246 111,147 215,894 --------- ---------- --------- Loss from continuing operations before income taxes and minority interest. . . . (19,236) (15,930) (59,946) --------- ---------- --------- Income taxes: Current income tax expense (benefit). . . . . . . . . . . . . . . . . . . . - - 487 Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . - - (2,636) --------- ---------- --------- Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (2,149) --------- ---------- --------- Loss from continuing operations before minority interest . . . . . . . . . . . . (19,236) (15,930) (57,797) Minority interest: Distributions on preferred securities net of tax of nil in 2002, 2001, and 2000. (16,024) (14,806) (13,587) ---------- --------- -------- Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . (35,260) (30,736) (71,384) Discontinued operations: Loss from operations of discontinued segment, less applicable income taxes Of nil in 2002, 2001, and 2000.. . . . . . . . . . . . . . . . . . . .. . . - - (16,141) Loss on disposal of discontinued segment, less applicable taxes of nil. . . - (2,156) (900) --------- ---------- --------- Loss from discontinued operations. . . . . . . . . . . . . . . . . . .. . . - (2,156) (17,041) --------- ---------- --------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(35,260) $ (32,892) $(88,425) ========= ========== ========= Weighted average shares outstanding - basic and fully diluted. . . . . . . . . . 10,385 10,385 10,385 ========= ========== ========= Net loss from continuing operations per share - basic and fully diluted. . . . . $ (3.40) $ (2.96) $ (6.87) ========= ========== ========= Net loss of discontinued operations per share - basic and fully diluted. . . . . $ - $ (0.21) $ (1.64) --------- ========== ========= Net loss per share - basic and fully diluted . . . . . . . . . . . . . . . . . . $ (3.40) $ (3.17) $ (8.51) ========= ========== =========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For the years ended December 31, 2002, 2001 and 2000 (In thousands, except number of shares) Unrealized Additional Gain/(Loss) Retained Total Paid-In On Earnings Shareholders' Common Stock Capital Investments (Deficit) Equity ------------ -------- ------------ ---------- ---------- Shares Amount ------------ -------- Balance at January 1, 2000. . . . . 10,385,399 $ 38,136 $ 5,851 $ (4,898) $ (64,069) $ (24,980) ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income: Net loss. . . . . . . . . . . . . . - - - - (88,425) (88,425) Change in unrealized gains (losses) on securities. . . . . . . . . . . - - - 960 - 960 ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income (loss) . . . . - - - 960 (88,425) (87,465) ------------ -------- ------------ ---------- ---------- ---------- Balance at December 31, 2000. . . . 10,385,399 38,136 5,851 (3,938) (152,494) (112,445) ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income: Net loss. . . . . . . . . . . . . . - - - - (32,892) (32,892) Change in unrealized gains (losses) on securities. . . . . . . . . . . - - - 1,325 - 1,325 ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income (loss) . . . . - - - 1,325 (32,892) (31,567) ------------ -------- ------------ ---------- ---------- ---------- Balance at December 31, 2001. . . . 10,385,399 38,136 5,851 (2,613) (185,386) (144,012) ============ ======== ============ ========== ========== ========== Comprehensive income: Net loss. . . . . . . . . . . . . . - - - - (35,260) (35,260) Change in unrealized gains (losses) on securities. . . . . . . . . . . - - - 393 - 393 ------------ -------- ------------ ---------- ---------- ---------- Comprehensive income (loss) . . . . - - - 393 (35,260) (34,867) ------------ -------- ------------ ---------- ---------- ---------- Balance at December 31, 2002. . . . 10,385,399 $ 38,136 $ 5,851 $ (2,220) $(220,646) $(178,879) ============ ======== ============ ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 --------- --------- --------- Cash flows from operating activities Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $(35,260) $(32,892) $(88,425) Adjustments to reconcile net loss to net cash provided by (used in) operations: Depreciation, amortization, impairment and other . .. . . . . . 3,810 2,710 39,305 Deferred income tax expense (benefit). . . . . . . . . . . . . . - - (2,636) Net realized capital loss. . . . . . . . . . . . . .. . . . . . 2,807 1,185 5,972 Net changes in operating assets and liabilities: Receivables. . . . . . . . . . . . . . . . . . . . . . .. . . . . 18,095 5,676 12,163 Reinsurance recoverable on losses, net . . . . . . . . .. . . . . 5,628 16,769 (33,560) Prepaid reinsurance premiums . . . . . . . . . . . . . .. . . . . 14,569 (15,266) (23,691) Deferred policy acquisition costs. . . . . . . . . . . .. . . . . 763 5,691 7,454 Other assets and liabilities . . . . . . . . . . . . . .. . . . . (1,966) 7,445 (6,868) Losses and loss adjustment expenses. . . . . . . . . . .. . . . . (13,938) (26,975) (44,338) Unearned premiums. . . . . . . . . . . . . . . . . . . .. . . . . (23,419) (3,170) (18,176) Reinsurance payables . . . . . . . . . . . . . . . . . .. . . . . (41,055) (3,833) 56,198 Distributions payable on preferred securities. . . . . .. . . . . 16,024 14,806 13,587 Net assets/(liabilities) from discontinued operations. . . . (7,710) 5,888 34,862 --------- --------- --------- Net cash (used in) operations. . . . . . . . . . . . . . . . . . . . (61,652) (21,966) (48,153) --------- --------- --------- Cash flows from investing activities, net of assets acquired: Net sales of short-term investments . . . . . . . . . . . . . 4,770 1,606 6,947 Purchases of fixed maturities. . . . . . . . . . . . . . . . . (28,723) (34,204) (9,937) Proceeds from sales, calls and maturities of fixed maturities. 70,821 60,262 76,947 Purchase of equity securities. . . . . . . . . . . . . . . . . (884) (11,668) (25,195) Proceeds from sales of equity securities . . . . . . . . . . . 5,428 10,820 17,491 Proceeds from repayment of mortgage loans. . . . . . . . . . . - 1,870 120 Purchase of property and equipment . . . . . . . . . . . . . . (681) (1,378) (1,685) Net sales (purchase) of other investments. . . . . . . . . . . 866 (92) (414) Net investing activities from discontinued operations. . . . . 5,663 (4,456) (150) --------- --------- --------- Net cash provided by investing activities . . . . . . . . . . . . . 57,260 22,760 64,124 --------- --------- --------- Cash flow from financing activities, net of assets acquired: Loans from and (repayments to) related parties . . . . . . . . 2,091 1,276 (274) Proceeds from related parties . . . . . . . . . . . . . . . . (2,477) - - Net financing activities from discontinued operations. . . . . 2,047 (48) (16,473) --------- --------- --------- Net cash provided by / (used in) financing activities: . . . . . . . 1,661 1,228 (16,747) --------- --------- --------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . (2,731) 2,022 (776) Cash and cash equivalents, beginning of year . . . . . . . . . . . . 3,385 1,363 2,139 --------- --------- --------- Cash and cash equivalents, end of year . . . . . . . . . . . . . . . $ 654 $ 3,385 $ 1,363 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. - ------ SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES - ------------------------------------------------------ 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Symons International Group, Inc. (the "Company") is a 73.8% owned subsidiary of Goran Capital Inc. ("Goran"). The Company operates in one segment, the sale of nonstandard automobile insurance. The Company's products are marketed through independent agents and brokers. The Company's active insurance subsidiaries are licensed in 19 states. The following is a description of the significant accounting policies and practices employed: A. BASIS OF PRESENTATION: The consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its wholly-owned subsidiaries as follows: Superior Insurance Group Management, Inc ("Superior Group Management") a holding company for the nonstandard automobile operations which includes: Superior Insurance Group, Inc. ("Superior Group") a management company for the nonstandard automobile operations; Superior Insurance Company ("Superior") an insurance company domiciled in Florida; Superior American Insurance Company ("Superior American") an insurance Company domiciled in Florida; Superior Guaranty Insurance Company ("Superior Guaranty") an insurance Company domiciled in Florida; and Pafco General Insurance Company ("Pafco") an insurance company domiciled in Indiana; IGF Holdings, Inc. ("IGFH") a holding company; and, IGF Insurance Company ("IGF") an insurance company domiciled in Indiana (See Note 19). B. USE OF ESTIMATES: The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. C. SIGNIFICANT ESTIMATES: The most significant estimates in the Company's balance sheet are the determination of prepaid policy acquisition costs, the reserve for insurance losses and loss adjustment expenses. Management's estimate of prepaid policy acquisition costs is based on historical studies and assumptions made regarding costs incurred. Management's estimate of insurance losses and loss adjustment expenses is based on past loss experience and consideration of current claim trends, as well as prevailing social, economic and legal conditions. Actual results could differ from these estimates. D. PREMIUMS: Premiums are recognized as income ratably over the life of the policies and are stated net of ceded premiums. Unearned premiums are computed on the daily pro rata basis. E. INVESTMENTS: Investments are presented on the following basis: Fixed maturities and equity securities are classified as available for sale and are carried at market value with the unrealized gain or loss considered a component of shareholders' equity. Accordingly, any change in the unrealized gain or loss has no effect on net income. Real estate is carried at cost, less an allowance for depreciation. Mortgage loans are carried at outstanding principal balance. Realized gains and losses on the sale 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 presentation in 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, certain other costs and investment income that 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. These costs are deferred and amortized over the term of the policies to which they relate. Acquisition costs that exceed estimated losses and loss adjustment expenses and maintenance costs are charged to expense in the period in which the excess costs are determined. H. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation for buildings is based on the straight-line method over 31 years. Other property and equipment is depreciated on the straight-line basis over their estimated useful lives ranging from three to seven years. Asset and accumulated depreciation accounts are relieved for disposals, with resulting gains or losses included in net income. I. INTANGIBLE ASSETS: Intangible assets consist primarily of debt acquisition costs and goodwill, in years 2000 and prior. Deferred debt acquisition costs are amortized over the term of the debt. Prior to 2000, goodwill was amortized over a 25-year period on a straight-line basis based upon management's estimate of the expected benefit period. See Note 5 regarding the goodwill impairment charge recorded in 2000. J. ASSET IMPAIRMENT POLICY: The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. See Note 5 regarding the goodwill impairment charge recorded in 2000. Any long-lived assets held for disposal are reported at the lower of carrying amount or fair value, less expected costs to sell. K. LOSSES AND LOSS ADJUSTMENT EXPENSES: Reserves for losses and loss adjustment expenses include estimates for reported unpaid losses and loss adjustment expenses, including a portion attributable to losses incurred but not reported. These reserves have not been discounted. Reserves are established using individual case-basis evaluations 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 make reasonable provisions for unpaid loss and loss adjustment expense obligations, those provisions are necessarily based on estimates and are subject to 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 gross reserve for losses and loss adjustment expenses is reported net of anticipated receipts for salvage and subrogation of approximately $4,535,000 and $5,822,000 at December 31, 2002 and 2001, respectively. L. PREFERRED SECURITIES: Preferred securities represent Company-obligated mandatorily redeemable securities of a trust subsidiary holding solely parent debentures and are reported at their liquidation value under minority interest. Distributions on these securities are charged against consolidated earnings. M. INCOME TAXES: The Company utilizes 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. 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. N. REINSURANCE: Reinsurance premiums, commissions and reserves related to reinsured business are accounted for on a basis 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. O. EARNINGS PER SHARE: The Company's basic earnings per share calculations are based on the weighted average number of shares of common stock outstanding during each period. As the Company has reported losses in 2002, 2001, and 2000, common stock equivalents are anti-dilutive; therefore, fully diluted earnings per share is the same as basic earnings per share. P. STOCK-BASED COMPENSATION: As discussed further in note 16, the Company accounts for stock-based employee compensation using the intrinsic value method under APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations as permitted under SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). Accordingly, no compensation expense is recognized if the market price of the underlying stock does not exceed the exercise price at the date of grant. However, SFAS 123, "Accounting for Stock-Based Compensation," (SFAS 123) as amended by SFAS 148 requires the Company to present pro forma information as if it had accounted for its stock-based compensation under the fair value method of SFAS 123. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
2002 2001 2000 --------- --------- --------- Net loss as reported. . . . . . . . . . . . . . . . . . . $(35,260) $(32,892) $(88,425) Add: Compensation expense for stock-based compensation included in reported net income, net of related tax effects. . . . . . . . . . . . . . . . -- -- -- Deduct: Total stock-based compensation expense determined under fair-value-based method, net of related tax effects. . . . . . . . . . . . . . . . . . . . . . . (143) (204) (284) --------- --------- --------- Pro forma net loss. . . . . . . . . . . . . . . . . . . . $(35,403) $(33,096) $(88,709) Net loss per share: Basic and fully diluted, as reported. . . . . . . . . . . $ (3.40) $ (3.17) $ (8.51) Basic and fully diluted, pro forma. . . . . . . . . . . . $ (3.41) $ (3.19) $ (8.54)
Q. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board (the "Board") finalized FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 143, Accounting for Asset Retirement Obligations. In August 2001, the Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. These new standards were effective in 2002 and did not have a material impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148) which amends SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The Company has decided to continue to account for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and interpretations as permitted under SFAS 148. Accordingly, no compensation expense is recorded if the current market price of the underlying stock does not exceed the exercise price at the date of grant. R. RECLASSIFICATIONS: Certain amounts from prior periods have been reclassified to allow for comparability to the 2002 presentation. 2. INVESTMENTS Investments are summarized as follows (in thousands):
Cost or Estimated Amortized Unrealized Unrealized Market December 31, 2002 Cost Gain Loss Value ---------- ----------- ------------ ------- Fixed Maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies. . . . . . $ 17,814 $ 541 $ - $18,355 Mortgage backed securities. . . . . . . . . . . . 4,828 182 (5) 5,005 ---------- ----------- ------------ ------- Total U.S. Treasury and other government obligations. . . . . . . . . . . . . . . . . . 22,642 723 (5) 23,360 Corporate securities. . . . . . . . . . . . . . . 13,043 1,129 (804) 13,368 ---------- ----------- ------------ ------- Total fixed maturities. . . . . . . . . . . . . 35,685 1,852 (809) 36,728 Equity securities . . . . . . . . . . . . . . . . 9,667 126 (3,389) 6,404 Short-term investments. . . . . . . . . . . . . . 8,495 - - 8,495 Other invested assets (including real estate) . . 3,046 - - 3,046 ---------- ----------- ------------ ------- Total investments . . . . . . . . . . . . . . . $ 56,893 $ 1,978 $ (4,198) $54,673 ========== =========== ============ =======
Cost or Estimated Amortized Unrealized Unrealized Market December 31, 2001 Cost Gain Loss Value ---------- ----------- ------------ ------- Fixed Maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies . . . . $ 29,912 $ 609 $ (311) $ 30,210 Mortgage backed securities. . . . . . . . . . . . 17,500 1,928 (47) 19,381 ---------- ----------- ------------ -------- Total U.S. Treasury and other government obligations . . . . . . . . . . . . . . . . . 47,412 2,537 (358) 49,591 Corporate securities. . . . . . . . . . . . . . . 29,528 430 (1,653) 28,305 ---------- ----------- ------------ -------- Total fixed maturities. . . . . . . . . . . . . 76,940 2,967 (2,011) 77,896 Equity securities . . . . . . . . . . . . . . . . 17,965 27 (3,596) 14,396 Short-term investments. . . . . . . . . . . . . . 13,266 - - 13,266 Other invested assets (including real estate) . . 1,469 - - 1,469 ---------- ----------- ------------ -------- Total investments . . . . . . . . . . . . . . . . $ 109,640 $ 2,994 $ (5,607) $107,027 ========== =========== ============ ========
At December 31, 2002, The Standard & Poors Corporation or Moody's Investor Services, Inc. considered 96.4% of the Company's fixed maturities investment grade. 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. The amortized cost and estimated market value of fixed maturities at December 31, 2002, by contractual maturity, are shown in the table that follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty and securities may have to be liquidated to cover operational losses (in thousands):
Estimated Amortized Cost Market Value --------------- ------------- Due in one year or less. . . . . . . . $ 8,733 $ 8,866 Due after one year through five years. 11,712 12,077 Due after five years through ten years 7,448 7,492 Due after ten years. . . . . . . . . . 2,965 3,288 Mortgage-backed securities . . . . . . 4,828 5,005 --------------- ------------- $ 35,686 $ 36,728 =============== =============
Gains and losses realized on sales of investments are as follows (in thousands):
2002 2001 2000 -------- -------- -------- Proceeds from sales . $76,249 $71,082 $94,558 Gross gains realized. 2,502 481 1,359 Gross losses realized (5,309) (1,666) (7,331)
Net investment income for the years ended December 31 are as follows (in thousands):
2002 2001 2000 ------- ------- -------- Fixed maturities. . . . . . . . $4,221 $5,666 $ 8,795 Equity securities . . . . . . . 145 213 304 Cash and short-term investments 204 469 1,077 Mortgage loans. . . . . . . . . - 65 - Other . . . . . . . . . . . . . - 769 - ------- ------- -------- Total investment income . . . . 4,570 7,182 10,176 Investment expenses . . . . . . (431) (896) (102) ------- ------- -------- Net investment income . . . . . $4,139 $6,286 $10,074 ======= ======= ========
Investments with a market value of $13,126,139 and $13,663,118 (amortized cost of $12,908,173 and $13,348,887) as of December 31, 2002 and 2001, respectively, were on deposit in the United States. The deposits are required by various insurance departments and others to support licensing requirements and certain reinsurance contracts. 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, premium taxes, and underwriting expenses net of reinsurance commission income on such policies. Policy acquisition costs both acquired and deferred, and the related amortization charged to income were as follows (in thousands):
2002 2001 2000 --------- --------- --------- Balance, beginning of year $ 763 $ 6,454 $ 13,908 Costs deferred during year 18,861 28,056 29,999 Amortization during year . (19,624) (33,747) (37,453) --------- --------- --------- Balance, end of year . . . $ - $ 763 $ 6,454 --------- ========= =========
4. PROPERTY AND EQUIPMENT Property and equipment at December 31 are summarized as follows (in thousands):
Accumulated 2002 Cost Depreciation 2002 Net 2001 Net ----------- ------------ --------- ------- Land . . . . . . . . . . . . . $ 100 $ - $ 100 $ 100 Buildings. . . . . . . . . . . 4,279 1,877 2,402 2,655 Office furniture and equipment 2,108 1,684 424 808 Automobiles. . . . . . . . . . 76 49 27 42 Computer equipment . . . . . . 14,801 10,685 4,116 6,285 ------------- --------- --------- ------ Total. . . . . . . . . . . . . $ 21,364 $ 14,295 $ 7,069 $9,890 ============= ========= ========= ======
Accumulated depreciation at December 31, 2001 was $10,792,000. Depreciation expense related to property and equipment for the years ended December 31, 2002, 2001 and 2000 was $3,658,000, $3,738,000 and $3,498,000, respectively. 5. INTANGIBLE ASSETS In accordance with SFAS No. 121, Accounting for the Impairment of Long-lived Assets, the Company determined in 2000 that the carrying value of goodwill that resulted from the acquisition of Superior Group Management exceeded its fair value. This determination was made considering the series of continued losses which the Company had experienced, the reduction in the volume of premiums written, as well as an evaluation of future cash flows. Based on this assessment, a charge of $33,464,000 was recorded in the fourth quarter of 2000 to write-off the remaining carrying value of the goodwill. Such charge is included as amortization expense in the accompanying financial statements for 2000. Intangible assets at December 31 are as follows (in thousands):
Accumulated 2002 Cost Amortization 2002 Net 2001 Net --------- ------------- --------- ------- Deferred securities issuance costs $ 5,132 $ 928 $ 4,204 $4,376
Accumulated amortization at December 31, 2001 was $755,000. Amortization expense related to intangible assets for the years ended December 31, 2002, 2001 and 2000 was $173,000, $171,000, and $34,977,000 respectively. 6. PREFERRED SECURITIES On August 12, 1997, the Company's trust subsidiary issued $135 million in preferred securities ("Preferred Securities") bearing interest at an annual rate of 9.5%. The principal assets of the trust subsidiary are senior subordinated notes of the Company in the principal amount of $135 million with an interest rate and maturity date substantially identical to those of the Preferred Securities. Expenses of the issue aggregated $5.1 million and are amortized over the term of the Preferred Securities. The Preferred Securities represent Company-obligated mandatorily redeemable securities of a trust subsidiary holding solely parent debentures and have a term of 30 years with semi-annual interest payments commencing February 15, 1998. The Company may redeem the Preferred Securities in whole or in part after 10 years. The annual Preferred Security obligations of approximately $13 million per year were anticipated to be funded from the Company's nonstandard automobile management company from management and billing fees in excess of operating costs. Under the terms of the indenture, the Company is permitted to defer semi-annual interest payments for up to five years. The Company elected to defer the interest payments due in February and August 2000, 2001 and 2002 and February 2003 and expects to continue this practice through 2003 and 2004. All of the deferred interest (approximately $84 million, if all payments due in 2003 and 2004 are deferred) will become due and payable in February 2005. The Company relies on the payment of finance and service fees by its subsidiaries to fund its operations, including its payment of interest on the Preferred Securities. Certain state regulators, including the Florida Department of Insurance ("FDOI"), have issued orders prohibiting the Company's subsidiaries from paying such fees to the Company. In the event such orders continue, the Company may not have sufficient revenue to fund its operations or to pay the deferred interest on the Preferred Securities. Such failure to pay could result in a default under the indenture and acceleration of the payment of the Preferred Securities. The trust indenture for the Preferred Securities contains certain restrictive covenants. These covenants are based upon the Company's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA"). If the Company's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Security distributions) for the most recent four quarters the following restrictions become effective: - - The Company may not incur additional indebtedness or guarantee additional indebtedness. - - The Company may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock or paying dividends in excess of a stated limitation. - - The Company may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply, as the Company's consolidated coverage ratio was (0.95) in 2002, and will continue to apply until the Company's consolidated coverage ratio complies with the terms of the trust indenture. The Company complied with these additional restrictions as of December 31, 2001 and 2002 and is in compliance as of May 9, 2003. 7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows (in thousands):
2002 2001 2000 ------- -------- --------- Balance at January 1. . . . . . $81,142 $108,117 $152,455 Less reinsurance recoverables . 30,600 23,252 13,527 ------- -------- --------- Net balance at January 1 . 50,542 84,865 138,928 ------- -------- --------- Incurred related to current year. . . . . . . . . . 35,413 69,667 127,497 Prior years . . . . . . . . . . 12,775 774 (14,118) ------- -------- --------- Total incurred . . . . . . 48,188 70,441 113,379 ------- -------- --------- Paid related to Current year. . . . . . . . . . 19,211 46,973 85,334 Prior years . . . . . . . . . . 36,374 57,791 82,108 ------- -------- --------- Total paid . . . . . . . . 55,585 104,764 167,442 ------- -------- --------- Net balance at December 31 43,145 50,542 84,865 Plus reinsurance recoverables . 24,059 30,600 23,252 ------- -------- --------- Balance at December 31 . . $67,204 $ 81,142 $108,117 ======= ======== =========
Reserve estimates are regularly adjusted in subsequent reporting periods as new facts and circumstances emerge to indicate that a modification of the prior estimate is necessary. The adjustment, referred to as "reserve development," is inevitable given the complexities of the reserving process and is recorded in the statements of operations in the period when the need for the adjustment becomes known. The foregoing reconciliation indicates unfavorable development of $12,775,000 on the December 31, 2001 reserves. A portion of the 2001 reserve development was caused by a larger than normal number of previously closed claims that reopened in 2002. The remainder of the 2001 reserve development resulted from a higher than expected frequency and severity on nonstandard automobile claims. The anticipated effect of inflation is implicitly considered when estimating losses and loss adjustment expenses liabilities. While anticipated price increases due to inflation are considered in estimating the ultimate claims costs, increases in average claim severities is caused by a number of factors. Future severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, claims management practices and procedures and general economic trends. Anticipated severity trends are monitored relative to 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, reserves have been established to cover additional exposure on both known and unasserted claims. 8. INCOME TAXES The Company files a consolidated federal income tax return with its wholly-owned subsidiaries. Intercompany tax sharing agreements between the Company and its wholly-owned subsidiaries provide that income taxes will be allocated based upon separate return calculations in accordance with the Internal Revenue Code of 1986, as amended. 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 (in thousands):
2002 2001 2000 -------- -------- --------- Computed income taxes (benefit) at statutory rate $(6,732) $(5,576) $(20,981) Goodwill. . . . . . . . . . . . . . . . . . . . . - - 12,176 Distribution in excess of basis . . . . . . . . . 637 - - Other . . . . . . . . . . . . . . . . . . . . . . 73 32 (4,042) -------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . (6,022) (5,544) (12,847) Valuation allowance . . . . . . . . . . . . . . . 6,022 5,544 10,698 -------- -------- --------- Income tax expense. . . . . . . . . . . . . . . . $ - $ - $ (2,149) ======== ======== =========
The net deferred tax asset at December 31, 2002 and 2001 is comprised of the following (in thousands):
2002 2001 --------- --------- Deferred tax assets: Unpaid losses and loss adjustment expenses $ 1,112 $ 1,300 Unearned premiums. . . . . . . . . . . . . 656 1,159 Allowance for doubtful accounts. . . . . . 190 629 Unrealized losses on investments . . . . . 777 914 Net operating loss carryforwards . . . . . 13,344 18,279 Capital loss carryforwards . . . . . . . . 4,055 2,107 Accrued interest payable . . . . . . . . . 17,230 11,621 Other. . . . . . . . . . . . . . . . . . . 1,806 1,452 --------- --------- Deferred tax assets . . . . . . . . . . 39,170 37,461 --------- --------- Deferred tax liabilities: Deferred policy acquisition costs. . . . . 713 (168) Other. . . . . . . . . . . . . . . . . . . (877) (924) --------- --------- Valuation allowance . . . . . . . . . . (39,006) (36,369) --------- --------- Net deferred tax assets . . . . . . . . $ - $ - ========= =========
At December 31, 2002 and 2001, the Company's net deferred tax assets were fully offset by a valuation allowance. As of December 31, 2002, the Company has unused net operating loss carryovers available as follows (in thousands):
Year of expiration: 2019. . . . . . . . $21,030 2020. . . . . . . . 17,095 ------- Total . . . . $38,125 =======
Federal income tax filings of the Company for years prior to 2000 have been examined by the Internal Revenue Service. 9. LEASES The Company leases buildings, furniture, cars and equipment under operating leases. Operating leases generally include renewal options for periods ranging from two to seven years and require the Company to pay utilities, taxes, insurance and maintenance expenses. The following is a schedule of future minimum lease payments under cancelable and non-cancelable operating leases for each of the five years succeeding December 31, 2002 and thereafter, excluding renewal options (in thousands):
Years Ending December 31: 2003. . . . . . . . . . . $617 2004. . . . . . . . . . . 438 2005. . . . . . . . . . . 338 2006. . . . . . . . . . . 117 2007 and Thereafter . . . 83
Rental expense charged to operations in 2002, 2001 and 2000 amounted to $1,009,516, $1,688,000 and $1,848,000, respectively, including amounts paid under short-term cancelable leases. 10. 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. The Company remains contingently liable with respect to reinsurance ceded, 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 addition, the Company assumes reinsurance on certain risk. Approximately 88.3% of uncollateralized amounts recoverable are with companies which maintain an A.M. Best rating of at least A+. Another 2.7% of recoverable amounts are with Granite Reinsurance Company Ltd. ("Granite Re"), an affiliated foreign corporation which has not applied for an A.M. Best rating, related primarily to commercial business which is ceded 100% to Granite Re, which are fully collateralized. Company management believes amounts recoverable from reinsurers are collectible. Superior commuted the accident year 2001 and 2000 portion of the reinsurance treaty with National Union Fire Insurance Company ("National"). Superior recognized the amounts received from National as a reduction of losses and loss adjustments expenses paid (thereby increasing losses and loss adjustment expenses incurred) to recognize the effect of releasing National from its obligations under the treaty. There was no effect on premiums earned, losses incurred, loss adjustment expense incurred or commission in the current year income statement due to this commutation. The Company sold 100% of its 2001 crop year business to Acceptance Insurance Companies Inc. ("Acceptance"), effective June 6, 2001. The agreements are without recourse as they relate to the net profit or loss on the 2001 crop year book of business. The sale was approved by the Indiana Department of Insurance. Reinsurance activity for 2002, 2001 and 2000, which includes reinsurance with related parties, is summarized as follows (in thousands):
2002 Direct Assumed Ceded Net -------- ------ ------- ------ Premiums written $107,708 $67 $(77,291) $30,484 Premiums earned 129,370 212 (91,920) 37,662 Incurred losses and loss adjustment expenses 114,056 147 (66,016) 48,187 Commission expenses (income) 11,038 (1) (24,656) (13,619) 2001 Direct Assumed Ceded Net ---- -------- ------- ------ ------- Premiums written $159,821 $1,271 $(105,158) $ 55,934 Premiums earned 163,828 2,484 (89,365) 76,947 Incurred losses and loss adjustment expenses 132,589 2,616 (64,764) 70,441 Commission expenses (income) 18,979 151 (25,716) (6,586) 2000 Direct Assumed Ceded Net ---- ------- ------- ----- ----- Premiums written $168,626 $5,835 $ (78,621) $ 95,840 Premiums earned 187,720 4,918 (54,932) 137,706 Incurred losses and loss adjustment expenses 144,987 4,828 (36,436) 113,379 Commission expenses (income) 21,234 1,041 (14,043) 8,232
Amounts recoverable from reinsurers relating to unpaid losses and loss adjustment expenses were $24,060,000 and $30,181,000 as of December 31, 2002 and 2001, respectively. These amounts are reported as assets and are not netted against the liability for loss and loss adjustment expenses in the accompanying Consolidated Balance Sheets. 11. RELATED PARTIES The Company and its subsidiaries have entered into transactions with various related parties including transactions with Goran and its affiliates, Granite Insurance Company ("Granite") and Granite Re. The following balances were outstanding at December 31 (in thousands):
2002 2001 -------- ------ Due from directors and officers . . . . . . . . . . . . . $ 44 $ 42 Other receivables from and (payables to) related parties. (2,731) (638) -------- ------ Total receivables (payables). . . . . . . . . . . . . . . $(2,687) $(596) ======== ====== Reinsurance payable to affiliates . . . . . . . . . . . . $ 502 $ 617 ======== ======
The following transactions occurred with related parties in the years ended December 31 (in thousands):
2002 2001 2000 ------ ------ -------- Reinsurance under various treaties, net: Ceded premiums earned. . . . . . . . . . . . . . . $ 0 $ 3 $ 186 Ceded losses and loss adjustment expenses incurred (85) (419) (4,858) Ceded commissions. . . . . . . . . . . . . . . . . 0 1 (1) Consulting fees charged by various related parties 48 16 1,895
The amounts due from officers and directors are non-interest-bearing loans. The Company paid $1,846,000 in 2000 for consulting and other services to a vendor owned in part by the brother of the Company's president. The consulting and other services were for the conversion of the Company's nonstandard automobile operating system. The Company has capitalized these costs as part of its nonstandard automobile operating system. Approximately 90% of these payments are for services provided by consultants and vendors unrelated to the Company. Superior Group obtained a line of credit from Granite Re in the amount of $2.5 million and $1 million in December 31, 2001 and October 2002, respectively. At December 31, 2002, $2.98 million was outstanding under the line. These line of credit notes bear interest at the rate of prime plus 5.25% for a total of 9.5% at December 31, 2002. Interest only payments are due monthly. The $2.5 million outstanding is due December 20, 2004 and $480 thousand is due November 30, 2004. 12. REGULATORY MATTERS Two of the Company's insurance company subsidiaries, Pafco and IGF, are domiciled in Indiana and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the IDOI. While neither Pafco nor IGF has surplus from which to pay dividends, statutory requirements place limitations on the amount of funds that can be remitted to the Company from Pafco and IGF. The Indiana statute allows 10% of surplus in regard to policyholders or 100% of net income, whichever is greater, to be paid as dividends only from earned surplus; however, the consent orders with the IDOI, described below, prohibit the payment of any dividends by Pafco and IGF. Another insurance company subsidiary, Superior, and Superior's insurance company subsidiaries, Superior American and Superior Guaranty, are domiciled in Florida and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the FDOI. The Florida statute also contains limitations with regard to the payment of dividends. Superior, Superior American and Superior Guaranty may pay dividends of up to 10% of surplus or 100% of net income, whichever is greater, from earned surplus. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. On June 6, 2001, IGF sold substantially all of its crop insurance assets to Acceptance. On June 29, 2001, following the sale of IGF's crop insurance assets and as a result of losses experienced by IGF in its crop insurance operations, the IDOI and IGF entered into a consent order (the "Consent Order") relating to IGF. IGF has discontinued writing new business and its operations are presently in run off. The IDOI has continued to monitor the status of IGF. The Consent Order prohibits IGF from taking any of the following actions without prior written consent of the IDOI: - - Sell or encumber any of its assets, property, or business in force; - - Disburse funds, except to pay direct unaffiliated policyholder claims and normal operating expenses in the ordinary course of business (which does not include payments to affiliates except for the reimbursement of costs for running IGF by the Company, and does not include payments in excess of $10,000); - - Lend its funds or make investments, except in specified types of investments; - - Incur debts or obligations, except in the ordinary course of business to unaffiliated parties; - - Merge or consolidate with another company; - - Enter into new, or amend existing, reinsurance agreements; - Complete, enter into or amend any transaction or arrangement with an affiliate, and - - Disburse funds or assets to any affiliate. The Consent Order also requires IGF to provide the IDOI with monthly written updates and immediate notice of any material change regarding the status of litigation with Continental Casualty Company, statutory reserves, number of non-standard automobile insurance policies in-force by state, and reports of all non-claims related disbursements. IGF's failure to comply with the Consent Order could cause the IDOI to begin proceedings to have a rehabilitator or liquidator appointed for IGF or to extend the provisions of the Consent Order. Pafco has been subject to an agreed to order of the IDOI since February 17, 2000 that requires Pafco, among other matters, to: - - Refrain from doing any of the following without the IDOI's prior written consent: - Selling assets or business in force or transferring property, except in the ordinary course of business; - Disbursing funds, other than for specified purposes or for normal operating expenses and in the ordinary course of business (which does not include payments to affiliates, other than under written contracts previously approved by the IDOI, and does not include payments in excess of $10,000); - Lending funds; - Making investments, except in specified types of investments; - Incurring debt, except in the ordinary course of business and to unaffiliated parties; - Merging or consolidating with another company; or - Entering into new or modifying existing, reinsurance contracts. - - Reduce its monthly auto premium writings, or obtain additional statutory capital or surplus, such that the ratio of gross written premium to surplus and net written premium to surplus does not exceed 4.0 and 2.4, respectively; and provide the IDOI with regular reports demonstrating compliance with these monthly writings limitations. - - Continue to comply with prior IDOI agreements and orders to correct business practices under which Pafco must provide monthly financial statements to the IDOI, obtain prior IDOI approval of reinsurance arrangements and affiliated party transactions, submit business plans to the IDOI that address levels of surplus and net premiums written, and consult with the IDOI on a monthly basis. Pafco's inability or failure to comply with any of the above conditions could result in the IDOI requiring further reductions in Pafco's permitted premium writings or in the IDOI instituting future proceedings against Pafco. Restrictions on premium writings result in lower premium volume. Management fees payable to Superior Group are based on gross written premium; therefore, lower premium volume results in reduced management fees paid by Pafco to Superior Group. In March 2000, Pafco agreed with the Iowa Department of Insurance ("IADOI") that it would not write any new non-standard business in Iowa, until such time as Pafco has reduced its overall non-standard automobile policy counts in the state or has: - - Increased surplus, or - - Has achieved a net written premium to surplus ratio of less than three to one, or - - Has surplus reasonable to its risk. Pafco has continued to service existing policyholders and renew policies in Iowa and provide policy count information on a monthly basis in conformance with IADOI requirements. Superior and Pafco provide monthly financial information to the departments of insurance in certain states in which they write business at the states' request. On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the "Notice") which principally addressed certain policy and finance fee payments by Superior to Superior Group. A formal administrative hearing to review the Notice and a determination that the order contemplated by the Notice not be issued was held in February 2001. The administrative law judge entered a recommended order on June 1, 2001 that was acceptable to the Company. On August 30, 2001, the FDOI rejected the recommended order and issued its final order which the Company believes improperly characterized billing and policy fees paid by Superior to Superior Group. On September 28, 2001, Superior filed an appeal of the final order to the Florida District Court of Appeal. On March 4, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida seeking court enforcement of the FDOI's final order. Superior filed a motion with the FDOI for stay of the FDOI's final order. Superior also filed a motion for stay with the District Court of Appeal, which was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a stay of the final order that was conditional upon the cessation of the payment of billing fees by Superior to Superior Group and the posting of a $15 million appeal bond. Superior did not agree to the conditions imposed by the FDOI's conditional stay. On May 6, 2002 Superior filed a motion with the District Court of Appeal seeking a stay of the final order pending Superior's appeal or, in the alternative, a consolidation of the FDOI's enforcement action with the pending appeal. On June 19, 2002, the District Court of Appeal entered an order which struck the FDOI's conditional requirement for the stay that Superior post a $15 million appeal bond. However, the order denied Superior's request to consolidate the appeal with the enforcement action. On September 26, 2002, the District Court of Appeal affirmed the final order of the FDOI. On October 31, 2002 the Circuit Court entered a final order which granted the FDOI's petition for enforcement of the FDOI's final order and which requires Superior to comply with the FDOI final order. In accordance with the FDOI's final order, Superior ceased payment of finance and service fees as of October 1, 2002 and has requested repayment from Superior Group of $15 million of finance and service fees paid from 1997 through 1999 and additional finance and service fees paid thereafter in the approximate amount of $20 million. Without the payment of finance and service fee income to Superior Group or an amendment to the management agreement or reallocation of operational responsibilities, Superior Group could not operate profitably. Accordingly, on October 1, 2002, Superior Group discontinued the provision of certain claims services to Superior. Superior is currently exchanging proposals with the FDOI to establish an acceptable repayment plan in accordance with the final order. On September 10, 2002, the FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida for an order to show cause and notice of automatic stay which sought the appointment of a receiver for the purpose of rehabilitation of Superior. The court entered an order to show cause, temporary injunction and notice of automatic stay on September 13, 2002 and a hearing was held on October 24, 2002. On November 1, 2002, the court entered an order that denied the FDOI's petition for appointment of a receiver. On November 8, 2002, the FDOI filed a motion for rehearing, which was denied on December 17, 2002. On November 20, 2002, the FDOI issued a notice and order to show cause which seeks to suspend or revoke Superior's certificate of authority principally based upon allegations that Superior did not comply with the FDOI's August 30, 2001 final order during the pendency of the appeal of the order to the District Court of Appeal. Superior believes that it has fully and timely complied with the final order and that the action brought by the FDOI is barred by res judicata. A formal administrative hearing to review the notice and a determination that the order or administrative action contemplated by the notice not be issued was held in May 2003. The administrative law judge has not yet issued a recommended order, which the FDOI may accept or reject. On March 21, 2003, the FDOI filed a Motion for Enforcement of Final Order Granting Petition to Enforce Agency Action (the "Motion for Enforcement") in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida which sought to hold Superior in contempt for failure to comply with the FDOI's final order during the pendency of Superior's appeal to the Florida District Court of Appeal. On May 7, 2003 a hearing was held on the Motion for Enforcement and an order has not yet been issued. On October 9, 2001, the State Corporation Commission of Virginia ("Virginia Commission") issued an order to take notice regarding an order suspending Superior's license to write business in that state. An administrative hearing for a determination that the suspension order not be issued was held March 5, 2002. On May 3, 2002, the hearing examiner issued his report and recommended that Superior's license not be suspended and that Superior file its risk based capital plans and monthly and quarterly financial information with the Virginia Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission entered an order which adopted the findings of the hearing examiner, continued the matter until such time as the Bureau requests further action and requires the continued monitoring of the financial condition of Superior by the Bureau. On October 11, 2002, the Virginia Commission filed an administrative Rule to Show Cause. A hearing was scheduled for November 18, 2002 to determine whether Superior's license to transact insurance business in Virginia should be suspended. Because of Superior's improved financial condition, the Virginia Commission continued the hearing indefinitely. The nonstandard automobile insurance policies written in Virginia by Superior accounted for approximately 13.1% and 14.5% of the total gross written premiums of the Company in 2001 and in 2002, respectively. The Company's operating subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to regulation and oversight by the IDOI, the FDOI, and the insurance regulators of other states in which the subsidiaries write business. The Company is a holding company and all of its operations are conducted by its subsidiaries. Regulation and oversight of insurance companies and their transactions with affiliates is conducted by state insurance regulators primarily for the protection of policyholders and not for the protection of other creditors or of shareholders. Failure to resolve issues with the IDOI and the FDOI or other state insurance regulators in a mutually satisfactory manner could result in future regulatory actions or proceedings that materially and adversely affect the Company. Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations, Indiana and Florida have substantially adopted the NAIC model law and Indiana directly, and Florida indirectly, have adopted the NAIC model Formula. The RBC formula for property and casualty 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; (iv) off-balance sheet risk arising from adverse experience from non-controlled asset, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus that 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 decreases. The first level, the Company Action Level (as defined by the NAIC), requires and insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory action level re quires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform and examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized Control Level gives the relevant insurance commissioner the option either to take the aforementioned actions or to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. At the time of filing of the unaudited annual statutory financial statements of the Company's insurance subsidiaries with the IDOI and the FDOI for the year ended December 31, 2002, the RBC calculations for Pafco and Superior were in excess of 200% of the RBC amount, a level which requires no corrective action. The RBC calculation for IGF as of December 31, 2002 was in excess of 100% of the RBC amount, which is above the authorized control level. In May 2003, pursuant to a reserve analysis completed by the consulting actuary engaged by BDO Seidman, LLP, the Company's independent auditor, reserves for losses and loss adjustment expenses for Superior and Pafco were increased as of December 31, 2002. These reserve adjustments, along with resulting adjustments to the permitted carrying values of certain assets of Superior, investments in Superior American and Superior Guaranty, were recorded in the 2002 audited statutory financial statement filed for Superior and Pafco with the FDOI and the IDOI, respectively. Based on the adjusted audited statutory financial statements, the surplus for Superior fell below 70% of the RBC amount and the surplus level for Pafco was above 150% of the RBC amount as of December 31, 2002. As a result, there may be additional regulatory actions taken by the insurance regulators in states in which the companies write business. 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. IRIS ratios consist of twelve ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of five priority designations is assigned and the insurance department of the state of domicile is then responsible for follow-up action. Based on the December 31, 2002 statutory financials filed with the NAIC, Pafco had values outside of the acceptable ranges for five IRIS tests. These included the two-year overall operating ratio, the investment yield ratio, the change in surplus ratio, the liabilities and liquid assets ratio, and the estimated current reserve deficiency to policyholders' surplus ratio. Based on the December 31, 2002 statutory financials filed with the NAIC, Superior had values outside of the acceptable ranges for six IRIS tests. These included the surplus aid to policyholders' surplus ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, the one-year reserve development to policyholders' surplus ratio, and the two-year reserve development to policyholders' surplus ratio. As of December 31, 2002, IGF had values outside of the acceptable ranges for five IRIS tests. These included the change in net writings ratio, the two-year overall operating ratio, the change in surplus ratio, the liabilities to liquid assets ratio, and the agent's balances to policyholders' surplus ratio. 13. COMMITMENTS AND CONTINGENCIES Superior Guaranty is a defendant in a case filed on November 26, 1996, in the Circuit Court for Lee County, Florida entitled Raed Awad v. Superior Guaranty Insurance Company, et al., Case No. 96-9151 CA LG. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The plaintiffs alleged that Superior Guaranty charged premium finance service charges in violation of Florida law. The parties have reached a class settlement which has been approved by the court that is not expected to be material to Superior Guaranty. As previously reported, IGF, which is a wholly owned subsidiary of the Company, had been a party to a number of pending legal proceedings and claims relating to agricultural production interruption insurance policies (the "AgPI Program") which were sold during 1998. All of the policies of insurance which were issued in the AgPI Program were issued by and under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota corporation with its principal place of business located in Arden Hills, Minnesota. Sales of this product resulted in large underwriting losses by IGF. Approximately $29 million was paid through December 31, 2002 in settlement of legal proceedings and policyholder claims related to the AgPI Program. All AgPI policyholder claims were settled during 2000. However, on January 12, 2001 a case was filed in the Superior Court of California, County of Fresno, entitled S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo & Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by four AgPI policyholders who had previously settled their AgPI claims pursuant to binding settlement agreements who now seek additional compensation by asserting through litigation that IGF and the third party carrier paid less than the policy limits they were promised when they purchased the policy and that each settling policyholder was forced to accept the lesser amount due to their economic duress - a legal theory recognized in California if certain elements can be established. The plaintiff's amended their complaint four times during 2002. A demurrer to the fourth amended complaint was filed by MSI and a motion to strike was filed by IGF, which were denied. IGF filed a motion for summary judgment to dismiss the claims in the plaintiff's fourth amended complaint on the basis that releases previously executed by the plaintiffs are binding. The court granted the motion for summary judgment. The cross claims between the selling brokers and MSI and IGF remain pending. The trial is scheduled to begin in August 2003. Superior Guaranty is a defendant in a case filed on October 8, 1999, in the Circuit Court for Manatee County, Florida entitled Patricia Simmons v. Superior Guaranty Insurance Company, Case No. 1999 CA-4635. The case purported to be brought on behalf of a class consisting of purchasers of insurance from Superior Guaranty. The Plaintiff alleged that the defendant charged interest in violation of Florida law. The parties have settled the case in an amount that is not material to the Company's financial condition. The Company is a defendant in a case filed on February 23, 2000, in the United States District Court for the Southern District of Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are Goran, three individuals who were or are officers or directors of the Company or of Goran, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case purports to be brought on behalf of a class consisting of purchasers of the Company's stock or Goran's stock during the period February 27, 1998, through and including November 18, 1999. Plaintiffs allege, among other things, that defendants misrepresented the reliability of the Company's reported financial statements, data processing and financial reporting systems, internal controls and loss reserves in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The individual defendants are also alleged to be liable as "controlling persons" under Sec.20 (a) of the 1934 Act. As previously reported in the Company's September 30, 2002 Form 10-Q, the Company, Goran and the individual defendants entered into an agreement with the plaintiffs for settlement. The settlement is subject to certain terms and conditions and court approval. As previously reported, the Company and two of its subsidiaries, IGFH and IGF, were parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired certain crop insurance operations of CNA. The obligations of the Company, IGFH, IGF and CNA under the SAA are the subject of an action filed on June 4, 2001 and pending in United States District Court for the Southern District of Indiana, Indianapolis Division. Claims have also been asserted in the action against Goran, Granite Re, Pafco, Superior and certain members of the Symons family. Discovery is proceeding. Although the Company continues to believe that it has claims against CNA and defenses to CNA's claims which may offset or reduce amounts owing by the Company or its affiliates to CNA, there can be no assurance that the ultimate resolution of the claims asserted by CNA against the Company and its affiliates will not have a material adverse effect upon the Company's and its affiliates' financial condition or results of operations. Superior was a defendant in a case filed on May 8, 2001 in the United States District Court Southern District of Florida entitled The Chiropractic Centre, Inc. v. Superior Insurance Company, Case No. 01-6782. The case purported to be brought on behalf of a class consisting of healthcare providers improperly paid discounted rates on services to patients based upon a preferred provider contract with a third party. The plaintiff alleged that Superior breached a third party beneficiary contract, committed fraud and engaged in racketeering activity in violation of federal and Florida law by obtaining discounted rates offered by a third party with whom the plaintiff contracted directly. On September 30, 2002, the court issued an administrative order which dismissed the case. The court's order administratively closing the case could be temporary or permanent. Superior believes that the allegations of wrongdoing as alleged in the complaint were without merit and in the event the order is temporary, Superior intends to vigorously defend the claims brought against it. IGF is a defendant in a case filed on December 31, 2002 in the Circuit Court of Greene County, Missouri entitled Kevin L. Stevens v. Wilkerson Insurers, et al., Case No. 102CC5135. Other parties named as defendants are Goran, Goran's subsidiaries, Symons International Group (Florida), Inc. and Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty, Pafco and three individuals who were or are officers or directors of the Company. Motions to dismiss Goran, Symons International Group (Florida), Inc., Granite Re, Superior Group Management, Superior, Superior American, Superior Guaranty and certain named individuals for lack of personal jurisdiction are pending. The case purports to be brought on behalf of an IGF insured seeking to recover alleged damages based on allegations of bad faith, negligent claims handling and breach of fiduciary duties with respect to a claim which arose from an accident caused by the IGF insured. IGF believes that the allegations of wrongdoing as alleged in the complaint are without merit and intends to vigorously defend the claims brought against it. See Note 12 to the Consolidated Financial Statements, Regulatory Matters, for additional contingencies involving insurance regulatory matters. The Company and its subsidiaries are named as defendants in various other lawsuits relating to their business and arising in the ordinary course of business. Legal actions arise from claims made under insurance policies issued by the Company's subsidiaries. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimate costs of litigation. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. 14. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid/(received) for income taxes and interest is summarized as follows (in thousands):
2002 2001 2000 ----- ----- -------- Cash paid/(received) for federal income taxes, net of refunds $ - $ - $(6,134) ===== ===== ======== Cash paid for interest. . . . . . . . . . . . . . . . . . . . $ 211 $ - $ - ===== ===== ========
15. 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, EQUITY SECURITIES AND OTHER INVESTMENTS: Fair values for fixed maturity and equity securities are based on quote market prices. b) 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 Consolidated Balance Sheets approximates their fair value. c) SHORT-TERM DEBT: The carrying value for short-term debt approximates fair value. d) PREFERRED SECURITIES: There is not an active market for the Preferred Securities; however, the estimated market value as of December 31, 2002 was approximately $9,000,000. 16. STOCK OPTION PLANS On November 1, 1996, the Company adopted the Symons International Group, Inc. 1996 Stock Option Plan (the "SIG Stock Option Plan"). The SIG Stock Option Plan provides the Company authority to grant nonqualified stock options and incentive stock options to officers and key employees of the Company and its subsidiaries and nonqualified stock options to non-employee directors of the Company and Goran. Options have been granted at an exercise price equal to the fair market value of the Company's stock at date of grant. All of the outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. Information regarding the SIG Stock Option Plan is summarized below:
2002 2001 2000 Weighted Weighted Weighted Average Average Average 2002 Exercise 2001 Exercise 2000 Exercise Shares Price Shares Price Shares Price ---------- ------- ---------- ------- ---------- ------- Outstanding at the beginning of the year . . . . . . . . . . . 1,271,333 $0.8283 1,344,833 $0.9400 213,033 $6.3125 Granted . . . . . . . . . . . . - - - - 1,287,000 0.5436 Exercised . . . . . . . . . . . - - - - - - Forfeited/Surrendered . . . . . (386,333) 1.4650 (73,500) 2.8474 (155,200) 5.0391 ---------- ---------- ---------- Outstanding at the end of the Year . . . . . . . . . . . . . 885,000 0.5503 1,271,333 0.8283 1,344,833 0.9400 ========== ========== ========== Options exercisable at year end 590,167 0.5520 465,333 1.3180 73,500 6.3125 Available for future grant. . . 615,000 - 228,667 - 155,167 -
Options Options Weighted Outstanding Exercisable Average Weighted Weighted Remaining Average Average Number Life (in Exercise Number Exercise Range of Exercise Prices Outstanding Years) Price Exercisable Price - ------------------------- ----------- ------------ --------- ---------- -------- 0.50 - $0.8750 . . . . . 884,500 7.4 $ 0.5477 763,000 $ 0.5477 6.3125 . . . . . . . . . 500 5.5 6.3125 500 6.3125 ----------- ----------- 885,000 763,500 ========== ===========
The Board of Directors of Superior Group Management (formally, GGS Management Holdings, Inc.) adopted the GGS Management Holdings, Inc. Stock Option Plan (the "Superior Group Management Stock Option Plan"), effective April 30, 1996. The Superior Group Management Stock Option Plan authorizes the granting of nonqualified and incentive stock options to such officers and other key employees as may be designated by the Board of Directors of Superior Group Management. Options granted under the Superior Group Management Stock Option Plan have a term of ten years and vest at a rate of 20% per year for the five years after the date of the grant. The exercise price of any options granted under the Superior Group Management Stock Option Plan is subject to the following formula: 50% of each grant of options having an exercise price determined by the Board of Directors of Superior Group Management at its discretion, with the remaining 50% of each grant of options subject to a compound annual increase in the exercise price of 10%, with a limitation on the exercise price escalation as such options vest. Information regarding the Superior Group Management Stock Option Plan is summarized below:
2002 2001 2000 Weighted Weighted Weighted Average Average Average 2002 Exercise 2001 Exercise 2000 Exercise Shares Price Shares Price Shares Price -------- ------ ------- ------ ------- ------ Outstanding at the beginning of the year. . . . . . . . . . 83,332 $57.65 83,432 $54.42 92,232 $51.75 Granted . . . . . . . . . . . . - - - - - - Forfeited . . . . . . . . . . . (55,555) 57.65 (100) 57.65 (8,800) 51.48 -------- ------ ------- ------- Outstanding at the end of the year . . . . . . . . . . . . . 27,777 57.65 83,332 57.65 83,432 54.42 ======== ======= ======= Options exercisable at year end 27,777 57.65 83,332 57.65 66,726 54.42 Available for future grant. . . 83,334 - 27,779 - 27,679 -
Options Options Outstanding Exercisable Weighted Weighted Weighted Average Average Average Number Remaining Exercise Number Exercise Range of Exercise Prices Outstanding Life (in years) Price Exercisable Price - ------------------------- ------------ -------------- ------- ---------- ----- 44.17. . . . . . . . . . 13,889 3.1 yrs $ 44.17 13,889 $ 44.17 71.14. . . . . . . . . . 13,888 3.1 yrs $ 71.14 13,888 $ 71.14
The Company accounts for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees" and interpretation as permitted under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure'' (SFAS 148). Accordingly, no compensation cost is recorded if the current market price of the underlying stock does not exceed the exercise price at the date of grant. See Note 1 for a pro forma disclosure of the effect stock-based compensation would have had on net loss and net loss per share had the Company applied the fair value accounting provisions of SFAS 123 to stock-based employee compensation and non-employee director compensation. For purposes of applying SFAS 123, the fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
SIG SIG SIG 2002 Grants 2001 Grants 2000 Grants ----------- ------------- ----------- Risk-free interest rates. . . . . . . N/A N/A 5% Dividend yields . . . . . . . . . . . N/A N/A - Volatility factors. . . . . . . . . . N/A N/A 106% Weighted average expected life. . . . N/A N/A 4.0 Years Weighted average fair value per share N/A N/A $ 0.40
17. MANAGEMENT'S PLANS The Company reported net losses of $(35.3) million and $(32.9) million for the years 2002 and 2001, respectively, and is a party to a number of legal proceedings and claims. While shareholders' equity at December 31, 2002 is a deficit of approximately $(179) million, the Company has partially offsetting thirty-year mandatorily redeemable trust preferred stock outstanding of $135 million, which are not due for redemption until 2027. Accumulated interest of approximately $84 million will be due in February 2005. The insurance subsidiaries, excluding IGF, have statutory surplus of approximately $30 million. Management has initiated substantial changes in operational procedures in an effort to return the Company to profitable levels and to improve its financial condition. The Company has and is continuing to raise its rates in a market environment where increasing rates and withdrawal from the market by other companies show positive trends for improving profitability of nonstandard automobile insurance underwriters. During January and February 2002, the Company sustained adverse loss experience on a substantial portion of its new business written in certain markets. In late February and early March 2002, the Company commenced further analysis of loss ratios by individual agency and a review of claim settlement procedures. Based on this and other analysis, the Company took a number of actions to improve the financial position and operating results of the Company including: - - Eliminated reinstatements in all markets, i.e., upon policy cancellation, the insured must obtain a new policy at prevailing rates and underwriting guidelines; - - Terminated or placed on new business moratorium several hundred agents whose loss ratios were abnormally high when compared to the average for the remaining agents (these agents accounted for approximately 16% of the total gross written premium in 2001); - - Increased underwriting requirements in certain markets including: higher down payments, new policy fees, and shorter policy terms; - - Hired a consultant with significant auto claims experience to review processes and suggest modifications to the claims function. The above actions were followed by: - - Replacement of the president of the non-standard automobile business; - - Hiring an experienced vice president of claims; - - Consolidation of all underwriting activities, premium accounting, and agency licensing to the Indianapolis, IN office from Atlanta, GA; - - Closing of regional offices in Denver, CO; Virginia Beach and Alexandria, VA; Glendale, CA; and Jacksonville, FL; - - Replacement of the claims department national litigation manager; - - Replacement of the marketing manager and the product manager; - - Heavy focus on the improvement of process and customer service; and - - Continued transition to an improved policy processing system. These actions have resulted in improved operations and a lower expense ratio. Employee staffing levels decreased 40% from 346 to 209 at December 31, 2001 and 2002, respectively. The Company continues to review all job functions in an effort to improve efficiencies. Management believes that despite the historical losses, it has developed a business plan that can improve the Company's operating results and financial condition in 2003. 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information of continuing operations is as follows (in thousands):
2002 ---- First Second Third Fourth Total -------- -------- -------- --------- --------- Gross written premiums . . . . . . . $43,755 $21,499 $17,449 $ 25,072 $107,775 Net premiums written . . . . . . . . 12,782 5,640 4,169 7,893 30,484 Net premiums earned. . . . . . . . . 11,766 9,876 7,721 8,299 37,662 Total revenues . . . . . . . . . . . 15,280 13,460 11,957 9,314 50,011 Net operating loss From continuing operations (1) . . . (3,102) (4,967) (1,013) (6,965) (16,047) Net loss from continuing operations. (7,729) (9,421) (4,584) (13,526) (35,260) Basic operating loss per share from continuing operations . . . . . (.30) (.48) (.10) (.67) (1.55) Net loss from continuing operations Per share - basic and diluted. . . . (.74) (.91) (0.44) (1.31) (3.40) 2001 ---- First Second Third Fourth Total -------- -------- -------- ------- ------ Gross written premiums . . . . . . . $48,222 $46,868 $27,268 $ 38,734 $161,092 Net premiums written . . . . . . . . 16,829 24,620 14,607 (122) 55,934 Net premiums earned. . . . . . . . . 18,728 23,031 22,839 12,349 76,947 Total revenues . . . . . . . . . . . 22,483 27,858 28,874 16,002 95,217 Net operating loss from Continuing operations (1). . . . . . (5,011) (2,848) (4,029) (2,686) (14,574) Net loss from continuing operations. (9,432) (7,009) (6,824) (7,471) (30,736) Basic operating loss per share from continuing operations . . . . . (.48) (.27) (.39) (.26) (1.40) Net loss from continuing operations Per share - basic and diluted. . . . (.91) (.68) (.66) (.71) (2.96) (1) Operating earnings and per share amounts exclude amortization, interest, taxes, realized capital gains and losses, minority interest, and any extraordinary items.
19. DISCONTINUED OPERATIONS As previously announced, the Company sold its crop insurance operations to Acceptance on June 6, 2001. This business was predominantly written through IGF. The divestiture of the crop insurance segment transferred ownership of crop insurance accounts, effective with the 2001 crop cycle. Management does not expect any remaining crop business to be material to the consolidated financial statements and accordingly has discontinued reporting crop insurance as a business segment. The results of the crop insurance segment have been reflected as "Discontinued Operations" in the accompanying consolidated financial statements. Summarized results of operations and financial position for discontinued operations were as follows: STATEMENTS OF OPERATIONS (in thousands)
Year Ended December 31, 2002 2001 2000 -------- --------- --------- Gross premiums written. . . . . . . . . . . . . . . . . . $ (314) $256,722 $241,748 ======== ========= ========= Net premiums written. . . . . . . . . . . . . . . . . . . $ (5) $ (308) $ 26,466 ======== ========= ========= Net premiums earned. . . . . . . . . . . . . . . . $ 8 $ (308) $ 26,531 Net investment and fee income. . . . . . . . . . . 1,058 1,657 1,229 Net realized capital gain. . . . . . . . . . . . . (2,935) 799 10 -------- --------- --------- Total revenues. . . . . . . . . . . . . . . . . . . . . . (1,869) 2,148 27,770 -------- --------- --------- Loss and loss adjustment expenses. . . . . . . . . 204 3,559 40,690 Policy acquisition and general and administrative expenses. . . . . . . . . . . . . . . . . . . . . . (2,073) 654 2,059 Interest and amortization expense. . . . . . . . . - 91 1,162 -------- --------- --------- Total expenses. . . . . . . . . . . . . . . . . . . . . . (1,869) 4,304 43,911 -------- --------- --------- Loss before income taxes. . . . . . . . . . . . . . . . . - (2,156) (16,141) Income taxes: Current income tax (benefit). . . . . . . . . . . - - - Deferred income tax expense . . . . . . . . . . . - - - -------- --------- --------- Total income tax expense (benefit). . . . . . . . . . . . - - - -------- --------- --------- Loss from operations of discontinued segment. . . . . . . - - (16,141) Loss on disposal of discontinued segment. . . . . . . . . - (2,156) (900) -------- --------- --------- Net loss from discontinued operations . . . . . . . . . . $ - $ (2,156) $(17,041) ======== ========= =========
- ------------------------------------------------------------------------------- MANAGEMENT'S RESPONSIBILITY - ------------------------------------------------------------------------------- Management recognizes its responsibility for conducting the Company's affairs in the best interests of all its shareholders. The consolidated financial statements and related information in this Annual Report are the responsibility of management. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which involve the use of judgement and estimates in applying the accounting principles selected. Other financial information in this Annual Report is consistent with that in the consolidated financial statements. The Company maintains a system of internal controls, which is designed to provide reasonable assurance that accounting records are reliable and to safeguard the Company's assets. The independent accounting firm of BDO Seidman, LLP has audited and reported on the Company's consolidated financial statements for 2002, 2001 and 2000. Their opinion is based upon audits conducted by them in accordance with generally accepted auditing standards to obtain assurance that the consolidated financial statements are free of material misstatements. The Board of Directors, two members of which include outside directors, meets with the independent external auditors and management representatives to review the internal accounting controls, the consolidated financial statements and other financial reporting matters. In addition to having unrestricted access to the books and records of the Company, the independent external auditors also have unrestricted access to the Board of Directors. [GRAPHIC OMITED] [GRAPHIC OMITED] Douglas H. Symons President, Chief Executive Officer and Secretary June 3, 2003 BOARD OF DIRECTORS AND SHAREHOLDERS OF SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES INDIANAPOLIS, INDIANA We have audited the accompanying consolidated balance sheets of Symons International Group, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of earnings (loss), changes in shareholders' equity (deficit) and cash flows for the years ended December 31, 2002, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated 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, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency, and as discussed in Note 13 is a party to a number of legal proceedings and claims, that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 17. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in note 12, the Company's insurance subsidiaries are subject to evaluation and regulation under the NAIC Insurance Regulatory Information System (IRIS) and risk-based capital (RBC) requirements for property and casualty insurance companies. The resulting IRIS test results and RBC calculations reported by the subsidiaries as of December 31, 2002, may result in various levels of corrective action, including regulatory control, by the Indiana Department of Insurance and the Florida Department of Insurance. /s/ BDO Seidman, LLP BDO Seidman, LLP Grand Rapids, Michigan May 9, 2003 SHAREHOLDER INFORMATION Corporate Offices Registrar and Transfer Agent Symons International Group, Inc. National City Bank 4720 Kingsway Drive 4100 West 150th Street Indianapolis, Indiana 46205 3rd Floor (317) 259-6300 Cleveland, Ohio 44135-1385 Independent Public Accountants Annual Meeting of Shareholders BDO Seidman, LLP 4720 Kingsway Drive 99 Monroe, Avenue, N.W., Suite 800 Indianapolis, Indiana 46205 Grand Rapids, Michigan 49503-2698 July 11, 2003 at 10:00 A.M. (EST) ANNUAL REPORT ON FORM 10-K: A copy of the Annual Report on Form 10-K for Symons International Group, Inc. for the year ended December 31, 2002, filed with the Securities and Exchange Commission, may be obtained, without charge, upon request to the individual and address noted under Shareholder Inquiries. MARKET AND DIVIDEND INFORMATION As of July 1, 2000 Symons International Group, Inc.'s common stock began trading on the OTC Bulletin Board under the symbol SIGC.OB. Prior to this date the Company's stock was traded on the NASDAQ Stock Market's National Market.
Stock Trading Prices 2002 2001 ----- ----- Quarter Ended High Low High Low - ------------- ---- --- ---- ---- March 31 $.09 $ .05 $1.19 $.41 June 30 $.06 $ .03 $ .59 $.35 September 30 $.05 $ .01 $ .51 $.06 December 31 $.06 $ .02 $ .17 $.04
Quotations reflect inter-dealer prices without retail mark-up, markdown or commission and may not represent actual transactions. As of March 31, 2003, the Company had approximately 1,200 shareholders, based on the number of holders of record and an estimate of the number of individual participants represented by securities position listings. Symons International Group, Inc. did not declare or pay cash dividends on its common stock during the years ended December 31, 2002, 2001 and 2000, nor does the Company presently plan to pay cash dividends on its common stock. Dividend payments to the Company by its insurance subsidiaries are subject to restrictions and limitations under applicable laws under which an insurance subsidiary may not pay dividends without prior notice to, or approval by, the subsidiary's domiciling insurance regulator. The indenture relating to the Preferred Securities currently prohibits the payment of dividends on the Company's common stock. See Management's Discussion and Analysis of Financial Condition and Results of Operations and the notes to the Consolidated Financial Statements for additional discussion regarding restrictions on the payment of dividends. SHAREHOLDER INQUIRIES Inquiries should be directed to: Mr. Douglas H. Symons President, Chief Executive Officer and Secretary Symons International Group, Inc. Tel.: (317) 259-6413 Email: dsymons@sigins.com BOARD OF DIRECTORS G. GORDON SYMONS Chairman of the Board Symons International Group, Inc. and Goran Capital Inc. DOUGLAS H. SYMONS President and Chief Executive Officer Symons International Group, Inc. President and Chief Executive Officer Goran Capital Inc. TERRY W. ANKER Chairman of the Board Anthology Companies MICHAEL D. PUCKETT President and Chief Financial Officer CFG Wealth Management EXECUTIVE OFFICERS DOUGLAS H. SYMONS President, Chief Executive Officer and Secretary Symons International Group, Inc. GREGG F. ALBACETE Vice President and Chief Information Officer Symons International Group, Inc. DAVID N. HAFLING Vice President and Chief Actuary Symons International Group, Inc. BRUCE K. DWYER Chief Financial Officer Symons International Group, Inc. COMPANY, SUBSIDIARY AND BRANCH OFFICES CORPORATE OFFICE Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Website: www.sigins.com -------------- SUBSIDIARY AND BRANCH OFFICES Superior Insurance Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Website: www.sigauto.com --------------- Pafco General Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company 280 Interstate North Circle, N.W., Suite 500 Atlanta, Georgia 30339 Tel: 770-952-4885 Fax: 770-988-8583 IGF Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Superior Insurance Company - Claims Office 1745 West Orangewood Road, Suite 210 Orange, California 92826 Tel: 714-978-6811 Fax: 714-978-0353 Superior Insurance Company - Claims Office 5503 W Waters Avenue, Suite 500 Tampa, Florida 33634 Tel: 813-887-4878 Fax: 813-243-0268 Superior Insurance Company- Claims Office 4500 PGA Boulevard, Suite 304A Palm Beach Gardens, Florida 33418 Tel: 561-622-7831 Fax: 561-622-9741 EX-99.1 CHARTER 10 doc10.txt Exhibit 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Symons International Group, Inc. (the "Company") on Form 10K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date herof (the 'Report"), I , Douglas H. Symons, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to sction 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of 15(d) of the Securieties Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods stated therein. Dated: June 3, 2003 By: /s/ Douglas H. Symons -------------- ------------------------ Douglas H. Symons Chief Executive Officer EX-99.2 BYLAWS 11 doc11.txt 1 Exhibit 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Symons International Group, Inc. (the "Company") on Form 10K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date herof (the 'Report"), I , Douglas H. Symons, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to sction 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of 15(d) of the Securieties Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods stated therein. Dated: June 3, 2003 By: /s/Bruce K. Dwyer -------------- ------------------- Bruce K. Dwyer Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----