-----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, OrpDAw3LfpR+6ZZI/YE/kv/MAZ4FqRiaWweQ1WCtzNbs5rZt1QHSf1CT7kiub4d9 Jn1RoycSEdnbmUxac4SVJA== 0001013698-97-000003.txt : 19970401 0001013698-97-000003.hdr.sgml : 19970401 ACCESSION NUMBER: 0001013698-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYMONS INTERNATIONAL GROUP INC CENTRAL INDEX KEY: 0001013698 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 351707115 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29042 FILM NUMBER: 97570069 BUSINESS ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 BUSINESS PHONE: 3172596300 MAIL ADDRESS: STREET 1: 11 SOUTH MERIDIAN STREET STREET 2: SUITE 1313 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) ( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the year ended December 31, 1996. ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________. Commission File Number: SYMONS INTERNATIONAL GROUP, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1707115 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 4720 Kingsway Drive, Indianapolis Indiana 46205 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (317) 259-6300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock without par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the 3,450,000 shares of the Issuer's Common Stock held by non-affiliates, as of March 20, 1997 was $52,612,500. The number of shares Common Stock of the Registrant, without par value, outstanding as of March 31, 1997 was 10,450,000. Documents Incorporated By Reference: Portions of the Annual Report to the Shareholders and the Proxy Statement for the 1997 Annual Meeting of Shareholders are incorporated into Parts II and III. Exhibit Index on Page 69. Page 1 of 245. SYMONS INTERNATIONAL GROUP INC. ANNUAL REPORT ON FORM 10-K December 31, 1996 PART I PAGE ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS . . . . . . . . . . . .44 ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . .55 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . .56 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . .57 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . .57 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . .57 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . .57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . .57 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . .57 ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . .58 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . .58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .58 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 ITEM 1 - BUSINESS General Overview Symons International Group, Inc. (the "Company") is a 67% subsidiary of Goran Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering ("Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran. The Company underwrites and markets nonstandard private passenger automobile insurance and crop insurance. Formation of GGS Management Holdings, Inc. ("GGSH"); Acquisition of Superior Insurance Company ("Superior") On January 31, 1996, Goran, the Company, Fortis, Inc. and its wholly-owned subsidiary, Interfinancial, Inc., a holding company for Superior ("Superior"), entered into a Stock Purchase Agreement (the "Superior Purchase Agreement") pursuant to which the Company agreed to purchase Superior from Interfinancial, Inc. (the "Acquisition") for a purchase price of approximately $66.6 Million. Simultaneously with the execution of the Superior Purchase Agreement, Goran, the Company, GGSH and GS Capital Partners II, L.P. ("GS Funds"), a Delaware limited partnership, entered into an agreement (the "GGS Agreement") to capitalize GGSH and to cause GGSH to issue its capital stock to the Company and to the GS Funds, so as to give the Company a 52% ownership interest and the GS Funds a 48% ownership interest (the "Formation Transaction"). Pursuant to the GGS Agreement (a) the Company contributed to GGSH (i) all the outstanding common stock of Pafco General Insurance Company ("Pafco"), with a book value of $16.9 Million, (ii) its right to acquire Superior pursuant to the Superior Purchase Agreement, and (iii) certain fixed assets, including office furniture and equipment, having a value of approximately $350,000, and (b) the GS Funds contributed to GGSH $21.2 Million in cash. The Formation Transaction and the Acquisition were completed on April 30, 1996. Pursuant to the GGS Agreement, prior to the Company's contribution of Pafco to GGSH, Pafco transferred all of the outstanding capital stock of IGF Insurance Company ("IGF") (the "Transfer") in order to improve the risk-based capital rating of Pafco and to permit GGSH to focus exclusively on the nonstandard automobile insurance business. Pafco accomplished the Transfer by forming a wholly-owned subsidiary, IGF Holdings, Inc. ("IGF Holdings"), to which Pafco contributed all of the outstanding shares of capital stock of IGF. Prior to the distribution of the IGF Holdings capital stock to the Company, IGF Holdings paid to Pafco a dividend in the aggregate amount of approximately $11.0 Million (the "Dividend"), consisting of $7.5 Million in cash and a subordinated promissory note in the principal amount of approximately $3.5 Million (the "IGF Note"). Pafco then distributed the outstanding capital stock of IGF Holdings to the Company. IGF Holdings funded the cash portion of the Dividend with bank debt in the principal amount of $7.5 Million (the "IGFH Bank Debt"). The IGFH Bank Debt and the IGF Note were repaid with a portion of the proceeds from the Offering. Prior to the Offering, the Company, through Symons International Group, Inc. - Florida ("SIGF"), its specialized surplus lines underwriting unit based in Florida, provided certain commercial insurance products through retail agencies, principally in the southeast United States. SIGF writes these specialty products through a number of different insurers including Pafco, United National Insurance Group, Munich American Reinsurance Corp. and underwriters at Lloyd's of London. Effective January 1, 1996, the Company transferred to Goran all of the issued and outstanding shares of capital stock of SIGF (the "Distribution"). The Company writes business in the U.S. exclusively through independent agencies and seeks to distinguish itself by offering high quality, technology based services for its agents and policyholders. The Company's nonstandard automobile insurance business, with its principal offices in Indianapolis, Indiana, Atlanta, Georgia, and Tampa, Florida, writes insurance through approximately 4,500 independent agencies in 18 states. IGF with its principal office in Des Moines, Iowa and regional offices in California, Indiana, Kansas, Mississippi and North Dakota, writes MPCI and crop hail insurance through approximately 1,200 independent agencies in 31 states. Based on a Company analysis of gross premiums written in 1995 as reported by A.M. Best, the Company believes that the combination of Pafco and Superior makes the Company's nonstandard automotive group the sixteenth largest underwriter of nonstandard automobile insurance in the United States. Based on premium information compiled in 1995 by the Federal Crop Insurance Corporation ("FCIC") and the National Crop Insurance Services, Inc. ("NCIS"), the Company believes that IGF is the fifth largest underwriter of multi-peril crop insurance ("MPCI") in the United States. The following table sets forth the premiums written by Pafco, Superior and IGF by line of business for the periods indicated: Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1994 1995 1996 Nonstandard Automobile (1) Gross Premiums Written $ 45,593 $ 49,005 $187,176 Net Premiums Written 28,114 37,302 186,579 Crop Hail (2) Gross Premiums Written $ 10,130 $ 16,966 $ 27,957 Net Premiums Written 4,565 11,608 23,013 MPCI (3) Gross Premiums Written $ 44,325 $ 53,408 $ 82,102 Net Premiums Written 0 0 0 Commercial Gross Premiums Written $ 3,086 $ 5,255 $ 8,264 Net Premiums Written 2,460 4,537 0 Total Gross Premiums Written (4) $103,134 $124,634 $305,499 Total Net Premiums Written $ 35,139 $ 53,447 $209,592 (1) Does not reflect net premiums written for Superior for the years ended December 31, 1994 and 1995 and for the four months ended April 30, 1996. For the years ended December 31, 1994 and 1995, Superior and its subsidiaries had gross premiums written of $112.9 Million and $94.8 Million, respectively, and net premiums written of $112.5 Million and $94.1 Million, respectively. For the four months ended April 30, 1996, Superior and its subsidiaries had gross premiums written of $44.0 Million and net premiums written of $43.6 Million. (2) Most crop hail insurance policies are sold in the second and third quarters of the calendar year. (3) For a discussion of the accounting treatment of MPCI premiums, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company". (4) For additional financial segment information concerning the Company's nonstandard automobile and crop insurance operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company". Nonstandard Automobile Insurance Industry Background The Company, through its 52% owned subsidiaries, Pafco and Superior, is engaged in the writing of insurance coverage on automobile physical damage and liability policies for "nonstandard risks". Nonstandard risks are those individuals who are unable to obtain insurance through standard market carriers due to factors such as poor premium payment history, driving experience, record of prior accidents or driving violations, particular occupation or type of vehicle. Premium rates for nonstandard risks are generally higher than for standard risks. Total private passenger automobile insurance premiums written by insurance carriers in the United States in 1995 have been estimated by A.M. Best to be approximately $106 billion. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when standard coverage becomes more restrictive. Although this factor, as well as industry differences in the criteria which distinguish standard from nonstandard insurance, make it difficult to estimate the size of the nonstandard market, management of the Company believes that the voluntary nonstandard market has accounted for approximately 15% of total private passenger automobile insurance premiums written in recent years. According to statistical information derived from insurer annual statements compiled by A.M. Best, the nonstandard automobile market accounted for $17.4 billion in annual premium volume for 1995. Strategy The Company has multiple strategies with respect to its nonstandard automobile insurance operations, including: 1. Through GGS Holdings, the Company seeks to achieve profitability through a combination of internal growth and the acquisition of other insurers and blocks of business. The Company regularly evaluates acquisition opportunities. There can be no assurance, however, that any suitable business opportunities will arise. 2. The Company is committed to the use of integrated technologies which permit it to rate, issue, bill and service policies in an efficient and cost effective manner. 3. The Company competes primarily on the basis of underwriting criteria and service to agents and insureds and generally does not match price decreases implemented by competitors which are directed towards obtaining market share. 4. The Company encourages agencies to place a large share of their profitable business with Pafco and Superior by offering, in addition to fixed commissions, a contingent commission based on a combination of volume and profitability. 5. The Company promptly responds to claims in an effort to reduce the costs of claims settlements by reducing the number of pending claims and uses computer databases to verify repair and vehicle replacement costs and to increase subrogation and salvage recoveries. 6. The Company will seek to expand the multi-tiered marketing approach currently employed by Superior and its subsidiaries in Florida and other states in order to offer to its independent agency network a broader range of products with different premium and commission structures. Products The Company offers both liability and physical damage coverage in the insurance marketplace, with policies having terms of three to twelve months, with the majority of policies having a term of six months. Most nonstandard automobile insurance policyholders choose the basic limits of liability coverage which, though varying from state to state, generally are $25,000 per person and $50,000 per accident for bodily injury, and in the range of $10,000 to $20,000 for property damage. Of the approximately 228,000 combined policies of Pafco and Superior in force on December 31, 1996, fewer than 9% had policy limits in excess of these basic limits of coverage. Of the 63,000 policies of Pafco in force on December 31, 1996, approximately 88% had policy periods of six months or less. Of the approximately 165,000 policies of Superior in force as of December 31, 1996, approximately 74% had policy periods of six months and approximately 26% had policy periods of 12 months. The Company offers several different policies which are directed toward different classes of risk within the nonstandard market. The Superior Choice policy covers insureds whose prior driving record, insurability and other relevant characteristics indicate a lower risk profile than other risks in the nonstandard marketplace. The Superior Standard policy is intended for risks which do not qualify for Superior Choice but which nevertheless present a more favorable risk profile than many other nonstandard risks. The Superior Specialty policies cover risks which do not qualify for either the Superior Choice or the Superior Standard. Pafco offers only a single nonstandard policy which includes multiple discounts and surcharges designed to recognize proof of prior insurance, driving violations, accident history and other factors relevant to the level of risk insured. Superior offers a product similar to the Pafco product in states in which it is not offering a multi- tiered product. Marketing The Company's nonstandard automobile insurance business is concentrated in the states of Florida, California, Indiana, Missouri, Texas and Virginia, and the Company writes nonstandard automobile insurance in 13 additional states. Management plans to continue to expand selectively into additional states. GGS Holdings will select states for expansion based on a number of criteria, including the size of the nonstandard automobile insurance market, state-wide loss results, competition and the regulatory climate. The following tables sets forth the geographic distribution of gross premiums written for the Company and Superior individually and for the Company and Superior on a combined basis for the periods indicated. Symons International Group, Inc. For The Years Ended December 31, (In Thousands) Company Superior 1994 1995 1996 1994 1995 1996 State Arkansas $ 1,619 $ 1,796 $ 2,004 $ 0 $ 0 $ 0 California 0 0 0 13,422 15,350 25,131 Colorado 5,629 9,257 10,262 0 0 0 Florida 0 0 0 55,282 54,535 97,659 Georgia 0 0 0 7,342 5,927 7,398 Illinois 0 80 1,380 3,894 2,403 1,614 Indiana 13,648 13,710 16,599 414 132 0 Iowa 3,769 3,832 5,818 0 0 0 Kentucky 9,573 7,840 11,065 0 0 0 Mississippi 0 0 0 4,411 2,721 2,250 Missouri 8,163 8,513 13,423 0 0 0 Nebraska 3,192 3,660 5,390 0 0 0 Ohio 0 0 0 4,325 3,164 3,643 Oklahoma 0 317 2,559 0 0 0 Tennessee 0 0 0 1,829 332 (2) Texas 0 0 0 10,660 3,464 10,122 Virginia 0 0 0 7,500 5,035 14,733 Washington 0 0 0 3,827 1,693 106 Totals 45,593 49,005 68,500 112,906 94,756 162,654 Symons International Group, Inc. and Superior Insurance Company (Combined) For The Years Ended December 31, (In Thousands) 1994 1995 1996 State Arkansas $ 1,619 $ 1,796 $ 2,004 California 13,422 15,350 25,131 Colorado 5,629 9,257 10,262 Florida 55,282 54,535 97,659 Georgia 7,342 5,927 7,398 Illinois 3,894 2,483 2,994 Indiana 14,062 13,842 16,599 Iowa 3,769 3,832 5,818 Kentucky 9,573 7,840 11,065 Mississippi 4,411 2,721 2,250 Missouri 8,163 8,513 13,423 Nebraska 3,192 3,660 5,390 Ohio 4,325 3,164 3,643 Oklahoma 0 317 2,559 Tennessee 1,829 332 (2) Texas 10,660 3,464 10,122 Virginia 7,500 5,035 14,733 Washington 3,827 1,693 106 Totals $158,499 $143,761 $231,154 The Company and Superior market their nonstandard products exclusively through approximately 4,500 independent agencies and focus their marketing efforts in rural areas and the peripheral areas of metropolitan centers. As part of its strategy, management is continuing its efforts to establish the Company as a low cost deliverer of nonstandard automobile insurance while maintaining a commitment to provide quality service to both agents and insureds. This element of the Company's strategy is being accomplished primarily through the automation of certain marketing, underwriting and administrative functions. In order to maintain and enhance its relationship with its agency base, the Company has 26 territorial managers, each of whom resides in a specific marketing region and has access to the technology and software necessary to provide marketing, rating and administrative support to the agencies in his or her region. The Company attempts to foster strong service relationships with its agencies and customers. The Company is currently developing computer software that will provide on-line communication with its agency force. In addition, to delivering prompt service while ensuring consistent underwriting, the Company offers rating software to its agents in some states which permits them to evaluate risks in their offices. The agent has the authority to sell and bind insurance coverages in accordance with procedures established by the Company, which is a common practice in the property and casualty insurance business. The Company reviews all coverages bound by the agents promptly and generally accepts all coverages which fall within its stated underwriting criteria. In most jurisdictions, the Company has the right within a specified time period to cancel any policy even if the risk falls within its underwriting criteria. See "Business - Nonstandard Automobile Insurance - Underwriting". Pafco and Superior compensate their agents on a commission basis based on a percentage of premiums produced. Pafco also offers its agents a contingent commission based on volume and profitability, thereby encouraging the agents to enhance the placement of profitable business with the Company. Superior has recently incorporated the contingent commission into the compensation package for its agents. The Company believes that the combination of Pafco with Superior and its two Florida domiciled insurance subsidiaries will allow the Company the flexibility to engage in multi-tiered marketing efforts in which specialized automobile insurance products are directed toward specific segments of the market. Since certain state insurance laws prohibit a single insurer from offering similar products with different commission structures or, in some cases, premium rates, it is necessary to have multiple licenses in certain states in order to obtain the benefits of market segmentation. The Company is currently offering multi-tiered products in Florida, Texas, Virginia, California and Missouri. The Company intends to expand the marketing of its multi-tiered products into other states and to obtain multiple licenses for its subsidiaries in these states to permit maximum flexibility in designing commission structures. Underwriting The Company underwrites its nonstandard automobile business with the goal of achieving adequate pricing. The Company seeks to classify risks into narrowly defined segments through the utilization of all available underwriting criteria. The Company maintains an extensive, proprietary database which contains statistical records with respect to its insureds on driving and repair experience by location, class of driver and type of automobile. Management believes this database gives the Company the ability to be more precise in the underwriting and pricing of its products. Further, the Company uses motor vehicle accident reporting agencies to verify accident history information included in applications. The Company utilizes many factors in determining its rates. Some of the characteristics used are type, age and location of the vehicle, number of vehicles per policyholder, number and type of convictions or accidents, limits of liability, deductibles, and, where allowed by law, age, sex and marital status of the insured. The rate approval process varies from state to state; some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and use of rates, while others, such as Florida, Arkansas and California, require approval of the insurance department prior to the use of the rates. The Company has begun to integrate its automated underwriting process with the functions performed by its agency force. For example, the Company has recently introduced a rating software package for use by agents in some states. In many instances, this software package, combined with agent access to the automated retrieval of motor vehicle reports, ensures accurate underwriting and pricing at the point of sale. The Company believes the automated rating and underwriting system provides a significant competitive advantage because it (i) improves efficiencies for the agent and the Company, further linking the agent to the Company, (ii) makes more accurate and consistent underwriting decisions possible, and (iii) can be changed easily to reflect new rates and underwriting guidelines. Underwriting results of insurance companies are frequently measured by their combined ratios. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are generally considered profitable when the combined ratio is under 100% and unprofitable when the combined ratio is over 100%. The following table sets forth loss and LAE ratios, underwriting expense ratios and combined ratios for the periods indicated for the nonstandard automobile insurance business of the Company and Superior individually and on a combined basis. The ratios shown in the table below are computed based upon GAAP, not SAP. Symons International Group, Inc. For The Years Ended December 31, (In Thousands) Company Superior 1994 1995 1996 1994 1995 1996 Loss Ratio 62.3% 65.8% 61.8% 72.3% 64.2% 66.1% LAE Ratio 9.8% 8.0% 8.6% 9.6% 9.9% 9.5% Underwriting Expense Ratio 34.3% 37.5% 33.3% 34.5% 33.5% 23.9% Combined Ratio 106.4% 111.3% 103.7% 116.4% 107.6% 99.5% Symons International Group, Inc. and Superior Insurance Company (Combined) (1) For The Years Ended December 31, (In Thousands) 1994 1995 1996 Loss Ratio 70.5% 64.6% 65.1% LAE Ratio 9.6% 9.4% 8.6% Underwriting Expense Ratio 34.5% 34.8% 27.7% Combined Ratio 114.6% 108.8% 101.4% (1) These ratios have not been computed on a pro-forma basis but rather have been derived by adding the premiums, expenses, losses and LAE of each of the Company and Superior after April 30, 1996. In an effort to maintain and improve underwriting profits, the territorialmanagers regularly monitor loss ratios of the agencies in their regions and meet periodically with the agencies in order to address any adverse trends in loss ratios. Claims The Company's nonstandard automobile claims department handles claims on a regional basis from its Indianapolis, Indiana, Atlanta, Georgia, Tampa, Florida and Anaheim, California locations. Management believes that the employment of salaried claims personnel, as opposed to independent adjusters, results in reduced ultimate loss payments, lower LAE and improved customer service. The Company generally retains independent appraisers and adjusters on an as needed basis for estimation of physical damage claims and limited elements of investigation. The Company uses the Audapoint, Audatex and Certified Collateral Corporation computer programs to verify, through a central database, the cost to repair a vehicle and to eliminate duplicate or "overlap" costs from body shops. Autotrak, which is a national database of vehicles, allows the Company to locate vehicles nearly identical in model, color and mileage to the vehicle damaged in an accident, thereby reducing the frequency of disagreements with claimants as to the replacement value of damaged vehicles. In 1995, the Company implemented new claims handling procedures designed to reduce the number of pending claims. Claims settlement authority levels are established for each adjuster or manager based on the employee's ability and level of experience. Upon receipt, each claim is reviewed and assigned to an adjuster based on the type and severity of the claim. All claims-related litigation is monitored by a home office supervisor or litigation manager. The claims policy of the Company emphasizes prompt and fair settlement of meritorious claims, adequate reserving for claims and controlling claims adjustment expenses. Reinsurance The Company follows the customary industry practice of reinsuring a portion of its risks and paying for that protection based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce the Company's exposure on large individual risks and to provide protection against large losses, including catastrophic losses. Although reinsurance does not legally discharge the ceding insurer from its primary obligation to pay the full amount of losses incurred under policies reinsured, it does render the reinsurer liable to the insurer to the extent provided by the terms of the reinsurance treaty. As part of its internal procedures, the Company evaluates the financial condition of each prospective reinsurer before it cedes business to that carrier. Based on the Company's review of its reinsurers' financial health and reputation in the insurance marketplace, the Company believes its reinsurers are financially sound and that they therefore can meet their obligations to the Company under the terms of the reinsurance treaties. Reserves for uncollectible reinsurance are provided as deemed necessary. In 1995, Pafco maintained a 25% quota share reinsurance treaty on its nonstandard automobile insurance business, as well as an excess of loss treaty covering 100% of losses on an individual occurrence basis in excess of $200,000 up to a maximum of $1,050,000. As of January 1, 1996, Pafco has terminated all third party quota share reinsurance with respect to its nonstandard automobile insurance business. Pafco has entered into a quota share reinsurance agreement with Superior whereby Pafco shall cede 100% of its gross premiums written on or after May 1, 1996 that are in excess of three times outstanding capital and surplus. See "Certain Relationships and Related Transactions - Reinsurance Arrangements". In 1996, Pafco continues to maintain an excess of loss treaty on its nonstandard automobile insurance business covering 100% of losses on an individual occurrence basis in excess of $200,000 up to a maximum of $1,050,000. Of such reinsurers, those having A.M. Best ratings of A or better provided 83% of such coverage. The following table provides information with respect to material third party reinsurers on the foregoing Pafco nonstandard automobile reinsurance treaties: Symons International Group, Inc. For The Year Ended December 31, 1996 (In Thousands) Reinsurers A.M. Best Rating Reinsurance Recoverables(1) Chartwell Reinsurance Company A(2) $ 290 Constitution Reinsurance Corporation A+(3) $1,210 (1) Only recoverables greater than $200,000 are shown. Total nonstandard automobile reinsurance recoverables as of December 31, 1996 were approximately $2,565. (2) An A.M. Best rating of "A" is the third highest of 15 ratings. (3) An A.M. Best rating of "A+" is the second highest of 15 ratings. In 1995, Superior maintained both automobile casualty and property catastrophe excess reinsurance. Superior's casualty excess of loss treaties covered losses in excess of $100,000 up to a maximum of $2 million. Superior's first casualty excess layer contained limits of $200,000 excess of $100,000, its second casualty excess layer contained limits of $700,000 excess of $300,000 and its third casualty excess layer had a limit of $1 million excess of $1 million. Superior's first layer of property catastrophe excess reinsurance covered 95% of $500,000 excess of $500,000 with an annual limit of $1 million and its second layer of property catastrophe excess reinsurance covered 95% of $2 million excess of $1 million with an annual limit of $4 million. In 1996, Superior maintained the same levels of coverage, except as follows: (i) as to its third casualty excess layer, the limit was increased to $4 million, and (ii) Superior added a third layer of property catastrophe excess reinsurance covering 95% of $2 million excess of $3 million with an annual limit of $4 million. Superior has had no quota share reinsurance on its nonstandard automobile business in either 1995 or 1996. In 1995, Superior placed all of its reinsurance with Prudential Reinsurance Company (now Everest Reinsurance Company). In 1996, Superior placed all of its reinsurance with Everest Reinsurance Company, except for its third layer casualty excess of loss treaty, which was placed as follows: Zurich Reinsurance Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%; Transatlantic Reinsurance Company, 15%; SOREMA North American Reinsurance Company, 10%; and Winterthur Reinsurance Corporation of America, 10%. The foregoing reinsurers have the following A.M. Best ratings: Everest Reinsurance Company - "A"; Skandia America Reinsurance Corporation - "A-" (the fourth highest of 15 ratings); SOREMA North American Reinsurance Company - "A-"; Transatlantic Reinsurance Company - "A+"; Winterthur Reinsurance Company of America - "A"; and Zurich Reinsurance Centre, Inc. - "A". For the year ended December 31, 1996, Superior had $737,000 of ceded premiums to unaffiliated reinsurers. On April 29, 1996, Pafco retroactively ceded all of its commercial business relating to 1995 and previous years to Granite Reinsurance Company Ltd. ("Granite Re"), an affiliate, with an effective date of January 1, 1996. On this date, Pafco also entered into a 100% quota share reinsurance Agreement with Granite Re, whereby all of Pafco's commercial business from 1996 and forward was ceded to Granite Re effective January 1, 1996. Pafco has a reinsurance recoverable at December 31, 1996 from Granite Re for $9,230,000, of which $770,000 is uncollateralized. Neither Pafco nor Superior has any facultative reinsurance with respect to its nonstandard automobile insurance business. Competition The Company competes with both large national writers and smaller regional companies in each state in which it operates. The Company's competitors include other companies which, like the Company, serve the agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and, potentially, reduced acquisition costs. The Company's primary competitors are Progressive Casualty Insurance Company, Guaranty National Insurance Company, Integon Corporation Group, Deerbrook Insurance Company (a member of the Allstate Insurance Group) and the companies of the American Financial Group. Generally, these competitors are larger and have greater financial resources than the Company. The nonstandard automobile insurance business is price sensitive and certain competitors of the Company have, from time to time, decreased their prices in an apparent attempt to gain market share. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to match such price decreases, choosing instead to compete on the basis of underwriting criteria and superior service to its agents and insureds. Crop Insurance Industry Background The two principal components of the Company's crop insurance business are MPCI and private named peril, primarily crop hail insurance. Crop insurance is purchased by farmers to reduce the risk of crop loss from adverse weather and other uncontrollable events. Farms are subject to drought, floods and other natural disasters that can cause widespread crop losses and, in severe cases, force farmers out of business. Because many farmers rely on credit to finance their purchases of such agricultural inputs as seed, fertilizer, machinery and fuel, the loss of a crop to a natural disaster can reduce their ability to repay these loans and to find sources of funding for the following year's operating expenses. MPCI was initiated by the federal government in the 1930s to help protect farmers against loss of their crops as a result of drought, floods and other natural disasters. In addition to MPCI, farmers whose crops are lost as a result of natural disasters have, in the past, sometimes been supported by the federal government in the form of ad hoc relief bills providing low interest agricultural loans and direct payments. Prior to 1980, MPCI was available only on major crops in major producing areas. In 1980, Congress expanded the scope and coverage of the MPCI program. In addition, the delivery system for MPCI was expanded to permit private insurance companies and licensed agents and brokers to sell MPCI policies, and the FCIC was authorized to reimburse participating companies for their administrative expenses and to provide federal reinsurance for the majority of the risk assumed by such private companies. Although expansion of the federal crop insurance program in 1980 was expected to make crop insurance the farmer's primary risk management tool, participation in the MPCI program was only 32% of eligible acreage in the 1993 crop year. Due in part to low participation in the MPCI program, Congress provided an average of $1.5 billion per year in ad hoc disaster payments over the six years prior to 1994. In view of the combination of low participation rates in the MPCI program and large federal payments on both crop insurance (with an average loss ratio of 147%) and ad hoc disaster payments since 1980, Congress has, since 1990, considered major reform of its crop insurance and disaster assistance policies. The Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act") was enacted in order to increase participation in the MPCI program and eliminate the need for ad hoc federal disaster relief payments to farmers. The 1994 Reform Act required farmers for the first time to purchase at least CAT Coverage (i.e., the minimum available level of MPCI providing coverage for 50% of farmers' historic yield at 60% of the price per unit for such crop set by the FCIC) in order to be eligible for other federally sponsored farm benefits, including, but not limited to, low interest loans and crop price supports. The 1994 Reform Act also authorized the marketing and selling of CAT Coverage by the local United States Department of Agriculture ("USDA") offices. The Federal Agriculture Improvement and Reform Act of 1996 ("the 1996 Reform Act"), signed into law by President Clinton in April, 1996, limits the role of the USDA offices in the delivery of MPCI coverage beginning in July, 1996, which is the commencement of the 1997 crop year, and also eliminates the linkage between CAT Coverage and qualification for certain federal farm program benefits. This limitation should provide the Company with the opportunity to realize increased revenues from the distribution and servicing of its MPCI product. In accordance with the 1996 Reform Act, the USDA announced in July, 1996, the following 14 states in which CAT Coverage will no longer be available through USDA offices but rather will be solely available through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and Wyoming. The FCIC has transferred to the Company approximately 8,900 insureds for CAT Coverage who previously purchased such coverage from USDA field offices. The Company believes that any future potential negative impact of the delinkage mandated by the 1996 Reform Act will be mitigated by, among other factors, the likelihood that farmers will continue to purchase MPCI to provide basic protection against natural disasters since ad hoc federal disaster relief programs have been reduced or eliminated. In addition, the Company believes that (i) lending institutions will likely continue to require this coverage as a condition to crop lending, and (ii) many of the farmers who entered the MPCI program as a result of the 1994 Reform Act have come to appreciate the reasonable price of the protection afforded by CAT Coverage and will remain with the program regardless of delinkage. There can, however, be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. Strategy The Company has multiple strategies for its crop insurance operations, including the following: 1. The Company will seek to enhance underwriting profits and reduce the volatility of its crop insurance business through geographic diversification and the appropriate allocation of risks among the federal reinsurance pools and the effective use of federal and third-party catastrophic reinsurance arrangements. 2. The Company also limits the risks associated with crop insurance through selective underwriting of crops based on its historical loss experience data base. 3. The Company continues to develop and maintain a proprietary knowledge- based underwriting system which utilizes a database of Company-specific underwriting rules. 4. The Company has further strengthened its independent agency network by using technology to provide fast, efficient service to its agencies and providing application documentation designed for simplicity and convenience. 5. Unlike many of its competitors, the Company employs a number of full time claims adjusters in order to reduce the losses experienced by IGF. 6. The Company stops selling its crop hail policies after the date on which the plant growth emerges from the ground in order to prevent farmers from adversely selecting against IGF when a storm is forecast or hail damage has already occurred. 7. The Company continues to explore growth opportunities and product diversification through new specialty coverages, including Crop Revenue Coverage and named peril insurance. 8. The Company continues to explore new opportunities for advances in administrative efficiencies and product underwriting presented by advances in Precision Farming software, Global Positioning System (GPS) software and Geographical Information System (GIS) technology, all of which continue to be adopted by insureds in their farming practices. Products Description of MPCI Insurance Program MPCI is a federally-subsidized program which is designed to provide participating farmers who suffer insured crop damage with funds needed to continue operating and plant crops for the next growing season. All of the material terms of the MPCI program and of the participation of private insurers, such as the Company, in the program are set by the FCIC under applicable law. MPCI provides coverage for insured crops against substantially all natural perils. Purchasing an MPCI policy permits a farmer to insure against the risk that his crop yield for any growing season will be less than 50% to 75% (as selected by the farmer at the time of policy application or renewal) of his historic crop yield. If a farmer's crop yield for the year is greater than the yield coverage he selected, no payment is made to the farmer under the MPCI program. However, if a farmer's crop yield for the year is less than the yield coverage selected, MPCI entitles the farmer to a payment equal to the yield shortfall multiplied by 60% to 100% of the price for such crop (as selected by the farmer at the time of policy application or renewal) for that season as set by the FCIC. In order to encourage farmers to participate in the MPCI program and thereby reduce dependence on traditional disaster relief measures, the 1994 Reform Act established CAT Coverage as a new minimum level of MPCI coverage, which farmers may purchase upon payment of a fixed administrative fee of $50 per policy instead of any premium. CAT Coverage insures 50% of historic crop yield at 60% of the FCIC-set crop price for the applicable commodities standard unit of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private insurers such as the Company or, in certain states, from USDA field offices. In addition to CAT Coverage, MPCI policies that provide a greater level of protection than the CAT Coverage level are also offered ("Buy-up Coverage"). Most farmers purchasing MPCI have historically purchased at Buy-up Coverage levels, with the most frequently sold policy providing coverage for 65% of historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up Coverages require payment of a premium in an amount determined by a formula set by the FCIC. Buy-up Coverage can only be purchased from private insurers. The Company focuses its marketing efforts on Buy-up Coverages, which have higher premiums and which the Company believes will continue to appeal to farmers who desire, or whose lenders encourage or require, revenue protection. The number of MPCI Buy-up policies written has historically tended to increase after a year in which a major natural disaster adversely affecting crops occurs, and to decrease following a year in which favorable weather conditions prevail. The Company, like other private insurers participating in the MPCI program, generates revenues from the MPCI program in two ways. First, it markets, issues and administers policies, for which it receives administrative fees; and second, it participates in a profit-sharing arrangement in which it receives from the government a portion of the aggregate profit, or pays a portion of the aggregate loss, in respect of the business it writes. The Company's share of profit or loss on the MPCI business it writes is determined under a complex profit sharing formula established by the FCIC. Under this formula, the primary factors that determine the Company's MPCI profit or loss share are (i) the gross premiums the Company is credited with having written; (ii) the amount of such credited premiums retained by the Company after ceding premiums to certain federal reinsurance pools; and (iii) the loss experience of the Company's insureds. The following discussion provides more detail about the implementation of this profit sharing formula. Gross Premiums For each year, the FCIC sets the formulas for determining premiums for different levels of Buy-up Coverage. Premiums are based on the type of crop, acreage planted, farm location, price per bushel for the insured crop as set by the FCIC for that year, and other factors. The federal government will generally subsidize a portion of the total premium set by the FCIC and require farmers to pay the remainder. Cash premiums are received by the Company from farmers only after the end of a growing season and are then promptly remitted to the federal government. Although applicable federal subsidies change from year to year, such subsidies will range up to approximately 40% of the Buy-up Coverage premium for 1996 depending on the crop insured and the level of Buy- up Coverage purchased, if any. Federal premium subsidies are recorded on the Company's behalf by the government. For purposes of the profit sharing formula, the Company is credited with having written the full amount of premiums paid by farmers for Buy-up Coverages, plus the amount of any related federal premium subsidies (such total amount, its "MPCI Premium"). As previously noted, farmers pay an administrative fee of $50 per policy but are not required to pay any premium for CAT Coverage. However, for purposes of the profit sharing formula, the Company is credited with an imputed premium (its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount of such MPCI Imputed Premium credited is determined by formula. In general, such MPCI Imputed Premium will be less than 50% of the premium that would be payable for a Buy-up Coverage policy that insured 65% of historic crop yield at 100% of the FCIC-set crop price per standard unit of measure for the commodity, historically the most frequently sold Buy-up Coverage. For income statement purposes under GAAP, the Company's gross premiums written for MPCI consist only of its MPCI Premiums and do not include MPCI Imputed Premiums. Reinsurance Pools Under the MPCI program, the Company must allocate its MPCI Premium or MPCI Imputed Premium in respect of a farm to one of three federal reinsurance pools, at its discretion. These pools provide private insurers with different levels of reinsurance protection from the FCIC on the business they have written. For insured farms allocated to the "Commercial Pool", the Company, at its election, generally retains 50% to 100% of the risk and the FCIC assumes 0% - 50% of the risk; for those allocated to the "Developmental Pool", the Company generally retains 35% of the risk and the FCIC assumes 65%; and for those allocated to the "Assigned Risk Pool", the Company retains 20% of the risk and the FCIC assumes 80%. The MPCI Retention is protected by private third party stop loss treaties. Although the Company in general must agree to insure any eligible farm, it is not restricted in its decision to allocate a risk to any of the three pools, subject to a minimum aggregate retention of 35% of its MPCI Premiums and MPCI Imputed Premiums written. The Company uses a sophisticated methodology derived from a comprehensive historical data base to allocate MPCI risks to the federal reinsurance pools in an effort to enhance the underwriting profits realized from this business. The Company has crop yield history information with respect to over 100,000 farms in the United States. Generally, farms or crops which, based on historical experience, location and other factors, appear to have a favorable net loss ratio and to be less likely to suffer an insured loss, are placed in the Commercial Pool. Farms or crops which appear to be more likely to suffer a loss are placed in the Developmental Pool or Assigned Risk Pool. The Company has historically allocated the bulk of its insured risks to the Commercial Pool. The Company's share of profit or loss depends on the aggregate amount of MPCI Premium and MPCI Imputed Premium on which the Company retains risk after allocating farms to the foregoing pools (its "MPCI Retention"). As previously described, the Company purchases reinsurance from third parties other than the FCIC to further reduce its MPCI loss exposure. Loss Experience of Insureds Under the MPCI program the Company pays losses to farmers through a federally funded escrow account as they are incurred during the growing season. The Company requests funding of the escrow account when a claim is settled, and the escrow account is funded by the federal government within three business days. After a growing season ends, the aggregate loss experience of the Company's insureds in each state for risks allocated to each of the three reinsurance pools is determined. If, for all risks allocated to a particular pool in a particular state, the Company's share of losses incurred is less than its aggregate MPCI Retention, the Company shares in the gross amount of such profit according to a schedule set by the FCIC for each year. The profit and loss sharing percentages are different for risks allocated to each of the three reinsurance pools, and private insurers will receive or pay the greatest percentage of profit or loss for risks allocated to the Commercial Pool. The percentage split between private insurers and the federal government of any profit or loss which emerges from an MPCI Retention is set by the FCIC and generally is adjusted from year to year. For 1995, 1996 and 1997 crop years, the FCIC increased the maximum potential profit share of private insurers for risks allocated to the Commercial Pool above the maximum potential profit share set for 1994, without increasing the maximum potential share of loss for risks allocated to that pool for 1995. This change increased the potential profitability of risks allocated to the Commercial Pool by private insurers. The following table presents MPCI Premiums, MPCI Imputed Premiums, and underwriting gains or losses of IGF for the periods indicated: Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1994 1995 1996 MPCI Premiums $44,325 $53,408 $82,102 MPCI Imputed Premiums 2,171 19,552 29,744 Gross Underwriting Gain 4,344 10,870 15,801 Net Private Third-Party Reinsurance Expense And Other (1,087) (1,217) (3,524) Net Underwriting Gain 3,257 9,653 12,277 MPCI Fees and Reimbursement Payments The Company receives Buy-up Expense Reimbursement Payments from the FCIC for writing and administering Buy-up Coverage policies. These payments provide funds to compensate the Company for its expenses, including agents' commissions and the costs of administering policies and adjusting claims. In 1994, the Buy-up Expense Reimbursement Payments were set at 31% of the MPCI Premium. In 1995 and 1996, this payment has also been set at 31% of the MPCI Premium, but it is scheduled to be reduced to 29% in 1997, 28% in 1998, and 27.5% in 1999. Although the 1994 Reform Act directs the FCIC to alter program procedures and administrative requirements so that the administrative and operating costs of private insurance companies participating in the MPCI program will be reduced in an amount that corresponds to the reduction in the expense reimbursement rate, there can be no assurance that the Company's actual costs will not exceed the expense reimbursement rate. Farmers are required to pay a fixed administrative fee of $50 per policy in order to obtain CAT Coverage. This fee is retained by the Company to defray the cost of administration and policy acquisition. The Company also receives, from the FCIC, a separate CAT LAE Reimbursement Payment equal to approximately 13.0% of MPCI Imputed Premiums in respect of each CAT Coverage policy it writes and a small MPCI Excess LAE Reimbursement Payment. In general, fees and payments received by the Company in respect of CAT Coverage are significantly lower than those received for Buy-up Coverage. In addition to premium revenues, the Company received the following fees and commissions from its crop insurance segment for the periods indicated: Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1994 1995 1996 CAT Coverage Fees $ 74 $ 1,298 $ 1,181 Buy-up Expense Reimbursement Payments 13,845 16,366 24,971 CAT LAE Reimbursement Payments and MPCI Excess LAE Reimbursement Payments 107 3,427 5,753 Total $14,026 $21,091 $31,905 Crop Revenue Coverage The Company has recently introduced a new product in its crop insurance business called Crop Revenue Coverage ("CRC"). In contrast to standard MPCI coverage, which features a yield guarantee or coverage for the loss of production, CRC provides the insured with a guaranteed revenue stream by combining both yield and price variability protection. CRC protects against a grower's loss of revenue resulting from fluctuating crop prices and/or low yields by providing coverage when any combination of crop yield and price results in revenue that is less than the revenue guarantee provided by the policy. CRC was approved by the FCIC as a pilot program for revenue insurance coverage plans for the 1996 crop year, and has been available for corn and soybeans in all counties in Iowa and Nebraska beginning with such crop year. CRC policies represent approximately 30% of the combined corn policies written by IGF in Iowa and Nebraska for the 1996 crop year. In July, 1996, the FCIC announced that CRC will be made available in the fall of 1996 for winter wheat in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas and Washington and in parts of Montana. Revenue insurance coverage plans such as CRC are the result of the 1994 Reform Act, which directed the FCIC to develop a pilot crop insurance program providing coverage against loss of gross income as a result of reduced yield and/or price. CRC was developed by a private insurance company other than the Company under the auspices of this pilot program, which authorizes private companies to design alternative revenue coverage plans and to submit them for review, approval and endorsement by the FCIC. As a result, although CRC is administered and reinsured by the FCIC and risks are allocated to the federal reinsurance pools, CRC remains partially influenced by the private sector, particularly with respect to changes in its rating structure. CRC plans to use the policy terms and conditions of the Actual Production History ("APH") plan of MPCI as the basic provisions for coverage. The APH provides the yield component by utilizing the insured's historic yield records. The CRC revenue guarantee is the producer's approved APH times the coverage level, times the higher of the spring futures price or harvest futures price (in each case, for post-harvest delivery) of the insured crop for each unit of farmland. The coverage levels and exclusions in a CRC policy are similar to those in a standard MPCI policy. As with MPCI policies, the Company receives from the FCIC an expense reimbursement payment equal to 31% of gross premiums written in respect of each CRC policy it writes. See " - MPCI Fees and Reimbursement Payments". This expense reimbursement payment is scheduled to be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999. CRC protects revenues by extending crop insurance protection based on APH to include price as well as yield variability. Unlike MPCI, in which the crop price component of the coverage is set by the FCIC prior to the growing season and generally does not reflect actual crop prices, CRC uses the commodity futures market as the basis for its pricing component. Pricing occurs twice in the CRC plan. The spring futures price is used to establish the initial policy revenue guarantee and premium, and the harvest futures price is used to establish the crop value to count against the revenue guarantee and to recompute the revenue guarantee (and resulting indemnity payments) when the harvest price is higher than the spring price. The industry (including the Company) and the FCIC are reviewing the current rating structure supporting the CRC product. The Company is studying this issue and other factors as part of its MPCI underwriting and risk allocation plan, although the Company currently expects to offer CRC in the regions where it can be sold for winter wheat in 1996 because of high interest in the product among farmers. Based on crop performance to date in the regions where it has written CRC for spring planted crops, the Company does not believe that any potential underpricing of CRC policies it has written for such crops will adversely affect its results of operations. Crop Hail In addition to MPCI, the Company offers stand alone crop hail insurance, which insures growing crops against damage resulting from hail storms and which involves no federal participation, as well as its proprietary HAILPLUS product which combines the application and underwriting process for MPCI and hail coverages. The HAILPLUS product tends to produce less volatile loss ratios than the stand alone product since the combined product generally insures a greater number of acres, thereby spreading the risk of damage over a larger insured area. Approximately 50% of IGF's hail policies are written in combination with MPCI. Although both crop hail and MPCI provide insurance against hail damage, under crop hail coverages farmers can receive payments for hail damage which would not be severe enough to require a payment under an MPCI policy. The Company believes that offering crop hail insurance enables it to sell more MPCI policies than it otherwise would. Named Peril In addition to crop hail insurance, the Company also sells a small volume of insurance against crop damage from other specific named perils. These products cover specific crops, including hybrid seed corn, cranberries, cotton, tomatoes and onions, and are generally written on terms that are specific to the kind of crop and farming practice involved and the amount of actuarial data available. The Company plans to seek potential growth opportunities in this niche market by developing basic policies on a diverse number of named crops grown in a variety of geographic areas, and to offer these polices primarily to large producers through certain select agents. The Company's experienced product development team will develop the underwriting criteria and actuarial rates for the named peril coverages. As with the Company's other crop insurance products, loss adjustment procedures for named peril policies are handled by full-time professional claims adjusters who have specific agronomy training with respect to the crop and farming practice involved in the coverage. Third Party Reinsurance In Effect For 1996 In order to reduce the Company's potential loss exposure under the MPCI program, the Company purchases stop loss reinsurance from other private insurers in addition to reinsurance obtained from the FCIC. In addition, since the FCIC and state regulatory authorities require IGF to limit its aggregate writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of capital, and retain a net loss exposure of not in excess of 50% of capital, IGF may also obtain reinsurance from private insurers in order to permit it to increase its premium writings. Such private reinsurance would not eliminate the Company's potential liability in the event a reinsurer was unable to pay or losses exceeded the limits of the stop loss coverage. For crop hail insurance, the Company has in effect quota share reinsurance of 10% of premiums, although the reinsurer is only liable to participate in losses of the Company up to a 150% pure loss ratio. The Company also has stop loss treaties for its crop hail business which reinsure approximately 45% of losses in excess of an 80% pure loss ratio up to a 100% pure loss ratio and 95% of losses in excess of a 100% pure loss ratio up to a 140% pure loss ratio. With respect to its MPCI business, the Company has stop loss treaties which reinsure 93.75% of the underwriting losses experienced by the Company to the extent that aggregate losses of its insureds nationwide are in excess of 100% of the Company's MPCI Retention up to 125% of MPCI Retention. The Company also has an additional layer of MPCI stop loss reinsurance which covers 95% of the underwriting losses experienced by the Company to the extent that aggregate losses of its insureds nationwide are in excess of 125% of MPCI Retention up to 150% of MPCI Retention. Based on a review of the reinsurers' financial health and reputation in the insurance marketplace, the Company believes that the reinsurers for its crop insurance business are financially sound and that they therefore can meet their obligations to the Company under the terms of the reinsurance treaties. Reserves for uncollectible reinsurance are provided as deemed necessary. The following table provides information with respect to all reinsurers on the aforementioned IGF reinsurance agreements: Symons International Group, Inc. For The Year Ended December 31, 1996 (In Thousands) Reinsurers A.M. Best Rating Ceded Premiums Folksam International Insurance Co. Ltd. A-(2) $ 587 Frankona Ruckversicherungs AG A(3) $ 400 Granite Re NR(4) $1,609 Insurance Corporation Of Hannover A- $1,159 Liberty Mutual Insurance Co. (UK) Ltd A $ 364 Partner Reinsurance Company Ltd. A $1,587 R & V Versicherung AG NR(5) $ 852 Scandinavian Reinsurance Company Ltd. A+(6) $1,393 (1) For the year ended December 31, 1996, total ceded premiums were $86,393. (2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings. (3) An A.M. Best rating of "A" is the third highest of 15 ratings. (4) Granite Re, an affiliate of the Company, is an insurer domiciled in Barbados which has never applied for or requested such a rating. (5) R + V Versicherung AG is an insurer domiciled outside of the United States and, as such, does not have a rating from A.M. Best. (6) An A.M. Best rating of "A+" is the second highest of 15 ratings. Marketing; Distribution Network IGF markets its products to the owners and operators of farms in 31 states through approximately 2,500 agents associated with approximately 1,200 independent insurance agencies, with its primary geographic concentration in the states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has, however, begun to diversify outside of the Midwest and Texas in order to reduce the risk associated with geographic concentration. IGF is licensed in 20 states and markets its products in additional states through a fronting agreement with a third party insurance company. IGF has a stable agency base and it experienced negligible turnover in its agencies in 1996. Through its agencies, IGF targets farmers with an acreage base of at least 1,000 acres. Such larger farms typically have a lower risk exposure since they tend to utilize better farming practices and to have noncontiguous acreage, thereby making it less likely that the entire farm will be affected by a particular occurrence. Many farmers with large farms tend to buy or rent acreage which is increasingly distant from the central farm location. Accordingly, the likelihood of a major storm (wind, rain or hail) or a freeze affecting all of a particular farmer's acreage decreases. The following table presents MPCI Premiums written by IGF by state for the years ended December 31, 1994, 1995 and 1996. Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1994 1995 1996 State Texas $ 6,751 $11,075 $12,361 Iowa 8,506 9,296 15,205 Illinois 7,302 7,305 11,228 Kansas 2,003 3,476 5,249 Minnesota 1,965 2,026 2,244 Nebraska 1,536 1,992 3,206 Indiana 1,486 1,875 3,870 Colorado 1,526 1,771 3,334 Missouri 1,785 1,718 2,427 North Dakota 1,153 1,638 2,796 All Other 10,312 11,236 20,182 Total $44,325 $53,408 $82,102 The following table presents gross premiums written by IGF by state for crop hail coverages for the years ended December 31, 1994, 1995 and 1996. Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1994 1995 1996 State Iowa $ 3,954 $ 4,667 $ 6,590 Minnesota 318 2,162 2,300 Colorado 964 1,775 1,651 Nebraska 1,022 1,477 1,567 Montana 239 1,355 5,632 North Dakota 1,087 1,283 2,294 Kansas 765 846 661 South Dakota 124 756 1,457 Wisconsin 315 458 370 Mississippi 277 400 482 All Other 1,065 1,787 4,953 Total $10,130 $16,966 $27,957 The Company seeks to maintain and develop its agency relationships by providing agencies with faster, more efficient service as well as marketing support. IGF owns an IBM AS400 along with all peripheral and networking equipment and has developed its own proprietary software package, Aplus, which allows agencies to quote and examine various levels of coverage on their own personal computers. The Company has seven regional managers who are responsible for the Company's field operations within an assigned geographic territory, including maintaining and enhancing relationships with agencies in those territories. IGF also uses application documentation which is designed for simplicity and convenience. The Company believes that IGF is the only crop insurer which has created a single application for MPCI and hail coverage. IGF generally compensates its agents based on a percentage of premiums produced and, in the case of CAT Coverage and crop hail insurance, a percentage of underwriting gain realized with respect to business produced. This compensation structure is designed to encourage agents to place profitable business with IGF (which tends to be insurance coverages for larger farms with respect to which the risk of loss is spread over larger, frequently noncontiguous insured areas). Underwriting Management Because of the highly regulated nature of the MPCI program and the fact that rates are established by the FCIC, the primary underwriting functions performed by the Company's personnel with respect to MPCI coverage are (i) selecting of marketing territories for MPCI based on the type of crops being grown in the area, typical weather patterns and loss experience of both agencies and farmers within a particular area, (ii) recruiting agencies within those marketing territories which service larger farms and other more desirable risks, and (iii) ensuring that policies are underwritten in accordance with the FCIC rules. With respect to its hail coverage, IGF seeks to minimize its underwriting losses by maintaining an adequate geographic spread of risk by rate group. In addition, IGF establishes sales closing dates after which hail policies will not be sold. These dates are dependent on planting schedules, vary by geographic location and range from May 15 in Texas to July 15 in North Dakota. Prior to these dates, crops are either seeds in the ground or young growth newly emerged from the ground and hail damage to crops in either of these stages of growth is minimal. The cut-off dates prevent farmers from adversely selecting against IGF by waiting to purchase hail coverage until a storm is forecast or damage has occurred. For its hail coverage, IGF also sets limits by policy ($400,000 each) and by township ($2.0 million per township). The Company also uses a daily report entitled "Severe Weather Digest" which shows the time and geographic location of all extraordinary weather events to check incoming policy applications against possible previous damage. Claims/Loss Adjustments In contrast to most of its competitors who retain independent adjusters on a part-time basis for loss adjusting services, IGF employs full-time professional claims adjusters who are agronomy trained as well as part-time adjusters. Management believes that the professionalism of the IGF full-time claims staff coupled with their exclusive commitment to IGF helps to ensure that claims are handled in a manner so as to reduce overpayment of losses experienced by IGF. The adjusters are located throughout IGF's marketing territories. In order to promote a rapid claims response, the Company has deployed several small four wheel drive vehicles for use by its adjusters. The adjusters report to a field service representative in their territory who manages adjusters' assignments, assures that all preliminary estimates for loss reserves are accurately reported and assists in loss adjustment. Within 72 hours of reported damage, a loss notice is reviewed by an IGF service office claims manager and a preliminary loss reserve is determined which is based on the representative's and/or adjuster's knowledge of the area or the particular storm which caused the loss. Generally, within approximately two weeks, hail and MPCI claims are examined and reviewed on site by an adjuster and the insured signs a proof of loss form containing a final release. As part of the adjustment process, IGF's adjusters use Global Positioning System Units, which are hand held devices using navigation satellites to determine the precise location where a claimed loss has occurred. IGF has a team of catastrophic claims specialists who are available on 48 hours notice to travel to any of IGF's six regional service offices to assist in heavy claim work load situations. Competition The crop insurance industry is highly competitive. The Company competes against other private companies and, with respect to CAT Coverage, USDA field service offices in certain areas. However, under the 1996 Reform Act, effective for the 1997 crop year, USDA field service offices may offer CAT Coverage in a state only if the Secretary of Agriculture determines that there is an insufficient number of approved insurance providers operating in the state to provide CAT Coverage to producers adequately. Many of the Company's competitors have substantially greater financial and other resources than the Company, and there can be no assurance that the Company will be able to compete effectively against such competitors in the future. The Company competes on the basis of the commissions paid to agents, the speed with which claims are paid, the quality and extent of services offered, the reputation and experience of its agency network and, in the case of private insurance, policy rates. Because the FCIC establishes the rates that may be offered for MPCI policies, the Company believes that quality of service and level of commissions offered to agents are the principal factors on which it competes in the area of MPCI. The Company believes that the crop hail and other named peril crop insurance industry is extremely rate-sensitive and the ability to offer competitive rate structures to agents is a critical factor in the agent's ability to write crop hail and other named peril premiums. Because of the varying state laws regarding the ability of agents to write crop hail and other named peril premiums prior to completion of rate and form filings (and, in some cases, state approval of such filings), a company may not be able to write its expected premium volume if its rates are not competitive. The crop insurance industry has become increasingly consolidated. From the 1985 crop year to the 1996 crop year, the number of insurance companies having agreements with the FCIC to sell and service MPCI policies has declined from 50 to 16. The Company believes that IGF is the fifth largest MPCI crop insurer in the U.S. based on premium information compiled in 1995 by the FCIC and NCIS. The Company's primary competitors are Rain & Hail Insurance Service, Inc. (affiliated with Cigna Insurance Company), Rural Community Insurance Services, Inc. (which is owned by Norwest Corporation), American Growers Insurance Company (Redland), Crop Growers Insurance, Inc., Great American Insurance Company, Blakely Crop Hail (an affiliate of Farmers Alliance Mutual Insurance Company) and North Central Crop Insurance, Inc. The Company believes that in order to compete successfully in the crop insurance business it will have to market and service a volume of premiums sufficiently large to enable the Company to continue to realize operating efficiencies in conducting its business. No assurance can be given that the Company will be able to compete successfully if this market further consolidates. Reserves for Losses and Loss Adjustment Expenses Loss reserves are estimates, established at a given point in time based on facts then known, of what an insurer predicts its exposure to be in connection with incurred losses. LAE reserves are estimates of the ultimate liability associated with the expense of settling all claims, including investigation and litigation costs resulting from such claims. The actual liability of an insurer for its losses and LAE reserves at any point in time will be greater or less than these estimates. The Company maintains reserves for the eventual payment of losses and LAE with respect to both reported and unreported claims. Nonstandard automobile reserves for reported claims are established on a case-by-case basis. The reserving process takes into account the type of claim, policy provisions relating to the type of loss and historical paid loss and LAE for similar claims. Reported crop insurance claims are reserved based upon preliminary notice to the Company and investigation of the loss in the field. The ultimate settlement of a crop loss is based upon either the value or the yield of the crop. Under the second method, loss and LAE reserves for claims that have been incurred but not reported are estimated based on many variables including historical and statistical information, inflation, legal developments, economic conditions, trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. The following loss reserve development tables illustrate the change over time of reserves established for claims and claims expense at the end of various calendar years for the nonstandard automobile segment of the Company (not including Superior), and for Superior separately. The first three line items show the reserves as originally reported at the end of the stated year. The table also includes the cumulative amounts paid as of the end of successive years with respect to that reserve liability. The "liabilities reestimated" section indicates reestimates of the original recorded reserve as of the end of each successive year based on additional information pertaining to such liabilities. The last portion of the table compares the latest reestimated reserve to the reserve amount as originally established and indicates whether or not the original recorded amount was adequate or inadequate to cover the estimated costs of unsettled claims. The reserve for claims and claims expense is an accumulation of the estimated amounts necessary to settle all outstanding claims as of the date for which the reserve is stated. The reserve and payment data shown below have been reduced for estimated subrogation and salvage recoveries. The reserve estimates are based upon the factors in each case and experience with similar cases. No attempt is made to isolate explicitly the impact of inflation from the multitude of factors influencing the reserve estimates though inflation is implicitly included in the estimates. The Company and Superior regularly update their reserve forecasts by type of claim as new facts become known and events occur which affect unsettled claims. The Company and Superior do not discount their reserves for unpaid claims and claims expense. The following loss reserve development tables are cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. Conditions and trends that have affected the development of liability in the past may not necessarily reoccur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies from the table. Symons International Group, Inc. Nonstandard Automobile Insurance Only (Not Including Superior) For The Years Ended December 31, (In Thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gross Reserves For Unpaid Losses And LAE $26,819 $30,844 $27,145 Deduct: Reinsurance Recoverable 10,927 9,921 8,124 Reserve For Unpaid Losses And LAE, Net Of Reinsurance $4,748 $10,775 $14,346 $17,083 $17,449 $18,706 $16,544 $16,522 $20,923 $19,021 Paid Cumulative As Of: One Year Later 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059 8,082 Two Years Later 4,318 7,510 10,388 10,930 12,723 14,934 12,966 8,806 Three Years Later 4,433 7,875 12,107 12,497 14,461 16,845 13,142 Four Years Later 4,146 8,225 12,863 13,271 15,071 16,641 Five Years Later 4,154 8,513 13,147 13,503 14,903 Six Years Later 4,297 8,546 13,237 13,500 Seven Years Later 4,297 8,561 13,238 Eight Years Later 4,295 8,561 Nine Years Later 4,295 Liabilities Reestimated As Of: One Year Later 3,434 11,208 15,060 15,103 16,797 18,872 16,747 17,000 21,748 Two Years Later 4,588 11,413 14,178 14,745 16,943 19,599 17,023 17,443 Three Years Later 4,702 10,923 14,236 14,993 16,914 19,662 17,009 Four Years Later 4,311 10,791 14,479 14,809 16,750 19,651 Five Years Later 4,234 10,877 14,436 14,659 16,746 Six Years Later 4,320 10,825 14,468 14,659 Seven Years Later 4,278 10,922 14,468 Eight Years Later 4,309 10,921 Nine Years Later 4,309 Net Cumulative (Deficiency) Or Redundancy 439 (146) (22) 2,424 695 (945) (465) (921) (825) Expressed As A Percentage Of Unpaid Losses And LAE 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.8%) (5.6%) (3.9%)
Net reserves for the nonstandard automobile business of the Company increased substantially in 1988, 1989, 1990 and 1995. Such changes were due entirely to changes in the premium volume of the nonstandard automobile business for those years. In general, the Company's nonstandard automobile segment has not developed significant redundancies or deficiencies as compared to original reserves. A deficiency of $956,000, or 5.1%, of original reserves developed with respect to loss reserves at December 31, 1992 due to an unexpected increase in loss severity and average claim cost. Superior Insurance Company For The Years Ended December 31, (In Thousands)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gross Reserves For Unpaid Losses And LAE $52,610 $54,577 $47,112 $52,413 Deduct: Reinsurance Recoverable 68 1,099 987 0 Reserve For Unpaid Losses And LAE, Net Of Reinsurance $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125 $52,413 Paid Cumulative As Of: One Year Later 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227 25,454 Two Years Later 25,526 34,122 43,547 44,128 40,513 41,231 38,908 35,141 Three Years Later 29,670 39,524 48,037 47,442 44,183 43,198 41,107 Four Years Later 32,545 41,257 49,064 49,256 44,708 44,010 Five Years Later 33,242 41,492 49,522 49,365 45,196 Six Years Later 33,395 41,716 49,327 49,476 Seven Years Later 33,535 41,576 49,425 Eight Years Later 33,469 41,621 Nine Years Later 33,408 Liabilities Reestimated As Of: One Year Later 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564 37,933 Two Years Later 37,118 49,327 53,715 56,626 50,520 50,474 50,006 42,989 Three Years Later 37,932 49,051 53,022 55,147 51,854 46,624 46,710 Four Years Later 38,424 49,436 52,644 57,720 49,739 44,823 Five Years Later 38,580 49,297 54,030 56,824 48,592 Six Years Later 38,584 50,701 53,697 55,770 Seven Years Later 39,965 50,515 53,683 Eight Years Later 39,861 50,521 Nine Years Later 39,998 Net Cumulative (Deficiency) Or Redundancy (13,553) (12,670) 2,741 4,348 11,980 5,832 10,489 8,193 8,192 Expressed As A Percentage Of Unpaid Losses And LAE (51.6%) (33.5%) 4.9% 7.2% 19.9% 10.3% 4.8% 9.2% 17.8%
Net reserves for Superior increased substantially through 1990 before decreasing in 1992. Such changes were due to changes in premium volume and reduction of reserve redundancies. The decrease in 1995 reflects the Company's curtailment of marketing efforts and writings in Illinois, Mississippi, Tennessee, Texas and Washington resulting from more restrictive underwriting criteria, inadequately priced business in these states and other unfavorable marketing conditions. Significant deficiencies developed in reserves established as of December 31 of each of 1986 through 1988 which were substantially offset by reserve additions in 1989 due to changes in reserve methodology. With respect to reserves established as of December 31, 1991 and 1992, Superior developed significant redundancies due to conservative levels of case basis and IBNR reserves. Beginning in 1993, Superior began to adjust its reserving methodology to reduce its redundancies and to take steps to close older claim files which still carried redundant reserves. The Company and Superior employ an independent actuary to annually evaluate and certify the adequacy of their loss and LAE reserves. Investments Insurance company investments must comply with applicable laws and regulations which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common securities, real estate mortgages and real estate. The Company's investment policies are determined by the Company's Board of Directors and are reviewed on a regular basis. The Company's investment strategy is to maximize the after-tax yield of the portfolio while emphasizing the stability and preservation of the Company's capital base. Further, the portfolio is invested in types of securities and in an aggregate duration which reflect the nature of the Company's liabilities and expected liquidity needs. The investment portfolios of the Company are managed by third party professional administrators, including Goldman Sachs & Co., in accordance with pre-established investment policy guidelines established by the Company. The investment portfolios of the Company at December 31, 1996 consisted of the following: Symons International Group, Inc. For The Year Ended December 31, 1996 (In Thousands) Amortized Estimated Type of Investment Cost Market Value Fixed Maturities: U.S. Treasury Securities and Obligations of U.S. Government Corporation and Agencies $ 55,034 $ 55,144 Foreign Governments 1,515 1,485 Obligations of States and Political Subdivisions 2,945 2,952 Corporate Securities 67,545 68,100 Total Fixed Maturities $127,039 $127,681 Equity Securities: Preferred stocks 0 0 Common Stocks 25,734 27,920 Short Term Investments 9,565 (1) 9,565 Real Estate 466 466 Mortgage Loans 2,430 2,430 Other Loans 75 75 Total Investments $165,309 $168,137 (1) Due to the nature of crop insurance, the Company must maintain short-term investments to fund amounts due under the MPCI program. The following table sets forth, as of December 31, 1995 and 1996 the composition of the fixed maturity securities portfolio of the Company by time to maturity. Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1995 1996 Market Percent Total Market Percent Total Time to Maturity Value Market Value Value Market Value 1 Year or Less $ 4,610 35.6% $ 6,423 5.0% More Than 1 Year Through 5 Years 5,051 39.1% 71,086 55.7% More Than 5 Years Through 10 Years 3,270 25.3% 43,404 34.0% More Than 10 Years 0 0% 6,768 5.3% Total $12,931 100.0% $127,681 100.0% The following table sets forth, as of December 31, 1995 and 1996 the ratings assigned to the fixed maturity securities of the Company. Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1995 1996 Market Percent Total Market Percent Total Rating (1) Value Market Value Value Market Value Aaa or AAA $ 7,753 60.0% $ 50,444 39.5% Aa or AA 680 5.2% 2,976 2.3% A 257 2.0% 50,365 39.4% Baa or BBB 100 0.8% 11,671 9.1% Ba or BB 0 0% 2,840 2.3% Other Below Investment Grade 0 0% 2,091 1.6% Not Rated (2) 4,141 32.0% 7,294 5.8% Total $12,931 100.0% $127,681 100.0% (1) Ratings are assigned by Moody's Investors Service, Inc., and when not available are based on ratings assigned by Standard & Poor's Corporation. (2) These securities were not rated by the rating agencies. However, these securities are designated as Category 1 securities by the NAIC, which is the equivalent rating of A or better. The investment results of the Company for the periods indicated are set forth below: Symons International Group, Inc. For The Years Ended December 31, (In Thousands) 1994 1995 1996 Net Investment Income (1) $ 1,241 $ 1,173 $ 6,733 Average Investment Portfolio (2) $20,628 $22,653 $153,565 Pre-tax Return On Average Investment Portfolio 6.0% 5.2% 5.9% Net Realized Gains (Losses) $ (159) $ (344) $ (1,015) (1) Includes dividend income received in respect of holdings of common stock. (2) Average investment portfolio represents the average (based on amortized cost) of the beginning and ending investment portfolio. Ratings A.M. Best has currently assigned a B+ rating to Superior and a B- rating to Pafco. Pafco's rating has been confirmed by A.M. Best at a B- rating subsequent to the Acquisition. Superior's rating was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting from indebtedness assumed in connection with the Acquisition. IGF recently received an "NA-2" rating (a "rating not assigned" category for companies that do not meet A.M. Best's minimum size requirement) from A.M. Best but intends to seek a revised rating after the infusion of capital from the proceeds of the Offering, although there can be no assurance that a revised rating will be obtained or as to the level of any such rating. A.M. Best's ratings are based upon a comprehensive review of a company's financial performance, which is supplemented by certain data, including responses to A.M. Best's questionnaires, phone calls and other correspondence between A.M. Best analysts and company management, quarterly NAIC filings, state insurance department examination reports, loss reserve reports, annual reports, company business plans and other reports filed with state insurance departments. A.M. Best undertakes a quantitative evaluation, based upon profitability, leverage and liquidity, and a qualitative evaluation, based upon the composition of a company's book of business or spread of risk, the amount, appropriateness and soundness of reinsurance, the quality, diversification and estimated market value of its assets, the adequacy of its loss reserves and policyholders' surplus, the soundness of a company's capital structure, the extent of a company's market presence, and the experience and competence of its management. A.M. Best's ratings represent an independent opinion of a company's financial strength and ability to meet its obligations to policyholders. A.M. Best's ratings are not a measure of protection afforded investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest rating classifications, respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated very good overall performance when compared to the standards established by the A.M. Best Company" and "have a good ability to meet their obligations to policyholders over a long period of time." A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate overall performance when compared to the standards established by the A.M. Best Company" and "generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions". There can be no assurance that such ratings or changes therein will not in the future adversely affect the Company's competitive position. Regulation General As a general rule, an insurance company must be licensed to transact insurance business in each jurisdiction in which it operates, and almost all significant operations of a licensed insurer are subject to regulatory scrutiny. Licensed insurance companies are generally known as "admitted" insurers. Most states provide a limited exemption from licensing for insurers issuing insurance coverages that generally are not available from admitted insurers. These coverages are referred to as "surplus lines" insurance and these insurers as "surplus lines" or "non-admitted" companies. The Company's admitted insurance businesses are subject to comprehensive, detailed regulation throughout the United States, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. The primary purpose of such regulations and supervision is the protection of policyholders and claimants rather than stockholders or other investors. Depending on whether the insurance company is domiciled in the state and whether it is an admitted or non-admitted insurer, such authority may extend to such things as (i) periodic reporting of the insurer's financial condition; (ii) periodic financial examination; (iii) approval of rates and policy forms; (iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers and their agents; (vii) restrictions on the payment of dividends and other distributions; (viii) approval of changes in control; and (ix) the type and amount of permitted investments. Pafco, IGF and Superior are subject to triennial examinations by state insurance regulators. Such examinations were last conducted for Pafco as of June 30, 1992 (covering the period to that date from September 30, 1990), for IGF as of March 31, 1992 (covering the period to that date from December 31, 1987), and Superior Insurance Company as of December 31, 1993 (covering the period to that date from January 1, 1991). The two subsidiaries of Superior, Superior American Insurance Company and Superior Guaranty Insurance Company, had examinations conducted as of October 31, 1996 (covering the period to that date from the subsidiaries' inception on December 9, 1994). Pafco will have a triennial examination in 1997. Superior and IGF have not been notified of the dates of their next examination. Insurance Holding Company Regulation The Company also is subject to laws governing insurance holding companies in Florida and Indiana, where they are domiciled. These laws, among other things, (i) require the Company to file periodic information with state regulatory authorities including information concerning its capital structure, ownership, financial condition and general business operations; (ii) regulate certain transactions between the Company, its affiliates and IGF, Pafco and Superior (the "Insurers"), including the amount of dividends and other distributions and the terms of surplus notes; and (iii) restrict the ability of any one person to acquire certain levels of the Company's voting securities without prior regulatory approval. Any purchaser of 10% or more of the outstanding shares of Common Stock of the Company would be presumed to have acquired control of IGF unless the Indiana Commissioner, upon application, has determined otherwise. In addition, any purchaser of approximately 10% or more of the outstanding shares of Common Stock of the Company will be presumed to have acquired control of Pafco and Superior unless the Commissioner of the Indiana Department of Insurance ("Indiana Commissioner") and the Commissioner of the Florida Department of Insurance ("Florida Commissioner"), upon application, have determined otherwise. Indiana law defines as "extraordinary" any dividend or distribution which, together with all other dividends and distributions to shareholders within the preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as regards policyholders as of the end of the preceding year, or (ii) the prior year's net income. Dividends which are not "extraordinary" may be paid ten days after the Indiana Department of Insurance receives notice of their declaration. "Extraordinary" dividends and distributions may not be paid without prior approval of the Indiana Commissioner or until the Indiana Commissioner has been given thirty days prior notice and has not disapproved within that period. The Indiana Department of Insurance must receive notice of all dividends, whether "extraordinary" or not, within five business days after they are declared. Notwithstanding the foregoing limit, a domestic insurer may not declare or pay a dividend of funds other than earned surplus without the prior approval of the Indiana Department of Insurance. "Earned surplus" is defined as the amount of unassigned funds set forth in the insurer's most recent annual statement, less surplus attributable to unrealized capital gains or reevaluation of assets. As of December 31 1996, IGF and Pafco had earned surplus of $29,412,000 and $18,112,000, respectively. Further, no Indiana domiciled insurer may make payments in the form of dividends or otherwise to shareholders as such unless it possesses assets in the amount of such payment in excess of the sum of its liabilities and the aggregate amount of the par value of all shares of its capital stock; provided, that in no instance shall such dividend reduce the total of (i) gross paid-in and contributed surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal to 50% of the aggregate amount of the par value of all shares of the insurer's capital stock. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to stockholders without prior approval of the Florida Department of Insurance if the dividend or distribution does not exceed the larger of (i) the lesser of (a) 10% of surplus, or (b) net income, not including realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or (iii) the lesser of (a) 10% of surplus, or (b) net investment income plus a 3-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department of Insurance if (1) the dividend is equal to or less than the greater of (i) 10% of the insurer's surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains, or (ii) the insurer's entire net operating profits (including unrealized gains or losses) and realized net capital gains derived during the immediately preceding calendar year; (2) the insurer will have policyholder surplus equal to or exceeding 115% of the minimum required statutory surplus after the dividend or distribution; (3) the insurer files a notice of the dividend or distribution with the department at least ten business days prior to the dividend payment or distribution; and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department of Insurance or (ii) 30 days after the Florida Department of Insurance has received notice of such dividend or distribution and has not disapproved it within such time. In the Consent Order approving the Acquisition, the Florida Department of Insurance has prohibited Superior from paying any dividends (whether extraordinary or not) for four years without the prior written approval of the Florida Department of Insurance. Under these laws, the maximum aggregate amounts of dividends to the Company in 1997 by IGF and Pafco without prior regulatory approval is $12,122,000 and $561,000, respectively, none of which has been paid. Although the Company believes that amounts required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Liquidity and Capital Resources". Further, there can be no assurance that, if requested, the Indiana Department of Insurance will approve any request for extraordinary dividends from Pafco or IGF or that the Florida Department of Insurance will allow any dividends to be paid by Superior during the four year period described above. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory surplus of an insurance company following any dividend or distribution by such company be reasonable in relation to its outstanding liabilities and adequate for its financial needs. While the non-insurance company subsidiaries are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount which a subsidiary within the holding company system may charge any of the Insurers for services (e.g., management fees and commissions). These regulations may affect the amount of management fees which may be paid by Pafco and Superior to GGS Management. See "The Company - Formation of GGS Holdings; Acquisition of Superior". The management agreement formerly in place between the Company and Pafco which provides for an annual management fee equal to 15% of gross premiums has been assigned to GGS Management, Inc. ("GGS Management"), a wholly-owned subsidiary of GGS Holdings. A similar management agreement with a management fee of 17% of gross premiums has been entered into between GGS Management and Superior. Employees of the Company relating to the nonstandard automobile insurance business and all Superior employees became employees of GGS Management effective April 30, 1996. As part of the approval of the Formation Transaction, the Indiana Department of Insurance has required Pafco to resubmit its management agreement for review by the Indiana Department of Insurance no later than May 1, 1997 (the first anniversary of the Formation Transaction), together with supporting evidence that management fees charged to Pafco are fair and reasonable in comparison to fees charged between unrelated parties for similar services. In the Consent Order approving the Acquisition, the Florida Department of Insurance has reserved, for three years, the right to reevaluate the reasonableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department of Insurance's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department of Insurance or the Florida Department of Insurance will not in the future require a reduction in these management fees. Federal Regulation The Company's MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. Consequently, the MPCI program is subject to oversight by the legislative and executive branches of the federal government, including the FCIC. The MPCI program regulations generally require compliance with federal guidelines with respect to underwriting, rating and claims administration. The Company is required to perform continuous internal audit procedures and is subject to audit by several federal government agencies. The MPCI program has historically been subject to change by the federal government at least annually since its establishment in 1980, some of which changes have been significant. The most recent significant changes to the MPCI program came as a result of the passage by Congress of the 1994 Reform Act and the 1996 Reform Act. Certain provisions of the 1994 Reform Act, when implemented by the FCIC, may increase competition among private insurers in the pricing of Buy-up Coverage. The 1994 Reform Act authorizes the FCIC to implement regulations permitting insurance companies to pass on to farmers in the form of reduced premiums certain cost efficiencies related to any excess expense reimbursement over the insurer's actual cost to administer the program, which could result in increased price competition. To date, the FCIC has not enacted regulations implementing these provisions but is currently collecting information from the private sector regarding how to implement these provisions. The 1994 Reform Act required farmers for the first time to purchase at least CAT Coverage in order to be eligible for other federally sponsored farm benefits, including but not limited to low interest loans and crop price supports. The 1994 Reform Act also authorized for the first time the marketing and selling of CAT Coverage by the local USDA offices. Partly as a result of the increase in the size of the MPCI market resulting from the 1994 Reform Act, the Company's MPCI Premium increased to $53.4 million in 1995 from $44.3 million in 1994. However, the 1996 Reform Act, signed into law by President Clinton in April, 1996, eliminates the linkage between CAT Coverage and qualification for certain federal farm program benefits and also limits the role of the USDA offices in the delivery of MPCI coverage. In accordance with the 1996 Reform Act, the USDA announced in July, 1996, 14 states where CAT Coverage will no longer be available through USDA offices but rather would solely be available through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and Wyoming. The limitation of the USDA's role in the delivery system for MPCI should provide the Company with the opportunity to realize increased revenues from the distribution and servicing of its MPCI product. The Company has not experienced any material negative impact in 1996 from the delinkage mandated by the 1996 Reform Act. In addition, the FCIC has transferred to the Company approximately 8,900 insureds for CAT Coverage who previously purchased such coverage from USDA field offices. The Company believes that any future potential negative impact of the delinkage mandated by the 1996 Reform Act will be mitigated by, among other factors, the likelihood that farmers will continue to purchase MPCI to provide basic protection against natural disasters since ad hoc federal disaster relief programs have been reduced or eliminated. In addition, the Company believes that (i) lending institutions will likely continue to require this coverage as a condition to crop lending, and (ii) many of the farmers who entered the MPCI program as a result of the 1994 Reform Act have come to appreciate the reasonable price of the protection afforded by CAT Coverage and will remain with the program regardless of delinkage. There can, however, be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. Underwriting and Marketing Restrictions During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals, and (iv) limitations upon or decreases in rates permitted to be charged. Insurance Regulatory Information System The NAIC Insurance Regulatory Information System ("IRIS") was developed primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. Insurance companies submit data on an annual basis to the NAIC, which analyzes the data using ratios concerning various categories of financial data. IRIS ratios consist of 12 ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of several priority designations is assigned, and the insurance department of the state of domicile is then responsible for follow-up action. During 1996 Pafco had a net premiums to surplus ratio of 3.03 to 1 which was in excess of the high end range of 3.0 to 1. The excess was not material and Pafco has the ability to cede business to Superior to maintain compliance with this ratio. Pafco's change in net writings was 61% compared to 33% at the high end of the range. This result was expected given growth in gross premiums and elimination of quota share reinsurance. Pafco also had positive surplus growth of 64% outside the high end of the range at 50%. Pafco planned for higher premium volume given the more profitable results than in prior years. During 1996, Pafco's investment yield as calculated under the IRIS tests was 3.8% which was below the low end of the range at 4.5%. However, this IRIS test is a simple average of beginning and end of year investments. Pafco's value fell below the range due to the following: (i) inclusion of investment in IGF prior to the Transfer during the first four months of the year when no investment income was received; (ii) growth in the portfolio in the latter part of the year not taken into account by the IRIS test; (iii) change during the course of the year to reduce ratio of equities to total investments in favor of fixed income securities; (iv) contribution to surplus of $3.7 million at the end of 1996 included in the IRIS test; and (v) inclusion of the home office building in the investment base. If a weighted average was calculated using monthly balances and excluding the IGF investment and real estate was excluded from the calculation, Pafco's return would have been 5.7%. Based on current investment levels and mix it is expected that this test will be met in 1997. During 1996, Pafco's ratio of reserve deficiency to surplus was 62% which exceeds the upper range of 25%. This IRIS test calculates the average of claims liability to premiums for the preceding two years and compares the resultant percentage to the current year's percentage with a corresponding analysis to surplus. During 1994 and 1995, Pafco's claims liability to premiums ratio was approximately 55% and decreased to approximately 35% in 1996, resulting in the unusual IRIS result. This situation was a result of commercial claims liabilities in 1994 and 1996 that have now been ceded to an affiliate. Thus, claims liability at December 31, 1996 is entirely for nonstandard automobile. The reserves for the commercial liability business were at a much higher ratio of premiums and are paid at a much slower rate than nonstandard automobile claims. Thus, although premiums grew in 1996, the increase in nonstandard automobile claims liability was offset by ceded commercial claims. As this IRIS test uses a two year average of claims liabilities to premiums, it is likely that Pafco may exceed the normal ratio in 1997. It should be noted that Pafco did not have unusual IRIS values for the one and two year reserve development to surplus tests. During 1996 IGF had unusual values for three IRIS tests. IGF's surplus increased by 237% which exceeded the high end of the range of 50%. However, this is a very positive development due to growth in profits and the capital infusion from the proceeds of the Offering. IGF continued to have unusual values in the liabilities to liquid assets and agents balances to surplus tests. IGF generally has an unusual value in these tests due to the reinsurance program mandated by the FCIC for the distribution of the MPCI program and the fact that agents' balances at December 31 are usually not settled until late February. During 1996 Superior had a ratio of net premiums written to surplus of 3.07 to 1 compared to the IRIS test upper limit of 3.0 to 1. During 1996, Superior's net premium writings increased by 116% which exceeded the upper limit of the IRIS range of 33%. Superior had a reserve deficiency to surplus ratio of 29% which was in excess of the upper IRIS limit of 25%. All these matters were a function of the strong growth of Superior. Such results may continue in the future if growth continues. See Management's Discussion and Analysis for further discussion on impact of premium writings to surplus ratio. Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. Indiana and Florida have substantially adopted the NAIC model law, and Indiana has directly, and Florida has indirectly, adopted the NAIC model formula. The RBC formula for property and casualty insurance companies measures four major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks; and (iv) off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus than that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC falls. The first level, the Company Action Level (as defined by the NAIC), requires an insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory Action Level (as defined by the NAIC) requires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform an examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized Control Level (as defined by the NAIC) gives the relevant insurance commissioner the option either to take the aforementioned actions or to rehabilitate or liquidate the insurer if surplus falls below 100% of the RBC amount. The fourth action level is the Mandatory Control Level (as defined by the NAIC) which requires the relevant insurance commissioner to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. Based on the foregoing formulae, as of December 31, 1996, the RBC ratios of the Insurers were in excess of the Company Action Level, the first trigger level that would require regulatory action. Guaranty Funds The Insurers also may be required under the solvency or guaranty laws of most states in which they do business to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insolvent or rehabilitated insurance companies. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. Some state laws and regulations further require participation by the Insurers in pools or funds to provide some types of insurance coverages which they would not ordinarily accept. The Company recognizes its obligations for guaranty fund assessments when it receives notice that an amount is payable to the fund. The ultimate amount of these assessments may differ from that which has already been assessed. It is not possible to predict the future impact of changing state and federal regulation on the Company's operations, and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws. Stockholder Agreement with GS Funds The Stockholder Agreement among the Company, GS Funds, Goran and GGS Holdings provides that the Board of Directors of GGS Holdings consists of five members, of whom three shall be designated by the Company and two shall be designated by GS Funds. However, in the event that (x) at any time the Company and its affiliates shall own less than 25% of the issued and outstanding common stock of GGS Holdings by reason of the issuance of shares of common stock to GS Funds in satisfaction of the indemnification obligations of the Company or Goran pursuant to the GGS Agreement (the "Indemnity Date") or (y) at any time (i) the Company, Goran or GGS Holdings is in violation of any term of the Stockholder Agreement, or (ii) GGS Holdings or GGS Management shall remain in violation of any covenant with respect to indebtedness incurred by GGSH to partially fund the Acquisition (the "GGS Senior Credit Facility") (whether or not such violation is waived) after the expiration of any applicable cure period or there shall occur an event of default under the GGS Senior Credit Facility (whether or not waived), the size of the Board shall be reduced to four members (a "Board Reduction"). At December 31, 1996, GS Funds waived their right to this Board Reduction for the covenants violations of the GGSH Senior Credit Facility. The covenants contained in the GGS Senior Credit Facility are customary commercial loan covenants relating to the maintenance of financial ratios and restrictions on dividends, significant corporate transactions and other matters. In such event, so long as the Indemnity Date has not occurred, the Company shall be entitled to designate only two directors and GS Funds shall be entitled to designate two directors. After the occurrence of the Indemnity Date, the Company shall be entitled to designate one director and GS Funds shall be entitled to designate three directors. Prior to a Board Reduction, action may be taken by the Board only with the approval of a majority of the members of the Board. After a Board Reduction, prior to the Indemnity Date, action may only be taken with the approval of at least one GS Funds designee and one Company designee. After the Indemnity Date following a Board Reduction, action may only be taken by the Board with the approval of a majority of the entire Board. Prior to a Board Reduction, GGS Holdings may not take the following actions, among others, without first obtaining approval by the Board and at least one GS Funds designee: (i) consolidate or merge with any person, (ii) purchase the capital stock or substantially all of the assets of any person, (iii) enter into any joint venture or partnership or establish any non-wholly owned subsidiaries in which the consideration paid by or invested by GGS Holdings is in excess of $1 million, (iv) voluntarily liquidate or dissolve, (v) offer any type of insurance other than nonstandard automobile insurance (other than certain policies issued on behalf of IGF or SIGF), (vi) sell, lease or transfer assets for an aggregate consideration in excess of $1 million, (vii) subject to certain exceptions, enter into any contract with a director or officer of Goran (or any relative or affiliate of such person) or with any affiliate of Goran, (viii) create or suffer to exist any indebtedness for borrowed money in an aggregate amount in excess of $1 million excluding certain existing indebtedness, (ix) mortgage or encumber its assets in an amount in excess of $1 million, (x) make or commit to make any capital expenditure in an amount in excess of $1 million, (xi) redeem or repurchase its outstanding capital stock, (xii) issue or sell any shares of capital stock of GGS Holdings or its subsidiaries, (xiii) enter into, adopt or amend any employment agreement or benefit plan, (xiv) amend its Certificate of Incorporation or Bylaws, (xv) amend or waive any provision of the Stockholder Agreement or the GGS Agreement, (xvi) change its independent certified accountants or actuaries, (xvii) register any securities under the Securities Act, (xviii) enter into one or more agreements to reinsure a substantial portion of the liability of GGS Holdings or any of its subsidiaries, or (xix) adopt or change the reserve policy or the investment policy of GGS Holdings or any of its subsidiaries. The Company's representatives on the Board of Directors of GGS Holdings are G. Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief Executive Officer of the Company and Douglas H. Symons, President and Chief Operating Officer of the Company. Pursuant to their power under the Stockholder Agreement to designate the Chairman of the Board of GGS Holdings, GS Funds have named G. Gordon Symons as Chairman of the Board of GGS Holdings. The Stockholder Agreement designates Alan G. Symons as the Chief Executive Officer of GGS Holdings and gives him the right to designate and determine the compensation for all management personnel, provided that the designation of, removal of, and determination of compensation for, any person earning $100,000 or more per annum is subject to the prior approval of the Board. GS Funds has the right at any time to designate a chief operating officer for GGS Holdings but has currently not elected to exercise this right. Upon request, GS Funds has the right to appoint one designee to each of the committees of the Board of Directors of GGS Holdings. The Stockholder Agreement does not give GS Funds the right to appoint any designees to the Board of Directors of any of the subsidiaries of GGS Holdings. Certain Rights Of The GS Funds To Cause A Sale of GGS Holdings Events Which Trigger the Rights of the GS Funds to Cause A Sale of GGS Holdings. The Stockholder Agreement establishes certain rights of GS Funds to cause a sale of GGS Holdings upon the occurrence of certain triggering events, including (i) the failure to consummate a registered initial public offering of GGS Holdings stock representing, on a fully diluted basis, at least 20% of all such stock issued and outstanding, and generating at least $25 million in net proceeds to the sellers of such securities, by April 30, 2001, (ii) the third separate occasion, during the term of the Stockholder Agreement, on which an equity financing or acquisition transaction proposed by GS Funds is rejected by the GGS Holdings Board of Directors, (iii) the loss of voting control of Goran or the Company (defined, with respect to Goran, as being direct or indirect ownership of more than 40% of the outstanding voting stock of Goran if any other holder or group holds in excess of 10% of the outstanding voting stock of Goran, and otherwise 25% thereof; and defined, with respect to the Company, as requiring both (a) direct ownership by Goran in excess of 50% of the Company's voting stock and (b) retention by Alan G. Symons and his family members of voting control of Goran) by Alan G. Symons or his family members or affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS Holdings for any reason. Upon the occurrence of any of such events, and at any time or from time to time thereafter, GS Funds may, by notifying the Company in writing, initiate the process of seeking to effect a sale of GGS Holdings on terms and conditions which are acceptable to the GS Funds. However, within thirty days after the Company receives notice of GS Funds' intention to initiate the sale of GGS Holdings, the Company may provide written notice to GS Funds that it wishes to acquire or combine with GGS Holdings. The Company's notice to GS Funds must include the proposed purchase price and other material terms and conditions with such specificity as is necessary to permit GS Funds to evaluate the Company's offer. If, within 90 days of delivery of the notice by the Company, GS Funds accepts the Company's offer, the Company will be obligated to acquire or combine with GGS Holdings. In the event GS Funds rejects the Company's proposal, (i) any sale to a third party effected within 180 days after receipt of such proposal must not contain terms that are in the aggregate less favorable to the GGS Holdings stockholders than those set forth in the Company's proposal, (ii) any sale must provide for the same consideration to be paid to each stockholder, and (iii) no sale may constitute an acquisition by or a combination with an affiliate of GS Funds. Accordingly, under certain circumstances, GS Funds may have the ability to force the Company to divest itself of its nonstandard automobile operations. Further, a forced sale of GGS Holdings may also cause the Company to be characterized as an investment company within the meaning of the "1940 Act" unless the proceeds are redeployed into other business operations or another exemption from registration under the 1940 Act is available. Employees At December 31, 1996 the Company and its subsidiaries employed approximately 600 persons. The Company believes that relations with its employees are excellent. FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS The statements contained in this Annual Report which are not historical facts, including but not limited to, statements concerning (i) the impact of federal and state laws and regulations, including but not limited to, the 1994 Reform Act and 1996 Reform Act, on the Company's business and results of operations, (ii) the competitive advantage afforded to IGF by approaches adopted by management in the areas of information, technology, claims handling and underwriting, (iii) the sufficiency of the Company's cash flow to meet the operating expenses, debt service obligations and capital needs of the Company and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense Reimbursements on the Company's results of operations, are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time the Company may also issue other statements either orally or in writing, which are forward looking within the meaning of these statutory provisions. Forward looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "plan" and similar expressions. These statements involve a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from the forward looking statements in this Form 10-K or from other forward looking statements made by the Company. In addition to the risks and uncertainties of ordinary business operations, some of the facts that could cause actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements are the risks and uncertainties (i) discussed herein, (ii) contained in the Company's other filings with the Securities and Exchange Commission and public statements from time to time, and (iii) set forth below: Uncertain Pricing and Profitability One of the distinguishing features of the property and casualty industry is that its products generally are priced, before its costs are known, because premium rates usually are determined before losses are reported. Premium rate levels are related in part to the availability of insurance coverage, which varies according to the level of surplus in the industry. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. The nonstandard automobile insurance business in recent years has experienced very competitive pricing conditions and there can be no assurance as to the Company's ability to achieve adequate pricing. Changes in case law, the passage of new statutes or the adoption of new regulations relating to the interpretation of insurance contracts can retroactively and dramatically affect the liabilities associated with known risks after an insurance contract is in place. New products also present special issues in establishing appropriate premium levels in the absence of a base of experience with such products' performance. The number of competitors and the similarity of products offered, as well as regulatory constraints, limit the ability of property and casualty insurers to increase prices in response to declines in profitability. In states which require prior approval of rates, it may be more difficult for the Company to achieve premium rates which are commensurate with the Company's under- writing experience with respect to risks located in those states. In addition, the Company does not control rates on its MPCI business, which are instead set by the FCIC. Accordingly, there can be no assurance that these rates will be sufficient to produce an underwriting profit. The reported profits and losses of a property and casualty insurance company are also determined, in part, by the establishment of, and adjustments to, reserves reflecting estimates made by management as to the amount of losses and loss adjustment expenses ("LAE") that will ultimately be incurred in the settlement of claims. The ultimate liability of the insurer for all losses and LAE reserved at any given time will likely be greater or less than these estimates, and material differences in the estimates may have a material adverse effect on the insurer's financial position or results of operations in future periods. Nature of Nonstandard Automobile Insurance Business The nonstandard automobile insurance business is affected by many factors which can cause fluctuation in the results of operations of this business. Many of these factors are not subject to the control of the Company. The size of the nonstandard market can be significantly affected by, among other factors, the underwriting capacity and underwriting criteria of standard automobile insurance carriers. In addition, an economic downturn in the states in which the Company writes business could result in fewer new car sales and less demand for automobile insurance. Severe weather conditions could also adversely affect the Company's business through higher losses and LAE. These factors, together with competitive pricing and other considerations, could result in fluctuations in the Company's underwriting results and net income. Nature of Crop Insurance Business The Company's operating results from its crop insurance program can vary substantially from period to period as a result of various factors, including timing and severity of losses from storms, drought, floods, freezes and other natural perils and crop production cycles. Therefore, the results for any quarter or year are not necessarily indicative of results for any future period. The underwriting results of the crop insurance business are recognized throughout the year with a reconciliation for the current crop year in the fourth quarter. The Company expects that for the foreseeable future a majority of its crop insurance will continue to be derived from MPCI business. The MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. As such, legislative or other changes affecting the MPCI program could impact the Company's business prospects. The MPCI program has historically been subject to modification at least annually since its establishment in 1980, and some of these modifications have been significant. No assurance can be given that future changes will not significantly affect the MPCI program and the Company's crop insurance business. The 1994 Reform Act also reduced the expense reimbursement rate payable to the Company for its costs of servicing MPCI policies that exceed the basic CAT Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and 1999 crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium serviced, a decrease from the 31% level established for the 1994, 1995 and 1996 crop years. Although the 1994 Reform Act directs the FCIC to alter program procedures and administrative requirements so that the administrative and operating costs of private insurance companies participating in the MPCI program will be reduced in an amount that corresponds to the reduction in the expense reimbursement rate, there can be no assurance that the Company's actual costs will not exceed the expense reimbursement rate. The FCIC has appointed several committees comprised of members of the insurance industry to make recommendations concerning this matter. The 1994 Reform Act also directs the FCIC to establish adequate premiums for all MPCI coverages at such rates as the FCIC determines are actuarially sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss ratio has exceeded this target ratio. There can be no assurance that the FCIC will not increase rates to farmers in order to achieve the targeted loss ratio in a manner that could adversely affect participation by farmers in the MPCI program above the CAT Coverage level. The 1996 Reform Act, signed into law by President Clinton in April, 1996, provides that, MPCI coverage is not required for federal farm program benefits if producers sign a written waiver that waives eligibility for emergency crop loss assistance. The 1996 Reform Act also provides that, effective for the 1997 crop year, the Secretary of Agriculture may continue to offer CAT Coverage through USDA offices if the Secretary of Agriculture determines that the number of approved insurance providers operating in a state is insufficient to adequately provide catastrophic risk protection coverage to producers. There can be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. Total MPCI Premium for each farmer depends upon the kinds of crops grown, acreage planted and other factors determined by the FCIC. Each year, the FCIC sets, by crop, the maximum per unit commodity price ("Price Election") to be used in computing MPCI Premiums. Any reduction of the Price Election by the FCIC will reduce the MPCI Premium charged per policy, and accordingly will adversely impact MPCI Premium volume. The Company's crop insurance business is also affected by market conditions in the agricultural industry which vary depending on such factors as federal legislation and administration policies, foreign country policies relating to agricultural products and producers, demand for agricultural products, weather, natural disasters, technologic advances in agricultural practices, international agricultural markets and general economic conditions both in the United States and abroad. For example, the number of MPCI Buy-up Coverage policies written has historically tended to increase after a year in which a major natural disaster adversely affecting crops occurs, and to decrease following a year in which favorable weather conditions prevail. Highly Competitive Businesses Both the nonstandard automobile insurance and crop insurance businesses are highly competitive. Many of the Company's competitors in both the nonstandard automobile insurance and crop insurance business segments have substantially greater financial and other resources than the Company, and there can be no assurance that the Company will be able to compete effectively against such competitors in the future. In its nonstandard automobile business, the Company competes with both large national writers and smaller regional companies. The Company's competitors include other companies which, like the Company, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than an independent agency and, potentially, reduced acquisition costs. In addition, certain competitors of the Company have from time to time decreased their prices in an apparent attempt to gain market share. Also, in certain states, state assigned risk plans may provide nonstandard automobile insurance products at a lower price than private insurers. In the crop insurance business, the Company competes against other crop insurance companies and, with respect to CAT Coverage, USDA field service offices in certain areas. In addition the crop insurance industry has become increasingly consolidated. From the 1985 crop year to the 1996 crop year, the number of insurance companies that have entered into agreements with the FCIC to sell and service MPCI policies has declined from 50 to 16. The Company believes that to compete successfully in the crop insurance business it will have to market and service a volume of premiums sufficiently large to enable the Company to continue to realize operating efficiencies in conducting its business. No assurance can be given that the Company will be able to compete successfully if this market consolidates further. Importance of Ratings A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco a B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting from indebtedness in connection with the Acquisition. A "B+" and a "B-" rating are A.M. Best's sixth and eighth highest rating classifications, respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated very good overall performance when compared to the standards established by the A.M. Best Company" and "have a good ability to meet their obligations to policyholders over long period of time". A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate overall performance when compared to the standards established by the A.M. Best Company" and "generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions." IGF recently received an "NA-2" rating (a "rating not assigned" category for companies that do not meet A.M. Best's minimum size requirement) from A.M. Best. IGF intends to seek a revised rating after the infusion of capital from the proceeds of the Offering, although there can be no assurance that a revised rating will be obtained or as to the level of any such rating. A.M. Best bases its ratings on factors that concern policyholders and agents and not upon factors concerning investor protection. Such ratings are subject to change and are not recommendations to buy, sell or hold securities. One factor in an insurer's ability to compete effectively is its A.M. Best rating. The A.M. Best ratings for the Company's rated Insurers are lower than for many of the Company's competitors. There can be no assurance that such ratings or future changes therein will not affect the Company's competitive position. Geographic Concentration The Company's nonstandard automobile insurance business is concentrated in the states of Florida, California, Indiana, Missouri and Virginia; consequently the Company will be significantly affected by changes in the regulatory and business climate in those states. The Company's crop insurance business is concentrated in the states of Iowa, Texas, Illinois, Kansas and Minnesota and the Company will be significantly affected by weather conditions, natural perils and other factors affecting the crop insurance business in those states. Future Growth and Continued Operations Dependent on Access to Capital Property and casualty insurance is a capital intensive business. The Company must maintain minimum levels of surplus in the Insurers in order to continue to write business, meet the other related standards established by insurance regulatory authorities and insurance rating bureaus and satisfy financial ratio covenants in loan agreements. Historically, the Company has achieved premium growth as a result of both acquisitions and internal growth. It intends to continue to pursue acquisition and new internal growth opportunities. Among the factors which may restrict the Company's future growth is the availability of capital. Such capital will likely have to be obtained through debt or equity financing or retained earnings. There can be no assurance that the Company's insurance subsidiaries will have access to sufficient capital to support future growth and also satisfy the capital requirements of rating agencies, regulators and creditors. In addition, the Company will require additional capital to finance future acquisitions. If the Company's representatives on the Board of Directors of GGS Holdings cause GGS Holdings to decline acquisition opportunities because the Company is unable to raise sufficient capital to fund its pro rata share of the purchase price, the GS Funds may be able to force a sale of GGS Holdings. The ability of each of the Company and GGS Holdings to raise capital through an issuance of voting securities may be affected by conflicts of interest between each of them and their respective control persons and other affiliates. Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE The reserves for unpaid losses and LAE established by the Company are estimates of amounts needed to pay reported and unreported claims and related LAE based on facts and circumstances then known. These reserves are based on estimates of trends in claims severing judicial theories of liability and other factors. Although the nature of the Company's insurance business is primarily short-tail, the establishment of adequate reserves is an inherently uncertain process, and there can be no assurance that the ultimate liability will not materially exceed the Company's reserves for losses and LAE and have a material adverse effect on the Company's results of operations and financial condition. Due to the inherent uncertainty of estimating these amounts, it has been necessary, and may over time continue to be necessary, to revise estimates of the Company's reserves for losses and LAE. The historic development of reserves for losses and LAE may not necessarily reflect future trends in the development of these amounts. Accordingly, it may not be appropriate to extrapolate redundancies or deficiencies based on historical information. Reliance Upon Reinsurance In order to reduce risk and to increase its underwriting capacity, the Company purchases reinsurance. Reinsurance does not relieve the Company of liability to its insureds for the risks ceded to reinsurers. As such, the Company is subject to credit risk with respect to the risks ceded to reinsurers. Although the Company places its reinsurance with reinsurers, including the FCIC, which the Company generally believes to be financially stable, a significant reinsurer's insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on the Company's financial condition or results of operations. The amount and cost of reinsurance available to companies specializing in property and casualty insurance are subject, in large part, to prevailing market conditions beyond the control of such companies. The Company's ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends upon its ability to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position. Due to continuing market uncertainties regarding reinsurance capacity, no assurances can be given as to the Company's ability to maintain its current reinsurance facilities, which generally are subject to annual renewal. If the Company is unable to renew such facilities upon their expiration and is unwilling to bear the associated increase in net exposures, the Company may need to reduce the levels of its underwriting commitments. Risks Associated with Investments The Company's results of operations depend in part on the performance of its invested assets. Certain risks are inherent in connection with fixed maturity securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors. Equity securities involve risks arising from the financial performance of, or other developments affecting, particular issuers as well as price volatility arising from general stock market conditions. Comprehensive State Regulation The Company's insurance subsidiaries are subject to comprehensive regulation by government agencies in the states in which they operate. The nature and extent of that regulation vary from jurisdiction to jurisdiction but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, limitations on dividends, approval or filing of premium rates and policy forms for many lines of insurance, solvency standards, minimum amounts of capital and surplus which must be maintained, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, limitation of the right to cancel or non-renew policies in some lines, regulation of the right to withdraw from markets or agencies, requirements to participate in residual markets, licensing of insurers and agents, deposits of securities for the benefit of policyholders, reporting with respect to financial condition, and other matters. In addition, state insurance department examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders. No assurance can be given that future legislative or regulatory changes will not adversely affect the Company. Holding Company Structure; Dividend And Other Restrictions; Management Fees Holding Company Structure. The Company is a holding company whose principal asset is the capital stock of the subsidiaries. The Company relies primarily on dividends and other payments from its subsidiaries, including the its insurance subsidiaries, to meet its obligations to creditors and to pay corporate expenses. The Insurers are domiciled in the states of Indiana and Florida and each of these states limits the payment of dividends and other distributions by insurance companies. Dividend and Other Restrictions. Indiana law defines as "extraordinary" any dividend or distribution which, together with all other dividends and distributions to shareholders within the preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as regards policyholders as of the end of the preceding year, or (ii) the prior year's net income. Dividends which are not "extraordinary" may be paid ten days after the Indiana Department of Insurance ("Indiana Department") receives notice of their declaration. "Extraordinary" dividends and distributions may not be paid without the prior approval of the Indiana Commissioner of Insurance (the "Indiana Commissioner") or until the Indiana Commissioner has been given thirty days' prior notice and has not disapproved within that period. The Indiana Department must receive notice of all dividends, whether "extraordinary" or not, within five business days after they are declared. Notwithstanding the foregoing limit, a domestic insurer may not declare or pay a dividend from any source of funds other than "Earned Surplus" without the prior approval of the Indiana Department. "Earned Surplus" is defined as the amount of unassigned funds set forth in the insurer's most recent annual statement, less surplus attributable to unrealized capital gain or re-evaluation of assets. Further, no Indiana domiciled insurer may make payments in the form of dividends or otherwise to its shareholders unless it possesses assets in the amount of such payments in excess of the sum of its liabilities and the aggregate amount of the par value of all shares of capital stock; provided, that in no instance shall such dividend reduce the total of (i) gross paid-in and contributed surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal to 50% of the aggregate amount of the par value of all shares of the insurer's capital stock. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may make dividend payments or distributions to stockholders without prior approval of the Florida Department of Insurance ("Florida Department") if the dividend or distribution does not exceed the larger of: (i) the lesser of (a) 10% of surplus or (b) net investment income, not including realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net investment income plus a 3-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department if (1) the dividend is equal to or less than the greater of (i) 10% of the insurer's surplus as regards policyholders derived from net operating profits on its business and net realized capital gains, or (ii) the insurer's entire net operating profits (including unrealized gains or losses) and realized net capital gains derived during the immediately preceding calendar year; (2) the insurer will have policyholder surplus equal to or exceeding 115% of the minimum required statutory surplus after the dividend or distribution; (3) the insurer files a notice of the dividend or distribution with the Florida Department at least ten business days prior to the dividend payment or distribution; and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department, or (ii) thirty days after the Florida Department has received notice of such dividend or distribution and has not disapproved it within such time. In the consent order approving the Acquisition (the "Consent Order"), the Florida Department has prohibited Superior from paying any dividends (whether extraordinary or not) for four years without the prior written approval of the Florida Department. Although the Company believes that funds required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Indiana Department will approve any request for extraordinary dividends from Pafco or IGF or that the Florida Department will allow any dividends to be paid by Superior during the four year period described above. Payment of dividends by IGF requires prior approval by the lender under the credit agreement which IGF is a party. There can be no assurance that IGF will be able to obtain this consent. The Company is in the process of seeking regulatory approval for a new arrangement whereby underwriting, marketing and administrative functions of IGF will be assumed by, and employees will be transferred to, IGF Holdings. As a result of this restructuring, management fees would be paid by IGF to IGF Holdings, thereby providing an additional source of liquidity for the Company to the extent these payments exceed the operating and other expenses of IGF Holdings. There can be no assurance that this regulatory approval will be obtained. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory surplus of an insurance company following any dividend or distribution by such company be reasonable in relation to its outstanding liabilities and adequate for its financial needs. Management Fees. The management agreement originally entered into between the Company and Pafco was assigned as of April 30, 1996 by the Company to GGS Management, a wholly-owned subsidiary of GGS Holdings. This agreement provides for an annual management fee equal to 15% of gross premiums written. A similar management agreement with a management fee of 17% of gross premiums written has been entered into between GGS Management and Superior. Employees of the Company relating to the nonstandard automobile insurance business and all Superior employees became employees of GGS Management effective April 30, 1996. As part of the approval of the transaction relating to the formation of GGS Holdings, the Indiana Department has required Pafco to resubmit its management agreement for review by the Indiana Department no later than May 1, 1997 (the first anniversary of the Formation Transaction), together with supporting evidence that management fees charged to Pafco are fair and reasonable in comparison to fees charged between unrelated parties for similar services. In the Consent Order approving the Acquisition, the Florida Department has reserved, for a period of three years, the right to re-evaluate the reasonableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department or the Florida Department will not in the future require a reduction in these management fees. Furthermore, as a result of certain restrictive covenants with respect to dividends and other payments contained in the GGS Senior Credit Facility, GGS Holdings and its subsidiaries, Pafco and Superior, are not expected to constitute a significant source of funds for the Company. In addition, since the GS Funds own 48% of the outstanding capital stock of GGS Holdings, the Company would only be entitled to receive 52% of any dividend or distribution paid by GGS Holdings to its stockholders. Certain Rights of the GS Funds to Cause A Sale of GGS Holdings The Stockholder Agreement establishes certain rights of the GS Funds to cause a sale of GGS Holdings upon the occurrence of certain triggering events, including (i) the failure to consummate a registered initial public offering of GGS Holdings stock representing, on a fully diluted basis, at least 20% of all such stock issued and outstanding, and generating at least $25 million in net proceeds to the sellers of such securities, by April 30, 2001, (ii) the third separate occasion, during the term of the Stockholder Agreement on which an equity financing or acquisition transaction proposed by the GS Funds is rejected by the GGS Holdings Board of Directors, (iii) the loss of voting control of Goran or the Company (defined, with respect to Goran as being direct or indirect ownership of more than 40% of the outstanding voting stock of Goran if any other holder or group holds in excess of 10% of the outstanding voting stock of Goran and otherwise 25% thereof, and defined, with respect to the Company, as requiring both (a) direct ownership by Goran in excess of 50% of the Company's voting stock and (b) retention by Alan G. Symons and his family members of voting control of Goran by Alan G. Symons or his family members or affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS Holdings for any reason. As a result of the considerations arising under the Investment Company Act of 1940 (the "1940 Act") with respect to GGS Holdings, any public offering by GGS Holdings would probably be required to consist solely of a secondary offering of shares held by stockholders. Upon the occurrence of any of such events, and at any time or from time to time thereafter, the GS Funds may, by notifying the Company in writing, initiate the process of seeking to effect a sale of GGS Holdings on terms and conditions which are acceptable to the GS Funds. However, within thirty days after the Company receives notice of the GS Funds' intention to initiate the sale of GGS Holdings, the Company may provide written notice to the GS Funds that it wishes to acquire or combine with GGS Holdings. The Company's notice to the GS Funds must include the proposed purchase price and other material terms and conditions with such specificity as is necessary to permit the GS Funds to evaluate the Company's offer. If, within ninety days of delivery of the notice by the Company, the GS Funds accept the Company's offer, the Company will be obligated to acquire or combine with GGS Holdings. In the event the GS Funds reject the Company's proposal, (i) any sale to a third party effected within 180 days after receipt of such proposal must not contain terms that are in the aggregate less favorable to the GGS Holdings stockholders than those set forth in the Company's proposal, (ii) any sale must provide for the same consideration to be paid to each stockholder, and (iii) no sale may constitute an acquisition by or a combination with an affiliate of the GS Funds. Accordingly, under certain circumstances, the GS Funds may have the ability to force the Company to divest itself of its nonstandard automobile operations. Further, a forced sale of GGS Holdings may also cause the Company to be characterized as an investment company within the meaning of the 1940 Act unless the proceeds are redeployed into other business operations or another exemption from registration under the 1940 Act is available. ITEM 2 - PROPERTIES The headquarters for the Company, GGS Holdings and Pafco are located at 4720 Kingsway Drive, Indianapolis, Indiana. The building is an 80,000 square foot multilevel structure approximately 50% of which is utilized by Pafco. The remaining space is leased to third parties at a price of approximately $10 per square foot. Pafco also owns an investment property located at 2105 North Meridian, Indianapolis, Indiana. The property is a 21,700 square foot, multilevel building leased out entirely to third parties. Superior's operations are conducted at leased facilities located in Atlanta, Georgia, Tampa, Florida and Orange, California. Under a lease term which extends through February, 1998, Superior leases office space at 280 Interstate North Circle, N.W., Suite 500 Atlanta, Georgia. Superior occupies 43,448 square feet at this location and subleases an additional 3,303 square feet to third party tenants. Superior also has an office located at 3030 W. Rocky Pointe Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of space leased for a term extending through February 2000. In addition, Superior occupies an office at 1745 West Orangewood, Orange, California consisting of 3,264 square fee under a lease extending through May 1997. IGF owns a 17,500 square foot office building located at 2882 106th Street, Des Moines, Iowa which serves as its corporate headquarters. The building is fully occupied by IGF. IGF also owns certain improved commercial property which is adjacent to its corporate headquarters. IGF has entered into a purchase agreement to acquire an office building in Des Moines, Iowa, to be used as its crop insurance division home office. The purchase price was $2.6 million, of which $2.4 million was escrowed on February 1, 1997. The terms include a floating closing date whereby the transaction will close on the earlier of February 1, 1998 or thirty days after the closing of the sale of the Company's currently occupied home office building, also located in Des Moines. The purchase of the new building is not contingent on the sale of the current building. ITEM 3 - LEGAL PROCEEDINGS The Company's insurance subsidiaries are parties to litigation arising in the ordinary course of business. The Company believes that the ultimate resolution of these lawsuits will not have a material adverse effect on its financial condition or results of operations. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimated costs of litigation. IGF is the administrator of a run-off book of business. The FCIC has requested that IGF take responsibility for the claims liabilities of these policies under its administration. IGF has requested reimbursement of certain expenses from the FCIC with respect to this run-off activity. IGF instituted litigation against the FCIC on March 23, 1995 in the United States District Court for the Southern District of Iowa seeking $4.3 million as reimbursement for these expenses. The FCIC has counterclaimed for approximately $1.2 million in claims payments for which FCIC contends IGF is responsible as successor to the run-off book of business. While the outcome of this lawsuit cannot be predicted with certainty, the Company believes that the final resolution of this lawsuit will not have a material adverse effect on the financial condition of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during 1996 to a vote of security holders of the Registrant, through the solicitation of proxies or otherwise. SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT Presented below is certain information regarding the executive officers of the Company who are not also directors. Their respective ages and their respective positions with the Company are listed as as follows: Name Age Position David L. Bates 37 Vice President, General Counsel and Secretary of the Company Gary P. Hutchcraft 35 Vice President, Chief Financial Officer and Treasurer of the Company Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and Secretary of the Company since November, 1995 after having been named Vice President and General Counsel of Goran in April, 1995. Mr. Bates served as a member of the Fort Howard Corporation Legal Department from September, 1988 through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager with Deloitte & Touche. Mr. Hutchcraft, C.P.A., has served as Vice President, Chief Financial Officer and Treasurer of the Company and Goran since July, 1996. Prior to that time, Mr. Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP from July, 1988 to July, 1996. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the trading market for the Company's Common Shares, the range of selling prices for each quarterly period since the Offering on November 4, 1996, with respect to the Common Shares and the approximate number of holders of Common Shares as of December 31, 1996 and other matters is included under the caption "Market and Dividend Information" on page 50 of the 1996 Annual Report, included as Exhibit 13, which information is incorporated herein by reference. The Company currently intends to retain earnings for use in the operation and expansion of its business and therefore does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend, among other things, upon earnings, capital requirements, any financing agreement covenants and the financial condition of the Company. In addition, regulatory restrictions and provisions of the GGS Senior Credit Facility limit distributions to shareholders. ITEM 6 - SELECTED FINANCIAL DATA The data included on pages 4 and 5 of the 1996 Annual Report, included as Exhibit 13, under "Selected Financial Data" is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 0PERATIONS The discussion entitled "Management Discussion and Analysis of Financial Condition and Results of Operations" included in the 1996 Annual Report on pages 6 through 19 included as Exhibit is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements in the 1996 Annual Report, included as Exhibit 13, and listed in Item 14 of this Report are incorporated herein by reference from the 1996 Annual Report. ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item regarding Directors of the Company is incorporated herein by reference to the Company's definitive proxy statement for its 1996 annual meeting of common stockholders filed with the Commission pursuant to Regulation 14A (the "1996 Proxy Statement"). ITEM 11 - EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Company's 1996 Proxy Statement. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Company's 1996 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Company's 1996 Proxy Statement. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The documents listed below are filed as a part of this Report except as otherwise indicated: 1. Financial Statements. The following described consolidated financial statements found on the pages of the 1996 Annual Report indicated below are incorporated into Item 8 of this Report by reference. Description of Financial Statement Item Location in 1996 Annual Report Report of Independent Accountants Page 49 Consolidated Balance Sheets, December 31, 1996 and 1995 Page 20 Consolidated Statements of Earnings, Years Ended December 31, 1996, 1995 and 1994 Page 21 Consolidated Statements of Changes In Shareholders' Equity, Years Ended December 31, 1996, 1995 and 1994 Page 22 Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1995 and 1994 Page 23 Notes to Consolidated Financial Statements, Years Ended December 31, 1996, 1995 and 1994 Page 24 2. Financial Statement Schedules. The following financial statement schedules are included beginning on Page 58. Report of Independent Accountants Schedule II - Condensed Financial Information of Registrant Schedule IV - Reinsurance Schedule V - Valuation and Qualifying Accounts Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Operations 3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated herein by reference. 4. Reports on Form 8-K. Registrant filed no reports on Form 8-K during the quarter ended December 31, 1996. Board of Directors and Stockholders of Symons International Group, Inc. and Subsidiaries Our report on the consolidated financial statements of Symons International Group, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 49 of the 1996 Annual Report to Shareholders of Symons International Group, Inc. and Subisidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 69 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Indianapolis, Indiana March 21, 1997. SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT As Of December 31, 1995 and 1996 (In Thousands) 1995 1996 ASSETS Assets: Investments In And Advances To $18,589 $77,514 Related Parties Cash and Cash Equivalents 0 6,160 Deferred Income Taxes 52 0 Property and Equipment 337 8 Other 57 168 Intangible Assets 0 83 Total Assets $19,035 $83,933 LIABILITIES AND STOCKHOLDERS EQUITY Liabilities: Payables To Affiliates $ 8,671 $ 350 Federal Income Tax Payable 0 81 Line of Credit and Notes Payable 0 0 Other 829 992 Total Liabilities $ 9,500 $ 1,423 Minority Interest 0 21,610 Stockholders' Equity: Common Stock, No Par, 1,000,000 Shares Authorized, 10,450,000 Issued And Outstanding $ 1,000 $38,969 Additional Paid-In Capital 3,130 5,905 Unrealized Loss On Investments (45) 820 (Net Of Deferred Taxes Of ($23,000) in 1995 and $1,225,000 in 1996) Retained Earnings 5,450 15,206 Total Stockholders' Equity $ 9,535 $60,900 Total Liabilities and Stockholders' Equity $19,035 $83,933 SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 1994, 1995 and 1996 (In Thousands) 1994 1995 1996 Net Investment Income $ 37 $1,522 $ 98 Net Realized Investment Losses (8) (52) 0 Other Income 8,533 7,626 5,353 Total Revenue 8,562 9,096 5,451 Expenses: Policy Acquisition And General And Administrative Expenses 7,528 7,891 4,269 Interest Expense 874 621 613 Total Expenses 8,402 8,512 4,882 Income Before Taxes and Minority Interest 160 584 569 Provision For Income Taxes: Current Year 176 293 228 Prior Year (70) 0 0 Provision for Income Taxes 106 293 228 Net Income Before Equity In Net Income Of Subsidiaries 54 291 341 Equity In Net Income Of Subsidiaries 2,063 4,530 12,915 Net Income For The Period $2,117 $4,821 $13,256 SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 1994, 1995 and 1996 (In Thousands) 1994 1995 1996 Net Income $ 2,117 $ 4,821 $13,256 Cash Flows From Operating Activities: Adjustments To Reconcile Net Cash Provided By (Used In) Operations: Equity In Net Income of Subsidiaries (2,063) (4,530) (12,915) Depreciation Of Property And Equipment 91 37 52 Net Realized Capital Loss 8 (52) 0 Amortization Of Intangible Assets 169 88 3 Net Changes In Operating Assets And Liabilities: Federal Income Taxes Recoverable (Payable) 206 (176) 81 Other Assets (70) 216 (145) Other Liabilities (1,060) 518 163 Net Cash Provided From (Used In) (602) 922 495 Operations Cash Flow Used In Investing Activities: Purchase Of Property And Equipment (58) (179) 0 Net Cash Used In Investing Activities (58) (179) 0 Cash Flows Provided By (Used In) Financing Activities: Proceeds from Common Stock Offering 0 0 37,969 Repayment Of Loans (1,750) (1,250) 0 Contributed Capital 0 0 (20,475) Loans From Related Parties 2,410 507 (8,329) Payment of Dividend to Parent 0 0 (3,500) Net Cash Provided By (Used In) Financing Activities 660 (743) 5,665 Increase (Decrease) In Cash And Cash Equivalents 0 0 6,160 Cash And Cash Equivalents - Beginning Of Year 0 0 0 Cash And Cash Equivalents - End Of Year 0 0 6,160 SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 1994, 1995 and 1996 Basis of Presentation The condensed financial information should be read in conjunction with the consolidated financial statements of Symons International Group, Inc. The condensed financial information includes the accounts and activities of the Parent Company which acts as the holding company for the insurance subsidiaries. SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE IV - REINSURANCE For The Years Ended December 31, (In Thousands) 1994 1995 1996 Direct Amount $102,178 $123,381 $298,596 Assumed From Other Companies $ 956 $ 1,253 $ 6,903 Ceded To Other Companies $ 67,995 $ 71,187 $(95,907) Net Amount $ 35,139 $ 53,447 $209,592 Percentage Of Amount Assumed To Net 2.7% 2.3% 3.3% SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, (In Thousands) 1994-Allowance 1995-Allowance 1996-Allowance for Doubtful for Doubtful for Doubtful Accounts Accounts Accounts Additions: Balance At Beginning Of Period $1,179 $1,209 $ 927 Reserves Acquired In The Superior Acquisition 500 Charged To Costs And Expenses (1) (86) 2,523 5,034 Charged to Other Accounts 0 0 0 Deductions From Reserves (116)(2) 2,805 (2) 4,981 Balance At End Of Period $1,209 $ 927 $1,480 (1) In 1993, the Company began to direct bill policyholders rather than agents for premiums. During late 1994 and into 1995, the Company experienced an increase in premiums written. During 1995, the Company further evaluated the collectibility of this business and incurred a bad debt expense of approximately $2.5 million. The Company continually monitors the adequacy of its allowance for doubtful accounts and believes the balance of such allowance at December 31, 1994, 1995 and 1996 was adequate. (2) Uncollectible accounts written off, net of recoveries. SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS For The Years Ended December 31, (In Thousands)
Deferred Reserves Discount, Unearned Earned Net Claims and Amortization Paid Premiums Policy for Unpaid if any, Premiums Prem- Invest- Adjustment of deferred claims Written Acqui- Claims and deducted iums ment expenses policy and claim sition claim ad- in Column Income incurred- cquisition adjust- Costs justment C related to: costs ment- expense expenses Column Column Column Column Column Column Cur- Prior Column Column Column B C D E F G rent Years I J K Year Column H 1994 1,479 29,269 $0 14,416 32,126 1,241 26,268 202 4,852 26,995 103,134 1995 2,379 59,421 $0 17,497 49,641 1,173 35,184 787 7,150 31,075 124,634 1996 12,800 101,719 $0 87,285 191,759 6,733 137,679 (570) 27,657 130,895 305,499
Note: All amounts in the above table are net of the effects of reinsurance and related commission income, except for net investment income regarding which reinsurance is not applicable, premiums written liabilities for losses and loss adjustment expenses, and unearned premiums which are stated on a gross basis. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. SYMONS INTERNATIONAL GROUP, INC. /s/ Alan G. Symons March 15, 1997 By: Alan G. Symons, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 29, 1996, on behalf of the registrant in the capacities indicated: (1) Principal Executive Officer: /s/ Alan G. Symons Alan G. Symons Chief Executive Officer (2) Principal Financial/Accounting Officer: /s/ Gary P. Hutchcraft Gary P. Hutchcraft Vice President and Chief Financial Officer (3) The Board of Directors: /s/ G. Gordon Symons /s/ David R. Doyle G. Gordon Symons David R. Doyle Chairman of the Board Director /s/ John K. McKeating /s/ James G. Torrance John K. McKeating James G. Torrance Director Director /s/ Robert C. Whiting /s/ Douglas H. Symons Robert C. Whiting Douglas H. Symons Director Director /s/ Jerome B. Gordon /s/ Alan G. Symons Jerome B. Gordon Alan G. Symons Director Director EXHIBIT INDEX Reference to Sequential Regulation S-K Page Exhibit No. Document Number 1 Final Draft of the Underwriting Agreement, dated November 4, 1996, among Registrant, Goran Capital, Inc., Advest, Inc. and Mesirow Financial, Inc...........................................76 3.1 The Registrant's Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 3.2 Registrant's Restated Code of Bylaws, as amended.................129 4.1 Article V - "Number, Terms and Voting Rights of Shares" of the Registrant's Restated Articles of Incorporation is incorporated by reference to the Registrant's Restated Articles of Incorporation incorporated by reference hereunder as Exhibit 3.1. 4.2 Article I - "Shareholders" and Article VI - "Stock Certificates, Transfer of Shares, Stock Records" of the Registrant's Restated Code of Bylaws are incorporated by reference to the Registrant's Restated Code of Bylaws, as amended, filed hereunder as Exhibit 3.2. 10.1 The Stock Purchase Agreement among Goran Capital Inc., Registrant, Fortis, Inc. and Interfinancial, Inc. dated January 31, 1996 is incorporated by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(1) The Stock Purchase Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Goran Capital Inc. and Registrant dated January 31, 1996 is incorporated by reference to Exhibit 10.2(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(2) The First Amendment to the Stock Purchase Agreement by and among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Goran Capital Inc. and Registrant dated March 28, 1996 is incorporated by reference to Exhibit 10.2(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(3) The Second Amendment to the Stock Purchase Agreement by and among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Goran Capital Inc. and Registrant dated April 30, 1996 is incorporated by reference to Exhibit 10.2(3) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(4) The Third Amendment to the Stock Purchase Agreement by and among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Goran Capital Inc., Registrant and Pafco General Insurance Company dated September 24, 1996 is incorporated by reference to Exhibit 10.2(4) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.3(1) The Stockholders Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Goran Capital Inc. dated April 30, 1996 is incorporated by reference to Exhibit 10.3(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.3(2) The Amended and Restated Stockholder Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Goran Capital Inc. dated September 24, 1996 is incorporated by reference to Exhibit 10.3(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.4 The Registration Rights Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Goran Capital Inc. and Registrant dated April 30, 1996 is incorporated by reference to Exhibit 10.4 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.5 The Management Agreement among Superior Insurance Company, Superior American Insurance Company, Superior Guaranty Insurance Company and GGS Management, Inc. dated April 30, 1996 is incorporated by reference to Exhibit 10.5 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.6 The Management Agreement between Pafco General Insurance Company and Registrant dated May 1, 1987, as assigned to GGS Management, Inc. effective April 30, 1996, is incorporated by reference to Exhibit 10.6 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.7 The Administration Agreement between IGF Insurance Company and Registrant dated February 26, 1990, as amended, is incorporated by reference to Exhibit 10.7 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.8 The Agreement between IGF Insurance Company and Registrant dated November 1, 1990 is incorporated by reference to Exhibit 10.8 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(1) The Credit Agreement between GGS Management, Inc., various Lenders and The Chase Manhattan Bank (National Association), as Administrative Agent, dated April 30, 1996 is incorporated by reference to Exhibit 10.11(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(2) The Pledge Agreement between GGS Management Holdings, Inc. and Chase Manhattan Bank, N.A. dated April 30, 1996 is incorporated by reference to Exhibit 10.11(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(3) The Pledge Agreement between GGS Management, Inc. and Chase Manhattan Bank, N.A. dated April 30, 1996 is incorporated by reference to Exhibit 10.11(3) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(4) The First Amendment to the Credit Agreement between GGS Management, Inc., various Lenders and Chase Manhattan Bank, N.A., as Administrative Agent, dated September 26, 1996..............................................................156 10.9(5) The Second Amendment to the Credit Agreement between GGS Management, Inc., various Lenders and Chase Manhattan Bank, N.A., as Administrative Agent, dated December 31, 1996..............................................................159 10.9(6) The Third Amendment to the Credit Agreement between GGS Management, Inc., various Lenders and Chase Manhattan Bank, N.A., as Administrative Agent, dated March 26, 1997........161 10.10 The Registration Rights Agreement between Goran Capital Inc. and Registrant dated May 29, 1996 is incorporated by reference to Exhibit 10.13 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.11(1) The License, Improvement and Support Agreement between Tritech Financial Systems, Inc. and Registrant dated August 30, 1995 is incorporated by reference to Exhibit 10.14(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.11(2) The License of Computer Software between Tritech Financial Systems, Inc. and Registrant dated August 30, 1995 is incorporated by reference to Exhibit 10.14(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(1) The Agreement among Cliffstan Investments, Inc., Pafco General Insurance Company and Gage North Holdings, Inc. dated September 1, 1989 is incorporated by reference to Exhibit 10.15(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(2) The Purchase of Promissory Note and Assignment of Security Agreement between Pafco General Insurance Company and Granite Reinsurance Company, Ltd., dated September 30, 1992 is incorporated by reference to Exhibit 10.15(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(3) The Guarantee of Alan G. Symons dated April 22, 1994 is incorporated by reference to Exhibit 10.15(3) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(4) The Share Pledge Agreement between Symons International Group, Ltd. and Pafco General Insurance Company dated April 22, 1994 is incorporated by reference to Exhibit 10.15(4) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.13(1) The Employment Agreement between GGS Management Holdings, Inc. and Alan G. Symons dated January 31, 1996 is incorporated by reference to Exhibit 10.16(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.13(2) The Employment Agreement between GGS Management Holdings, Inc. and Douglas H. Symons dated January 31, 1996 is incorporated by reference to Exhibit 10.16(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.14(1) The Employment Agreement between IGF Insurance Company and Dennis G. Daggett effective February 1, 1996 is incorporated by reference to Exhibit 10.17(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.14(2) The Employment Agreement between IGF Insurance Company and Thomas F. Gowdy effective February 1, 1996 is incorporated by reference to Exhibit 10.17(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.15 The Employment Agreement between Superior Insurance Company and Roger C. Sullivan, Jr. dated May 9, 1996 is incorporated by reference to Exhibit 10.18 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.16 The Employment Agreement between Goran Capital Inc. and Gary P. Hutchcraft effective June 30, 1996 is incorporated by reference to Exhibit 10.19 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.17 The Goran Capital Inc. Stock Option Plan is incorporated by reference to Exhibit 10.20 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.18 The GGS Management Holdings, Inc. 1996 Stock Option Plan is incorporated by reference to Exhibit 10.21 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.19 The Registrant's 1996 Stock Option Plan is incorporated by reference to Exhibit 10.22 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.20 The Registrant's Retirement Savings Plan is incorporated by reference to Exhibit 10.24 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.21 The Insurance Service Agreement between Mutual Service Casualty Company and IGF Insurance Company dated May 20, 1996 is incorporated by reference to Exhibit 10.25 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(1) The Automobile Third Party Liability and Physical Damage Quota Share Reinsurance. Contract between Pafco General Insurance Company and Superior Insurance Company is incorporated by reference to Exhibit 10.27(1) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(2) The Crop Hail Quota Share Reinsurance Contract and Crop Insurance Service Agreement between Pafco General Insurance Company and IGF Insurance Company is incorporated by reference to Exhibit 10.27(2) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(3) The Automobile Third Party Liability and Physical Damage Quota Share Reinsurance Contract between IGF Insurance Company and Pafco General Insurance Company is incorporated by reference to Exhibit 10.27(3) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(4) The Multiple Line Quota Share Reinsurance Contract between IGF Insurance Company and Pafco General Insurance Company is incorporated by reference to Exhibit 10.27(4) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(5) The Standard Revenue Agreement between Federal Crop Insurance Corporation and IGF Insurance Company is incorporated by reference to Exhibit 10.27(5) of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 10.23 The Commitment Letter, effective October 24, 1996, between Fifth Third Bank of Central Indiana and Registrant is incorporated by reference to Exhibit 10.28 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 13 Annual Report to Security Holders.................................170 21 The Subsidiaries of the Registrant are incorporated by reference to Exhibit 21 of the Registrant's Registration Statement on Form S-1, Reg. No. 333-9129. 27 Financial Data Schedule...........................................223 99 Proxy Statement with respect to 1997 Annual Meeting of Shareholders of Registrant....................................224 EX-1 2 UNDERWRITING AGREEMENT 3,000,000 Shares (plus 450,000 Shares to cover overallotments, if any) SYMONS INTERNATIONAL GROUP, INC. Common Stock UNDERWRITING AGREEMENT November 4, 1996 ADVEST, INC. MESIROW FINANCIAL, INC. As Representatives (the "Representatives") of the Several Underwriters Named in Schedule I Hereto c/o Advest, Inc. 90 State House Square Hartford, CT 06103 Dear Sirs: Symons International Group, Inc., an Indiana corporation (the "Company") and a wholly owned subsidiary of Goran Capital Inc., a Canadian federally chartered corporation ("Parent"), proposes, subject to the terms and conditions stated herein, to sell to the Underwriters (the "Underwriters") named in Schedule I hereto an aggregate of Three Million (3,000,000) shares (the "Company Shares") of the Company's Common Stock, no par value ("Common Stock"). In addition, in order to cover overallotments in the sale of the Company Shares, the Underwriters may, at the Underwriters' election and subject to the terms and conditions stated herein, purchase ratably in proportion to the amounts set forth opposite their respective names in Schedule I hereto, up to Four Hundred Fifty Thousand (450,000) additional shares of Common Stock from the Company (such additional shares of Common Stock, the "Optional Shares"). The Company Shares and the Optional Shares are referred to collectively herein as the "Shares." As part of the offering contemplated by this Agreement, Advest, Inc. has agreed to reserve out of the Shares set forth opposite its name on Schedule I to this Agreement, up to 150,000 Shares, for sale to certain officers, directors and employees of the Company and its affiliates, certain family members of the foregoing and other persons having business relationships with 1 the Company or its affiliates (collectively, "Participants"), as set forth in the Prospectus under the heading "Underwriting" (the "Directed Share Program"). The Shares to be sold by Advest, Inc. pursuant to the Directed Share Program (the "Directed Shares") will be sold by Advest, Inc. pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the first business day after the date on which this Agreement is executed will be offered to the public by Advest, Inc. as set forth in the Prospectus. The Company hereby confirms its engagement of each of Advest, Inc. and Mesirow Financial, Inc. as, and each of Advest, Inc. and Mesirow Financial, Inc. hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the Shares. Each of Advest, Inc. and Mesirow Financial, Inc., solely in its capacity as qualified independent underwriter and not otherwise, is referred to herein as a "QIU" (and together with the other QIU, as the "QIUs"). Each of the Company and Parent, intending to be legally bound, hereby confirms its agreement with the Underwriters as follows: 1. Representations and Warranties of the Company and Parent. (a) Each of the Company and Parent, and IGF Holdings, Inc., an Indiana corporation and a wholly owned subsidiary of the Company ("IGFH") (to the extent that the following representations and warranties relate directly to IGFH or its subsidiaries), jointly and severally represent and warrant to, and agree with, each of the Underwriters that: (i) A registration statement on Form S-1 (File No. 333-09129) with respect to the Shares, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (A) if such registration statement, as it may have been amended, has become effective under the Act and information has been omitted therefrom in accordance with Rule 430A under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement) with such changes or insertions as 2 are required by Rule 430A or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Representatives, or (B) if such registration statement, as it may have been amended, has not become effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been provided to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including (i) all financial statements, schedules and exhibits thereto, (ii) all documents (or portions thereof) incorporated by reference therein, and (iii) any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion included in such registration statement or any amendment or post-effective amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement at the time it was or is declared effective), including all documents (or portions thereof) incorporated by reference therein; and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be so filed, such term means the prospectus included in the Registration Statement, in either case, including all documents (or portions thereof) incorporated by reference therein. As used herein, any reference to any statement or information as being "made," "included," "contained," "disclosed" or "set forth" in any Preliminary Prospectus, a Prospectus or any amendment or supplement thereto, or the Registration Statement or any amendment thereto (or other similar references) shall refer both to information and statements actually appearing in such document as well as information and statements incorporated by reference therein. (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued and no proceeding for that purpose has been instituted or threatened by the Commission or the securities authority of any state or other jurisdiction. If the Registration Statement has become effective under the Act, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceeding for that purpose has been instituted or threatened or, to the best knowledge of the Company, contemplated by the Commission or the securities authority of any state or other jurisdiction. (iii) When any Preliminary Prospectus was filed with the Commission it (A) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the 3 rules and regulations of the Commission thereunder and (B) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, and at each Time of Delivery (as hereinafter defined), it (A) contained and will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not and will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and at each Time of Delivery, the Prospectus, as amended or supplemented at any such time, (A) contained and will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not and will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (iii) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you specifically for use therein. It is understood that the statements set forth in each Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto (W) in the last paragraph of the cover page, (X) on the inside cover page with respect to stabilization and passive market making, (Y) under the section entitled "Underwriting" regarding the Underwriters and the underwriting arrangements, and (Z) under the section entitled "Legal Matters" regarding the identity of the counsel for the Underwriters, constitute the only written information furnished to the Company by or on behalf of any Underwriter through you specifically for use in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus and any amendment or supplement thereto, as the case may be. (iv) The descriptions in the Registration Statement and the Prospectus of laws, statutes, regulations, 4 legal and governmental proceedings, contracts and other documents are accurate in all material respects; and there are no laws, statutes, regulations, or legal or governmental proceedings required to be described in the Registration Statement or the Prospectus that are not described as required and no contracts or documents of a character that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. (v) Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has full power and authority (corporate and other) to own or lease its properties and conduct its business as described in the Prospectus. Each of the Company and Parent has full power and authority (corporate and other) to enter into this Agreement and to perform its obligations hereunder. Each of the Company and its subsidiaries is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole (a "Material Adverse Event"). (vi) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the descriptions of the Common Stock contained in the Prospectus. None of the issued shares of capital stock of the Company or any of its subsidiaries has been issued or is owned or held in violation of any statutory (or to the knowledge of the Company, any other) preemptive rights of shareholders, and no person or entity (including any holder of outstanding shares of capital stock of the Company or its subsidiaries) has any statutory (or to the knowledge of the Company, any other) preemptive or other rights to subscribe for any of the Shares. None of the capital stock of the Company has been issued in violation of applicable federal or state securities laws. (vii) All of the issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company or a subsidiary of the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, defects, shareholders' agreements, voting agreements, proxies, voting trusts, equities 5 or claims of any nature whatsoever except for (A) the pledge by GGS Management, Inc., a Delaware corporation ("GGS Management") of all of the outstanding shares of capital stock of Pafco General Insurance Company, an Indiana insurance company, and Superior Insurance Company, a Florida insurance company, as collateral to secure the GGS Senior Credit Facility (as such term is defined in the Prospectus), (B) the pledge by GGS Management Holdings, Inc., a Delaware corporation, of all of the outstanding shares of capital stock of GGS Management as collateral to secure the GGS Senior Credit Facility, (C) the pledge by IGFH of 29,614 shares of Common Stock of IGF Insurance Company ("IGF") and 2,494,000 shares of IGF Preferred Stock as collateral to secure both the IGFH Bank Debt and the IGF Note (as such terms are defined in the Prospectus) and (D) the pledge by the Company of shares of IGFH and GGS Management Holdings, Inc. as security for the obligations of Parent under the Amended and Restated Trust Indenture dated as of December 29, 1992, as amended by the First Supplemental Indenture dated as of April 30, 1996 which will be released prior to the closing of the sale and purchase of the Shares (the pledges described in clauses (A), (B), (C) and (D) being hereinafter referred to as the "Pledges") and (E) the Stockholder Agreement (as such term is defined in the Prospectus). Other than the subsidiaries listed on Exhibit 21 to the Registration Statement and the equity securities held in the investment portfolios of such subsidiaries (the composition of which is not materially different than the disclosures in the Prospectus as of specific dates), the Company does not own, directly or indirectly, any capital stock or other equity securities of any other corporation or any ownership interest in any partnership, joint venture or other association. (viii) Except as disclosed in the Prospectus, there are no outstanding (A) securities or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (ix) Since the date of the most recent audited financial statements included in the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as disclosed in or contemplated by the Prospectus and other than pursuant to claims 6 made by insureds in the ordinary course of business under policies issued by the Company's subsidiaries. (x) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) neither the Company nor any of its subsidiaries has incurred any liabilities or obligations, direct or contingent, or entered into any transactions, not in the ordinary course of business, that are material to the Company and its subsidiaries, (B) the Company has not purchased any of its outstanding capital stock or declared, paid or otherwise made any dividend or distribution of any kind on its capital stock, (C) there has not been any change in the capital stock, long-term debt or short-term debt of the Company or any of its subsidiaries, and (D) there has not been any material adverse change, or any development involving a prospective material adverse change, in or affecting the financial position, results of operations or business of the Company and its subsidiaries, in each case other than as disclosed in or contemplated by the Prospectus. (xi) Except for the Goran Registration Rights Agreement (as such term is defined in the Prospectus), there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement (or any such right has been effectively waived) or any securities being registered pursuant to any other registration statement filed by the Company under the Act. (xii) Neither the Company nor any of its subsidiaries is, or with the giving of notice or passage of time or both would be, in violation of its Articles of Incorporation or Bylaws or in default in any material respect under any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or to which any of their respective properties or assets are subject. (xiii) The Company and its subsidiaries have good and marketable title in fee simple to all real property, if any, and good title to all personal property owned by them, in each case free and clear of all liens, security interests, pledges, charges, encumbrances, mortgages and defects, except such as are disclosed in the Prospectus or such as do not constitute a Material Adverse Event and do not interfere with the use made or proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held 7 under lease by the Company or any of its subsidiaries are held under valid, subsisting and enforceable leases, with such exceptions as are disclosed in the Prospectus or are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary. (xiv) Neither the Company nor Parent requires any consent, approval, authorization, order or declaration of or from, or registration, qualification or filing with, any court or governmental agency or body in connection with the sale of the Shares or the consummation of the transactions contemplated by this Agreement in order for the Company to be permitted to increase the capital and surplus of the Company's insurance company subsidiaries as contemplated in the "Use of Proceeds" section of the Prospectus, the registration of the Shares under the Act (which, if the Registration Statement is not effective as of the time of execution hereof, shall be obtained as provided in this Agreement) and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such as may be required under state securities or blue sky laws in connection with the offer, sale and distribution of the Shares by the Underwriters. (xv) Other than as disclosed in the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation (including without limitation, any insurance regulatory proceeding) pending or, to the best of the Company's or Parent's knowledge, as the case may be, threatened in which the Company or any of its subsidiaries or Parent is a party or of which any of their respective properties or assets are the subject which, if determined adversely to the Company or any such subsidiary or Parent, would individually or in the aggregate constitute a Material Adverse Event. Neither the Company nor any of its subsidiaries nor Parent is in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate constitute a Material Adverse Event, and neither the Company nor any of its subsidiaries nor Parent is required to take any action in order to avoid any such violation or default. (xvi) To the best of the Company's knowledge, Coopers & Lybrand L.L.P., who have certified certain financial statements of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus, are independent public accountants as required by the Act, the Exchange Act and the respective rules and regulations of the Commission thereunder. (xvii) The consolidated financial statements and schedules (including the related notes) of the Company and 8 its consolidated subsidiaries included in the Registration Statement, the Prospectus and/or any Preliminary Prospectus were prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved and fairly present the financial position and results of operations of the Company and its subsidiaries, on a consolidated basis, at the dates and for the periods presented. The selected financial data set forth under the captions "Summary Company Consolidated Financial Data," "Summary Superior Consolidated Financial Data," "Selected Consolidated Historical Financial Data of Symons International Group, Inc.," "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company," "Selected Consolidated Historical Financial Data of Superior Insurance Company" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Superior" in the Prospectus fairly present, on the basis stated in the Prospectus, the information included therein, and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The supporting notes and schedules included in the Registration Statement, the Prospectus and/or any Preliminary Prospectus fairly state in all material respects the information required to be stated therein in relation to the financial statements taken as a whole. The unaudited interim consolidated financial statements included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of Rule 10-01 of Regulation S-X under the Act. (xviii) This Agreement has been duly authorized, executed and delivered by each of the Company and Parent, and, assuming due execution by the Representatives of the Underwriters, constitutes the valid and binding agreement of each of the Company and Parent, enforceable against the Company and Parent in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles and except as the enforceability of rights to indemnity and contribution under this Agreement may be limited under applicable securities laws or the public policy underlying such laws. (xix) The sale of the Shares and the performance of this Agreement and the consummation of the transactions herein contemplated will not (with or without the giving of notice or the passage of time or both) (A) conflict with any term or provision of the articles of incorporation or bylaws, or other organizational documents, of the Company or Parent, (B) result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement 9 or instrument to which the Company or Parent is a party or to which any of their respective properties or assets are subject, (C) conflict with or violate any provision of the governing instruments of the Company or Parent or any law, statute, rule or regulation or any order, judgment or decree of any court or governmental agency or body having jurisdiction over the Company or Parent or any of the properties or assets of the Company or Parent or (D) result in a breach, termination or lapse of the corporate power and authority of the Company or Parent to own or lease and operate its assets and properties and conduct its business as described in the Prospectus. (xx) When the Shares have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and non-assessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The certificates representing the Shares are in proper legal form under, and conform in all respects to the requirements of, the Indiana Business Corporation Law, as amended. Neither the filing of the Registration Statement nor the offering or sale of Shares as contemplated by this Agreement gives any security holder of the Company any rights for or relating to the registration of any shares of Common Stock or any other capital stock of the Company, except such as have been satisfied or waived. (xxi) The Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, a Preliminary Prospectus, the Prospectus and other material, if any, permitted by the Act. (xxii) Neither the Company nor any of its officers, directors or affiliates nor Parent has (A) taken, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company or Parent to facilitate the sale or resale of the Shares or (B) since the filing of the Registration Statement (1) sold, bid for, purchased or paid anyone any compensation for soliciting purchases of, the Shares or (2) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company or Parent. (xxiii) Neither the Company, any of its subsidiaries, nor any director, officer, employee or other person associated with or acting on behalf of the Company or any such subsidiary has, directly or indirectly, violated any provision of the Foreign Corrupt Practices Act of 1977, as amended. 10 (xxiv) The operations of the Company and its subsidiaries with respect to any real property currently leased or owned or by any means controlled by the Company or any subsidiary (the "Real Property") are in compliance in all material respects with all federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Laws"), and the Company and its subsidiaries have not violated any Laws in a way which would give rise to a Material Adverse Event. Except as disclosed in the Prospectus, there is no pending or, to the best of the Company's knowledge, threatened claim, litigation or any administrative agency proceeding, nor has the Company or any subsidiary received any written or oral notice from any governmental entity or third party, that: (A) alleges a material violation of any Laws by the Company or any subsidiary or (B) alleges the Company or any subsidiary is a liable party under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss. 9601 et seq. or any state superfund law. (xxv) The Company and each of its subsidiaries owns or has the right to use trademarks, trademark applications, trade names, service marks, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles"); and, to the best knowledge of the Company, neither the Company nor any subsidiary has infringed or is infringing, and neither the Company nor any subsidiary has received notice of infringement with respect to, asserted Intangibles of others. (xxvi) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a comparable cost, except as disclosed in the Prospectus. The foregoing representation is not intended to and does not relate to any reinsurance contracts, agreements or treaties to which the Company or any of its subsidiaries is a party. (xxvii) Each of the Company and its subsidiaries makes and keeps accurate books and records reflecting its assets and maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of the Company's consolidated financial statements in accordance with generally 11 accepted accounting principles and to maintain accountability for the assets of the Company, (C) access to the assets of the Company and each of its subsidiaries is permitted only in accordance with management's authorization and (D) the recorded accountability for assets of the Company and each of its subsidiaries is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxviii)The Company and its subsidiaries have filed all foreign, federal, state and local tax returns that are required to be filed by them and have paid all taxes shown as due on such returns as well as all other taxes, assessments and governmental charges that are due and payable; and no material deficiency with respect to any such return has been assessed or proposed. (xxix) Except for such plans that are expressly disclosed in the Prospectus, the Company and its subsidiaries do not maintain, contribute to or have any material liability with respect to any employee benefit plan, profit sharing plan, employee pension benefit plan, employee welfare benefit plan, equity-based plan or deferred compensation plan or arrangements (collectively, "Plans") that are subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder ("ERISA"). All Plans are in compliance in all material respects with all applicable laws, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), and have been operated and administered in all material respects in accordance with their terms. No Plan is a defined benefit plan or multiemployer plan. The Company does not provide retiree life and/or retiree health benefits or coverage for any employee or any beneficiary of any employee after such employee's termination of employment, except as required by Section 4980B of the Code or under a Plan which is intended to be "qualified" under Section 401(a) of the Code. No Plan has been involved in any prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. Full payment has been made of all amounts which the Company or any of its subsidiaries were required under the terms of the Plans to have paid as contributions to such Plans on or prior to the date hereof (excluding any amounts not yet due). No material liability, claim, action or litigation, has been incurred, made, commenced or, to the knowledge of the Company, threatened, by or against the Company or any of its subsidiaries with respect to any Plan (other than for benefits payable in the ordinary course). No material liability has been, or could reasonably be expected to be, incurred under Title IV of ERISA or Section 412 of the Code by any entity required to be aggregated with the Company or any of its subsidiaries pursuant to Section 4001(b) of ERISA and/or Section 414(b) or (c) of the Code (and the 12 regulations promulgated thereunder) with respect to any "employee pension benefit plan" which is not a Plan. As used in this subsection, the terms "defined benefit plan," "employee benefit plan," "employee pension benefit plan," "employee welfare benefit plan" and "multiemployer plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA. (xxx) No material labor dispute exists with the Company's or any of its subsidiary's employees, and no such labor dispute is threatened. The Company has no knowledge of any existing or threatened labor disturbance by the employees of any of its principal agents, suppliers, contractors or customers that would give rise to a Material Adverse Event. (xxxi) Each contract or other instrument (however characterized or described) to which the Company or any subsidiary is a party or by which any of its properties or business is bound or affected and which is material to the conduct of the Company's business as described in the Prospectus has been duly and validly executed by the Company or such subsidiary, and, to the knowledge of the Company, by the other parties thereto. Each such contract or other instrument is in full force and effect and is enforceable against the parties thereto in accordance with its terms, and the Company and each of its subsidiaries are not, and to the knowledge of the Company, no other party is, in default thereunder, nor has any event occurred that, with the lapse of time or the giving of notice, or both, would constitute a default under any such contract or other instrument. All necessary consents under such contracts or other instruments to disclosure in the Prospectus with respect thereto have been obtained. (xxxii) The Company and its subsidiaries have received all permits, licenses, franchises, authorizations, registrations, qualifications and approvals (collectively, "Permits") of governmental or regulatory authorities (including, without limitation, state and/or other insurance regulatory authorities) as may be required of them to own their properties and conduct their businesses in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; and the Company and its subsidiaries have fulfilled and performed all of their material obligations with respect to such Permits, and no event has occurred which allows or, after notice or lapse of time or both, would allow revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, such Permits contain no restrictions that materially affect the ability of the Company and its subsidiaries to conduct their businesses. 13 (xxxiii)The Company and each of its subsidiaries have filed, or has had filed on its behalf, on a timely basis, all materials, reports, documents and information, including but not limited to annual reports and reports of examination with each applicable insurance regulatory authority, board or agency, which are required to be filed by it, except where the failure to have timely filed such materials, reports, documents and information would not constitute a Material Adverse Event. (xxxiv) Neither Parent nor the Company nor any of the Company's subsidiaries is an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and, if the Company conducts its business as set forth in the Registration Statement and the Prospectus, will not become an "investment company" and will not be required to register under the Investment Company Act. (xxxv) To the best knowledge of the Company, none of the officers, directors (except as previously disclosed to you by the Company in writing) or shareholders holding 5% or more of any class of the Company's capital stock are affiliated with any member of the National Association of Securities Dealers, Inc. (the "NASD"). (xxxvi) The common stock of Parent is registered under the Exchange Act and Parent is in substantial compliance with the requirements of the United States federal securities laws (including, without limitation, the requirements of the Exchange Act), the Nasdaq National Market and the Toronto Stock Exchange. No document that has been filed by Parent with the Commission pursuant to the Exchange Act including, without limitation, any Form 10-K, 10-Q or 8-K, annual report to stockholders or proxy statement, (a) contained at the time of such filing or, except to the extent corrected or modified by a subsequent filing under the Exchange Act, contains an untrue statement of material fact or (b) omitted at the time of filing or, except to the extent corrected or modified by a subsequent filing under the Exchange Act, omits to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (xxxvii)The Company and each of its subsidiaries is in compliance with all provisions of Section 1 of the Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba. (xxxviii The Company has not offered, or caused the Underwriters to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully 14 influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products or services. Any certificate signed by any officer of the Company or any subsidiary in such capacity and delivered to the Representatives or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company or such subsidiary to the several Underwriters as to the matters covered thereby. 2. Purchase and Sale of Shares. (a) Subject to the terms and conditions herein set forth, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of Eleven Dollars and Fifty Cents ($11.50) per share (reflecting a seven percent underwriting discount and a one percent non-accountable expense allowance payable to the Representatives on behalf of the Underwriters pursuant to Section 6) (the "Per Share Price"), the number of Company Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Shares to be sold by the Company as set forth in the first paragraph of this Agreement by a fraction, the numerator of which is the aggregate number of Company Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto, and the denominator of which is the aggregate number of Company Shares to be purchased by the several Underwriters hereunder. (b) The Company hereby grants to the Underwriters the right to purchase at their election in whole or in part from time to time up to Four Hundred Fifty Thousand (450,000) Optional Shares, at the Per Share Price, for the sole purpose of covering overallotments in the sale of the Company Shares. Any such election to purchase Optional Shares may be exercised by written notice from the Representatives to the Company, given from time to time within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as hereinafter defined) or, unless you otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. In the event you elect to purchase all or a portion of the Optional Shares, the Company agrees to furnish or cause to be furnished to you the certificates, letters and opinions, and to satisfy all 15 conditions, set forth in Section 7 hereof at each Subsequent Time of Delivery (as hereinafter defined). (c) In making this Agreement, each Underwriter is contracting severally, and not jointly, and except as provided in Sections 2(b) and 9 hereof, the agreement of each Underwriter is to purchase only that number of shares specified with respect to that Underwriter in Schedule I hereto. No Underwriter shall be under any obligation to purchase any Optional Shares prior to an exercise of the option with respect to such Shares granted pursuant to Section 2(b) hereof. 3. Offering by the Underwriters. Upon the authorization by you of the release of the Shares, the several Underwriters propose to offer the Shares for sale upon the terms and conditions disclosed in the Prospectus. 4. Delivery of Shares; Closing. (a) Certificates in definitive form for the Shares to be purchased by each Underwriter hereunder, and in such denominations and registered in such names as you may request upon at least 48 hours' prior notice to the Company, shall be delivered by or on behalf of the Company, to you for the account of such Underwriter, against payment by such Underwriter on its behalf of the purchase price therefor by (at the Representatives' election) wire transfer of immediately available funds to such accounts as the Company (as the case may be) shall designate in writing, or by official bank check or checks (payable in next day funds), payable to the order of the Company in next-day available funds. The closing of the sale and purchase of the Shares shall be held at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York 10019, except that physical delivery of such certificates shall be made at the office of The Depository Trust Company, 55 North Water Street, New York, New York 10041. The time and date of such delivery and payment shall be, with respect to the Company Shares, at 10:00 a.m., New York, New York time, on the third (3rd) full business day after this Agreement is executed or at such other time and date as you and the Company may agree upon in writing, and, with respect to the Optional Shares, at 10:00 a.m., New York, New York time, on the date specified by you in the written notice given by you of the Underwriters' election to purchase all or part of such Optional Shares, or at such other time and date as you and the Company may agree upon in writing. Such time and date for delivery of the Company Shares is herein called the "First Time of Delivery," such time and date for delivery of any Optional Shares, if not the First Time of Delivery, is herein called a "Subsequent Time of Delivery," and each such time and date for delivery is herein called a "Time of Delivery." The Company will make such certificates available for checking and 16 packaging at least 24 hours prior to each Time of Delivery at the office of The Depository Trust Company, 55 North Water Street, New York, New York 10041 or at such other location specified by you in writing at least 48 hours prior to such Time of Delivery. 5. Covenants of the Company. (a) The Company and the Parent covenant and agree with each of the Underwriters that: (i) The Company will use its best efforts to cause the Registration Statement, if not effective prior to the execution and delivery of this Agreement, to become effective. If the Registration Statement has been declared effective prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by you, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifth business day after the date on which the Registration Statement is declared effective. The Company will advise you promptly of any such filing pursuant to Rule 424(b). The Company will file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering, sale and distribution of the Shares. (ii) The Company will not file with the Commission the prospectus or the amendment referred to in the second sentence of Section 1(a)(i) hereof, any amendment or supplement to the Prospectus or any amendment to the Registration Statement unless you have received a reasonable period of time to review any such proposed amendment or supplement and consented to the filing thereof and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective as promptly as possible. Upon the request of the Representatives or counsel for the Underwriters, the Company will promptly prepare and file with the Commission, in accordance with the rules and regulations of the Commission, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the several Underwriters and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective as promptly as possible. If required, the Company will file any amendment or supplement to the Prospectus with the Commission in the manner and within the time period required by Rule 424(b) under the Act. The Company will advise the Representatives, promptly after 17 receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence to the Representatives of each such filing or effectiveness. (iii) The Company will advise you promptly after receiving notice or obtaining knowledge of (A) when any post-effective amendment to the Registration Statement is filed with the Commission, (B) the receipt of any comments from the Commission concerning the Registration Statement, (C) when any post-effective amendment to the Registration Statement becomes effective, or when any supplement to the Prospectus or any amended Prospectus has been filed, (D) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any part thereof or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (E) the suspension of the qualification of the Shares for offer or sale in any jurisdiction or of the initiation or threatening of any proceeding for any such purpose, (F) any request made by the Commission or any securities authority of any other jurisdiction for amending the Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order or suspension and, if any such stop order or suspension is issued, to obtain the withdrawal thereof as promptly as possible. (iv) If the delivery of a prospectus relating to the Shares is required under the Act at any time prior to the expiration of nine months after the date of the Prospectus and if at such time any events have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any reason it is necessary during such same period to amend or supplement the Prospectus, the Company will promptly notify you and upon your request (but at the Company's expense) prepare and file with the Commission an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance and will furnish without charge to each Underwriter and to any dealer in securities as many copies of such amended or supplemented Prospectus as you may from time to time reasonably request. If the delivery of a prospectus relating to the Shares is required under the Act at any time nine months or more after the date of the Prospectus, upon your request but at the expense of such Underwriter, the Company will prepare and deliver to such Underwriter as many 18 copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act. (v) The Company promptly from time to time will take such action as you may reasonably request to qualify the Shares for offering and sale under the securities or blue sky laws of such jurisdictions as you may request and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction. (vi) The Company will promptly provide you, without charge, (A) three manually executed copies of the Registration Statement as originally filed with the Commission and of each amendment thereto, including all exhibits and all documents or information incorporated by reference therein, (B) for each other Underwriter a conformed copy of the Registration Statement as originally filed and of each amendment thereto, without exhibits but including all documents or information incorporated by reference therein and (C) so long as a prospectus relating to the Shares is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as you may reasonably request. (vii) As soon as practicable, but in any event not later than the last day of the thirteenth month after the effective date of the Registration Statement, the Company will make generally available to its security holders an earnings statement of the Company and its subsidiaries, if any, covering a period of at least 12 months beginning after the effective date of the Registration Statement (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations thereunder. (viii) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, the Company and Parent will not, without your prior written consent, offer, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exercisable or exchangeable for shares of Common Stock, except as provided in Section 2. (ix) During the period of three years after the effective date of the Registration Statement, the Company will furnish to you and, upon request, to each of the other Underwriters, without charge, (A) copies of all reports or other communications (financial or other) furnished to shareholders and 19 (B) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission, the National Association of Securities Dealers, Inc. or any national securities exchange. (x) Prior to the termination of the underwriting syndicate contemplated by this Agreement, neither the Company nor any of its officers, directors or affiliates nor Parent will (A) take, directly or indirectly, any action designed to cause or to result in, or that might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Shares or (B) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of, the Shares other than as contemplated under the Directed Share Program. (xi) If at any time during the period beginning on the date the Registration Statement becomes effective and ending on the later of (A) the date 30 days after such effective date and (B) the date that is the earlier of (1) the date on which the Company first files with the Commission a Quarterly Report on Form 10-Q after such effective date and (2) the date on which the Company first issues a quarterly financial report to shareholders after such effective date, (x) any publication or event relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such publication or event necessitates an amendment of or supplement to the Prospectus), or (y) any rumor relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor necessitates an amendment of or supplement to the Prospectus), the Company will consult with you concerning the necessity of a press release or other public statement, and, if the Company determines that a press release or other public statement is necessary, the Company will forthwith prepare and consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such publication, event or rumor. (xii) The Company will comply with the Act, the Exchange Act and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Shares for as long as may be necessary to complete the distribution of the Shares as contemplated hereby. (xiii) In case of any event, at any time within the period during which a prospectus is required to be delivered 20 under the Act, as a result of which any Preliminary Prospectus or the Prospectus, as then amended or supplemented, would contain an untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or, if it is necessary at any time to amend any Preliminary Prospectus or the Prospectus to comply with the Act or any applicable securities or blue sky laws, the Company promptly will prepare and file with the Commission, and any applicable state securities commission, an amendment, supplement or document that will correct such statement or omission or effect such compliance and will furnish to the several Underwriters such number of copies of such amendment(s), supplement(s) or document(s) as the Representatives may reasonably request. For purposes of this subsection, the Company will provide such information to the Representatives, the Underwriters' counsel and counsel to the Company as shall be necessary to enable such persons to consult with the Company with respect to the need to amend or supplement the Registration Statement, any Preliminary Prospectus or the Prospectus or file any document, and shall furnish to the Representatives and the Underwriters' counsel such further information as each may from time to time reasonably request. (xiv) The Company will use its best efforts to maintain the qualification or listing of the shares of Common Stock (including, without limitation, the Shares) on the Nasdaq National Market. (xv) In connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. Advest, Inc. will notify the Company as to which Participants will need to be so restricted. At the request of Advest, Inc., the Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (xvi) The Company will pay all fees and disbursements incurred by the Underwriters in connection with the offer of any Directed Shares outside of the United States under the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. (b) The Company and Parent covenant with Advest, Inc. that the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign 21 jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. 6. Expenses. The Company will pay all costs and expenses incident to the performance of the obligations of the Company under this Agreement, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated pursuant to Section 10 hereof, including, without limitation, all costs and expenses incident to (i) the printing of and mailing expenses associated with the Registration Statement, the Preliminary Prospectus and the Prospectus and any amendments or supplements thereto, this Agreement, the Agreement among Underwriters, the underwriters' questionnaire submitted to each of the Underwriters by the Representatives in connection herewith, the power of attorney executed by each of the Underwriters in favor of Advest, Inc. in connection herewith, the Dealer Agreement and related documents (collectively, the "Underwriting Documents") and the preliminary Blue Sky memorandum relating to the offering prepared by LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Underwriters (collectively with any supplement thereto, the "Preliminary Blue Sky Memorandum"); (ii) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation and, if applicable, filing of the Registration Statement (including all amendments thereto), any Preliminary Prospectus, the Prospectus and any amendments and supplements thereto, the Underwriting Documents and the Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing documents to the Underwriters; (iv) the filing fees of the Commission and the NASD relating to the Shares; (v) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Shares, including transfer agent's and registrar's fees; (vi) the qualification of the Shares for offering and sale under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters (and local counsel therefor) relating thereto; (vii) any listing of the Shares on the Nasdaq National Market; (viii) any expenses for travel, lodging and meals incurred by the Company and any of its officers, directors and employees in connection with any meetings with prospective investors in the Shares; (ix) the costs of advertising the offering, including, without limitation, with respect to the placement of "tombstone" advertisements in publications selected by the Representatives; and (x) all other costs and expenses reasonably incident to the performance of the Company's obligations hereunder that are not otherwise specifically provided for in this Section 6. In addition, the Company has agreed to pay to Advest, Inc., on behalf of the Underwriters, at each Time of Delivery, a non-accountable expense allowance in the amount of 1% of the gross 22 proceeds from the sale of the Shares to be applied to the reimbursement of underwriting syndicate expenses. 7. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder to purchase and pay for the Shares to be delivered at each Time of Delivery shall be subject, in their discretion, to the accuracy of the representations and warranties of each of the Company and Parent contained herein as of the date hereof and as of such Time of Delivery, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by each of the Company and Parent of its covenants and agreements hereunder, and to the following additional conditions precedent: (a) If the registration statement as amended to date has not become effective prior to the execution of this Agreement, such registration statement shall have been declared effective not later than 11:00 a.m., Hartford, Connecticut time, on the date of this Agreement or such later date and/or time as shall have been consented to by you in writing. The Prospectus and any amendment or supplement thereto shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing and in accordance with Section 5(a) of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceedings for that purpose shall have been instituted, threatened or, to the knowledge of the Company, Parent or the Representatives, contemplated by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction. (b) All corporate proceedings and other matters incident to the authorization, form and validity of this Agreement, the Shares and the form of the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby, shall be satisfactory in all material respects to counsel to the Underwriters. (c) The Representatives shall have received copies of executed lock-up agreements from each of Parent, the Company and the Company's officers and directors who own shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or who may be issued shares of Common Stock under an option plan or other arrangement to the effect that such individuals and entities will not offer, sell, contract to sell, or otherwise dispose of, any such shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock for a period of 180 days after the 23 date of the Prospectus without the written consent of Advest, Inc. (d) The Representatives shall have received at or prior to the First Time of Delivery from the Underwriters' counsel the Preliminary Blue Sky Memorandum, such memorandum to be in form and substance satisfactory to the Representatives. (e) LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Underwriters, shall have furnished to you such opinion or opinions, dated such Time of Delivery, with respect to the incorporation of the Company, the validity of the Shares being delivered at such Time of Delivery, the Registration Statement, the Prospectus, and other related matters as you may reasonably request, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (f) The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of any of the Shares. (g) You shall have received an opinion, dated such Time of Delivery, of Barnes & Thornburg, counsel for the Company, in form and substance satisfactory to you and your counsel, to the effect that: (i) The Company has been duly incorporated, is validly existing as a corporation under the laws of the State of Indiana and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and to enter into this Agreement and perform its obligations hereunder. (ii) Each of the subsidiaries listed on Exhibit 21 to the Registration Statement (the "Subsidiaries") of the Company is validly existing as a corporation in good standing (where applicable) under the laws of its jurisdiction of incorporation and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus. (iii) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description of the Common Stock contained in the Prospectus. None of the outstanding shares of Common Stock have been issued in violation of the preemptive or other similar rights of any shareholder or warrantholder of the Company arising by operation of law, under the Articles of 24 Incorporation or Bylaws of the Company or, to our knowledge, under any agreement to which the Company or any of its Subsidiaries is a party. The issuance of the shares of Common Stock is not subject to preemptive or other similar rights under the Articles of Incorporation or Bylaws of the Company or, to our knowledge, under any agreement to which the Company or any of its Subsidiaries is a party. (iv) All of the issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and, to such counsel's knowledge, are owned beneficially by the Company or its subsidiaries, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements, voting agreements, proxies, voting trusts, defects, equities or claims of any nature whatsoever (collectively, "Encumbrances"), including, without limitation, Encumbrances arising or resulting from any indenture, mortgage, deed of trust, loan agreement, lease or other agreement of or entered into by Parent, except for the Pledges and the Stockholder Agreement (as such term is defined in the Prospectus). (v) When the Shares have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be duly authorized, validly issued and fully paid and nonassessable, the holders thereof will not be subject to personal liability solely by reason of being such holders and the Shares will conform to the description of the Common Stock contained in the Prospectus; the certificates evidencing the Shares will comply with all applicable requirements of Indiana law; and the Shares will have been listed on the Nasdaq National Market. (vi) To such counsel's knowledge, neither the Company nor any of its subsidiaries is, or with the giving of notice or passage of time or both, would be, in violation of its Articles of Incorporation or Bylaws, in each case as amended to date. (vii) The sale of the Shares being sold at such Time of Delivery and the performance of this Agreement and the consummation of the transactions herein contemplated will not violate any provision of the Articles of Incorporation or Bylaws of the Company or any of its Subsidiaries, in each case as amended to date, or to such counsel's knowledge, any existing law, statute, rule or regulation, or conflict with, or (with or without the giving of notice or the passage of time or both) result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel to which the Company or any such Subsidiary 25 is a party or to which any of their respective properties or assets is subject (except for any conflicts with, breaches of or violations of any such indentures, mortgages, deeds of trust, loan agreements, leases or other agreements or instruments which would not, individually or in the aggregate, have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole), or, conflict with or violate any order, judgment or decree known to such counsel, of any court or governmental agency or body having jurisdiction over the Company or any of its Subsidiaries or any of their respective properties or assets, except with respect to any statute, rule or regulation of any regulatory authority imposing any obligation on the part of the Underwriters by way of their purchase of the Shares, as to which no opinion need be rendered. (viii) To such counsel's knowledge, no consent, approval, authorization, order or declaration of or from, or registration, qualification or filing with, any court or governmental agency or body is required for the sale of the Shares or the consummation of the transactions contemplated by this Agreement, except such as have been or will have been obtained and are or will be in effect, and except the registration of the Shares under the Act, the Exchange Act and such as may be required under state securities or blue sky laws in connection with the offer, sale and distribution of the Shares by the Underwriters, as to which such counsel expresses no opinion. (ix) To such counsel's knowledge and other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which the Company or any of its Subsidiaries is a party or of which any of their respective properties or assets is the subject which, if determined adversely to the Company or any such Subsidiary, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. (x) The statements in the Prospectus under "Business -- Regulation," "Business -- Legal Proceedings," "Description of Capital Stock" and "Shares Eligible for Future Sale" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations, or legal conclusions, are correct in all material respects. (xi) This Agreement has been duly authorized, executed and delivered by the Company. 26 (xii) Neither the Company nor any of its subsidiaries nor Parent is an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as amended. (xiii) The Registration Statement and the Prospectus and each amendment or supplement thereto (other than the financial statements, the notes and schedules thereto and other financial data included therein, to which such counsel need express no opinion), as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the respective rules and regulations thereunder. The descriptions in the Registration Statement and the Prospectus of contracts and other documents are accurate in all material respects and fairly present the information required to be shown; and such counsel do not know of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required. (xiv) Such counsel has been advised by the Division of Corporation Finance of the Commission that the Registration Statement has become effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to such counsel's knowledge, (A) no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and (B) no proceedings for that purpose have been instituted or threatened or are contemplated by the Commission. Such counsel shall also state that they have participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and representatives of and counsel to the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel has not passed upon or assumed any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, and although such counsel has not undertaken to verify independently the accuracy or completeness of the statements in the Registration Statement or the Prospectus and, therefore, would not necessarily have become aware of any material misstatement of fact or omission to state a material fact, on the basis of and subject to the foregoing, nothing has come to such counsel's attention to lead them to believe that the Registration Statement, or any further 27 amendment thereto made prior to such Time of Delivery, on its effective date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, or any amendment or supplement thereto made prior to such Time of Delivery, as of its issue date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements, the notes and schedules thereto and other financial and statistical data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deem proper, on certificates of officers of the Company and public officials and letters from officials of the NASD and on the opinions of other counsel reasonably satisfactory to you and your counsel as to matters which are governed by laws other than the laws of the State of Indiana and the Federal laws of the United States; provided that such counsel shall state in their opinion that they are so relying, and they are justified in relying on such other opinions. Copies of such certificates of officers of the Company and other opinions shall be addressed and furnished to the Underwriters and furnished to counsel for the Underwriters. (h) You shall have received an opinion, dated such Time of Delivery, of David L. Bates, Esquire, General Counsel of the Company and Parent, in form and substance satisfactory to you and your counsel, to the effect that: (i) The Company has been duly incorporated, is validly existing as a corporation under the laws of the State of Indiana and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and to enter into this Agreement and perform its obligations hereunder. The Company is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases property, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. Parent has been duly incorporated, is validly existing as a federally chartered corporation in good standing under the laws of Canada and has the 28 corporate power and authority to enter into this Agreement and perform its obligations hereunder. (ii) Each of the subsidiaries of the Company is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus. Each such subsidiary is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases property, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. (iii) Except as disclosed in the Prospectus, there are, to such counsel's knowledge, no outstanding (A) securities or obligations of Parent, the Company or any of the Company's subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from Parent, the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of Parent, the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (iv) Except for the Goran Registration Rights Agreement (as such term is defined in the Prospectus), to such counsel's knowledge, there are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement (or any such right has been effectively waived) or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (v) To such counsel's knowledge, neither the Company nor any of its subsidiaries nor Parent is, or with the giving of notice or passage of time or both, would be, in violation of its Articles of Incorporation or Bylaws, in each case as amended to date, or, in default in any material respect under any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel to 29 which the Company, any such subsidiary or Parent is a party or to which any of their respective properties or assets is subject. (vi) To such counsel's knowledge and other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which the Company, any of its subsidiaries or Parent is a party or of which any of their respective properties or assets is the subject which, if determined adversely to the Company, any such subsidiary or Parent, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole; and, to the best of such counsel's knowledge, neither the Company nor any of its subsidiaries nor Parent is in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole, nor is the Company, any such subsidiary or Parent required to take any action in order to avoid any such violation or default. (vii) This Agreement has been duly authorized, executed and delivered by each of the Company and Parent. (viii) All offers and sales of the Company's capital stock prior to the date hereof were at all relevant times duly registered or exempt from the registration requirements of the Act, and were duly registered or the subject of an available exemption from the registration requirements of the applicable state securities or blue sky laws, or any actions in respect thereof are barred by the applicable statutes of limitations. (ix) To such counsel's knowledge, the Company and each of its subsidiaries have received all permits, licenses, franchises, authorizations, registrations, qualifications and approvals (collectively, "permits") of governmental or regulatory authorities (including, without limitation, state and/or other insurance regulatory authorities) as may be required of them to own their properties and to conduct their businesses in the manner described in the Prospectus, subject to such qualification as may be set forth in the Prospectus; to the best of such counsel's knowledge, the Company and each of its subsidiaries have fulfilled and performed all of their material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time or both would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such permits, subject in each case to such qualifications as may be set forth 30 in the Prospectus; and other than as described in the Prospectus, such permits contain no restrictions that materially affect the ability of the Company and its subsidiaries to conduct their businesses. Such counsel shall also state that he has participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and representatives of and counsel to the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel has not passed upon or assumed any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, and although such counsel has not undertaken to verify independently the accuracy or completeness of the statements in the Registration Statement or the Prospectus and, therefore, would not necessarily have become aware of any material misstatement of fact or omission to state a material fact, on the basis of and subject to the foregoing, nothing has come to such counsel's attention to lead him to believe that the Registration Statement, or any further amendment thereto made prior to such Time of Delivery, on its effective date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, or any amendment or supplement thereto made prior to such Time of Delivery, as of its issue date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements, the notes and schedules thereto and other financial and statistical data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deem proper, on certificates of officers of the Company and Parent, and public officials and letters from officials of the NASD and on the opinions of other counsel reasonably satisfactory to you and your counsel as to matters which are governed by laws other than the laws of the State of Indiana and the Federal laws of the United States; provided that such counsel shall state in his opinion that he is so relying, and he is justified in relying on such other opinions. Copies of such certificates of officers of the 31 Company and Parent and other opinions shall be addressed and furnished to the Underwriters and furnished to counsel for the Underwriters. (i) You shall have received an opinion, dated such Time of Delivery, of Smith Lyons, counsel for the Parent, in form and substance satisfactory to you and your counsel, to the effect that: (i) Parent has been duly incorporated and is validly existing under the laws of Canada and has the corporate power and authority to enter into this Agreement and perform its obligations hereunder. (ii) The execution, delivery and performance by Parent of this Agreement does not result in, and with the giving of notice or passage of time or both, would not result in, a violation of its Articles of Amalgamation or Bylaws, in each case as amended to date. (iii) To such counsel's knowledge and other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which Parent is a party or of which any of its properties or assets is the subject which, if determined adversely to Parent, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole; and, to such counsel's knowledge, Parent is not in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole, nor is Parent required to take any action in order to avoid any such violation or default. (iv) This Agreement has been duly authorized, executed and delivered by Parent. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel may deem proper, on certificates of officers of Parent and public officials. Copies of such certificates of officers of Parent and other opinions shall be addressed and furnished to the Underwriters and furnished to counsel for the Underwriters. (j) You shall have received from Coopers & Lybrand L.L.P., letters dated, respectively, the date hereof (or, if the Registration Statement has been declared effective prior 32 to the execution and delivery of this Agreement, dated such effective date and the date of this Agreement) and each Time of Delivery, in form and substance satisfactory to you, which letters shall cover such matters as you shall request as well as: (i) confirming that they are independent certified public accountants (within the meaning of the Act) with respect to the Company and its subsidiaries; (ii) stating that, in their opinion, the financial statements, certain summary and selected consolidated financial and operating data, and any supplementary financial information and schedules audited by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act; and they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, and any supplementary financial information and schedules, selected financial data, and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, and, as indicated in their report thereon, copies of which have been furnished to the Representatives; (iii) stating that, on the basis of specified procedures, which included the procedures specified by the American Institute of Certified Public Accountants ("AICPA") for a review of interim financial information, as described in SFAS No. 71, Interim Financial Information (with respect to the latest unaudited consolidated financial statements of the Company included in the Registration Statement), a reading of the latest available unaudited interim consolidated financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the meetings of the shareholders and the Board of Directors of the Company and its subsidiaries, and audit and compensation committees of such Boards, if any, and inquiries to certain officers and other employees of the Company and its subsidiaries responsible for operational, financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention that would cause them to believe that (A) the unaudited consolidated financial statements included in the Registration Statement (1) do not comply in form in all material respects with the applicable accounting requirements of the Act or (2) any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available unaudited interim consolidated financial statements of the Company and a specified date not more than five business days prior to the date of such letter, there 33 was any change in the capital stock and other items specified by the Representatives, increase in long-term debt, decrease in net current assets, total assets, investments or shareholders' equity of the Company and its subsidiaries, as compared with the amounts shown in the June 30, 1996 unaudited consolidated balance sheet of the Company included in the Registration Statement, or that for the periods from June 30, 1996 to the date of the latest available unaudited financial statements of the Company and to a specified date not more than five days prior to the date of the letter, there were any decreases, as compared to the corresponding periods in the prior year, in gross premiums written, net investment income, net realized capital gains, or total or per share amounts of net income, or other items specified by the Representatives, except in all instances for changes, decreases or increases which the Registration Statement discloses have occurred or may occur and except for such other changes, decreases or increases which the Representatives shall in their sole discretion accept; or (C) any other unaudited income statement data and balance sheet items included in the Registration Statement do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included or incorporated by reference in the Registration Statement; (iv) stating that, on the basis of a reading of the unaudited pro forma financial statements included in the Registration Statement and the Prospectus (the "pro forma financial statements"), carrying out certain specified procedures, inquiries of certain officials of the Company and its subsidiary, Superior Insurance Company who have responsibility for financial and accounting matters, and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing has come to their attention that would cause them to believe that the pro forma financial statements do not comply in all material respects with the applicable accounting requirements of Rule 11- 02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements; (v) stating that they have compared specific dollar amounts, numbers of shares, percentage of revenues and earnings statements and other numerical data and financial information pertaining to the Company and its subsidiaries set forth in the Registration Statement and all of the dollar amounts and percentages in the Registration Statement, in each case to the extent that such information is derived from the accounting records subject to the internal control structure, policies and 34 procedures of the Company's and its subsidiaries' accounting system, or has been otherwise derived in a manner permitted by AICPA Statement on Auditing Standards No. 72 with the results obtained from the application of specific readings, inquiries and other appropriate procedures (which procedures do not constitute an audit in accordance with generally accepted auditing standards) set forth in the letter and with the accounting records of the Company and its subsidiaries, and found them to be in agreement. In the event that the letters referred to in this Section 7(h) set forth any changes, decreases or increases in the items identified by you, it shall be a further condition to the obligations of the Underwriters that (i) such letters shall be accompanied by a written explanation by the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary and (ii) such changes, decreases or increases do not, in your sole judgment, make it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date of such letter. (k) Since the date of the latest audited financial statements included in the Prospectus and except pursuant to claims made by insureds in the ordinary course of business under policies of insurance issued by the Company's subsidiaries which claims are reasonably consistent with the Company's historical claims experience, neither the Company nor any of its subsidiaries shall have sustained (i) any loss or interference with their respective businesses from fire, explosion, flood, hurricane or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as disclosed in or contemplated by the Prospectus, or (ii) any change, or any development involving a prospective change (including, without limitation, a change in management or control of the Company), in or affecting the position (financial or otherwise), results of operations, net worth or business prospects of the Company and its subsidiaries, otherwise than as disclosed in or contemplated by the Prospectus, the effect of which, in either such case, is in your sole judgment so material and adverse as to make it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date hereof. (l) Subsequent to the date hereof, there shall not have occurred any of the following: (i) any suspension or limitation in trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on 35 such exchange, or in the Common Stock of the Company by the Commission or the National Association of Securities Dealers Automated Quotation National Market System (except for suspensions or limitations that last only a portion of one business day); (ii) a moratorium on commercial banking activities in New York, Indiana or Connecticut declared by either federal or state authorities; or (iii) any outbreak or escalation of hostilities involving the United States, declaration by the United States of a national emergency or war or any other national or international calamity or emergency if the effect of any such event specified in this clause (iii) in your sole judgment makes it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date hereof. (m) The Company shall have furnished to you at such Time of Delivery certificates of the chief executive and chief financial officers of the Company satisfactory to you, as to the accuracy in all material respects of the respective representations and warranties of the Company herein at and as of such Time of Delivery with the same effect as if made at such Time of Delivery, as to the performance by the Company of all of their respective obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates of such officers as to such matters as you may reasonably request. (n) The representations and warranties of each of the Company and Parent in this Agreement and in the certificates delivered by each of the Company and Parent pursuant to this Agreement shall be true and correct in all material respects when made and on and as of each Time of Delivery as if made at such time, and each of the Company and Parent shall have performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by each of the Company and Parent at or before such Time of Delivery. (o) The Shares shall continue to be listed on the National Association of Securities Dealers Automated Quotation National Market System. (p) The Representatives shall have received copies of executed lock-up agreements from each of Parent, Parent's principal shareholders and Parent's officers and directors who own shares of common stock of Parent or securities convertible into or exchangeable or exercisable for common stock of Parent to the effect that such individuals and entities will not offer, sell, contract to sell, or otherwise dispose of, any such shares of common stock of Parent or securities convertible 36 into or exchangeable or exercisable for common stock of Parent for a period of 180 days after the date of the Prospectus without the prior written consent of Advest, Inc. 8. Indemnification and Contribution. (a) Each of the Company and Parent agrees to jointly and severally indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company or Parent in Section 1(a) of this Agreement; (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (B) any application or other document, or amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"); or (iii) the omission of or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that neither the Company nor Parent shall be liable in any such case to the extent that any such loss, claim, damage, liability or action (i) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you expressly for use therein (which information is solely as set forth in Section 1(a)(iii) hereof) or (ii) is asserted by a person who purchased any of the Shares which are the subject thereof from an Underwriter and if a copy of the Prospectus (as amended or supplemented) which corrected the untrue statement or alleged untrue statement or omission or alleged omission which is the basis of the loss, claim, damage, liability or action for which indemnification is sought was not delivered or given to such person at or prior to the written 37 confirmation of the sale to such person. Neither the Company nor Parent will, without the prior written consent of the Representatives of the Underwriters, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding (or related cause of action or portion thereof) in respect of which indemnification may be sought hereunder (whether or not any Underwriter is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Underwriter from all liability arising out of such claim, action, suit or proceeding (or related cause of action or portion thereof). (b) Each of the Company and Parent agrees to jointly and severally indemnify and hold harmless each QIU, in its capacity as QIU, against any losses, claims, damages or liabilities, joint or several, to which such QIU may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company or Parent in Section 1(a) of this Agreement; (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (B) any Application; (iii) the omission of or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) other than as referred to in the preceding clauses (i) through (iii), such QIU's actions as a QIU, except insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arising under this clause (iv) result from such QIU's willful misconduct or gross negligence, and will reimburse each QIU for any legal or other expenses reasonably incurred by such QIU in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that neither the Company nor Parent shall be liable in any such case to the extent that any such loss, claim, damage, liability or action (i) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information relating to such QIU furnished to the Company by or on behalf of such QIU in such capacity through you expressly for use therein (it being understood and acknowledged by the Company that such written information shall consist solely 38 of the three sentences that are set forth in the second to last paragraph of the section entitled "Underwriting" in the Prospectus) or (ii) is asserted by a person who purchased any of the Shares which are the subject thereof from an Underwriter and if a copy of the Prospectus (as amended or supplemented) which corrected the untrue statement or alleged untrue statement or omission or alleged omission which is the basis of the loss, claim, damage, liability or action for which indemnification is sought was not delivered or given to such person at or prior to the written confirmation of the sale to such person. (c) Each Underwriter, severally but not jointly, agrees to indemnify and hold harmless the Company and Parent against any losses, claims, damages or liabilities to which the Company and Parent may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through you expressly for use therein; and will reimburse the Company and Parent for any legal or other expenses reasonably incurred by the Company and Parent in connection with investigating or defending any such loss, claim, damage, liability or action. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party); provided, however, that if the defendants in any such action include both the indemnified 39 party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party and such indemnified party shall have the right to select separate counsel to defend such action on behalf of such indemnified party. After such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence or (ii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. Nothing in this Section 8(d) shall preclude an indemnified party from participating at its own expense in the defense of any such action so assumed by the indemnifying party. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and Parent on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and Parent on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and Parent on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and Parent bear to the total underwriting discounts and commissions received by the 40 Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and Parent on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Parent and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless a QIU under subsection (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such QIU as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and Parent on the one hand and the QIUs on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such QIU in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and Parent on the one hand and the QIUs on the other in connection with the statements or 41 omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and Parent on the one hand and the QIUs on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and Parent bear to the underwriting discounts and commissions received by the QIUs. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and Parent on the one hand or the QIUs on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Parent and the QIUs agree that it would not be just and equitable if contributions pursuant to this subsection (f) were determined by pro rata allocation (even if the QIUs were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), no QIUs shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it as shown on Schedule I and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The QIUs' obligations in this subsection (f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) The obligations of the Company and Parent under this Section 8 shall be in addition to any liability which the Company and Parent may otherwise have and shall extend, upon the same terms and conditions, and to each officer, director and employee of the Underwriters (including the QIUs) and to each person, if any, who controls any Underwriter (including the QIUs) within the meaning of the Act or the Exchange Act; and the obligations of the Underwriters (including the QIUs) under this Section 8 shall be in addition to any liability which the respective Underwriters (including the QIUs) may otherwise have 42 and shall extend, upon the same terms and conditions, to each officer and director of the Company and Parent and to each person, if any, who controls the Company or Parent within the meaning of the Act or the Exchange Act. 9. Default of Underwriters. (a) If any Underwriter defaults in its obligation to purchase Shares at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six (36) hours after such default by any Underwriter you do not arrange for the purchase of such Shares, the Company shall be entitled to a further period of thirty-six (36) hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone a Time of Delivery for a period of not more than seven (7) days in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus that in your opinion may thereby be made necessary. The cost of preparing, printing and filing any such amendments shall be paid for by the Underwriters. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you or the Company as provided in subsection (a) above, if any, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made. 10. Termination. (a) This Agreement may be terminated with respect to the Company Shares or any Optional Shares in the sole 43 discretion of the Representatives by notice to the Company given prior to the First Time of Delivery or any Subsequent Time of Delivery, respectively, in the event that (i) any condition to the obligations of the Underwriters set forth in Section 7 hereof has not been satisfied, or (ii) the Company shall have failed, refused or been unable to deliver such party's respective Shares or the Company or Parent shall have failed, refused or been unable to perform all obligations and satisfy all conditions on their respective parts to be performed or satisfied hereunder at or prior to such Time of Delivery, in either case other than by reason of a default by any of the Underwriters. If this Agreement is terminated pursuant to this Section 10(a), the Company and/or Parent will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in Section 9(a), the aggregate number of such Shares which remains unpurchased exceeds one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in Section 9(b) to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to a Subsequent Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 11. Survival. The respective indemnities, agreements, representations, warranties and other statements of the Company, Parent and their officers and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person referred to in Section 8(e) or the Company, Parent or any officer or director or controlling person of the Company or Parent referred to in Section 8(e), and shall survive delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 44 12. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed, delivered or telegraphed and confirmed in writing to you in care of Advest, Inc., 90 State House Square, Hartford, CT 06103, Attention: David Minot (with a copy to LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, NY 10019, Attention: Lars Bang-Jensen, Esquire); and if sent to the Company, shall be mailed, delivered or telegraphed and confirmed in writing to Symons International Group, Inc., 4720 Kingsway Drive, Indianapolis, IN 46205, Attention: Alan G. Symons (with a copy to Barnes & Thornburg, 11 South Meridian Street, Indianapolis, IN 46205, Attention: Catherine Bridge, Esquire). 13. Representatives. You will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by you jointly or by Advest, Inc. will be binding upon all the Underwriters. 14. Binding Effect. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company, Parent and to the extent provided in Sections 8 and 10 hereof, the officers, directors and employees and controlling persons referred to therein and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to any provisions regarding conflicts of laws. 16. Counterparts. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 45 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us one of the counterparts hereof, and upon the acceptance hereof by Advest, Inc., on behalf of each of the Underwriters, this letter will constitute a binding agreement among the Underwriters, Parent and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in the Agreement among Underwriters, a copy of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, SYMONS INTERNATIONAL GROUP, INC. By:/s/ Alan G. Symons ----------------------------------- Name: Alan G. Symons Title:Chief Executive Officer GORAN CAPITAL INC. By:/s/ Alan G. Symons ----------------------------------- Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first written above at Hartford, Connecticut. ADVEST, INC. MESIROW FINANCIAL, INC. By: ADVEST, INC. By:/s/ Phil M. Skidmore ----------------------------------- Name: Phil M. Skidmore Title: Group Vice President Director Investment Banking On behalf of each of the Underwriters 46 JOINDER The following subsidiary of the Company, intending to be legally bound, hereby joins this Agreement for purposes of Sections 1 and 8 hereof. IGF HOLDINGS, INC. By:/s/ David L. Bates ------------------------ Title VP & Sec 47 SCHEDULE I Number of Optional Total Number Shares to be of Company Purchased if Shares Maximum to be Option Underwriter Purchased Exercised Advest, Inc. 920,000 138,000 Mesirow Financial, Inc. 920,000 138,000 Dean Witter Reynolds Inc. 60,000 9,000 Deutsche Morgan Grenfell Inc. 60,000 9,000 Donaldson, Lufkin & Jenrette Securities Corporation 60,000 9,000 Dresdner Kleinwort Benson North America LLC 60,000 9,000 A.G. Edwards & Sons, Inc. 60,000 9,000 Goldman, Sachs & Co. 60,000 9,000 Lehman Brothers Inc. 60,000 9,000 Morgan Stanley & Co. Incorporated 60,000 9,000 Oppenheimer & Co., Inc. 60,000 9,000 NatCity Investments, Inc. 60,000 9,000 J.C. Bradford & Co. 35,000 5,250 Brean Murray & Co., Inc. 35,000 5,250 City Securities Corporation 35,000 5,250 Dominick & Dominick, Inc. 35,000 5,250 EVEREN Securities, Inc. 35,000 5,250 First of Michigan Corporation 35,000 5,250 Friedman, Billings, Ramsey & Co., Inc. 35,000 5,250 Janney Montgomery Scott Inc. 35,000 5,250 Ladenburg, Thalmann & Co. Inc. 35,000 5,250 Legg Mason Wood Walker, Incorporated 35,000 5,250 McDonald & Company Securities, Inc. 35,000 5,250 Morgan Keegan & Company, Inc. 35,000 5,250 The Robinson-Humphrey Company, Inc. 35,000 5,250 Sands Brothers & Co., Ltd. 35,000 5,250 Stephens Inc. 35,000 5,250 Wheat, First Securities, Inc. 35,000 5,250 --------- ------- Total 3,000,000 450,000 ========= ======= EX-3.(II) 3 BYLAWS OF SYMONS INTERNATIONAL GROUP, INC. BYLAWS OF SYMONS INTERNATIONAL GROUP, INC. (As Restated July 29, 1996) ARTICLE I SHAREHOLDERS Section 1. Annual Meeting An Annual Meeting of the Shareholders shall be held at such hour as shall be designated by the Board of Directors on the third Thursday of May, or such other date within five (5) months after the close of the fiscal year of the Corporation as the Board of Directors may select, in each year for the purpose of electing Directors for the terms hereinafter provided and for the transaction of such other business as may properly come before the meeting. If the day fixed for the Annual Meeting shall be a legal holiday in the State of Indiana, such meeting shall be held on the next succeeding full business day. Section 2. Special Meetings. Special meetings of the Shareholders may be called by the Chief Executive Officer, by the Board of Directors, or by Shareholders holding not less than a majority of all votes entitled to be cast on any issue to be considered at the special meeting who sign, date and deliver to the Secretary of the Corporation one or more written demands for the meeting describing the purpose or purposes for which it is to be held. Only business within the purpose or purposes described in the meeting notice may be conducted at a special Shareholders' meeting. Section 3. Place Of Meetings. All meetings of Shareholders shall be held at the principal office of the Corporation in Indianapolis, Indiana, or at such other place, either within or without the State of Indiana, as may be designated by the Board of Directors. Section 4. Notice Of Meetings. A written or printed notice, stating the place, day and hour of the meeting, and in the case of a special meeting or when required by law or by the Articles of Incorporation or these Bylaws, the purpose or purposes for which the meeting is called, shall be delivered or mailed or sent by facsimile transmission by or at the direction of the Secretary no fewer than ten (10) days nor more than sixty (60) days before the date of the meeting, to each shareholder of record entitled to vote at such meeting at such address as appears upon the stock records of the Corporation. Section 5. Quorum. Unless otherwise provided by the Articles of Incorporation or these Bylaws, at any meeting of Shareholders, the majority of the outstanding shares entitled to vote at such meeting, represented in person or by proxy or by any means of communication by which all Shareholders participating in the meeting may simultaneously hear each other during the meeting, shall constitute a quorum. If less than a majority of such shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time. The Shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum. Section 6. Adjourned Meetings. At any adjourned meeting at which a quorum shall be represented, any business may be transacted as might have been transacted at the meeting as originally notified. If a new record date is or must be established pursuant to law, notice of the adjourned meeting must be given to persons who are Shareholders as of the new record date. Section 7. Proxies. At all meetings of Shareholders, a Shareholder may vote either in person or by proxy executed in writing by the Shareholder or a duly authorized attorney in fact. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Section 8. Voting Of Shares. Except as otherwise provided by law, by the Articles of Incorporation or by these Bylaws, every Shareholder shall have the right at every Shareholders' meeting to one vote for each share standing in his name on the books of the Corporation on the date established by the Board of Directors as the record date for determination of Shareholders entitled to vote at such meeting. Section 9. Order Of Business. The order of business at each Shareholders' meeting shall be established by the person presiding at the meeting. Section 10. Notice Of Shareholder Business. At any meeting of the Shareholders, only such business may be conducted as shall have been properly brought before the meeting, and as shall have been determined to be lawful and appropriate for consideration by Shareholders at the meeting. To be properly brought before a meeting, business must be: -2- (a) specified in the notice of meeting given in accordance with Section 4 of this Article I; (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or the Chief Executive Officer; or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before a meeting by a Shareholder pursuant to clause (c) above, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice must be delivered to or mailed and received at the principal office of the Corporation not less than fifty (50) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than sixty (60) days' notice of the date of the meeting is given to shareholders, notice by the Shareholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was given. A Shareholder's notice to the Secretary shall set forth as to each matter the Shareholder proposes to bring before the meeting: (a) a brief description of the business desired to be brought before the meeting; (b) the name and address, as they appear on the Corporation's stock records, of the Shareholder proposing such business; (c) the class and number of shares of the Corporation which are beneficially owned by the Shareholders; and (d) any interest of the Shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 10. The person presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that business was not brought before the meeting in accordance with the Bylaws, or that business was not lawful or appropriate for consideration by Shareholders at the meeting, and if he should so determine, he shall so declare to the meeting and any such business shall not be transacted. -3- Section II. Notice Of Shareholder Nominees. Nominations of persons for election to the Board of Directors of the Corporation may be made at any meeting of Shareholders by or at the direction of the Board of Directors or by any Shareholder of the Corporation entitled to vote for the election of Directors at the meeting. Shareholder nominations shall be made pursuant to timely notice given in writing to the Secretary of the Corporation in accordance with Section 10 of this Article I. Such Shareholder's notice shall set forth, in addition to the information required by Section 10, as to each person whom the Shareholder proposes to nominate for election or re-election as a Director: (a) the name, age, business address and residence address of such person; (b) the principle occupation or employment of such person; (c) the class and number of shares of the Corporation which are beneficially owned by such person; (d) any other information relating to such person that is required to be disclosed in solicitation of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being name in the Proxy Statement as a nominee and to serving as a Director if elected); and (e) the qualifications of the nominee to serve as a Director of the Corporation. No Shareholder nomination shall be effective unless made in accordance with the procedures set forth in this Section 11. The person presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that a Shareholder nomination was not made in accordance with the Bylaws and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 12. Control Share Acquisition. As used in this Section 12, the terms, "control shares" and "control share acquisition" shall have the same meanings as set forth in Indiana Code Section 23-1-42-1, et. seq. (the "Act"). Control shares of the Corporation acquired in a control share acquisition shall have only such voting rights as are conferred by the Act. Control shares of the Corporation acquired in a control share acquisition with respect to which the acquiring person has not filed with the Corporation the statement required by the Act may, at any time -4- during the period ending sixty (60) days after the last acquisition of control shares by the acquiring person, be redeemed by the Corporation at the fair value thereof pursuant to procedures authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers, Number Classes And Tenure. The business of the Corporation shall be managed by a Board of Directors. The number of Directors which shall constitute the whole Board of Directors of the Corporation shall be seven (7). The number of Directors may be increased or decreased from time to time by amendment of these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent Director. The Directors shall be divided into three classes, each class to consist, as nearly as may be, of one-third of the number of Directors then constituting the whole Board of Directors, with one class to be elected annually by Shareholders for a term of three (3) years, to hold office until their respective successors are elected and qualified; except that: (a) the terms of office of Directors initially elected shall be staggered so that the term of office of one class shall expire in each year; (b) the term of office of a Director who is elected by either the Directors or Shareholders to fill a vacancy in the Board of Directors shall expire at the end of the term of office of the succeeded Director's class or at the end of the term of office of such other class as determined by the Board of Directors to be necessary or desirable in order to equalize the number of Directors among the classes; and (c) the Board of Directors may adopt a policy limiting the time beyond which certain Directors are not to continue to serve, the effect of which may be to produce classes of unequal size or to cause certain directors either to be nominated for election for a term of less than three (3) years or to cease to be a Director before expiration of the term of the Director's class. In case of any increase in the number of Directors, the additional Directors shall be distributed among the several classes to make the size of the classes as equal as possible. -5- Section 2. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as the Annual Meeting of Shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Indiana, for the holding of additional regular meetings without other notice than such Resolution. Section 3. Special Meetings. Special meetings of the Board of Directors may be called by the Chief Executive Officer. The Secretary shall call special meetings of the Board of Directors when requested in writing to do so by a majority of the members thereof. Special meetings of the Board of Directors may be held within or without the State of Indiana. Section 4. Notice Of Meetings. Except as otherwise provided in these Bylaws, notice of any meeting of the Board of Directors shall be given not less than two (2) days before the date fixed for such meeting by oral, telegraphic, telephonic, electronic or written communication stating the time and place thereof and delivered personally to each member of the Board of Directors or telegraphed or mailed to him at his business address as it appears on the books of the Corporation; provided, that in lieu of such notice, a director may sign a written waiver of notice either before the time of the meeting, at the time of the meeting or after the time of the meeting. Section 5. Quorum. A majority of the whole Board of Directors, represented in person or by any means of communication by which all Directors participating may simultaneously hear each other, shall be necessary to constitute a quorum for the transaction of any business except the filling of vacancies, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. Section 6. Manner Of Acting. The act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by law or by the Articles of Incorporation or these Bylaws. Unless otherwise provided by the Articles of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if such action is evidenced by one or more written consents, describing the action taken, signed by all members of the Board of Directors and such written consent is filed with the minutes -6- of proceedings of the Board of Directors. Action taken by means of a written consent is effective when the last member of the Board of Directors signs a written consent, unless the written consent specifies a different prior or subsequent date. Written consents may be signed in counterparts. Unless otherwise provided by the Articles of Incorporation, any or all members of the Board of Directors may participate in a meeting of the Board of Directors by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can communicate with each other, and participation in this manner constitutes presence in person at the meeting. Section 7. Vacancies. Except as otherwise provided in the Articles of Incorporation, any vacancy occurring in the Board of Directors may be filled by a majority vote of the remaining Directors, though less than a quorum of the Board of Directors, or, at the discretion of the Board of Directors, any vacancy may be filled by a vote of the Shareholders. Section 8. Notice To Shareholders. Shareholders shall be notified of any increase in the number of Directors and the name, address, principal occupation and other pertinent information about any Director elected by the Board of Directors to fill any vacancy. Such notice shall be given the next mailing sent to Shareholders following any such increase or election, or both, as the case may be. ARTICLE III OFFICERS Section 1. Elected Officers. The elected Officers of the Corporation shall be a Chief Executive Officer, President, a Secretary and a Treasurer and may also include a Chairman of the Board, a Vice Chairman, one or more Vice Presidents as the Board of Directors may determine and such other Officers as the Board of Directors may determine. The Chairman of the Board and the Vice Chairman, if any, shall be chosen from among the Directors. Any two or more offices may be held by the same person. Section 2. Appointed Officers. The appointed Officers of the Corporation shall be a Controller and one or more Assistant Vice Presidents, Assistant Treasurers, Assistant Secretaries and Assistant Controllers. -7- Section 3. Election Or Appointment And Term Of Office. The elected Officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each Annual Meeting of the Shareholders. The appointed Officers of the Corporation shall be appointed annually by the Chief Executive Officer immediately following the first meeting of the Board of Directors held after each Annual Meeting of the Shareholders. Additional elected Officers may be elected at any regular or special meeting of the Board of Directors to serve until the regular meeting of the Board held after the next Annual Meeting of Shareholders and additional appointed Officers may be appointed by the Chief Executive Officer at any time to serve until the next annual appointment of Officers. Each officer shall hold office until his successor shall have been duly elected or appointed and shall have been qualified or until his death or until he shall resigned or retire or shall have been removed. Section 4. Removal. Any Officer may be removed by the Board of Directors and any appointed Officer may be removed by the Chief Executive Officer, whenever in their judgment, the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 5. Vacancies. A vacancy in the office of Chief Executive Officer, President, Secretary or Treasurer because of death, resignation, retirement, removal or otherwise, shall be filled by the Board of Directors, and a vacancy in any other elected office may be filled by the Board of Directors. Section 6. Chief Executive Officer. The Chief Executive Officer of the Corporation shall be, subject to the Board of Directors, in general charge of the affairs of the Corporation. The Chief Executive Officer shall also have the authority to contract loans and issue evidences of indebtedness on behalf of the Corporation on a per transaction basis in a principal amount not in excess of One Million ($1,000,000) Dollars. In the absence of the Chairman of the Board, or if such office be vacant, the Chief Executive Officer shall have all the powers of the Chairman of the Board and shall perform all his duties. Section 7. Chairman Of The Board. The Chairman of the Board shall preside at all meetings of the Shareholders and of the Board of Directors at which he may be present and shall have such other powers and duties as may be determined by the Board of Directors. -8- Section 8. Vice Chairman. The Vice Chairman, if any, shall have such powers and duties as may be determined by the Board of Directors or the Chief Executive Officer. Section 9. President. The President shall have such powers and duties as may be determined by the Board of Directors or the Chief Executive Officer. Section 10. Vice Presidents. A Vice President shall perform such duties as may be assigned by the Chief Executive Officer or the Board of Directors. In the absence of the President and in accordance with such order of priority as may be established by the Board of Directors, he may perform the duties of the President, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. Section 11. Assistant Vice Presidents. An Assistant Vice President shall perform such duties as may be assigned by the Chief Executive Officer or the Board of Directors. Section 12. Secretary. The Secretary shall (a) keep the minutes of the shareholders' and Board of Directors' meetings in one or more books provided for that purpose, (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law, (c) be custodian of the corporate records and of the seal, if any, of the corporation, and (d) in general perform all duties incident to the Office of Secretary and such other duties as may be assigned by the Chief Executive Officer or the Board of Directors. Section 13. Assistant Secretaries. In the absence of the Secretary, an Assistant Secretary shall have the power to perforrn his duties including the certification, execution and attestation of corporate records and corporate instruments. Assistant Secretaries shall perform such other duties as may be assigned to them by the Chief Executive Officer or the Board of Directors. Section 14. Treasurer. The Treasurer shall (a) have charge and custody of all funds and securities of the corporation, (b) receive and give receipts for the monies due and payable to the corporation from any source whatsoever, (c) deposit all such monies in the name of the corporation in such depositories as are selected by the Board of Directors or Chief Executive Officer, and (d) in general perform all duties incident to the Office of Treasurer and such other duties as may be -9- assigned by the Chief Executive Officer or the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such form and with such surety or sureties as the Board of Directors shall determine. Section 15. Assistant Treasurers. In the absence of the Treasurer, an Assistant Treasurer shall have the power to perform his duties. Assistant treasurers shall perform such other duties as may be assigned to them by the Chief Executive Officer or the Board of Directors. Section 16. Controller. The Controller shall perform such duties as may be assigned by the Chief Executive Officer or the Board of Directors. Section 17. Assistant Controller. In the absence of the Controller, an Assistant Controller shall have the power to perform his duties. Assistant Controllers shall perform such other duties as may be assigned to them by the Chief Executive Officer or the Board of Directors. ARTICLE IV COMMITTEES Section 1. Board Committees. The Board of Directors may, by resolution adopted by a majority of the whole Board of Directors, from time to time designate from among its members one or more Committees each of which, to the extent provided in such resolution and except as otherwise provided by law, shall have and exercise all the authority of the Board of Directors. Each such Committee shall serve at the pleasure of the Board of Directors. The designation of any such Committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law, Each such Committee shall keep a record of its proceedings and shall adopt its own rules of procedure. It shall make such reports to the Board of Directors of its actions as may be required by the Board. Section 2. Advisory Committees. The Board of Directors may, by resolution adopted by a majority of the whole Board of Directors, from time to time designate one or more Advisory Committees, a majority of whose members shall be Directors. An Advisory Committee shall serve at the pleasure of the Board of Directors, keep a record of its proceeding and adopt its own rules of procedure. It shall make such reports to the Board of Directors of its actions as may be required by the Board. -10- Section 3. Manner Of Acting. Unless otherwise provided by the Articles of Incorporation, any action required or permitted to be taken at any meeting of a Committee established under this Article IV may be taken without a meeting if such action is evidenced by one or more written consents, describing the action taken, signed by all members of the Committee, and such written consent is filed with the minutes of proceedings of the Committee. Action taken by means of a written consent is effective when the last member of the Committee signs a written consent, unless the written consent specifies a different prior or subsequent date. Written consents may be signed in counterparts. Unless otherwise provided by the Articles of Incorporation, any or all members of such Committee may participate in a meeting of the Committee by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can communicate with each other, and participation in this manner constitutes presence in person at the meeting. ARTICLE V. CORPORATE INSTRUMENTS AND LOANS. Section 1. Corporate Instruments. The Board of Directors may authorize any Officer or Officers to execute and deliver any instrument in the name of or on behalf of the corporation, and such authority may be general or confined to specific instances. Section 2. Loans. No loans the principal amount of which is in excess of One Million Dollars ($1,000,000) shall be contracted on behalf of the corporation and no evidences of indebtedness the principal amount of which is in excess of One Million Dollars ($1,000,000) shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. ARTICLE VI STOCK CERTIFICATES, TRANSFER OF SHARES, STOCK RECORDS Section 1. Certificates For Shares. Each shareholder shall be entitled a certificate, signed by the Chief Executive Officer, President or a Vice President and the Secretary or any Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. If such certificate is countersigned by the written signature of a transfer agent other than the corporation or its employee, the signatures of the Officers of the corporation may be facsimiles. If such certificate is countersigned by the written signature of a registrar other than the corporation or its employee, the signatures of the transfer agent and the -11- Officers of the corporation may be facsimiles. In case any Officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such Officer, transfer agent, or registrar before, such certificate is issued, it may be issued by the corporation with the same effect as if he were such Officer, transfer agent, or registrar at the date of its issue. Certificates representing shares of the corporation shall be in such form consistent with the laws of the State of Indiana as shall be determined by the Board of Directors. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer records of the corporation. Section 2. Transfer Of Shares. Transfer of shares of the corporation shall be made on the stock transfer records of the corporation by the holder of record thereof or by his legal representative who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the corporation, and, except as otherwise provided in these Bylaws, on surrender for cancellation of the certificates for such shares. Section 3. Lost, Destroyed Or Wrongfully Taken Certificates. Any person claiming a certificate of stock to have been lost, destroyed or wrongfully taken, and who requests the issuance of a new certificate before the corporation has notice that the certificate alleged to have been lost, destroyed or wrongfully taken has been acquired by a bona fide purchaser, shall make an affidavit of that fact and shall give the corporation and its transfer agents and registrars a bond of indemnity with unlimited liability, in form and with one or more corporate sureties satisfactory to the Chief Executive Officer or Treasurer of the corporation (except that the Chief Executive Officer or Treasurer may authorize the acceptance of a bond of different amount, or a bond with personal surety thereon,, or a personal agreement of indemnity), whereupon in the discretion of the Chief Executive Officer or the Treasurer and except as otherwise provided by law a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to have been lost, destroyed or wrongfully taken. In lieu of a separate bond of indemnity in each case, the Chief Executive Officer of the corporation may accept an assumption of liability under a blanket bond issued in favor of the corporation and its transfer agents and registrars by one or more corporate sureties satisfactory to him. -12- Section 4. Transfer Agent And Registrars. The Board of Directors by resolution may appoint a transfer agent or agents or a registrar or registrars of transfer, or both. All such appointments shall confer such powers, rights, duties and obligations consistent with the laws of the State of Indiana as the Board of Directors shall determine. The Board of Directors may appoint the Treasurer of the corporation and one or more Assistant Treasurers to serve as transfer agent or agents. Any signature required of a transfer agent or registrar may be accomplished manually or by facsimile. Section 5. Record Date. For the purposes of determining Shareholders entitled to vote at any meeting of Shareholders or any adjournment thereof, or Shareholders entitled to receive payment of any dividend, or in order to make a determination of Shareholders for any other proper purpose, the Board of Directors shall fix in advance a date as a record date for any such determination of Shareholders, such date in any case to be not more than seventy days (70) before the meeting or action requiring a determination of Shareholders. ARTICLE VII LIABILITY. Section 1. No person or his personal representatives shall be liable to the corporation for any loss or damage suffered by it on account of any action taken or omitted to be taken by such person in good faith as an Officer or employee of the corporation, or a director, officer, partner. trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, which he serves or served at the request of the corporation, if such person (a) exercised and used the same degree of care and skill as a prudent man would have exercised and used under like circumstances, charged with a like duty, or (b) took or omitted to take such action in reliance upon advice of counsel for the corporation or such enterprise or upon statements made or information furnished by persons employed or retained by the corporation or such enterprise upon which he had reasonable grounds to rely. The foregoing shall not be exclusive of other rights and defenses to which such person or his personal representatives may be entitled under law. ARTICLE VIII INDEMNIFICATION Section 1. Actions By A Third Party. The corporation shall, to the fullest extent to which it is empowered to do so by the Indiana Business Corporation Law, or any other applicable laws, as from time to time in effect, indemnify any person who is or was a party, or -13- is threatened to be made a defendant or respondent, to a proceeding, including any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than actions by or in the right of the corporation), and whether formal or informal, who is or was a Director, Officer, employee, or agent of the corporation or who, while a Director, Officer, employee, or agent of the corporation, is or was serving at the corporation's request as a Director, Officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, against: (a) any reasonable expenses (including attorneys' fees) incurred with respect to a proceeding, if such person is wholly successful on the merits or otherwise in the defense of such proceeding, or (b) judgments, settlements, penalties, fines (including excise taxes assessed with respect to employee benefit plans) and reasonable expenses (including attorneys' fees) incurred with respect to a proceeding where such person is not wholly successful on the merits or otherwise in the defense of the proceeding if: (i) the individual's conduct was in good faith; and (ii) the individual reasonably believed: (A) in the case of conduct in the individual's official capacity as a Director, Officer, employee or agent of the corporation, that the individual's conduct was in the corporation's best interests; and (B) in all other cases, that the individual's conduct was at least not opposed to the corporation's best interests; and (iii) in the case of any criminal proceeding, the individual either: (A) had reasonable cause to believe the individual's conduct was lawful; or (B) had no reasonable cause to believe the individual's conduct was unlawful. -14- The termination of a proceeding by a judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the Director, Officer, or employee did not meet the standard of conduct described in this Section. Section 2. Actions By Or In The Right Of The Corporation. The corporation shall, to the fullest extent to which it is empowered to do so by the Indiana Business Corporation Law, or any other applicable laws, as from time to time in effect, indemnify any person who is or was a party, or is threatened to be made a defendant or respondent, to a proceeding, including any threatened, pending or completed action, suit or proceeding, by or in the right of the corporation to procure a judgment in its favor, by reason of the fact that such person is or was a Director, Officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a Director, Officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not, against any reasonable expenses (including attorneys' fees): (a) if such person is wholly successful on the merits or otherwise in the defense of such proceeding, or (b) if not wholly successful: (i) the individual's conduct was in good faith; and (ii) the individual reasonably believed: (A) in the case of conduct in the individual's official capacity as a Director, Officer, or employee of the corporation, that the individual's conduct was in the corporation's best interests; and (B) in all other cases, that the individual's conduct was at least not opposed to the corporation's best interests. Section 3. Methods Of Determining Whether Standards For Indemnification Have Been Met. Any indemnification under Sections 1 or 2 of this Article VIII (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the Director, Officer, employee or agent is proper in the circumstances because he has met the applicable standards of conduct set forth in Section 1 or 2. In the case of -15- Directors of the corporation such determination shall be made by any one of the following procedures: (a) by the Board of Directors by a majority vote of a quorum consisting, of Directors not at the time parties to the proceeding; (b) if a quorum cannot be obtained under (a), by majority vote of a Committee duly designated by the Board of Directors (in which designation Directors who are parties may participate), consisting solely of two or more Directors not at the time parties to the proceeding; or (c) by special legal counsel: (i) selected by the Board of Directors or a Committee thereof in the manner proscribed in (a) or (b); or (ii) if a quorum of the Board of Directors cannot be obtained under (a) and a Vommittee cannot be designated under (b), selected by a majority vote of the full Board of Directors (in which selection directors who are parties may participate). In the case of persons who are not Directors of the corporation, such determination shall be made (a) by the Chief Executive Officer of the corporation or (b) if the Chief Executive Officer so directs or in his absence, in the manner such determination would be made if the person were a Director of the corporation. Section 4. Good Faith Defined. For purposes of any determination under Section 1 or 2, a person shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in such Section if his action is based on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (1) one or more Officers or employees of the corporation or another enterprise whom he reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants, appraisers or other persons as to matters he reasonably believes are within the person's professional or expert competence; or (3) a Committee of the Board of Directors of the corporation or another enterprise of which the person is not a member if he reasonably believes the Committee merits confidence. The term "another enterprise" as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such -16- person is or was serving at the request of the corporation as a Director, Officer, partner, trustee, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standards of conduct set forth in Section 1 or 2. Section 5. Advancement Of Defense Expenses. The corporation shall pay for or reimburse the reasonable expenses incurred by a Director, Officer, employee or agent who is a party to a proceeding described in Section 1 or 2 of this Article VIII in advance of the final disposition of said proceeding if: (a) the Director, Officer, employee or agent furnishes the corporation a written affirmation of his good faith belief that he has met the standard of conduct described in Section 1 or 2; and (b) the Director, Officer, employee or agent furnishes the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that the Director, Officer, employee or agent did not meet the standard of conduct; and (c) a determination is made that the facts then known to those making the determination would not preclude indemnification under Section 1 or 2. The undertaking required by this Section 5 must be an unlimited general obligation of the Director, Officer, employee or agent but need not be secured and may be accepted by the corporation without reference to the financial ability of such person to make repayment. Section 6. Non-Exclusiveness Of Indemnification. The indemnification and advancement of expenses provided for or authorized by this Article VIII do not exclude any other rights to indemnification or advancement of expenses that a person may have under: (a) the corporation's Articles of Incorporation or Bylaws; (b) any resolution of the Board of Directors or the Shareholders of the corporation; (c) any other authorization adopted by the Shareholders; -17- (d) any Director and Officer insurance policy, or any other type of insurance policy; or (e) otherwise as provided by law, both as to such person's actions in his capacity as a Director, Officer, employee or agent of the corporation and as to actions in another capacity while holding such office. Such indemnification shall continue as to a person who has ceased to be a Director, Officer, or employee, and shall inure to the benefit of the heirs and personal representatives of such person. Section 7. Vested Right To Indemnification. The right of any individual to indemnification under this Article VIII shall vest at the time of occurrence or performance of any event, act or omission giving rise to any action, suit or proceeding of the nature referred to in Section I or 2 and, once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these provisions. Notwithstanding the foregoing, the indemnification afforded under this Article VIII shall be applicable to all alleged prior acts or omissions of any individual seeking indemnification hereunder, regardless of the fact that such alleged acts or omissions may have occurred prior to the adoption of this Article VIII. To the extent such prior acts or omissions cannot be deemed to be covered by this Article VIII, the right of any individual to indemnification shall be governed by the indemnification provisions in effect at the time of such prior acts or omissions. Section 8. Insurance. The corporation may purchase and maintain insurance covering any person who is or was a Director, Officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a Director, Officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a Director, Officer, employee or agent, whether or not the corporation would have power to indemnify the individual against the same liability under this Article VIII. Section 9. Additional Definitions. For purposes of this Article VIII, references to the corporation shall include any domestic or foreign predecessor entity of the corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. -18- For purposes of this Article VIII, "serving an employee benefit plan at the request of the corporation" shall include any service as a Director, Officer, employee or agent of the corporation which imposes duties on, or involves services by, such Director, Officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner it "not opposed to the best interest of the corporation" referred to in this Article VII. For purposes of this Article VIII, "official capacity", when used with respect to a Director, shall mean the Office of Director of the corporation; and when used with respect to an individual other than a Director, shall mean the office in the corporation held by the Officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan. or other enterprise, whether for profit or not. Section 10. Payments A Business Expense. Any payments made to any indemnified party under this Article VIII or under any other right to indemnification shall be deemed to be an ordinary and necessary business expense of the corporation, and payment thereof shall not subject any person responsible for the payment, or the Board of Directors, to any action for corporate waste or to any similar action. ARTICLE IX Amendments. Section 1. These bylaws may be altered, amended or repealed and new bylaws may be made by a majority of the whole Board of Directors at any regular or special meeting of the Board of Directors. -19- EX-10.9(4) 4 CREDIT AGREEMENT CONSENT AND AMENDMENT [CHASE LOGO] September 26, 1996 GGS Management, Inc. GGS Management Holdings, Inc. c/o Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: David L. Bates, Esq. Re: Consent and Amendment Gentlemen: We refer to the Credit Agreement dated as of April 30, 1996 (as amended, supplemented and otherwise modified and in effect on the date hereof, the "Credit Agreement"; terms defined in the Credit Agreement to have their respective defined meanings when used herein) between GGS Management, Inc. (the "Company") certain banks (the "Banks") and The Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank (National Association)), as agent for the Banks (the "Administrative Agent"). In connection with a public offering by SIG of up to 3,450,000 shares of its common stock pursuant to Form S-1 dated September __, 1996, we understand that (1) the parties to the Stockholder Agreement wish to amend and restate such Stockholder Agreement in substantially the form of Exhibit A attached hereto (the "Amended and Restated Stockholder Agreement") so that the Company and GGS may be consolidated with SIG for financial reporting purposes and (2) the parties to the GGS Stock Purchase Agreement wish to enter into a Third Amendment to the Stock Purchase Agreement in substantially the form of Exhibit B attached hereto (the "Third Amendment"). - 2 - With the consent of the Majority Banks, we consent to GGS entering the Amended and Restated Stockholder Agreement and the Third Amendment on the condition that simultaneously therewith, the Credit Agreement shall, automatically and without any further action by the parties hereto, be amended in the following respects: 1. The first sentence of Section 8.08 of the Credit Agreement shall be amended by deleting therefrom the text from and including the words "except that Pafco may pay to SIG a dividend" to and including the words "and Goran". 2. Section 8.12 of the Credit Agreement shall be amended by deleting the words "clauses (e) and (f)" and replacing them with "clause (b)". The foregoing consent shall become effective upon receipt by the Administrative Agent of a copy of this letter duly executed on behalf of the Company and GGS as below provided. This letter agreement shall be governed by and construed in accordance with, the law of the State of New York. Very truly yours, THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ J. David Parker, Jr. ------------------------ J. David Parker Vice President CONSENT: GGS MANAGEMENT, INC. By /s/ A Y Zuror - ------------------------ Title: President GGS MANAGEMENT HOLDINGS, INC. By /s/ A Y Zuror - ------------------------ Title: President EX-10.9(5) 5 CREDIT AGREEMENT SECOND AMENDMENT [CHASE LOGO] December 31, 1996 GGS Management, Inc. GGS Management Holdings, Inc. c/o Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: David L. Bates, Esq. Re: Second Amendment Gentlemen: We refer to the Credit Agreement dated as of April 30, 1996 (as amended by a Consent and Amendment dated as of October 31, 1996, the "Credit Agreement"; terms defined in the Credit Agreement to have their respective defined meanings when used herein) between GGS Management, Inc. (the "Company") certain banks (the "Banks") and The Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank (National Association)), as agent for the Banks (the "Administrative Agent"). You have requested that the Credit Agreement be amended to provide for an amendment of a certain mandatory prepayment provision in the Credit Agreement. Having received the consent of the all the Banks, we agree that the Credit Agreement is hereby amended in the following respect: Subsection (a) of Section 2.08 of the Credit Agreement shall be amended to add the following at the end thereof: "; provided that, without making any such prepayment, the Company may make an Equity Issuance for up to but not exceeding $6,000,000 in the aggregate to GGS at any time from and including December 20, 1996 to and including December 31, 1996 so long as all of such proceeds are -3- contributed as Statutory Surplus to the Insurance Subsidiaries on or before December 31, 1996." The foregoing amendment shall become effective upon receipt by the Administrative Agent of a copy of this letter duly executed on behalf of the Company and GGS as below provided. This letter agreement shall be governed by and construed in accordance with, the law of the State of New York. THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ J. David Parker, Jr. ------------------------ J. David Parker Vice President CONSENT: GGS MANAGEMENT, INC. By /s/ - --------------------------------- Title: CFO GGS MANAGEMENT HOLDINGS, INC. By /s/ David L. Bates - --------------------------------- Title: VP & General Counsel EX-10.9(5) 6 CREDIT AGREEMENT THIRD AMENDMENT [Execution Copy] AMENDMENT NO. 3 Amendment No. 3 dated as of December 31, 1996, between GGS MANAGEMENT, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of thelenders that is a signatory hereto (individually, a "Bank" and collectively, the "Banks"); and THE CHASE MANHATTAN BANK, a New York banking company, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, the Banks and the Administrative Agent (successor by merger to The Chase Manhattan Bank (National Association)) are parties to a Credit Agreement dated as of April 30, 1996 (as heretofore modified and supplemented and in effect on the date hereof, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Banks to the Company in an aggregate principal amount not exceeding $48,000,000. The Company, the Banks and the Administrative Agent wish to amend the Credit Agreement in certain respects, and accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 3, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Subject to the satisfaction of the conditions precedent specified in Section 4 below, but effective as of the date hereof, the Credit Agreement shall be amended as follows: 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and'hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement shall be amended by adding the following new definitions and inserting the same in the appropriate alphabetical locations, as follows: "Guaranteed Note" shall mean the promissory note of GGS date December 31, 1996 in the principal amount of $4,800,000 payable to Superior on or before March 28, 1997, guaranteed in part by SIG in accordance with terms thereof. Amendment No. 3 -2- "1997 Equity Contribution" shall mean a common equity capital contribution by SIG and GS Capital to GGS during the period from and including March 17, 1997 to andincluding March 28, 1997, aggregating not less than $4,800,000 and not more than $6,000,000, a portion of which shall be used directly for the payment in full of the principal of and accrued interest on Guaranteed Note on or before March 28, 1997 and the remainder of which will be contributed to the common equity of the Company. 2.03. The proviso to subsection (a) of Section 2.08 of the Credit Agreement shall be amended to read in its entirety as follows: "; provided that, no such prepayment need be made in respect of any Equity Issuance to GGS resulting from either (x) the 1997 Equity Contribution (or the use of the proceeds thereof) or (y) the issuance to Superior of, or any payment made in respect of the Guaranteed Note; and any such Equity Issuance and any payment made in respect of the Guaranteed Note shall not be deemed to violate any provision of Section 8.15." 2.04. Section 8.07(b) of the Credit Agreement shall be amended by adding the following proviso immediately after the first proviso of said Section 8.07(b): "; provided further, that, notwithstanding the forgoing, Superior may make the Investment referred to in the proviso to subsection (a) of Section 2.08 hereof." 2.05. Section 8.09(e) of the Credit Agreement shall be amended to read in its entirety as follows: "(e) Maximum Statutory Net Premiums Written. The Company shall not permit its Insurance Subsidiaries (on a combined basis) to have Statutory Net Premiums Written during any period of four consecutive fiscal quarters of such Insurance Subsidiaries (including any portion of such period prior to the Closing Date when they were not Subsidiaries of the Company) to exceed 3 times the combined Statutory Surplus of Pafco and Superior as at the end of such period, provided that for the period of four consecutive fiscal quarters ending September 30, 1996 and December 31, 1996 and March 31, 1997, the Company shall not permits its Insurance Subsidiaries (on a combined basis) to have Statutory Net Premiums Written during such period to Amendment No. 3 -3- exceed 3.15 times the combined Statutory Surplus of Pafco and Superior as at the end of such period." 2.06. Section 8.10 of the Credit Agreement shall be amended to read in its entirety as follows: "8.10 Risk-Based Capital Ratio. The Company will not on any date permit the Risk Based Capital Ratio (a) of Pafco to be less than 2 to 1 or (b) of Superior to be less than (x) 2.70 to 1 prior to June 30, 1997 or (y) 3 to 1 on or after June 30, 1997." Section 3. Representations and Warranties. The Company represents and warrants to the Banks that the representations and warranties set forth in Section 7.01, 7.04, 7.05 and 7.06 of the Credit Agreement are true and correct on the date hereof as if made on and as of the date hereof and as if each reference in said Sections to "the Agreement" included reference to the Credit Agreement as amended by this Amendment No. 3. Section 4. Conditions Precedent. As provided in Section 2 above, the amendments to the Credit Agreement set forth in said Section 2 shall become effective, as of the date hereof, upon the satisfactions of the following conditions precedent: 4.01. Execution by All Parties. This Amendment No. 3 shall have been executed and delivered by each of the parties hereto. 4.02 1997 Equity Contribution. Evidence that the 1997 Equity Contribution shall have occurred, and the Administrative Agent shall have receivec copies of each of the documents and instruments pursuant to which the 1997 Equity Contribution shall have occurred. 4.03 Repayment of Guaranteed Note. Evidence that the Guaranteed Note has been paid in full in cash. 4.04. Stock Certificates. Pursuant to the Pledge Agreements, the Administrative Agent shall have received in connection with the Equity Issuances referred to in the proviso to subsection (a) of Section 2.08 of the Credit Agreement (a) all stock certificates (if any) received in consideration for any Equity Issuance by the Company, accompanied by stock powers executed in blank and (b) all stock certificates (if any) received in consideration for any Equity Issuance by Superior, accompanied by stock powers executed in blank. Amendment No. 3 -4- 4.05. Amendment Fee; Expenses. Chase shall have received payment by the Company, in immediate available funds, of (a) an amendment fee as separately agreed to by the Company and Chase in the Fee Letter date of even date herewith and (b) all reasonable out-of-pocket costs and expenses of Chase (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel of Chase) from October 29, 1996 to the execution and delivery of this Amendment No. 3 in connection with the preparation, negotiation, execution and delivery of this Amendment No. 3. 4.06. Other Documents. The Administrative Agent shall have received such other documents as the Administrative Agent or any Bank or special New York counsel to Chase may reasonably request. The Administrative Agent shall notify the Company and the Banks of the date on which the conditions specified in this Section 4 have been satisfied. Such letter shall constitute conclusive evidence that such conditions have been satisfied. Section 5. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 3 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 3 by signing any such counterpart. This Amendment No. 3 shall be governed by, and construed in accordance with, the law of the State of New. York. Amendment No. 3 -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to be duly executed and delivered as of the day and year first above written. GGS MANAGMENT, INC. By: /s/ David L. Bates Title: Vice President, General Counsel & Secretary -6- THE CHASE MANHATTAN BANK By: /s/ Peter Platten Title: Vice President DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: Title: DEUTSCHE BANK By: Title: COMERICA BANK By: Title: Amendment No. 3 -6- THE CHASE MANHATTAN BANK By: Title: DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: /s/ John S. Runnion Title: Vice President /s/ John Sweeney Title: Vice President DEUTSCHE BANK By: Title: COMERICA BANK By: Title: Amendment No. 3 -6- THE CHASE MANHATTAN BANK By: Title: DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: Title: DEUTSCHE BANK AG, NEW YORK AND/ OR CAYMAN ISLANDS BRANCHS By: /s/ Eckhard Osenberg Title: Assistant Vice President /s/ John S. McGill Title: Vice President COMERICA BANK By: Title: Amendment No. 3 THE CHASE MANHATTAN BANK By: Title: DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: Title: DEUTSCHE BANK By: Title: COMERICA BANK By: /s/ Phillip A. Coosaia Title: Vice President Amendment No. 3 EX-13 7 1996 SYMONS INTERNATIONS GROUP, INC. ANNUAL REPORT [COVER] SIG LOGO 1996 Annual Report [Large SIG logo with three photos] Corporate Profile Symons International Group, Inc. owns niche insurance companies principally in the crop and nonstandard automobile insurance markets. Its crop subsidiary, IGF Insurance Company of Des Moines, Iowa is the fifth largest crop insurer in the United States. Its nonstandard automobile division, Pafco General Insurance Company of Indianapolis, Indiana and Superior Insurance Company of Tampa, Florida, is the sixteenth largest provider of nonstandard automobile insurance in the United States. The crop segment markets and sells crop and multi-peril coverages to farmers. This is the fastest growing sector of the commercial insurance market. The nonstandard automobile division markets and sells insurance through the independent agency system to drivers who are unable to obtain coverage from insurers at standard or preferred rates. This market is the fastest growing of the personal lines market. The common stock of Symons International Group, Inc. was initially offered to the public on November 5, 1996 and trades on The NASDAQ Stock Market's National Market under the symbol "SIGC". Table of Contents Financial Highlights 1 Chairman's Report 2 Selected Financial Data 4 Management's Discussion and Analysis 6 Consolidated Financial Statements 20 Notes to Consolidated Financial Statements 24 Report of Independent Accountants 49 Stockholder Information 50 Board of Directors and Executive Officers 51 Subsidiary and Branch Offices IBC [GRAPH OMITTED] 1992 1993 1994 1995 1996 Gross Premiums Written $109,219 $88,936 $103,134 $124,634 $305,499 Gross Premiums Written By Year Financial Highlights (in thousands, except per share data)
For the years ended December 31, 1992 1993 1994 1995 1996 - ------------------------------------ -------- -------- -------- -------- -------- Gross premiums written $109,219 $88,936 $103,134 $124,634 $305,499 Net earnings (loss)(1) $ 817 $ (323) $ 2,117 $ 4,821 $ 13,256 Net operating earnings (loss)(2) $ 496 $ (244) $ 2,222 $ 5,048 $ 13,916 Earnings (loss) per share(1) $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 1.76 Operating earnings (loss) per share (1)(2) $ 0.07 $ (0.03) $ 0.32 $ 0.72 $ 1.85 Stockholders' equity $ 1,193 $ 2,219 $ 4,255 $ 9,535 $ 60,900 Return on beginning equity 168.8% (27.1%) 95% 113.3% 139.0% Book value per share $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 5.83 Market value per share(3) N/A N/A N/A N/A $ 16.75
(1) In 1993, the Company recognized an increase to net earnings as a result of a cumulative effect of a change in accounting principle of $1,175. Earnings and operating earnings per share excluding this effect were $(0.20). (2) Operating earnings and per share amounts exclude the after tax effects of realized capital gains and losses. (3) The Company's shares were first publicly traded on November 5, 1996. CORPORATE STRUCTURE [graphic omitted] Symons International Group, Inc, Indianapolis, Indiana ("SIG or the "Company") | | ---------------------------------- | | 100% Owned 52% Owned Funds Affiliated IGF Holdings, Inc. GGS Management ----48%---- with Goldman ("IGFH") Holdings, Inc. Sachs & Co. ("GGSH" or "GGS Holdings") ("GS Funds") | | | | 100% Owned 100% Owned IGF Insurance GGS Management, Inc. Company "GGS Management" ("IGF") | | ----------------------------------- | | | | 100% Owned 100% Owned PAFCO General Superior Insurance Company Insurance Company ("Superior") ("Pafco") | | | ---------------------------- | | | | 100% Owned 100% Owned Superior Guranty Superior Insurance Company American Insurance Company Chairman's Report - -------------------------------------------------------------- Symons International Group, Inc. - -------------------------------------------------------------- 1996 saw Symons International Group, Inc. ("SIG") change from being a wholly-owned subsidiary of Goran to a 67% owned newly listed (NASDAQ) public company on the occasion of its Initial Public Offering on November 5, 1996. Three million of its ten million outstanding common shares were offered to the public at $12.50 per share, and a further 450,000 shares were issued under the terms of the "over-allotment" agreement. The total proceeds were $43.1 million. While this was a significant adventure for SIG, it came late in a year of several outstanding achievements produced by its subsidiary companies. The year started with the completion on January 31, 1996, of an agreement with the Fortis Group to purchase their nonstandard automobile insurance division, the Superior Group of Insurance Companies. The purchase price was 105% of the "book" value, which developed a selling value to Fortis of $66,600,000, a most satisfactory arrangement for SIG as we will demonstrate. The funds were raised by the following: The substantial financial house of Goldman Sachs, through their affiliate, GS Capital Partners II, L.P. contributed $21.2 million in cash to a newly formed nonstandard automobile insurance holding company, GGS Management Holdings Inc. We contributed our previously wholly-owned, nonstandard auto insurer, Pafco General Insurance Company. For its contribution, GS Capital Partners II, L.P. received a 48% interest in GGS Management Holdings, Inc. and we, of course, retained the other 52% of GGS Management Holdings, Inc. in SIG. With the assistance of our new investors, GS Capital Partners II, L.P., GGS Management Holdings, Inc. borrowed $48 million thus satisfying the cash requirement for the acquisition and a definitive agreement was concluded for the purchase with Fortis on January 31, 1996. The necessary application seeking approval of the purchase was expeditiously made to the regulators and by April 30, 1996, the Florida Department of Insurance sanctioned the deal and GGS Management Holdings, Inc. was in business. With the keys to Superior firmly in our hands, we proceeded to make several major improvements in the sales and administration of the nonstandard automobile companies. This field of insurance is one of our core lines and we felt most comfortable with the acquisition from the outset. Our first chore was to implement proven and constructive systems and to reduce redundancies that might prevail within our two active nonstandard auto insurers. Time proved that these changes were effective in that by the end of 1996, only eight months after we acquired Superior, gross premiums of the Company had risen from $95 million in 1995 to $159 million. For 1996, we were also able to reduce the operating ratios from 107.6% of premiums to 99.5% over this period. During 1996 we reduced operation costs and increased production at Pafco as well. In combination with Pafco, the two nonstandard entities now under the banner of GGS Management Holdings, Inc. moved into 16th place in this the fastest growing segment of personal insurance. IGF Insurance Company, our crop insurer, now occupies 5th place in volume of income in the crop insurance business, which has been categorized as the fastest growing segment of the commercial insurance business. The company, since we acquired it in November 1990, has progressed from a relatively small writer of this sophisticated line of insurance, doing $22 million of premium income in 1990, to gross premiums for 1996 of $110 million - an increase of 56% over 1995. Pre-tax earnings increased from $11 million in 1995 to $17.7 million in 1996. A gentleman employed with a major investment house asked a short time ago if we expected to see results, such as we have displayed over the past years, continue into the future. It is a good question and if we could look into a crystal ball and come up with the answer that might prove useful, too. The fact of the matter is that there have been sound and understandable reasons for our growth and we can take credit for that. We have stuck to the business philosophy developed some years back of being a "niche" company, carefully selecting our areas of development. These have been the nonstandard auto insurance and crop insurance segments. We have made antidilutive acquisitions, and managed above average growth while increasing profitability. As the large standard auto insurers tightened their underwriting criteria, this threw a large number of motorists into the nonstandard market. As the nonstandard market grew to accept more business, various legislators brought in tougher laws to eliminate the uninsured motorist. Florida even introduced bounty hunters to hound out the noninsured motorists. Other states have been introducing tighter laws to impose a mandatory obligation to insure with seizure of the car and large fines in the event of non-compliance. The market for nonstandard auto insurance has now reached more than $17 billion and there is still some shortfall in the capacity to absorb these premiums by the insurers. We are selective in the risks we accept which accounts for our results bettering the averages. Dating as far back as the period following the Dust Bowl of the 30's, there was a lack of insurance markets to accept the risks of farmers for damage or loss of crops. This was not a serious problem in the past for many farmers were not prone to purchase the coverage and relied on the luck of the draw, or as the more religious put it, the hand of God to look after them. The time came, however, when losses became too severe for the well-being of the nation's farmers and the central government in the U.S. had to step in and offer to provide assistance with the creation of a sound insurance market. With reluctance, the Federal Crop Insurance Corporation was established and for some time, along with a small group of speciality insurance companies, a suitable market existed. In 1993 devastating floods hit the farms in mid-America following some turbulent and unpredictable weather in the years preceding. There were disaster areas aplenty and of course many farmers, as was their tradition, had not insured. The demands for "Disaster Fund" assistance was loud and insistent and the government, of course with taxpayers funds, did its best to render useful assistance. The upshot of this was the 1994 Crop Reform bill and the 1996 Freedom to Farm legislature. These bills, while modernizing many aspects of protection to farmers and the way in which they conducted their business affairs, imposed an obligation on the farmers to purchase protection for their own security. Premiums in the crop insurance industry have doubled since while the number of insurance providers has shrunk. IGF has increased its segment of this business by a greater amount than the overall factor of growth. We have added many capable people to our staff over the past few years, some through acquisition of companies such as IGF and Superior, but others garnered from other insurers and businesses. Our goal is to continue to grow by increased sales and acquisitions, but the proof of the pudding is in the eating and we have become an efficient producer of business, both in the nonstandard auto field and crop insurance business. We have developed unique marketing strategies and our underwriting results and expense ratios are comparable to the largest and most experienced companies. G. Gordon Symons, Chairman SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA Years Ended December 31, - -------------------------------------------------------------------------------- SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA - -------------------------------------------------------------------------------- OF SYMONS INTERNATIONAL GROUP, INC. The selected consolidated financial data presented below is derived from the consolidated financial statements of the Company and its Subsidiaries and should be read in conjunction with the consolidated financial statements of the Company and the notes thereto, included elsewhere in this Report.
1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (in thousands except per share amounts and ratios) Consolidated Statement of Operations Data: Gross Premiums Written $ 109,219 $ 88,936 $ 103,134 $ 124,634 $ 305,499 Net Premiums Written 35,425 31,760 35,139 53,447 209,592 Net Premiums Earned 35,985 31,428 32,126 49,641 191,759 Net Investment Income 1,319 1,489 1,241 1,173 6,733 Other Income - - - - 886 1,632 2,170 9,286 Net Realized Capital Gain (Loss) 486 (119) (159) (344) (1,015) --------- --------- --------- --------- --------- Total Revenues 37,790 33,684 34,840 52,640 206,763 ========= ========= ========= ========= ========= Losses and Loss Adjustment Expenses 27,572 25,080 26,470 35,971 137,109 Policy Acquisition and General and Administrative Expenses 7,955 8,914 5,801 7,981 42,013 Interest Expense 459 996 1,184 1,248 3,938 --------- --------- --------- --------- --------- Total Expenses 35,986 34,990 33,455 45,200 183,060 ========= ========= ========= ========= ========= Earnings (Loss) Before Taxes, Extraordinary Item, Cumulative Effect Of An Accounting Change And Minority Interest 1,804 (1,306) 1,385 7,440 23,703 Income Taxes 996 83 (718) 2,619 8.046 ========= ========= ========= ========= ========= Earnings (Loss) Before Extraordinary Item, Cumulative Effect Of An Accounting Change And Minority Interest $ 808 $ (1,389) $ 2,103 $ 4,821 $ 15,657 Net Earnings (Loss) $ 817 $ (323) $ 2,117 $ 4,821 $ 13,256 ========= ========= ========= ========= =========
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA Years Ended December 31, - -------------------------------------------------------------------------------- SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA - --------------------------------------------------------------------------------
1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- Per Common Share Data: Earnings (Loss) Before Extraordinary Item, And Cumulative Effect Of An Accounting Change And Minority Interest $ 0.12 $ (0.20) $ 0.30 $ 0.69 $ 2.08 --------- --------- --------- --------- --------- Net Earnings (Loss) $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 1.76 ========= ========= ========= ========= ========= Weighted Average Shares Outstanding 7,000 7,000 7,000 7,000 7,537 GAAP Ratios: Loss and LAE Ratio 76.6% 79.8% 82.4% 72.5% 71.5% Expenses Ratio 23.4 31.5 21.7 18.6 24.0 --------- --------- --------- --------- --------- Combined Ratio 100.0% 111.3% 104.1% 91.1% 95.5% ========= ========= ========= ========= ========= Consolidated Balance Sheet Data: Investments $ 27,941 $ 21,497 $ 18,572 $ 25,902 $ 178,429 Total Assets 75,001 81,540 66,628 110,516 344,679 Losses and Loss Adjustment Expenses 38,616 54,143 29,269 59,421 101,719 Total Debt 11,528 9,341 10,683 11,776 48,000 Minority Interest 55 - - - - 16 - - - - 21,610 Total Shareholders Equity 1,193 2,219 4,255 9,535 60,900 Book Value Per Share $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 5.83 Statutory Capital And Surplus: Pafco $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 18,112 IGF $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 29,412 Superior $57,121
[photographs of automobiles down right margin] MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY - -------------------------------------------------------------------------------- Overview Symons International Group, Inc. (the "Company" or "SIG") is a 67% subsidiary of Goran Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering (the "Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran. The Company underwrites and markets nonstandard private passenger automobile insurance and crop insurance. Formation of GGS Management Holdings, Inc. ("GGSH" or "GGS Holdings"), The Holding Company For Its Nonstandard Operations SIG entered into a Letter of Intent on June 3, 1995 with Fortis, Inc. to buy Superior Insurance Company ("Superior"), a nonstandard automobile insurance company operating principally in Florida, Texas, California and four other states. SIG needed to finance the purchase so it turned to Goldman Sachs & Co. ("Goldman Sachs") which has a large fund that invests in equity of growing and profitable companies. SIG formed GGSH through contribution of its nonstandard subsidiary, Pafco General Insurance Company ("Pafco") and a contribution by Goldman Sachs of about $21 Million, or 48% of GGS Holdings' stock. With this cash and the value of Pafco, GGS Holdings borrowed from Chase Manhattan Bank, N.A. ("Chase") $48 Million through a term loan of 6 years at LIBOR plus 2.75%. With these funds, GGS Holdings bought Superior for $66.6 Million in cash and closed the deal on April 30, 1996 (the "Acquisition"). Today, GGS Holdings is the sixteenth largest nonstandard automobile insurance writer in the United States with gross written premiums for 1996 of $187,176,000 compared to $49,005,000 for 1995. GGS Holdings is an acquisition and growth company in the nonstandard automobile insurance sector, which is the fastest growing sector of the personal lines market. [photographs of automobiles down left margin and across top of page] The Company wanted to define its business as two distinct units, crop and nonstandard. The Company also wanted Goldman Sachs to invest only in the nonstandard division. In order to accomplish this, SIG moved IGF Insurance Company ("IGF") out from being a subsidiary of Pafco to become a subsidiary of SIG. After all the accountants and lawyers got through their deliberations, IGF Holdings, Inc. ("IGFH") was formed as a subsidiary of SIG and IGFH owned 100% of IGF, now the fifth largest crop insurer in the United States. To replace the value of IGF to Pafco, IGF paid a dividend of $11 Million to Pafco and funded same through our friendly local bank for $7.5 Million (the "IGFH Bank Debt") and a note back from Pafco for $3.5 Million. Both of these loans were paid off through the Offering proceeds. Nonstandard Automobile Insurance Operations The Company owns 52% of GGS Holdings, our nonstandard division, with the remaining 48% owned by certain funds affiliated with Goldman Sachs. GGS Holdings, through its wholly-owned subsidiaries, Pafco and Superior, is engaged in the writing of insurance coverage on automobile insurance for "nonstandard risks". Nonstandard insureds are those individuals who are unable to obtain insurance through standard market carriers due to factors such as poor premium payment history, driving experience, record of prior accidents or driving violations, particular occupation or type of vehicle. Premium rates for nonstandard risks are higher than for standard risks. Nonstandard policies have relatively short policy periods and low limits of liability. Due to the low limits of coverage, the period of time that elapses between the occurrence and settlement of losses under nonstandard policies is shorter than many other types of insurance. The nonstandard automobile market is the fastest growing sector of the personal lines market. This is fueled by two main factors. (A) As states clamp down on uninsured motorists, more insureds find their way to our market. For example, Florida, our biggest state, has bounty hunters who take your plates off your car if you fail to have insurance. Further, California just passed strong laws to enforce insurance or lose your car. (B) The baby boomers' children are now reaching driving age and they mainly find their way to our market. [photographs of crops down right margin] Crop Insurance Operations General Crop insurance consists of two main products. Hail insurance, which is controlled by the private insurance industry, receives no subsidy from the government. The other, Multi-Peril Crop Insurance ("MPCI"), is a government sponsored product that receives subsidy for the farmer to reduce their cost and provide protection for major catastrophic loss. When a farmer wants to borrow money to buy his seed, the bank wants insurance on the seed so it knows the loan can be repaid either through normal harvest or through an insurance policy covering the yield on the crop. There are many types of coverages and percentages that farmers can purchase. Our job is to work with our independent agent to counsel the farmer on the best coverage and premium for his farm. The government supports this effort through commissions it pays us to do this work and through premium subsidy for the farmer's insurance costs. The government also provides back-up risk protection to the 18 or so crop insurance providers in the event of major loss. Based on the results for any given year, the Company and the government share in the results of profit and loss. In order to protect IGF from the loss part of this equation, IGF buys third party reinsurance to reduce the downside from a loss year. Certain Accounting Policies for Crop Insurance Operations The majority of the Company's crop insurance business consists of MPCI. MPCI is a government-sponsored program with accounting treatment which differs in certain respects from more traditional property and casualty insurance lines. Farmers may purchase "CAT Coverage" (the minimum available level of MPCI coverage) upon payment of a fixed administrative fee of $50 per policy (the "CAT Coverage Fee") instead of a premium. This fee is included in other income. Commissions paid to agents to write CAT policies are partially offset by the CAT Coverage Fee, which is also reflected in other income. For purposes of the profit-sharing formula under the MPCI program referred to below, the Company is credited with an imputed premium (its "MPCI Imputed Premium") for all CAT Coverage policies it sells, determined in accordance with the profit-sharing formula established by the Federal Crop Insurance Corporation ("FCIC"). For income statement purposes under GAAP, gross premiums written consist of the aggregate amount of premiums paid by farmers for "Buy-up Coverage" (MPCI coverage in excess of CAT Coverage), and any related federal premium subsidies, but do not include any MPCI Imputed Premium [photographs of crops down left margin] credited on CAT Coverage. By contrast, net premiums written and net premiums earned do not include any MPCI premiums or premium subsidies, all of which are deemed to be ceded to the U.S. Government as reinsurer. The Company's profit or loss from its MPCI business is determined after the crop season ends on the basis of a complex profit-sharing formula established by federal regulation and the FCIC. For GAAP income statement purposes, any such profit or loss sharing earned or payable by the Company is treated as an adjustment to commission expense and is included in policy acquisition and general and administrative expenses. Amounts receivable from the FCIC are reflected on the Company's consolidated balance sheet as reinsurance recoverables. The Company also receives from the FCIC (i) an expense reimbursement payment equal to a percentage of gross premiums written for each Buy-up Coverage policy it writes (the "Buy-up Expense Reimbursement Payment"), (ii) an LAE reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it writes (the "CAT LAE Reimbursement Payment") and (iii) a small excess LAE reimbursement payment of two hundredths of one percent (.02%) of MPCI Retention (as defined herein) to the extent the Company's MPCI loss ratios on a per state basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For 1994, 1995 and 1996, the Buy-up Expense Reimbursement Payment has been set at 31% of the MPCI Premium, but it is scheduled to be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999. The Company is working to reduce costs in order to preserve the profit margins of the Company. For GAAP income statements purposes, the Buy-up Expense Reimbursement Payment is treated as a contribution to income and reflected as an offset against policy acquisition and general and administrative expenses. The CAT LAE Reimbursement Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement purposes, recorded as an offset against LAE, up to the actual amount of LAE incurred by the Company in respect of such policies, and the remainder of the payment, if any, is recorded as other income. In 1996, the Company instituted a policy of recognizing (i) 35% of its estimated MPCI gross premiums written for each of the first and second quarters, (ii) commission expense at a rate of 16% of MPCI gross premiums written recognized and (iii) Buy-up Expense Reimbursement at a rate of 31% of MPCI gross premiums written recognized along with normal operating expenses incurred in connection with premium writings. In the third quarter, if a sufficient volume of policyholder acreage reports have been received and processed by the Company, the Company's policy is to recognize MPCI gross premiums written for the first nine months based on a re-estimate. If an insufficient volume of policies has been processed, the Company's policy is to recognize 20% of its full year estimate of MPCI gross premiums written in the third quarter. The remaining amount of gross premiums written is recognized in the fourth quarter, when all amounts are reconciled. In prior years, recognition of MPCI gross premiums written was 30%, 30%, 30% and 10%, for the first, second, third and fourth quarters, respectively. Commencing with its June 30, 1995 financial statements, the Company also began recognizing MPCI underwriting gain or loss during the first and second quarters, as well as the third quarter, reflecting the Company's best estimate of the amount of such gain or loss to be recognized for the full year, based on, among other things, historical results, plus a provision for adverse developments. In the fourth quarter, a reconciliation amount is recognized for the underwriting gain or loss based on final premium and loss information. Discontinuance of Surplus Lines Underwriting Unit Prior to January 1, 1996, the Company, through its wholly-owned subsidiary, Symons International Group, Inc. - Florida ("SIGF"), a surplus lines underwriting unit based in Florida, provided commercial insurance products through independent insurance agents. SIGF writes these specialty products through Pafco as well as a number of other insurers. Effective January 1, 1996, the Company transferred SIGF to Goran and reinsured all current and future policies issued by Pafco on this business through Goran's subsidiary, Granite Reinsurance Company Ltd. ("Granite Re"). Selected Segment Data of the Company The following table presents historical segment data for the Company's nonstandard automobile and crop insurance operations. This data does not reflect results of operations attributable to corporate operations nor does it include the results of operations of Superior prior to May 1, 1996.
Year Ended December 31, 1993 1994 1995 1996 (in thousands, except ratios) Nonstandard -Automobile Insurance Operations: Gross premiums written $ 52,187 $ 45,593 $ 49,005 187,176 Net premiums written 26,479 28,114 37,302 186,579 Net premiums earned 26,747 25,390 34,460 168,746 Net investment income 1,144 904 624 6,489 Other income, principally billing fees 886 1,545 1,787 7,578 Net realized capital loss (44) (55) (508) (1,014) Total revenues 28,733 27,784 36,363 181,799 Losses and loss adjustment expenses 17,152 18,303 25,423 124,385 Policy acquisition and general and administrative expenses 5,855 8,709 12,929 46,796 Interest and amortization of intangibles - - - - - - - - - - - 3,184 Total expenses 23,007 27,012 38,352 174,365 Earnings (loss) before income taxes $ 5,726 $ 772 $ (1,989) $ 7,434 GAAP Ratios (Nonstandard Automobile Only): Loss ratio 55.5% 62.3% 65.8% 65.1% LAE ratio 8.6% 9.8% 8.0% 8.6% Expense ratio, net of bilLing fees 18.6% 28.2% 32.3% 25.1% Combined ratio 82.7% 100.3% 106.1% 98.8% Crop Insurance Operations: Gross premiums written $ 35,156 $ 54,455 $ 70,374 $ 110,059 Net premiums written 4,281 4,565 11,608 23,013 Net premiums earned 4,281 4,565 11,608 23,013 Net investment income 347 339 674 181 Other income 0 73 384 1,672 Net realized capital gain (loss) 114 (104) 164 (1) Total revenues 4,742 4,873 12,830 24,865 Losses and loss adjustment expenses 6,774 7,031 8,629 12,724 Policy acquisition and general and administrative expenses 1,468 (4,802) (7,466) (6,095) Interest expense 235 492 627 551 Total expenses 8,477 2,721 1,790 7,180 Earnings (loss) before income taxe $ (3,735) $ 2,152 $ 11,040 $ 17,685 Statutory Capital and Surplus: Pafco $ 8,132 $ 7,848 $ 11,875 $ 18,112 IGF 2,789 4,512 9,219 29,412 Superior 56,656 43,577 49,277 57,121
Results of Operations Overview 1996 Compared To 1995 Net earnings and earnings per share increased 175.0% to $13,256,000 and 155.1% to $1.76 in 1996 from $4,821,000 and $0.69 in 1995. Improved earnings in 1996 were attributable to both the nonstandard automobile and crop segments. The nonstandard automobile segment benefited from significant premium growth from the acquisition of Superior, elimination of quota share reinsurance and internal growth. The nonstandard automobile segment also benefited from lower loss and expense ratios due to improved claims management, introduction of multi-tiered products and operating efficiencies through reengineering, management changes and gains from technological advancements. The crop insurance segment also benefited from significant premium growth in both crop hail and MPCI premiums. The crop insurance segment's profitability was enhanced by a lower crop hail loss ratio and improved MPCI underwriting gains. 1995 Compared To 1994 Net earnings and earnings per share increased 128% to $4,821,000 and 130% to $0.69 in 1995 from $2,117,000 and $0.30 in 1994. Improved earnings in 1995 were attributable to the crop insurance segment which demonstrated premium growth, lower loss ratios and higher MPCI underwriting gains than in 1994. Years Ended December 31, 1996 and 1995: Gross Premiums Written. Gross premiums written in 1996 increased to $305,499,000 from $124,634,000 in 1995 reflecting a 282% increase in nonstandard automobile insurance and an increase of 56.4% in crop insurance. Other written premiums consist of premiums on commercial business which were 100% ceded to Granite Re effective January 1, 1996. The increase in nonstandard automobile gross premiums written was due to the Acquisition, which generated gross premiums written of $118,661,000 subsequent to the Acquisition, as well as a 21% increase in policies in-force issued by Pafco. The increase in Pafco policies in-force primarily resulted from improved service and product improvements. The increase in crop insurance gross premiums written was primarily due to (i) farmers electing higher percentage of crop price levels to be insured under MPCI Buy-up Coverages, (ii) an increase in MPCI policies in-force and (iii) an increase in the number of acres insured, together with an increase of $10,990,000, or 64.8%, in crop hail premiums in 1996 compared to 1995. Net Premiums Written. The Company's net premiums written in 1996 increased 292.1% to $209,592,000 from $53,447,000 in 1995 was due to the Acquisition, which generated net premiums written for Superior of $118,298,000 subsequent to the Acquisition, and the increase in gross premiums written in Pafco's nonstandard automobile insurance business. In addition, the increase in net premiums written resulted from the Company's election not to renew, as of January 1, 1996, its 25% quota share reinsurance on its nonstandard automobile business. As a result of increases over time in its statutory capital, the Company determined that it no longer required the additional capacity provided by this coverage in order to maintain acceptable premium to surplus ratios. Since all MPCI premiums are reported as 100% ceded, MPCI gross premiums written have no effect on net premiums written. Net Premiums Earned. The Company's net premiums earned in 1996 increased 286.3% reflecting the increase in net premiums written. The ratio of net premiums earned to net premiums written for nonstandard automobile business in 1996 decreased to 90.4% from 92.4% in 1995 due to growth in net premiums written in 1996 exceeding growth in net premiums written in 1995. Net Investment Income. The Company's net investment income in 1996 increased 474.0%. This increase was due primarily from the investment earnings of $4,996,000 at Superior subsequent to the Acquisition. Also contributing to the increase in net investment income is an increase in average invested assets (not including Superior) to $30,911,000 in 1996 from $22,653,000 in 1995. Other Income. The Company's other income in 1996 increased 327.9% due principally to (i) billing fee revenue of $4,655,000 at Superior subsequent to the Acquisition, (ii) increased billing fee revenue at Pafco of $998,000 from nonstandard automobile insurance policies, resulting from the increase in the in-force policy count described above, and an increase in fees charged per installment in late 1995, and (iii) increased CAT Coverage Fees and CAT LAE Reimbursement Payments resulting from the introduction of CAT Coverages in the Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act"). Net Realized Capital Gain (Loss). The Company recorded a net realized capital loss from the sale of investments of $1,015,000 in 1996 compared to a net realized capital loss from the sale of investments of $344,000 in 1995. The net realized capital loss in 1996 was the result of sales of securities to shorten the portfolio's overall maturity to provide a better duration match with claims payments. Losses and LAE. The loss and LAE ratio for the nonstandard automobile segment in 1996 was 73.7% as compared to 73.8% in 1995. The reduction in the loss and LAE ratio for 1996 was a function of rate increases and improved claim closure ratios. Crop hail loss ratios decreased in 1996 to 55.3% from 74.3% in 1995 due to more favorable weather conditions and a broader geographic expansion of premiums which serves to reduce exposure. Policy Acquisition and General and Administrative Expenses. The expense ratio for the nonstandard automobile segment decreased to 29.6% in 1996 from 37.5% in 1995. Excluding interest on the Acquisition debt and amortization of goodwill and other intangibles associated with the Acquisition would reduce this ratio to 27.7% in 1996. This decrease was due to several factors including (i) lower commission expense at Superior through utilization of multi-tiered products, (ii) lower staff expenses as a result of higher utilization and work flow re-engineering, and (iii) technological advancements in the underwriting, premium processing and claims areas. As a result of the unique accounting for the crop insurance segment, such segment experienced a contribution to income reflected in the policy acquisition and general and administrative expense line item of $6,095,000 in 1996 compared to a contribution to income of $7,466,000 in 1995. This decrease in contribution resulted from a combination of several factors. The primary difference is the decrease in ceding commission income of $2,036,000 which is due to only a 10% quota share agreement for crop hail in 1996 versus a 25% quota share in 1995. Other items include a commission expense increase of $6,217,000 due to higher premium writings and an increase in other operating expenses of $4,153,000. This net increase in expense of $10,370,000 was reduced by an increase of $8,490,000 in Buy-up Expense Reimbursement and an increase in the MPCI underwriting gain of $2,624,000. Interest Expense. The Company's interest expense in 1996 increased to $3,938,000 from $1,248,000 in 1995 due primarily to interest of $2,774,000 on the $48 Million indebtedness incurred by a subsidiary of GGSH to partially fund the Acquisition (the "GGS Senior Credit Facility"). Income Tax Expense. The effective tax rate in 1996 reflects a 33.9% provision compared to a 35.2% provision in 1995. The reduction in the effective tax rate is due to higher tax-exempt interest and dividend income. Years Ended December 31, 1995 and 1994: Gross Premiums Written. Gross premiums written in 1995 increased 20.8%, to $124,634,000 from $103,134,000 in 1994 reflecting an increase in gross premiums written of 29.2% in crop insurance and 7.5% in nonstandard automobile insurance. The increase in gross premiums written for the nonstandard automobile insurance segment was primarily attributable to an increase in policies in-force of 13.4%. The Company experienced a greater percentage increase in certain states due to the introduction of product improvements. In Colorado, policies in-force increased due to the increased number of its deductible options and more favorable pricing for certain personal injury protection coverages. The crop insurance segment experienced growth in both the crop hail and MPCI business. The increase in crop hail gross premiums written to $16,966,000 in 1995 from $10,130,000 in 1994 was due primarily to increased opportunities to market crop hail coverages to farmers as a result of the increases in sales of MPCI products (both Buy-up Coverage and CAT Coverage) due to the 1994 Reform Act. The net increase in MPCI gross premiums written to $53,408,000 in 1995 from $44,325,000 in 1994 resulted from an increase in the number of acres insured in 1995 following the 1994 Reform Act. Net Premiums Written. The Company's net premiums written in 1995 increased 52.1%, to $53,447,000 from $35,139,000 in 1994 due to an increase in gross premiums written and a reduction in premiums ceded to reinsurers under quota share reinsurance for both nonstandard automobile and crop hail insurance. The percentage of the Company's nonstandard automobile premiums ceded under its quota share reinsurance treaty was reduced to 25% from an effective percentage ceded of 38% in 1994 as a result of a reduction in the Company's need for the additional capacity provided by this reinsurance. Net Premiums Earned. The Company's net premiums earned in 1995 increased 54.5% reflecting an increase in net premiums written and a reduction in quota share reinsurance on the nonstandard automobile insurance business. The ratio of net premiums earned to net premiums written for nonstandard automobile insurance in 1995 remained relatively unchanged at 92.4% as compared to 90.3% in 1994. Net Investment Income. Net investment income in 1995 decreased 5.5% principally due to a decrease in the average yield earned on invested assets to 5.2% in 1995 from 6.0% in 1994. Although market interest rates increased in 1995, the average yield on investments declined primarily as a result of the repositioning of the Company's investment portfolio, begun in the latter part of 1995, into a higher concentration in fixed income securities, particularly including shorter term securities. The decrease in the average yield was partially offset by an increase in average invested assets to $22,653,000 in 1995 from $20,628,000 in 1994. Other Income. The Company's other income in 1995 increased 34.0% as a result of increased billing fee income of $351,000 on nonstandard automobile business due primarily to the increase in the in-force policy count as described above, with the remainder due primarily to the receipt of CAT Coverage Fees and CAT LAE Reimbursement Payments following the 1995 introduction of CAT Coverages. Net Realized Capital Gain (Loss). The Company recorded a net realized capital loss of $344,000 from the sale of investments in 1995 as compared to a net realized capital loss of $159,000 in 1994. The net realized capital loss in 1995 was the result of appointing a new investment manager in October 1995 and the resulting repositioning of the Company's investment portfolio described above, as well as certain write-downs taken on investments with an other than temporary decline in estimated fair value. Losses and LAE. The nonstandard automobile segment loss and LAE ratio increased to 73.8% in 1995 from 72.1% in 1994 primarily due to increased repair costs for automobile parts resulting from the implementation of laws prohibiting use of reconditioned parts as well as general inflationary pressures on costs of settling claims. The crop hail loss and LAE ratio decreased to 74.3% in 1995 from 154.0% in 1994 due to more favorable weather conditions than in the prior year. Crop insurance losses and LAE were also impacted by net MPCI LAE of $0 in 1995 and $936,000 in 1994, after reduction for LAE reimbursements of $3,324,000 in 1995 compared to $107,000 in 1994. These reimbursements are reflected in losses and LAE up to the actual amount of LAE incurred with any excess reflected in Other Income. Policy Acquisition and General and Administrative Expenses. The Company's policy acquisition and general and administrative expenses in 1995 increased 37.6%, to $7,981,000 from $5,801,000 in 1994. The nonstandard automobile segment expense ratio increased to 37.5% in 1995 from 34.3% in 1994 primarily due to a $2,390,000, or 44%, reduction in ceding commission income in 1995 arising from reduced reliance on quota share reinsurance. As a result of the unique accounting for the crop insurance segment, such segment experienced a contribution to income reflected in the policy acquisition and general and administrative expense line item of $7,466,000 in 1995 compared to a contribution to income of $4,802,000 in 1994. This increase in contribution resulted from an increase in Buy-Up Expense Reimbursement Payments of $2,521,000 due to higher gross premium writings in 1995, together with an increase in the MPCI underwriting gain of 6,396,000. Interest Expense. The Company's interest expense in 1995 increased 5.4% as a result of increased line of credit borrowings by IGF due to an increase in cash flow requirements and an increase in applicable interest rates. This was partially offset by interest savings in 1995 over 1994 resulting from debt principal repayments and the retirement of a Company term loan in June 1995. [photographs of a building down right margin] Income Tax Expense. The effective tax rate in 1995 was 35.2% as compared to an effective tax rate of (52.2%) in 1994. The tax benefit in 1994 was due to a $1,492,000 reduction in the valuation allowance the Company had previously established for its deferred tax assets. Liquidity and Capital Resources The primary sources of funds available to the Company and its Subsidiaries are premiums, billing fees, expense reimbursements, investment income and proceeds from the maturity of invested assets. Such funds are used principally for the payment of claims, operating expenses, commissions, dividends and the purchase of investments. There is variability to cash outflows because of uncertainties regarding settlement dates for liabilities for unpaid losses. Accordingly, the Company maintains investment programs generally intended to provide adequate funds to pay claims without the forced sale of investments. Net cash provided by operating activities in 1996 was $10,003,000 compared to $9,654,000 in 1995 for an increase of $349,000. This increase was due to improved profitability and growth in written premiums. Loss payments in the nonstandard automobile insurance business tend to lag behind receipt of premiums thus providing cash for operations. Net cash provided by operating activities in 1995 was $9,654,000 compared to net cash used by operating activities of $3,302,000 in 1994. Operations in 1995 provided an additional $12,956,000 in cash compared to 1994 due to additional net earnings of $2,704,000 and cash flow provided of $5,109,000 relating to premium receipts and loss payments, including effects of reinsurance, due primarily to growth in operations with the remainder due to timing of tax and other liability payments. Net cash used in investing activities increased from $8,835,000 in 1995 to $92,769,000 in 1996. Included in 1996 was a $66,590,000 use of cash for the Acquisition. The remaining increase in cash used in investing activities in 1996 related to the growth in investments due to increased cash provided by operating activities. Net cash of $8,835,000 was used in investing activities in 1995 compared to net cash provided by investing activities in 1994 of $1,473,000. The increase in the use of cash in 1995 over 1994 primarily relates to investing of excess funds generated by additional operating earnings in fixed income securities. Due to the nature of insurance operations, the Company does not have a significant amount of expenditures on property and equipment. The primary items comprising the $93,550,000 of cash provided by financing activities in 1996 were the $48,000,000 of proceeds from the GGS Senior Credit Facility, $21,200,000 minority interest investment received as part of the formation of GGS Holdings and the funding of the Acquisition and $37,969,000 of proceeds from the Offering. Cash provided or used by financing activities in 1995 and 1994 primarily related to activity in the Company's line of credit for its crop segment. The nonstandard automobile segment generates sufficient cash from operations to preclude the need for working capital borrowings while the timing of receipts and payments in the crop segment is such that an operating line of credit is necessary. [photographs of a building down right margin and across top of page] After the Offering, the Company, on a stand-alone basis, requires funds to defray operating expenses consisting primarily of legal, accounting and other fees and expenses in connection with the disclosure and regulatory obligations of a public company. In order to satisfy its cash requirements, the Company intends to rely primarily on the fees from an administrative agreement between the Company and IGF (the "Administration Agreement") pursuant to which the Company provides certain executive management, accounting, investing, marketing, data processing and reinsurance services in exchange for a fee in the amount of $150,000 quarterly. In addition, the Company is currently in the process of seeking approval from the Indiana Department of Insurance to implement a new arrangement whereby the underwriting, marketing and administrative functions of IGF will be assumed by, and employees will be transferred to, IGFH. There can, however, be no assurance that the required regulatory approval will be obtained. In accordance with industry practice, the FCIC will continue to pay Buy-up Expense Reimbursement Payments to IGF, which will in turn pay management fees to IGFH. Accordingly, IGFH will be able to pay dividends to the Company to the extent that such fees exceed the operating and other expenses of IGFH. There can, however, be no assurance that IGFH will have sufficient excess cash flow to permit the payment of any dividends to the Company. As a result of the covenants contained in the credit agreement with respect to the GGS Senior Credit Facility, GGS Holdings and its subsidiaries, Pafco and Superior, are not expected to constitute a significant source of funds for the Company. The GGS Senior Credit Facility restricts the ability of GGS Management, Inc., a wholly-owned subsidiary of GGSH ("GGS Management") to undertake certain actions, including making, or permitting any of its subsidiaries to make, certain restricted payments in excess of $100,000 per year in the aggregate. For purposes of the GGS Senior Credit Facility, "restricted payments" include dividends in the form of cash or other tangible or intangible property (other than stock, options, warrants or other rights to purchase stock), as well as administrative, advisory, management and billing fees payable by GGS Management to any of its affiliates (other than investment banking fees payable to Goldman Sachs). As a result, this covenant restricts the ability of GGS Management to pay dividends to its parent company, GGS Holdings, in excess of $100,000 per year. GGS Management collects billing fees charged to policyholders of Pafco and Superior who elect to make their premium payments in installments. GGS Management also receives management fees under its management agreement with Pafco and Superior. When the Florida Department of Insurance approved the acquisition of Superior by GGS Holdings, it prohibited Superior from paying any dividends (whether extraordinary or not) for four years without the prior written approval of the Florida Department of Insurance, and extraordinary dividends, within the meaning of the Indiana Insurance Code, cannot be paid by Pafco without the prior approval of the Indiana Commissioner of Insurance. The management fees charged to Pafco and Superior by GGS Management are subject to review by the Indiana and Florida Departments of Insurance. The GGS Senior Credit Facility, with an outstanding principal balance of $48 million, matures on April 30, 2002 and will be repaid in 11 consecutive semi-annual installments, the first of which will occur on the first anniversary of the closing date of the GGS Senior Credit Facility. The first installments of principal repayments will be $3,128,000 and $2,886,500, respectively, with the remaining annual installments to be paid as follows: 1998 - $6,494,500; 1999 - $7,938,000; 2000 - $9,742,000; 2001 - $11,611,500; and 2002 $6,199,500. At the election of GGS Management, interest on the GGS Senior Credit Facility shall be payable either at the "Base Rate" option or LIBOR option, plus in each case the applicable margin. The Base Rate is defined as the higher of (i) the federal funds rate plus 1/2 of 1% or (ii) the prime commercial lending rate of the lending bank. LIBOR is defined as an annual rate equal to the London Interbank Offered Rate for the corresponding deposits of U.S. dollars. The applicable margin for Base Rate loans is 1.50% and for LIBOR loans is 2.75%. In May, 1996, the Company entered into an interest rate swap agreement to protect the Company against interest rate volatility. As a result, the Company fixed its interest rate on the GGS Senior Credit Facility at 8.85% through January 31, 1997, 9.08% through April 30, 1997, 9.24% through July 30, 1997 and 8.80% through October 30, 1999. The GGS Senior Credit Facility is collateralized by a pledge of all of the tangible and intangible assets of GGS Holdings, including all of the outstanding shares of GGS Management, and by a pledge of all of the tangible and intangible assets of GGS Management, including all of the outstanding shares of capital stock of Pafco and Superior. GGS Management intends to rely primarily on management fees from Pafco and Superior and billing fee income to satisfy these debt service requirements which are subject to review by the Indiana and Florida Departments of Insurance. As of December 31, 1996, GGS Management was in default of three covenants in the GGS Senior Credit Facility. The first covenant requires Pafco and Superior to maintain a combined ratio of statutory net premiums written for the prior four quarters to surplus of 3:1 (three dollars of premiums to 1 dollar of surplus). As at December 31, 1996 such ratio was 3.06:1. The commercial bank lenders under the GGS Senior Credit Facility amended the agreement to cure this default for the four consecutive fiscal quarters ended December 31, 1996. As of December 31, 1996, GGS Management contributed additional capital to Pafco $3,737,000 and GGS Holdings contributed $4,800,000 to Superior in the form of a note payable, due March 28, 1997, of which the Company guaranteed $2,496,000. The Company loaned $500,000 to GGS Holdings, which was used to fund a portion of the note at December 31, 1996. The outstanding balance of the note payable from GGS Holdings to Superior of $4,300,000 at December 31, 1996 was funded by its due date. The Company believes that premium volume in 1997 will be at a level where capital contributions from GGS Management will be necessary to maintain compliance with this covenant. The Company believes GGS Management will have sufficient cash flow after debt service to provide a significant portion of this capital need. However, GGS Management believes, based on 1997 projcted premium writings, it will need to either obtain reinsurance, reduce premium writings or obtain additional funding of approximately $12,000,000 from either SIG or additional financing. The Company is currently exploring its options including negotiating with its lenders. Should the Company experience less than satisfactory loss experience, it will reduce its premium writings either internally or through additional reinsurance. Certain factors will influence the Company's ability to maintain adequate capital including actual level of premium writings, loss trends, commission rates, investment yields and cash flow. There can be no assurance that GGS Management's plans will provide adequate capital. The second covenant violation relates to insufficient funds posted by an affiliate reinsurer to cover ceded premiums and loss reserves. Such deficiency was approximately $770,000 at December 31, 1996, or less than 10% of total funds required to be held for ceded premiums and loss reserves. In addition to cash, the affiliate had posted a $1.5 Million letter of credit as of December 31, 1996. However, reserve development calculated subsequent to December 31 created most of the deficiency. The affiliate has posted sufficient funds in March, 1997 and the Company doesnot expect future violations of this covenant to occur. The commercial bank lenders have agreed in writing that this violation has been cured. The third covenant violation relates to Superior's risk-based capital rating being less than 3 to 1 as of December 31, 1996 due to premium growth. The commercial bank lenders have amended the agreement to cure this violation as of December 31, 1996. The Company believes cash flows in the nonstandard automobile segment from premiums, investment income and billing fees are sufficient to meet that segment's obligations to policyholders, operating expenses and debt service on both a short and long term basis. This is due primarily to the lag time between receipt of premiums and claims payments. Therefore, the Company does not anticipate additional borrowings for this segment other than in the event of an acquisition or funding of surplus for premium growth. The Company also believes cash flows in the crop segment from premiums and expense reimbursements are sufficient to meet the segment's obligations on both a short and long term basis. Due to the more seasonal nature of the crop segment's operations, it is necessary to obtain short term funding at times during a calendar year in the form of an existing line of credit. Except for this short term funding and normal increases therein resulting from an increase in the business in force, the Company does not anticipate any significant short or long term additional borrowing needs for this segment. Accordingly, while there can be no assurance as to the sufficiency of the Company's cash flow in future periods, the Company believes that its cash flow will be sufficient to meet all of the Company's operating expenses and debt service for the foreseeable future and, therefore, does not anticipate additional borrowings except as may be necessary to finance acquisitions or funding of surplus for premium growth. While GAAP shareholders' equity was $60,900,000 at December 31, 1996, it does not reflect the statutory equity upon which the Company conducts its various insurance operations. Pafco, Superior and IGF individually had statutory surplus at December 31, 1996 of $18,112,000, $57,121,000 and $29,412,000, respectively. Cash flows in the Company's MPCI business differ from cash flows from certain more traditional lines. The Company pays insured losses to farmers as they are incurred during the growing season, with the full amount of such payments being reimbursed to the Company by the federal government within three business days. MPCI premiums are not received from farmers until covered crops are harvested. Such premiums are required to be paid over in full to the FCIC by the Company, with interest, if not paid by a specified date in each crop year. During 1996, IGF continued the practice of borrowing funds under a revolving line of credit to finance premium payables to the FCIC on amounts not yet received from farmers (the "IGF Revolver"). The maximum borrowing amount under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a weighted average interest rate of 6.0%, 8.1%, 9.7% and 8.6%, in 1993, 1994, 1995 and 1996, respectively. These payables to the FCIC accrue interest at a rate of 15%, as do the receivables from farmers. By utilizing the IGF Revolver, which bears interest at a floating rate equal to the prime rate plus 1/4%, IGF avoids incurring interest expense at the rate of 15% on interest payable to the FCIC while continuing to earn 15% interest on the receivables due from the farmer. The IGF Revolver contains certain covenants which restrict IGF's ability to (i) incur indebtedness, (ii) declare dividends or make any capital distribution upon its stock whether through redemption or otherwise, and (iii) make loans to others, including affiliates. The IGF Revolver also contains other customary covenants which, among other things, restricts IGF's ability to participate in mergers, acquire another enterprise or participate in the organization or creation of any other business entity. At December 31, 1996, $7,000,000 remains available under the IGF Revolver. At December 31, 1996, IGF was in compliance with all covenants associated with the line, except the covenant pertaining to certain investments as a percentage of total admitted assets, for which IGF obtained a waiver. Effects of Inflation Due to the short term that claims are outstanding in the two product lines the Company underwrites, inflation does not pose a significant risk to the Company. Primary Variances Between GAAP and SAP The financial statements in this Annual Report have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ from statutory accounting practices ("SAP") prescribed or permitted for insurance companies by regulatory authorities in the following respects: Certain assets are excluded as "Nonadmitted Assets" under statutory accounting. Costs incurred by the Company relating to the acquisition of new business are expensed for statutory purposes. The investment in wholly owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method. The net income or loss and changes in unassigned surplus of the subsidiaries is reflected in net income for the period rather than recorded directly to unassigned surplus. Fixed maturity investments are reported at amortized cost or market value based on their National Association of Insurance Commissioners ("NAIC") rating. The liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes. Deferred income taxes are not recognized on a statutory basis. Credits for reinsurance are recorded only to the extent considered realizable. Under SAP, credit for reinsurance ceded are allowed to the extent the reinsurers meet the statutory requirements of the Insurance Departments of the States of Indiana and Florida, principally statutory solvency. New Accounting Standards On January 1, 1994, the Company adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of January 1, 1994 of adopting Statement 115 has no effect on net income. The effect of this change in accounting principle was an increase in stockholders' equity of $139,000, net of deferred taxes of $73,000 on net unrealized gains on fixed maturities classified as available for sale that were previously carried at amortized cost. On January 1, 1996, the Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement is effective for financial statements for fiscal years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations. In December 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. It introduces the use of a fair-value based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize compensation expense for stock-based compensation to employees based on the new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". However, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company has chosen not to adopt the new rules but has provided the appropriate disclosure as required. In February 1996, SFAS No. 128, Earning Per Share, was issued. This Statement establishes standards for computing and presenting Earnings per Share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simpliflies the standards for computing Earning per Share previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presention of basic and diluted EPS on the face of theincome statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. The Company has not yet determined the effects of adopting this Statement. The National Association of Insurance Commissioners ("NAIC") is considering the adoption of a recommended statutory accounting standard for crop insurers, the impact of which is uncertain since several methodologies are currently being examined. Although the Indiana Department has permitted the Company to continue, for its statutory financial statements through December 31, 1996, its practice of recording its MPCI business as 100% ceded to the FCIC with net underwriting results recognized in ceding commissions, the Indiana Department of Insurance has indicated that in the future it will require the Company to adopt the MPCI accounting practices recommended by the NAIC or any similar practice adopted by the Indiana Department of Insurance. Since such a standard would be adopted industry wide for crop insurers, the Company would also be required to conform its future GAAP financial statements to reflect the new MPCI statutory accounting methodology and to restate all historical GAAP financial statements consistently with this methodology for comparability. The Company can not predict what accounting methodology will eventually be implemented or when the Company will be required to adopt such methodology. The Company anticipates that any such new crop accounting methodology will not affect GAAP net income. The NAIC currently has a project under way to codify SAP, as existing SAP does not address all accounting issues and may differ from state to state. Upon completion, the Codification is expected to replace prescribed or permitted SAP in each state as the new comprehensive statutory basis of accounting for insurance companies. The final format of the Codification is uncertain at this time, yet implementation could be required as early as January 1, 1998. Due to the project's uncertainty, the Company has not yet quantified the impact any such changes would have on the statutory capital and surplus or results of operations of the Company's insurance subsidiaries. The impact of adopting this new comprehensive statutory basis of accounting is, however, expected to materially impact statutory capital and surplus. Consolidated FINANCIAL STATEMENTS as of December 31, 1996 and 1995 (in thousands, except share data) - -------------------------------------------------------------------------------- Consolidated Balance Sheets - -------------------------------------------------------------------------------- Assets 1996 1995 Investments Available for sale: Fixed maturities, at market $127,681 $12,931 Equity securities, at market 27,920 4,231 Short-term investments, at amortized cost, which approximates market 9,565 5,283 Real estate, at cost 466 487 Mortgage loans, at cost 2,430 2,920 Other 75 50 -------- -------- Total investments 168,137 25,902 Investments in and advances to related parties 1,152 2,952 Cash and cash equivalents 13,095 2,311 Receivables (net of allowance for doubtful accounts of $1,480 and $927 in 1996 and 1995, respectively) 65,194 8,203 Reinsurance recoverable on paid and unpaid losses, net 48,294 54,136 Prepaid reinsurance premiums 14,983 6,263 Federal income taxes recoverable 319 --- Deferred policy acquisition costs 12,800 2,379 Deferred income taxes 3,329 1,421 Property and equipment, net of accumulated depreciation 8,137 5,502 Other assets 9,239 1,447 -------- -------- Total assets $344,679 $110,516 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Losses and loss adjustment expenses $101,719 $ 59,421 Unearned premiums 87,285 17,497 Reinsurance payables 6,508 6,206 Payables to affiliates 366 6,474 Federal income tax payable --- 133 Line of credit and notes payable --- 5,811 Term debt 48,000 --- Other 18,291 5,439 -------- -------- Total liabilities 262,169 100,981 -------- -------- Minority interest in consolidated subsidiary 21,610 --- -------- -------- Commitments and contingencies Stockholders' equity: Common stock, no par value, 100,000,000 shares authorized, 10,450,000 and 7,000,000 shares issued and outstanding in 1996 and 1995, respectively 38,969 1,000 Additional paid-in capital 5,905 3,130 Unrealized gain (loss) on invest- ments, net of deferred tax of $625 in 1996 and $(23) in 1995 820 (45) Retained earnings 15,206 5,450 -------- -------- Total stockholders' equity 60,900 9,535 -------- -------- Total liabilities and stockholders' equity $344,679 $110,516 ======== ======== Consolidated FINANCIAL STATEMENTS for the years ended December 31, 1996, 1995 and 1994 (in thousands, except per share data) - -------------------------------------------------------------------------------- Consolidated Statements of Earnings - -------------------------------------------------------------------------------- 1996 1995 1994 Gross premiums written $ 305,499 $ 124,634 $ 103,134 Less ceded premiums (95,907) (71,187) (67,995) --------- --------- --------- Net premiums written 209,592 53,447 35,139 Change in unearned premiums (17,833) (3,806) (3,013) Net premiums earned 191,759 49,641 32,126 Net investment income 6,733 1,173 1,241 Other income 9,286 2,170 1,632 Net realized capital loss (1,015) (344) --------- --------- --------- Total revenues 206,763 52,640 34,840 --------- --------- --------- Expenses: Losses and loss adjustment expenses 137,109 35,971 26,470 Policy acquisition and general and administrative expenses 42,013 7,981 5,801 Interest expense 3,938 1,248 1,184 Total expenses 183,060 45,200 33,455 --------- --------- --------- Earnings before income taxes and minority interest 23,703 7,440 1,385 --------- --------- --------- Income taxes: Current income tax expense 7,982 2,275 462 Deferred income tax expense (benefit) 64 344 (1,180) Total income taxes 8,046 2,619 (718) --------- --------- --------- Net earnings before minority interest 15,657 4,821 2,103 Minority interest (2,401) --- 14 --------- --------- --------- Net earnings $ 13,256 $ 4,821 $ 2,117 ========= ========= ========= Weighted average shares outstanding 7,537 7,000 7,000 ========= ========= ========= Net earnings per share $ 1.76 $ 0.69 $ 0.30 ========= ========= ========= Consolidated FINANCIAL STATEMENTS for the years ended December 31, 1996, 1995 and 1994 (in thousands) - -------------------------------------------------------------------------------- Consolidated Statements of Changes in Stockholders' Equity - --------------------------------------------------------------------------------
Unrealized Additional Gain(Loss) Retained Total Common Paid-in on Earnings Stockholders' Stock Capital Investments (Deficit) Equity ----- ------- ----------- --------- ------ Balance at January 1, 1994 $ 1,000 $3,130 $ (423) $ (1,488) $ 2,219 Unrealized gain on fixed maturities resulting from a change in accounting principle, net of deferred taxes --- --- 139 --- 139 Change in unrealized loss on investments, net of deferred taxes --- --- (220) --- (220) Net earnings --- --- --- 2,117 2,117 ------- ------ ------- -------- ------- Balance at December 31, 1994 1,000 3,130 (504) 629 4,255 Change in unrealized loss on investments, net of deferred taxes --- --- 459 --- 459 Net earnings --- --- --- 4,821 4,821 ------- ------ ------- -------- ------- Balance at December 31, 1995 1,000 3,130 (45) 5,450 9,535 Sale of subsidiary stock --- 2,775 --- --- 2,775 Change in unrealized loss on investments, net of deferred taxes --- --- 865 --- 865 Issuance of common stock 37,969 --- --- --- 37,969 Dividend to parent --- --- --- (3,500) (3,500) Net earnings --- --- --- 13,256 13,256 ------- ------ ------- -------- ------- Balance at December 31, 1996 $38,969 $5,905 $ 820 $ 15,206 $60,900 ======= ====== ======= ======== =======
Consolidated Statements of Cash Flows for the years ended December 31, 1996,1995 and 1994 (in thousands) 1996 1995 1994 Cash flows from operating activities: Net earnings $ 13,256 $ 4,821 $ 2,117 Adjustments to reconcile net earnings to net cash provided from (used in) operations: Minority interest 2,401 --- (14) Depreciation and amortization 2,194 742 690 Deferred income tax expense (benefit) 64 344 (1,180) Net realized capital loss 1,015 344 159 Net changes in operating as sets and liabilities (net of assets acquired): Receivables (22,673) 6,462 (9,057) Reinsurance recoverable on paid and unpaid losses, net 5,842 (41,250) (25,130) Prepaid reinsurance premiums (8,720) 725 (3,343) Federal income taxes recoverable (payable) (1,270) 325 759 Deferred policy acquisition costs (2,496) (900) (727) Other assets (2,923) 1,019 98 Losses and loss adjustment expenses (2,125) 30,152 (24,874) Reinsurance payables (1,978) 2,133 1,982 Unearned premiums 24,508 3,081 6,356 Other liabilities 2,908 1,656 (1,398) -------- -------- -------- Net cash provided from (used in) operations 10,003 9,654 (3,302) -------- -------- -------- Cash flow from investing activities: Cash paid for Superior (66,590) --- --- Net sales (purchases) of short-term investments 8,026 (4,493) (308) Proceeds from sales, calls and maturities of fixed maturities 56,903 8,603 8,460 Purchases of fixed maturities (73,503) (12,517) (7,587) Proceeds from sales of equity securities 19,796 29,599 10,510 Purchase of equity securities (34,157) (28,173) (10,122) Proceeds from the sale of real estate --- --- 1,165 Purchases of mortgage loans --- (100) (50) Proceeds from repayment of mortgage loans 490 120 60 Purchase of property and equipment (3,734) (1,874) (655) -------- -------- -------- Net cash (used in) provided from investing activities (92,769) (8,835) 1,473 -------- -------- -------- Cash flow from financing activities: Proceeds from initial public offering, net of expenses 37,969 --- --- Proceeds from line of credit and notes payable --- 1,620 26,900 Proceeds from term debt 48,000 0 --- Payments on line of credit and notes payable (5,811) (1,250) (26,459) Proceeds from consolidated subsidiary minority interest owner 21,200 --- --- Payment of dividend to parent (3,500) --- --- Repayments from related parties 1,800 44 711 Loans from and (repayments to) related parties (6,108) 1,036 425 -------- -------- -------- Net cash provided from financing activities 9,355 1,450 1,577 -------- -------- -------- Increase (decrease) in cash and cash equivalents 10,784 2,269 (252) Cash and cash equivalents, beginning of year 2,311 42 294 -------- -------- -------- Cash and cash equivalents, end of year $ 13,095 $ 2,311 $ 42 ======== ======== ======== Notes to Consolidated Financial Statements (Dollars in thousands) SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- 1. Nature of Operations and Significant Accounting Policies: Symons International Group, Inc. (the "Company") is a 67% owned subsidiary of Goran Capital, Inc. (Goran). The Company is primarily involved in the sale of personal nonstandard automobile insurance and crop insurance. Nonstandard automobile represents approximately 61% of the Company's premium volume. The Company's products are marketed through independent agents and brokers, within a 31-state area, primarily in the Midwest and Southern United States. The following is a description of the significant accounting policies and practices employed: a. Principles of Consolidation: The consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its subsidiaries as follows: GGS Management Holdings, Inc. (GGSH)-a holding company for the nonstandard automobile operations which includes GGS Management, Inc., Pafco General Insurance Company, Pafco Premium Finance Company and the Superior entities, as described below - 52% owned; GGS Management, Inc. (GGS)-a management company for the nonstandard automobile operations-52% owned; Superior Insurance Company (Superior)-an insurance company domiciled in Florida-52% owned; Superior American Insurance Company (Superior American)-an insurance company domiciled in Florida-52% owned; Superior Guaranty Insurance Company (Superior Guaranty)-an insurance company domiciled in Florida-52% owned; Pafco General Insurance Company (Pafco)-an insurance company domiciled in Indiana-52% owned; Pafco Premium Finance Company (PPFC)-an Indiana-based premium finance company-52% owned; IGF Holdings, Inc. (IGFH)-a holding company for the crop operations which includes IGF and Hail Plus Corp.-100% owned; IGF Insurance Company (IGF)-an insurance company domiciled in Indiana-100% owned; and Hail Plus Corp.-an Iowa-based premium finance company-100% owned. On January 31, 1996, the Company entered into an agreement with GS Capital Partners II, L.P. (Goldman Funds) to create a company, GGSH, to be owned 52% by the Company and 48% by Goldman Funds. GGSH created GGS, a management company for the nonstandard automobile operations which include PGIC and the Superior entities. On April 30, 1996, GGSH acquired the Superior entities through a purchase business combination. The Company's Consolidated Results of Operations for the year ended December 31, 1996 include the results of operations of the Superior entities subsequent to April 30, 1996. (See Note 2.) Notes to Consolidated Financial Statements (Dollars in thousands) On January 1, 1996, the Company sold its excess and surplus lines insurance operations, Symons International Group, Inc. of Florida (SIGF), with a net book value of $2, to Goran for $2. Accordingly, no gain or loss was recognized in 1996 on the transaction. b. Basis of Presentation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) which differ from statutory accounting practices (SAP) prescribed or permitted for insurance companies by regulatory authorities in the following respects: Certain assets are excluded as "Nonadmitted Assets" under statutory accounting. Costs incurred by the Company relating to the acquisition of new business are expensed for statutory purposes. The investment in wholly owned subsidiaries is consolidated for GAAP rather than valued on the statutory equity method. The net income or loss and changes in unassigned surplus of the subsidiaries is reflected in net income for the period rather than recorded directly to unassigned surplus. Fixed maturity investments are reported at amortized cost or market value based on their National Association of Insurance Commissioners' (NAIC) rating. The liability for losses and loss adjustment expenses and unearned premium reserves are recorded net of their reinsured amounts for statutory accounting purposes. Deferred income taxes are not recognized on a statutory basis. Credits for reinsurance are recorded only to the extent considered realizable. Under SAP, credit for reinsurance ceded are allowed to the extent the reinsurers meet the statutory requirements of the Insurance Departments of the States of Indiana and Florida, principally statutory solvency. c. Use of Estimates: The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. Net earnings and capital and surplus for the insurance subsidiaries reported on the statutory accounting basis is as follows: 1996 1995 1994 Capital and surplus: Superior entities $57,121 N/A N/A PGIC 18,112 11,875 7,848 IGF 29,412 9,219 4,512 Net earnings (losses): Superior entities 1,978 N/A N/A PGIC 5,151 (553) (571) IGF 12,122 6,574 1,511 d. Premiums: Premiums are recognized as income ratably over the life of the related policies and are stated net of ceded premiums. Unearned premiums are computed on the semimonthly pro rata basis. Notes to Consolidated Financial Statements (Dollars in thousands) e. Investments: Investments are presented on the following bases: Fixed maturities and equity securities-at market value-all such securities are classified as available for sale and are carried at market value with the unrealized gain or loss as a component of stockholders' equity, net of deferred tax, and accordingly, has no effect on net income. Real estate-at cost, less allowances for depreciation. Mortgage loans-at outstanding principal balance. Realized gains and losses on sales of investments are recorded on the trade date and are recognized in net income on the specific identification basis. Interest and dividend income are recognized as earned. f. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company includes in cash and cash equivalents all cash on hand and demand deposits with original maturities of three months or less. g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are comprised of agents' commissions, premium taxes and certain other costs which are related directly to the acquisition of new and renewal business, net of expense allowances received in connection with reinsurance ceded, which have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. These costs are deferred and amortized over the terms 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 those 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 31.5 years and the declining balance method for other property and equipment over their estimated useful lives ranging from five to seven years. Asset and accumulated depreciation accounts are relieved for dispositions, with resulting gains or losses reflected in net income. i. Other Assets: Other assets consists primarily of goodwill, debt acquisition costs, and organization costs. Goodwill resulting from the acquisition of the Superior entities is amortized over a 25-year period on a straight-line basis based upon management's estimate of the expected benefit period. Deferred debt acquisition costs are amortized over the term of the debt (six years). Organization costs are amortized over five years. j. Losses and Loss Adjustment Expenses: Reserves for losses and loss adjustment expenses include estimates for reported unpaid losses and loss adjustment expenses and for estimated losses incurred but not reported. These reserves have not been discounted. The Company's losses and loss adjustment expense reserves include an aggregate stop-loss program. The Company retains an independent actuarial firm to estimate reserves. Reserves are established using individual case-basis valuations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves are adequate, the provisions for losses and loss adjustment expenses are necessarily based on estimates and are subject to considerable variability. Changes in the estimated reserves are charged or credited to operations as additional information on the estimated amount of a claim becomes known during the course of its settlement. The reserves for losses and loss adjustment expenses are reported net of the receivables for salvage and subrogation of approximately $4,766 and $948 at December 31, 1996 and 1995, respectively. Notes to Consolidated Financial Statements (Dollars in thousands) k. 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. Changes in future tax rates will result in immediate adjustments to deferred taxes. (See Note 11.) 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. l. Reinsurance: Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. m. Certain Accounting Policies for Crop Insurance Operations: In 1996, IGF instituted a policy of recognizing (i) 35% of its estimated Multi Peril Crop Insurance (MPCI) gross premiums written for each of the first and second quarters, (ii) commission expense at a rate of 16% of MPCI gross premiums written recognized and (iii) Buy-up Expense Reimbursement at a rate of 31% of MPCI gross premiums written recognized along with normal operating expenses incurred in connection with premium writings. In the third quarter, if a sufficient volume of policyholder acreage reports have been received and processed by IGF, IGF's policy is to recognize MPCI gross premiums written for the first nine months based on a reestimate which takes into account actual gross premiums processed. IGF followed the foregoing approach for the 1996 third quarter. If an insufficient volume of policies has been processed, IGF's policy is to recognize in the third quarter 20% of its full year estimate of MPCI gross premiums written, unless other circumstances require a different approach. The remaining amount of gross premiums written is recognized in the fourth quarter, when all amounts are reconciled. In prior years, recognition of MPCI gross premiums written was 30%, 30%, 30% and 10%, for the first, second, third and fourth quarters, respectively. Commencing with its June 30, 1995 financial statements, IGF also began recognizing MPCI underwriting gain or loss during the first and second quarters, as well as the third quarter, reflecting IGF's best estimate of the amount of such gain or loss to be recognized for the full year, based on, among other things, historical results, plus a provision for adverse developments. n. Accounting Changes: On January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, (Statement 115). In accordance with Statement 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of January 1, 1994 of adopting Statement 115 had no effect on net earnings. The effect of this change in accounting principle was an increase to stockholders' equity of $139, net of deferred taxes of $73, of net unrealized gains on fixed maturities classified as available for sale that were previously carried at amortized cost. On January 1, 1996, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement is effective for financial statements for fiscal years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations. In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was issued. It introduces the use of a fair value-based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize compensation expense for stock-based compensation to employees based on the new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. However, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company has adopted the disclosure provisions of SFAS No. 123 (see Note 22). Notes to Consolidated Financial Statements (Dollars in thousands) In February 1996, SFAS No. 128, Earnings per Share, was issued. This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. This statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This statement requires restatement of all prior period EPS data presented. The Company has not yet determined the effects of adopting this statement. o. Vulnerability from Concentration: At December 31, 1996, the Company did not have a material concentration of financial instruments in an industry or geographic location. Also at December 31, 1996, the Company did not have a concentration of (1) business transactions with a particular customer, lender or distributor, (2) revenues from a particular product or service, (3) sources of supply of labor or services used in the business, or (4) a market or geographic area in which business is conducted that makes it vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a serious impact to the Company's financial condition. p. Earnings Per Share: The Company's net earnings per share calculations are based upon the weighted average number of shares of common stock outstanding during each period, as restated for the 7,000-for-1 stock split. The weighted average shares outstanding in 1996 have been increased by 44,000 shares for the $3.5 million dividend paid to Goran from the proceeds of the offering, in accordance with generally accepted accounting principles. Stock options were not considered to be common stock equivalents and, thus, not included in the calculation of earnings per share as the Company's shares have been traded for less than one calendar quarter. 2. Corporate Reorganization and Acquisition: In April 1996, Pafco contributed all of the outstanding shares of capital stock of IGF to IGF Holdings, a wholly owned and newly formed subsidiary of Pafco, and the Board of Directors of IGF Holdings declared an $11,000 distribution to Pafco in the form of cash of $7,500 and a note payable of $3,500 (PGIC Note). IGFH borrowed the $7,500 portion of the distribution from a bank (IGFH Note). The notes were paid in full from the proceeds of the Offering. Immediately following the distribution, Pafco distributed all of the outstanding common stock of IGF Holdings to the Company. Although the Company believes the plan of reorganization or spin off did not result in gain or loss, no assurance can be given that the Internal Revenue Service will not challenge the transaction. Notes to Consolidated Financial Statements (Dollars in thousands) On January 31, 1996, the Company entered into an agreement (Agreement) with GS Capital Partners II, L.P. to create GGSH, to be owned 52% by the Company and 48% owned by the Goldman Funds. In accordance with the Agreement, on April 30, 1996, the Company contributed certain fixed assets and PGIC with a combined book value, determined in accordance with generally accepted accounting principles, of $17,186, to GGSH. Goldman Funds contributed $21,200 to GGSH, in accordance with the Agreement. In return for the cash contribution of $21,200, Goldman Funds received a minority interest share in GGSH at the date of contribution of $18,425, resulting in a $2,775 increase to additional paid-in capital. At December 31, 1996, Goldman Funds' minority interest share consisted of the following: Contribution, April 30, 1996 $18,425 GGSH earnings 2,401 Unrealized gains, net of deferred tax of $599 784 ------- $21,610 ======= In connection with the above transactions, GGSH acquired (the "Acquisition") all of the outstanding shares of common stock of Superior Insurance Company and its wholly owned subsidiaries, domiciled in Florida, (collectively referred to as "Superior") for cash of $66,590. In conjunction with the Acquisition, the Company's funding was through a senior bank facility of $48,000 and a cash contribution from Goldman Funds of $21,200. The acquisition of Superior was accounted for as a purchase and was recorded as follows: Assets acquired: Invested assets $118,665 Receivables 34,933 Deferred acquisition 7,925 Other assets 2,082 -------- Total 163,605 -------- Liabilities assumed: Unpaid losses and loss adjustment expense 44,423 Unearned premiums 45,280 Other liabilities 10,863 -------- Total 100,566 -------- Net assets required 63,039 Purchase price 65,590 -------- Excess purchase price 3,551 Less amounts allocated to deferred income taxes on unrealized gains on investments 1,334 -------- Goodwill $ 2,217 ======== Notes to Consolidated Financial Statements (Dollars in thousands) 2. Corporate Reorganization and Acquisitin, continued: The Company's results from operations for the year ended December 31, 1996 include the results of Superior subsequent to April 30, 1996. 3. Initial Public Offering: On November 5, 1996, the Company sold 3,000,000 shares at $12.50 per share in an initial public offering of common stock (the "Offering"). An additional 450,000 shares were sold in December 1996 representing the exercise of the overallotment option. The Company generated net proceeds, after underwriter's discount and expenses, of $37,900 from the Offering. The proceeds were used to repay the IGFH Note and PGIC Note totaling $11,000, repay indebtedness to Goran and Granite Re of approximately $7,500, pay Goran a dividend of $3,500 and contribute capital to IGF of $9,000. The remainder will be used for general corporate purposes, including acquisitions. After completion of the Offering, Goran owns 67% of the total common stock outstanding. Assuming that these transactions, described in Notes 2 and 3, took place (including the Offering) at January 1, 1995 or at January 1, 1996, the pro forma effect of these transactions on the Company's Consolidated Statements of Earnings is as follows: 1996 1995 (unaudited) Revenues $250,848 $159,899 ======== ======== Net Income 15,238 6,701 ======== ======== Net Income per common share 1.42 0.65 ======== ======== Assuming that these transactions took place (including the Offering) at January 1, 1995 or January 1, 1996 and that shares outstanding only included shares issued in connection with the IPO whose proceeds were used to repay indebtedness, the pro forma effect of these transactions on the Company's net income per common share is as follows: 1996 1995 (unaudited) Net Income per common share $ 1.86 $ 0.81 ======== ======== Outstanding shares used in the above calculation include the 7,000,000 shares outstanding before the Offering plus 1,200,000 shares issued in connection with the Offering whose proceeds were used to pay external indebtedness. The latter calculation was determined by dividing the aggregate amount of the repayment of the $7.5 million IGFH Note and the $7.5 million repayment of parent indebtedness by the Offering price of $12.50 per share. The pro forma results are not necessarily indicative of what actually would have occurred if these transactions had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results. Notes to Consolidated Financial Statements (Dollars in thousands) 4. Investments: Investments are summarized as follows:
Cost or Estimated Amortized Unrealized Market December 31, 1996 Cost Gain Loss Value --------- ----------------------- --------- Fixed maturities: U.S. Treasury securities and obligations of U.S. government operations and agencies $ 55,034 $ 343 $ (233) $ 55,144 Foreign governments 1,515 0 (30) 1,485 Obligations of states and political subdivisions 2,945 11 (4) 2,952 Corporate securities 67,545 977 (422) 68,100 --------- --------- --------- --------- Total Fixed Maturities $127,039 $ 1,331 $ (689) $ 127,681 --------- --------- --------- --------- Equity Securities: Common stocks 25,734 2,884 (698) 27,920 Short-term investments 9,565 0 0 9,565 Real Estate 466 0 0 466 Mortgage Loans 2,430 0 0 2,430 Other loans 75 0 0 75 --------- --------- --------- --------- Total Investments $ 165,309 $ 4,215 $ (1,387) $ 168,137 ========= ========= ========= ========= December 31, 1995 Fixed maturities: U.S. Treasury securities and obligations of U.S. government operations and agencies $ 10,978 $ 63 $ (1) $ 11,040 Obligations of states and political subdivisions 1,470 57 (1) 1,526 Corporate securities 364 1 0 365 --------- --------- --------- --------- Total Fixed Maturities $ 12,812 $ 121 $ (2) $ 12,931 --------- --------- --------- --------- Equity Securities: Preferred stocks 100 1 (4) 97 Common stocks 4,318 108 (292) 4,134 Short-term investments 5,283 0 0 5,283 Real Estate 487 0 0 487 Mortgage Loans 2,920 0 0 2,920 Other loans 50 0 0 50 --------- --------- --------- --------- Total Investments $ 25,970 $ 230 $ (298) $ 25,902 ========= ========= ========= =========
Notes to Consolidated Financial Statements (Dollars in thousands) 4. Investments, continued: At December 31, 1996, 90.2% of the Company's fixed maturities were considered investment grade by The Standard & Poors Corporation or Moody's Investor Services, Inc. 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, 1996, by contractual maturity, are shown in the table which follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty: Estimated Amortized Market Maturity: Cost Value -------- -------- Due in one year or less $ 6,412 $ 6,423 Due after one year through five years 70,848 71,086 Due after five years through ten years 43,109 43,404 Due after ten years 6,670 6,768 -------- -------- Total $127,039 $127,681 ======== ======== Gains and losses realized on sales of investments in fixed maturities are as follows: 1996 1995 1994 Proceeds from sales $40,153 $7,903 $4,083 Gross gains realized 92 106 119 Gross losses realized 561 291 29 Real Estate is reported net of accumulated depreciation of $164 and $143 for 1996 and 1995, respectively. Investments in a single issuer greater than 10% of stockholders' equity at December 31, 1996 are as follows: Fixed Description Maturities ---------- United States Treasury Notes $26,318 Federal National Mortgage Association $41,203 Notes to Consolidated Financial Statements (Dollars in thousands) An analysis of net investment income for the years ended December 31, 1996, 1995, and 1994 follows: 1996 1995 1994 Fixed maturities $5,714 $ 534 $ 470 Equity securities 756 256 677 Cash and short-term investments 281 194 99 Real Estate 51 52 273 Mortgage Loans 207 231 132 Other 25 270 96 Total Investment Income 7,034 1,537 1,747 Investment expenses (301) (364) (506) ------ ------ ------ Net Investment Income $6,733 $1,173 $1,241 ====== ====== ====== In 1992, PGIC acquired a hotel property through a deed in lieu of foreclosure on a mortgage it held in the amount of $2,985. In 1993, the property was renovated and changed to a Comfort Inn. In June 1994, the property was sold for net proceeds of $4,166, resulting in a gain on sale of $147. Upon the sale, PGIC issued an 8% mortgage loan due in the year 2001 in the amount of $3,000. It calls for monthly principal payments of $10 plus interest. All payments on the mortgage were current at December 31, 1996. Investments with a market value of $23,419 and $6,410 (amortized cost of $22,749 and $6,296) as of December 31, 1996 and 1995, respectively, were on deposit in the United States and Canada. The deposits are required by law to support certain reinsurance contracts, performance bonds and outstanding loss reserves on assumed business. Fixed maturities and short-term investments with a market value of $1,539 (amortized cost of $1,571) as of December 31, 1996 were pledged as collateral on an unused letter of credit of $1,500 issued to a ceding reinsurer. 5. 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: 1996 1995 1994 Balance, beginning of year $ 2,379 $ 1,479 $ 752 Deferred policy acquisition costs purchased in the Superior acquisition 7,925 0 0 Costs deferred during year 27,657 8,050 5,579 Amortization during year (25,161) (7,150) (4,852) -------- ------- ------ Balance, end of year $ 12,800 $ 2,379 $1,479 ======== ======= ====== Notes to Consolidated Financial Statements (Dollars in thousands) 6. Property and Equipment: Property and equipment at December 31 are summarized as follows: 1996 Accumulated 1996 1995 Cost Depreciation Net Net ------- ------------- ------ ------ Land $ 226 $ 0 $ 226 $ 226 Buildings 4,342 (1,186) 3,156 3,209 Office furniture and equipment 2,032 (999) 1,024 610 Automobiles 20 (7) 13 1 Computer equipment 5,535 (1,817) 3,718 1,456 ------- ------- ------ ------ $12,146 $(4,009) $8,137 $5,502 ======= ======= ====== ====== Accumulated depreciation at December 31, 1995 was $2,226. Depreciation expense related to property and equipment for the years ended December 31, 1996, 1995 and 1994 were $1,783, $637, and $374, respectively. 7. Other Assets: Other assets at December 31, 1996 includes the following intangible assets: Accumulated Amortization Cost Amortization Expense ---- ------------ ------- Goodwill $2,217 $ 95 $ 95 Deferred debt costs 1,386 154 154 Organization costs 1,689 162 162 ----- --- --- 5,292 411 411 ===== === === No such amounts existed at December 31, 1995. 8. Line of Credit: At December 31, 1996, IGF maintained a revolving bank line of credit in the amount of $7,000. At December 31, 1996 and 1995, the outstanding balance was $0 and $5,811, respectively. Interest on this line of credit was at the New York prime rate (8.25% at December 31, 1996) plus 0.25% adjusted daily. This line is collateralized by the crop-related uncollected premiums, reinsurance recoverable on paid losses, Federal Crop Insurance Corporation (FCIC) annual settlement, and a first lien on the real estate owned by IGF. The line requires IGF to maintain its primary banking relationship with the issuing bank, limits dividend payments and capital purchases and requires the maintenance of certain financial ratios. At December 31, 1996, IGF was in compliance with all covenants associated with the line, except the covenant pertaining to certain investments as a percentage of total admitted assets, for which IGF obtained a waiver. The weighted average interest rate on the line of credit was 8.6%, 9.7%, and 8.1% during December 31, 1996, 1995, and 1994, respectively. Notes to Consolidated Financial Statements (Dollars in thousands) 9. Term Debt: The term debt, with an outstanding principal balance of $48,000, matures on April 30, 2002, and will be repaid in 11 consecutive semiannual installments, the first of which will occur on the first anniversary of the closing date. The first installments of principal repayments will be $3,128 and $2,886 in 1997, respectively, with the remaining annual installments over the term of the debt to be paid as follows: 1998-$6,494; 1999-$7,938; 2000-$9,742; 2001- $11,612; and 2002-$6,200. Interest on the term debt is payable quarterly at LIBOR plus 2.75%. In 1996, the Company entered into an interest rate swap agreement to protect the Company against interest rate volatility. As a result, the Company fixed its interest rate on the term debt at 8.31% through November 1996, 8.85% through January 1997, 9.08% through April 1997, 9.24% through July 1997, and 8.80% through October 1999. The term debt is collateralized by a pledge of all of the tangible and intangible assets of GGSH, including all of the outstanding shares of GGS, and by a pledge of all of the tangible and intangible assets of GGS, including all of the outstanding shares of capital stock of PGIC and Superior. As of December 31, 1996, GGS was in default of three covenants in the term debt. The first covenant required Pafco and Superior to maintain a combined ratio of statutory net premiums written to surplus of 3:1. The commercial bank lenders under the term debt have amended the agreement to cure this default. While there can be no assurance that GGS will have in the future sufficient cash flow after satisfaction of its debt service requirements to permit GGS to infuse sufficient capital into its insurance subsidiaries to permit them to maintain a ratio of net premiums written to surplus not in excess of 3:1, the Company believes that it or GGS will be able either to contribute additional capital to PGIC and Superior or, if necessary, to obtain reinsurance, reduce premium writings, or obtain additional financing in order to permit them to satisfy this covenant in future years. The second covenant violation relates to insufficient funds posted by an affiliate reinsurer to cover its obligations under reinsurance treaties with Pafco. The affiliate has posted sufficient funds in 1997, and the Company does not expect future violations of this covenant to occur. The commercial bank lenders under the term debt have agreed that this violation has been cured. The third violation relates to Superior's risk-based capital ratio being less than 300% due to growth in premium writings. The commercial lenders under the term debt have amended the agreement to cure this default. Notes to Consolidated Financial Statements (Dollars in thousands) 10. Unpaid Losses and Loss Adjustment Expenses: Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows: 1996 1995 1994 -------- ------- ------- Balance at January 1 $ 59,421 $29,269 $54,143 Less reinsurance recoverables 37,798 12,542 36,891 -------- ------- ------- Net balance at January 1 21,623 16,727 17,252 -------- ------- ------- Reserves required in connection with the Superior Acquisition 44,423 0 0 -------- ------- ------- Incurred related to: Current year 183,618 35,184 26,268 Prior years (1,509) 787 202 -------- ------- ------- Total Incurred 137,109 35,971 26,470 Paid related to: Current year 102,713 21,057 16,647 Prior years 28,182 10,018 10,348 -------- ------- ------- Total paid 130,895 31,075 26,995 -------- ------- ------- Net balance at December 31 72,260 21,623 16,727 Plus reinsurance recoverables 29,459 37,798 12,542 -------- ------- ------- Balance at December 31 $101,719 $59,421 $29,269 ======== ======= ======= The foregoing reconciliation shows that the (redundancies) deficiencies of $(1,509), $787, and $202 in the December 31, 1995, 1994 and 1993 reserves, respectively, emerged in the following year. These (redundancies) deficiencies resulted from (lower) higher than anticipated losses resulting from a change in settlement costs relating to those estimates. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. Liabilities for loss and loss adjustment expenses have been established when sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, a liability has been established to cover additional exposure on both known and unasserted claims. These liabilities are reviewed and updated continually. Notes to Consolidated Financial Statements (Dollars in thousands) 11. Income Taxes: The Company files a consolidated federal income tax return with its wholly owned subsidiaries. GGSH files a consolidated tax return with its wholly owned subsidiaries. Intercompany tax sharing agreements between the Company and its wholly owned subsidiaries and GGSH 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. Intercompany tax payments are remitted at such times as estimated taxes would be required to be made to the Internal Revenue Service. A reconciliation of the differences between federal tax computed by applying the federal statutory rate of 35% in 1996 and 34% in 1995 and 1994 to income before income taxes and the income tax provision is as follows: 1996 1995 1994 Computed income taxes at statutory rate $8,296 $2,531 $ 468 Dividends received deduction (158) (54) (30) Tax-exempt interest (270) (32) (36) Change in valuation allowance (23) (237) (1,492) Change in tax rate (14) 0 0 Other 215 414 372 ------ ------ ------ Income Taxes $8,046 $2,622 $ (718) ====== ====== ====== State income taxes for 1996, 1995 and 1994 are not significant. Therefore, state income taxes have been recorded in general and administrative expenses and not as part of income taxes. The net deferred tax asset at December 31, 1996 and 1995 is comprised of the following: 1996 1995 Deferred tax assets: Unpaid losses and loss adjustment expenses $2,705 $ 422 Unearned premiums 5,061 764 Allowance for doubtful accounts 518 315 Unrealized losses on investments 0 23 Net operating loss carryforwards 328 457 Other 685 411 ------ ------ 9,297 2,392 Valuation allowance 0 23 ------ ------ Net deferred tax asset 9,297 2,369 ------ ------ Deferred tax liabilities: Deferred policy acquisition costs (4,480) (809) Unrealized gains on investments (1,224) 0 Other (264) (139) ------ ------ (5,968) (948) ------ ------ Net Deferred tax asset $3,329 $1,421 ====== ====== Notes to Consolidated Financial Statements (Dollars in thousands) The Company is required to establish a "valuation allowance" for any portion of its deferred tax assets which is unlikely to be realized. No valuation allowance was established as of December 31, 1996 since management believes it is more likely than not that the Company will realize the benefit of its deferred tax assets through utilization of such amounts under the carryback rules and through future taxable income. As of December 31, 1996, the Company has unused net operating loss carryovers available as follows: Years ending not later than December 31: Amount ------ 2000 $811 2002 126 ---- --- Total $937 ==== Federal income tax attributed to the Company has been examined through 1993. In the opinion of management, the Company has adequately provided for the possible effects of future assessments related to prior years. 12. Leases: The Company has certain commitments under long-term operating leases for a branch office and sales offices for Superior Insurance Company. Rental expense under these commitments was $751 for 1996. Future minimum lease payments required under these noncancelable operating leases are as follows: 1997 $ 928 1998 466 1999 373 2000 62 2001 and thereafter 0 ------ Total $1,829 ====== 13. Reinsurance: The Company limits the maximum net loss that can arise from a large risk, or risks in concentrated areas of exposure, by reinsuring (ceding) certain levels of risks with other insurers or reinsurers, either on an automatic basis under general reinsurance contracts known as "treaties" or by negotiation on substantial individual risks. Such reinsurance includes quota share, excess of loss, stop-loss and other forms of reinsurance on essentially all property and casualty lines of insurance. In addition, the Company assumes reinsurance on certain risks. The Company remains contingently liable with respect to reinsurance, which would become an ultimate liability of the Company in the event that such reinsuring companies might be unable, at some later date, to meet their obligations under the reinsurance agreements. Notes to Consolidated Financial Statements (Dollars in thousands) 13. Reinsurance, continued: Approximately 66% of amounts recoverable from reinsurers are with the FCIC, a branch of the federal government. Another 28% of recoverable amounts are with Granite Re, a foreign corporation, which has not applied for an A.M. Best rating. An additional 5% of uncollateralized recoverable amounts are with companies which maintain an A.M. Best rating of at least A+. Company management believes amounts recoverable from reinsurers are collectible. Amounts recoverable from reinsurers relating to unpaid losses and loss adjustment expenses were $29,459, $37,798, and $12,542 as of December 31, 1996, 1995, and 1994, respectively. These amounts are reported gross of the related reserves for unpaid losses and loss adjustment expenses in the accompanying Consolidated Balance Sheets. On April 29, 1996, PGIC and IGF entered into a 100% quota share reinsurance agreement, whereby all of IGF's nonstandard automobile business from 1996 and forward was ceded to PGIC effective January 1, 1996. On April 29, 1996, PGIC retroactively ceded all of its commercial business relating to 1995 and previous years to Granite Re, with an effective date of January 1, 1996. Amounts ceded for outstanding losses and loss adjustment expenses and unearned premiums were approximately $3,519 and $2,380, respectively. No gain or loss was recognized in 1996 on the transaction. On this date, PGIC also entered into a 100% quota share reinsurance agreement with Granite Re, whereby all of PGIC's commercial business from 1996 and forward was ceded to Granite Re effective January 1, 1996. (See Note 17.) Reinsurance activity for 1996, 1995, and 1994, which includes reinsurance with related parties, is summarized as follows: 1996 Direct Assumed Ceded Net -------- ------ -------- -------- Premiums written $298,596 $6,903 $(95,907) $209,592 Premiums earned 279,061 6,903 (94,205) 191,759 Incurred losses and loss adjustment expenses 223,879 4,260 (91,030) 137,109 Commission expenses (income) 44,879 3,663 (46,716) 1,826 1995 Premiums written $123,381 $1,253 $(71,187) $ 53,447 Premiums earned 116,860 1,256 (68,475) 49,641 Incurred losses and loss adjustment expenses 125,382 2,839 (92,250) 35,971 Commission expenses (income) 17,177 174 (27,092) (9,741) 1994 Premiums written $102,178 $ 956 $(67,995) $ 35,139 Premiums earned 96,053 1,308 (65,235) 32,126 Incurred losses and loss adjustment expenses 57,951 1,588 (33,069) 26,470 Commission expenses (income) 19,619 48 (24,174) (4,507) Notes to Consolidated Financial Statements (Dollars in thousands) The Company and its subsidiaries have entered into transactions with various related parties including transactions with Goran, and its affiliates, Symons International Group, Ltd. (SIG Ltd.), Goran's parent, Granite Insurance Company (Granite), and Granite Reinsurance Company, Ltd. (Granite Re), Goran's subsidiaries. The following balances were outstanding at December 31, 1996 and 1995: 1996 1995 Investments in and advances to related parties: Nonredeemable, nonvoting preferred stock of Granite $ 702 $ 702 Secured notes receivable from related parties 0 1,355 Unsecured mortgage loan from director and officer 278 278 Due from directors and officers 172 199 Other receivables from related parties 0 418 ------ ------ $1,152 $2,952 ====== ====== 1996 1995 Payable to affiliates: Loan and related interest payable to Goran $ 0 $2,232 Loan and related interest payable to Granite Re 0 3,733 Other payable to Goran 350 500 Other payables to related parties 16 9 ------ ------ $ 366 $6,474 ====== ====== The following transactions occurred with related parties in the years ended December 31, 1996, 1995, and 1994: 1996 1995 1994 Management fees charged by Goran $ 139 $ 414 $ 494 Reinsurance under various treaties, net: Ceded premiums earned 5,463 5,235 (73) Ceded losses and loss adjustment expenses incurred 5,168 2,612 0 Ceded commissions 2,620 1,142 0 Consulting fees charged by various related parties 180 26 75 Interest charged by Goran 196 208 188 Dividend income from Granite Re 0 0 18 Interest charged by Granite Re 385 346 312 The unsecured mortgage loan to the Chairman and CEO of the Company was repaid in full in February 1997. Amounts due from directors and officers of the Company bear interest at the 180-day Treasury bill rate payable semiannually. Loan principal is payable on demand. The loans payable, including accrued interest, to Goran and Granite Re at December 31, 1995, were repaid in full in 1996 from the proceeds of the offering. Notes to Consolidated Financial Statements (Dollars in thousands) 15. Stockholders' Equity: On July 29, 1996, the Board of Directors approved an increase in the authorized common stock of the Company from 1,000 shares to 100,000,000 shares. The common stock remains no par value. On July 29, 1996, the Board approved a 7,000-for-1 stock split of the Company's issued and outstanding shares. All share and per share amounts have been restated to retroactively reflect the stock split. On July 29, 1996, the Board of Directors authorized the issuance of 50,000,000 shares of preferred stock. No shares of preferred stock have been issued. 16. Effects of Statutory Accounting Practices and Dividend Restrictions: At December 31, 1996 and 1995, PGIC's statutory capital and surplus was $18,112 and $11,875, respectively, and IGF's statutory capital and surplus was $29,412 and $9,219, respectively. The minimum regulatory requirement for capital and surplus is $1,250. The Indiana statute allows 10% of surplus as regards policyholders or 100% of net income, whichever is greater, to be paid as dividends only from earned surplus. Statutory requirements place limitations on the amount of funds which can be remitted to the Company from PGIC and to PGIC from IGF. Subsequent to Board of Directors and regulatory approval, IGF declared and paid in April 1996 and December 1995 extraordinary dividends to PGIC in the amounts of $11 million and $2 million on the 2,494,000 shares of convertible preferred stock owned by PGIC. In December 1995, upon Board of Directors of PGIC and regulatory approval, PGIC declared and paid to the Company a $1.5 million extraordinary dividend on the common stock owned by the Company. At December 31, 1996, the Superior entities' statutory capital and surplus was $57,121. In the consent order approving the Acquisition, the Florida Department has prohibited Superior from paying any dividends for four years without the prior written approval of the Florida Department. 17. Regulatory Matters: PGIC and IGF, domiciled in Indiana, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Indiana Department of Insurance (IDOI). The Superior entities, domiciled in Florida, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Florida Department of Insurance (FDOI). Prescribed statutory accounting practices include a variety of publications of the NAIC, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Notes to Consolidated Financial Statements (Dollars in thousands) IGF received written approval through December 31, 1996 from the IDOI to reflect its business transacted with the FCIC as a 100% cession with any net underwriting results recognized in ceding commissions for statutory accounting purposes, which differs from prescribed statutory accounting practices. As of December 31, 1996, that permitted transaction had no effect on statutory surplus or net income. The underwriting profit results of the FCIC business, net of reinsurance of $12,277, $9,653, and $3,257, are netted with policy acquisition and general and administrative expenses for the years ended December 31, 1996, 1995, and 1994, respectively, in the accompanying Consolidated Statements of Earnings. PGIC received approval from the IDOI to record its quota share reinsurance agreement with Granite Re for its commercial business as reinsurance effective January 1, 1996 for statutory accounting purposes, which differs from prescribed statutory practices. SAP prescribed by the IDOI require certain administrative matters to be completed by an insurance company to recognize a reinsurance agreement as of its effective date. As of December 31, 1996, these permitted transactions increased statutory surplus by $512 over what it would have been had prescribed accounting practices been followed. The NAIC is considering the adoption of a recommended statutory accounting standard for crop insurers, the impact of which is uncertain since several methodologies are currently being examined. Although the Indiana Department has permitted the Company to continue for its statutory financial statements through December 31, 1996 its practice of recording its MPCI business as 100% ceded to the FCIC with net underwriting results recognized in ceding commissions, the Indiana Department has indicated that in the future it will require the Company to adopt the MPCI accounting practices recommended by the NAIC or any similar practice adopted by the Indiana Department. Since such a standard would be adopted industry-wide for crop insurers, the Company would also be required to conform its future GAAP financial statements to reflect the new MPCI statutory accounting methodology and to restate all historical GAAP financial statements consistently with this methodology for comparability. The Company cannot predict what accounting methodology will eventually be implemented or when the Company will be required to adopt such methodology. The Company anticipates that any such new crop accounting methodology will not affect GAAP net earnings. The NAIC has promulgated risk-based capital (RBC) requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks, such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. The RBC information is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized control level RBC requires no corrective actions by PGIC, IGF or regulators. As of December 31, 1996, IGF, PGIC and the Superior entities had Ratios that were in excess of the minimum RBC requirements. The NAIC currently has a project under way to codify SAP, as existing SAP does not address all accounting issues and may differ from state to state. Upon completion, the Codification is expected to replace prescribed or permitted SAP in each state as the new comprehensive statutory basis of accounting for insurance companies. The final format of the Codification is uncertain at this time, yet implementation could be required as early as January 1, 1998. Due to the project's uncertainty, the Company has not yet quantified the impact any such changes would have on the statutory capital and surplus or results of operations of the Company's insurance subsidiaries. The impact of adopting this new comprehensive statutory basis of accounting is, however, expected to materially impact statutory capital and surplus. 18. Commitments and Contingencies: The Company, and its subsidiaries, are named as defendants in various lawsuits relating to their business. Legal actions arise from claims made under insurance policies issued by the subsidiaries. These actions were considered by the Company in establishing its loss reserves. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. IGF is responsible for the administration of a run-off book of business. FCIC has requested that IGF take responsibility for the claim liabilities under its administration of these policies, and IGF has requested reimbursement of certain Notes to Consolidated Financial Statements (Dollars in thousands) 18. Commitments and Contingencies:, continued expenses from the FCIC with respect to this run-off activity. It is the Company's opinion, and that of its legal counsel, that there is no material liability on the part of the Company for claim liabilities of other companies under IGF's administration. The increase in number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in increased assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. The Company recognizes its obligations for guaranty fund assessments when it receives notice that an amount is payable to a guaranty fund. The ultimate amount of these assessments may differ from that which has already been assessed. The Company received a commitment from a commercial bank which provided funds to certain executives and a director of the Company to purchase 69,500 shares in the Directed Share Program in the Company's Offering. The Company agreed to guarantee 100% of the aggregate principal amount, including unpaid accrued interest, extended by the commercial bank under this commitment. The amount of the Company's guarantee under this commitment is approximately $869. The Company has entered into a purchase agreement to acquire an office building in Des Moines, Iowa, to be used as its crop insurance division home office. The purchase price was $2.6 million, of which $2.4 million was escrowed on February 1, 1997. The terms include a floating closing date whereby the transaction will close on the earlier of February 1, 1998 or thirty days after the closing of the Company's currently occupied home office building, also located in Des Moines. The purchase of the new building is not contingent on the sale of the current building. 19. Supplemental Cash Flow Information: Cash paid for interest and income taxes are summarized as follows: 1996 1995 1994 Cash paid for interest $5,178 $ 553 $685 Cash paid for income taxes, net of refunds 9,825 1,953 166 During 1994, IGF exchanged 700,000 shares of Granite Reinsurance Company, Ltd. stock for 9,800 shares of Granite Insurance Company stock, recording no gain or loss. In addition, PGIC exchanged an investment in real estate for a mortgage loan of $3,000 plus cash of $1,166. During 1996, the Company contributed the stock of PGIC and certain assets of the Company totaling $17,186 to GGSH in exchange for a 52% ownership interest in GGSH. In addition, Goldman Funds received a minority interest share of $18,425 in GGSH for its $21,200 contribution, resulting in a $2,775 increase to additional paid-in capital from the sale of PGIC common stock and certain assets. Notes to Consolidated Financial Statements (Dollars in thousands) 20. Disclosures About Fair Values of Financial Instruments: The following discussion outlines the methodologies and assumptions used to determine the estimated fair value of the Company's financial instruments. Considerable judgment is required to develop these fair values and, accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of the Company's financial instruments. a. Fixed Maturity and Equity Securities: Fair values for fixed maturity and equity securities are based on market values obtained from the NAIC Securities Valuation Office. Such values approximate quoted market prices from published information. b. Mortgage Loan: The estimated fair value of the mortgage loan was established using a discounted cash flow method based on credit rating, maturity and future income when compared to the expected yield for mortgages having similar characteristics. The estimated fair value of the mortgage loan was $2,360 at December 31, 1996. c. Short-term Investments, and Cash and Cash Equivalents: The carrying value for assets classified as short-term investments, and cash and cash equivalents in the accompanying Consolidated Balance Sheets approximates their fair value. d. Short-term and Long-term Debt: Fair values for long-term debt issues are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. In 1996, the rate on the Company's term debt approximated 8.38%, below the current rate of 8.41% for similar types of borrowing arrangements. The estimated fair value of the term debt was $49,047 at December 31, 1996. For short-term debt, the carrying value approximates fair value. e. Advances to Related Parties and Payables to Affiliates: It is not practicable to determine the fair value of the advances to related parties or the payables to affiliates as of December 31, 1996 and 1995, because these are related party obligations and no comparable fair value measurement is available. 21. Segment Information: The Company has two business segments: Nonstandard automobile and Crop insurance. The Nonstandard automobile segment offers personal nonstandard automobile insurance coverages through a network of independent general agencies. These products are sold by PGIC in seven states, Superior in eight states, and IGF in three states. Effective in the first quarter of 1996, all nonstandard automobile business will be retained in PGIC (see Note 13). The Crop segment writes MPCI and crop hail insurance in 31 states through independent agencies with its primary concentration in the Midwest. Activity which is not included in the major business segments is shown as "Corporate and Other." "Corporate and Other" includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt and unallocated overhead expenses). Identifiable assets by business segment are those assets in the Company's operations in each segment. Corporate and other assets are principally cash, short-term investments, related-party assets, intangible assets, and property and equipment. Capital expenditures are reported exclusive of the Acquisition. Notes to Consolidated Financial Statements (Dollars in thousands) Segment information for 1994 through 1996 is as follows (certain information for 1995 and 1994 is not available by segment due to general use by all segments of corporate assets): Year Ended December 31, 1996 1995 1994 Revenue: Nonstandard automobile $181,799 $36,363 $27,784 Crop 24,865 12,830 4,873 Corporate and other 99 3,447 2,183 -------- ------- ------- Total Revenue $206,763 $52,640 $34,840 ======== ======= ======= Earnings (loss) before taxes and minority interest: Nonstandard automobile $ 7,434 $(1,989) $ 722 Crop 17,685 11,040 2,152 Corporate and other (1,416) (1,611) (1,539) -------- ------- ------- Total earnings (loss) before taxes and minority interest $ 23,703 $ 7,440 $ 1,385 ======== ======= ======= Identifiable assets: Nonstandard automobile $260,332 Crop 72,916 Corporate and other 6,550 -------- Total Identifiable assets: $339,798 ======== Depreciation and amortization: Nonstandard automobile $ 1,568 Crop 574 Corporate and other 52 -------- Total depreciation and amortization $ 2,194 ======== Capital expenditures: Nonstandard automobile $ 2,058 Crop 1,676 Corporate and other 0 -------- Total capital expenditures $ 3,374 ======== Notes to Consolidated Financial Statements (Dollars in thousands) 22. Stock Option Plans: On November 1, 1996, the Company adopted the SIG 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 nonemployee directors of the Company and Goran. A total of 1,000,000 shares of common stock have been reserved for issuance under the SIG Stock Option Plan. On November 1, 1996, the Company issued 830,000 stock options to the Company's nonemployee directors and certain Goran directors and certain officers, and certain other key employees of the Company and Goran. The options were granted at an exercise price equal to the Offering price of the Company's common stock. The Company has granted (i) options to purchase 20,000 shares of common stock to the nonemployee directors of the Company, (ii) options to purchase 791,000 shares of common stock to officers and key employees of the Company and the subsidiaries, (iii) options to purchase 6,000 shares of common stock to certain nonemployee directors of Goran and (iv) options to purchase 13,000 shares of common stock to certain employees of Goran and its subsidiaries who have provided valuable services or assistance for the benefit of the Company and the subsidiaries. The options granted to the Company's Chairman (375,000 shares) vest and become exercisable in full on the first anniversary of the grant date. All of the remaining outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. 1996 Stock Option Plan (the "GGS Stock Option Plan"), effective as of April 30, 1996. A maximum of 10% of the issued and outstanding shares of GGSH's common stock (on a fully diluted basis assuming exercise in full of all options) may be made the subject of options granted under the GGS Stock Option Plan. A total of 111,111 shares of common stock of GGSH have actually been reserved for issuance under the GGS Stock Option Plan, which 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 GGSH. During 1996, 55,922 options have been granted under the GGS Stock Option Plan. Stock options granted under the GGS Stock Option Plan will be exercisable at such times and at such exercise prices as the Board of Directors of GGSH shall determine, but in any event not prior to the earlier of (i) an initial public offering of GGS Holdings, and (ii) a GGSH Sale, as defined, and not later than ten years from the date of the grant. Options granted under the GGS Stock Option Plan vest at a rate of 20% per year for five years after the date of the grant. The exercise price of options granted as of April 30, 1996 is, with respect to 50% of the shares subject to each such option, $44.17 per share. The exercise price per share for the remaining 50% is $44.17, subject to a compound annual increase in the exercise price of 10% for the duration of the vesting period. The exercise price of any options granted under the GGS Stock Option Plan after April 30, 1996, will be subject to a similar formula, with 50% of the shares subject to any such option having an exercise price determined by the Board of Directors in its discretion, and the other 50% having an exercise price which increases on each anniversary of the date of the grant for the duration of the vesting period. No option granted under the GGS Stock Option Plan is transferable by the option holder other than by the laws of descent and distribution. Shares received upon exercise of such an option are not transferable, except as provided in the Stockholder Agreement among the Company and the Goldman Funds. Notes to Consolidated Financial Statements (Dollars in thousands) At December 31, 1996, the Company applied APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans in the accompanying Statement of Earnings. Had compensation cost for the Company's stock option plan been determined consistent with FASB Statement No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 ------------------------------ As Reported Pro Forma ----------- --------- Net earnings $13,256 $13,021 ======= ======= Net earnings per share $ 1.76 $ 1.73 ======= ======= The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used: no dividend yield for all years; expected volatility of 40% for the SIG Stock Option Plan and no percentage for the GGSH Stock Option Plan, since the GGSH stock is privately held; risk-free interest rate of 6.0% to 6.50% for the SIG Stock Option Plan and 6.4% for the GGSH Stock Option Plan; and an expected life of two to four years for the SIG Stock Option Plan and five years for the GGSH Stock Option Plan. 23. Quarterly Financial Information (unaudited): Quarterly financial information is as follows: Quarters ------------------------------------- 1996 First Second Third Fourth Total ------- -------- ------- ------- -------- Gross written premiums $41,422 $105,528 $71,813 $86,736 $305,499 Net earnings 1,586 2,718 4,589 4,363 13,256 Earnings per share 0.22 0.39 0.66 0.49 1.76 1995 Gross written premiums 28,272 67,487 16,978 11,897 124,634 Net earnings 1,066 940 1,464 1,351 4,821 Earnings per share 0.15 0.14 0.21 0.19 0.69 As is customary in the crop insurance industry, insurance company participants in the FCIC program receive more precise financial results from the FCIC in the fourth quarter based upon business written on spring-planted crops. On the basis of FCIC-supplied financial results, IGF recorded, in the fourth quarter, an additional underwriting gain, net of reinsurance, on its FCIC business of $5,572 during 1996 and $3,139 during 1995. FORWARD-LOOKING STATEMENTS The statements contained in this Annual Report which are not historical facts, including but not limited to, statements concerning (i) the impact of federal and state laws and regulations on the Company's business and results of operations, (ii) the competitive advantage afforded to the Company's crop insurance operations by approaches adopted by management in the areas of information, technology, claims handling and underwriting, (iii) the sufficiency of the Company's cash flow to meet the operating expenses, debt service obligations and capital needs of the Company and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense Reimbursements on the Company's results of operations, are forward-looking statements. The company desires to take advantage of the "safe harbor" afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. Such cautionary statements which discuss certain risks associated with the Company's business including the variability of the results of operations of the Company's crop insurance business as a result of weather and natural perils, the highly competitive nature of both the Company's crop insurance and nonstandard automobile insurance business and the effects of state and federal regulation, the capital intensive nature of the property and casualty business and potential limitations on the ability of the Company to raise additional capital set forth under the heading "Forward-Looking Statements -- Safe Harbor Provisions" in Item 1 - Business in the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996. - -------------------------------------------------------------------------------- MANAGEMENT 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 systems of internal controls which are designed to provide reasonable assurance that accounting records are reliable and to safe-guard the Compnay's assets. The independent accounting firm of Coopers & Lybrand L.L.P. has audited and reported on the Company's financial statements. Their opinion is based upon audits conducted by them in accordance that the consolidated financial statements are free of material misstatements. The Audit Committee of the Board of Directors, the members of which include outside directors, meets with the independent external auditors and management representative 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 Audit Committee. The Audit Committee reports its findings and makes recommendations to the Board of Directors. Alan G. Symons Chief Executive Officer /s/ Gary P. Hutchraft Gary P. Hutchraft Vice Presidnet and Chief Financial Officer March 21, 1997 Board of directors and Stockholders of Symons International Group, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Symons International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Symons International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand Indianapolis, Indiana March 21, 1997 STOCKHOLDER INFORMATION Corporate Offices Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 (317) 259-6300 Registrar and Transfer Agent National City Bank 4100 West 150th Street 3rd Floor Cleveland, Ohio 44135-1385 Independent Public Accountants Coopers & Lybrand L.L.P. Indianapolis, Indiana Annual Meeting of Stockholders Tuesday, May 20, 1997 10:00 a.m. Corporate Offices 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, 1996, 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 Symons International Group, Inc. effected its initial public offering on November 5, 1996. Symons International Group, Inc.'s common stock trades on the NASDAQ Stock Market's National Market under the symbol SIGC. The initial offering price of its shares of Common Stock was $12.50 per share. The high and low trading prices of the Common Stock for the period from November 5, 1996 through December 31, 1996 were $16.75 and $12.50, respectively. Trading Period High Low - -------------- ---- --- 11/5/96-12/31/96 $16.75 $12.50 As of March 20, 1997, the Company had approximately 120 stockholders 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 year ended December 31, 1996. The Company does not plan to pay cash dividends on its common stock in order to retain earnings to support the growth of its business. Shareholder Inquiries Inquiries should be directed to: Alan G. Symons Chief Executive Officer Symons International Group, Inc. Tel: (317) 259-6402 Board of Directors G. Gordon Symons Chairman of the Board Symons International Group, Inc. Goran Capital Inc. Alan G. Symons Chief Executive Officer, Symons International Group, Inc. President and Chief Executive Officer, Goran Capital Inc. Douglas H. Symons President and Chief Operating Officer, Symons International Group, Inc. Vice President and Chief Operating Officer, Goran Capital Inc. John K. McKeating Retired former President and Owner of Vision 2120 Optometric Clinics Robert C. Whiting President, Prime Advisors, Ltd James G. Torrance, Q.C. Partner Emeritus, Smith, Lyons Barristers & Solicitors David R. Doyle Vice President and Chief Fnancial Officer Avantec, Inc. Executive Officers G. Gordon Symons Chairman of the Board Symons International Group, Inc. Alan G. Symons Chief Executive Officer Symons International Group, Inc. Douglas H. Symons President and Chief Operating Officer Symons International Group, Inc. Gary P. Hutchcraft Vice President, Chief Financial Officer and Treasurer Symons International Group, Inc. David L. Bates Vice President, General Counsel and Secretary Symons International Group, Inc. Dennis G. Daggett President and Chief Operating Officer IGF Insurance Company Thomas F. Gowdy Executive Vice President IGF Insurance Company Roger C. Sullivan Jr. Executive Vice President Superior Insurance Company Donald J. Goodenow Executive Vice President Pafco General Insurance Company COMPANY, SUBSIDIARIES AND BRANCH OFFICES CORPORATE OFFICE IGF South Symons International Group, Inc. 101 Business Park Drive 4720 Kingsway Drive Jackson, Mississippi 39213 Indianapolis, Indiana 46205 Tel: 601 957-9780 Tel: 317 259-6300 Fax: 601 957-9793 Fax: 317 259-6395 IGF East SUBSIDIARIES AND BRANCHES 4720 Kingsway Drive Pafco General Insurance Company Indianapolis, Indiana 46205 4720 Kingsway Drive Tel: 317 259-6300 Indianapolis, Indiana 46205 Fax: 317 259-6395 Tel: 317 259-6300 Fax: 317 259-6395 IGF West 407 Campus Drive Superior Insurance Company Garden City, Kansas 67846 280 Interstate North Circle, N.W. Tel: 316 276-4111 Atlanta, Georgia 30339 Fax: 316 275-6453 Tel: 770 952-4885 Fax: 770 952-6616 IGF North 208 S. Main Superior Insurance Company Stanley, North Dakota 58784 3030 N. Rocky Point Drive Tel: 701 628-3536 Suite 770 Fax: 701 628-3537 Tampa, Florida 33607 Tel: 813 281-2444 IGF California Fax: 831 281-8036 1750 Bullard Avenue Suite 106 Superior Insurance Company Fresno, California 93710 1745 West Orangewood Road Tel: 209 432-0196 Orange, California 92868 Fax: 209 432-0294 Tel: 714 978-6811 Fax: 714 978-0353 IGF Insurance Company Corporate Office 2882 106th Street Des Moines, Iowa 50322 Tel: 515 276-2766 Fax: 515 276-8305 SIG Logo Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 EX-27 8 FDS OF SYMONS INTERNATIONAL GROUP, INC.
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001013698 SYMONS INTERNATIONAL GROUP, INC. 1,000 U.S. Dollars 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 1.000 127,631 0 0 27,920 2,430 466 168,137 13,095 48,294 12,800 344,679 101,719 87,285 0 0 48,000 0 0 38,969 21,931 344,679 191,759 6,733 (1,015) 9,286 206,763 (2,496) 44,509 27,703 8,046 15,657 0 0 0 13,256 1.76 0 59,421 138,618 (1,509) 102,713 28,182 101,719 0
EX-99 9 PROXY STATEMENT SYMONS INTERNATIONAL GROUP, INC. 4720 KINGSWAY DRIVE INDIANAPOLIS, INDIANA 46205 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held On Tuesday, May 20, 1997 NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Symons International Group, Inc. ("Company") will be held at the Company's offices, 4720 Kingsway Drive, Indianapolis, Indiana on Tuesday, May 20, 1997, at 10:00 a.m., Indianapolis time. The Annual Meeting will be held for the following purposes: 1. Election of Directors. Election of 3 Directors for terms to expire in 2000. 2. Ratification of Auditors. Ratification of the appointment of Coopers & Lybrand L.L.P. as auditors for the Company for the year ending December 31, 1997. 3. Other Business. Such other matters as may properly come before the meeting or any adjournment thereof. Shareholders of record as of the close of business on March 21, 1997 are entitled to vote at the meeting or any adjournment thereof. Please read the enclosed Proxy Statement carefully so that you may be informed about the business to come before the meeting, or any adjournment thereof. At your earliest convenience, please sign and return the accompanying Proxy in the postage-paid envelope furnished for that purpose. A copy of the Company's Annual Report for the year ended December 31, 1996 is enclosed. The Annual Report is not a part of the Proxy soliciting material enclosed with this letter. FOR THE BOARD OF DIRECTORS G. Gordon Symons Chairman Indianapolis, Indiana March 27, 1997 IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. SYMONS INTERNATIONAL GROUP, INC. 4720 Kingsway Drive, Indianapolis, Indiana 46205 PROXY STATEMENT The accompanying Proxy is solicited by the Board of Directors of Symons International Group, Inc. (the "Company") for use at the Annual Meeting of Shareholders to be held May 20, 1997 and any adjournments thereof. When the Proxy is properly executed and returned, the shares it represents will be voted at the meeting in accordance with any directions noted on that Proxy. If no direction is indicated, the Proxy will be voted in favor of the proposals set forth in the Notice attached to this Proxy Statement. The election of Directors will be determined by a plurality of the shares present in person or represented by Proxy. Abstentions, broker non-votes and instructions on the accompanying Proxy Card to withhold authority to vote for one or more nominees might result in some nominees receiving fewer votes. However, the number of votes otherwise received by the nominee will not be reduced by such action. The holder of each outstanding share of common stock is entitled to vote for as many persons as there are Directors to be elected. All other matters to come before the meeting will be approved if the votes cast in favor exceed the votes cast against. Any abstention or broker non-vote on any such matter will not change the number of votes cast for or against the matter, however, such abstaining shares will be counted in determining whether a quorum is present pursuant to the applicable provisions of the Indiana Business Corporation Law. The Board of Directors knows of no matters, other than those reported herein, which are to be brought before the meeting. However, if other matters properly come before the meeting, it is the intention of the persons named in the enclosed Form of Proxy to vote such Proxy in accordance with their judgment on such matters. Any shareholder giving a Proxy has the power to revoke it at any time before it is voted by a written notice delivered to the Secretary of the Company or in person at the meeting. The approximate date of mailing of this Proxy Statement is April 10, 1997. VOTING SECURITIES AND BENEFICIAL OWNERS Only shareholders of record as of the close of business on March 21, 1997 will be entitled to vote at the Annual Meeting. On the Record Date, there were 10,450,000 shares of Common Stock outstanding, the only class of the Company's stock which is currently outstanding. The following table shows, as of March 14, 1997 the number and percentage of shares of Common Stock held by each person known to the Company who owned beneficially more than 5% of the issued and outstanding Common Stock of the Company and Goran by the Company's Directors and Named Executive Officers: Symons International Goran Group, Inc. Capital Inc. Name of Amount and Percent Amount and Percent Beneficial Nature of of Class Nature of of Class Owner Beneficial Beneficial Owernship Ownership G. Gordon Symons1 385,000 3.4% 2,817,080 46.0% Alan G. Symons2 227,500 2.0% 541,557 8.9% Douglas H. Symons3 140,500 1.2% 299,368 4.9% Robert C. Whiting4 10,000 * 35,900 * James G. Torrance5 7,000 * 4,000 * David R. Doyle6 10,000 * - - - - - - John K. McKeating7 7,000 * 2,000 * Jerome B. Gordon8 - - - - - - 3,420 * Goran Capital Inc. 7,000,000 62.1% - - - - - - FMR Corp./ Fidelity Canadian Growth Company Fund - - - - - - 344,600 5.6% Symons International Group Ltd.9 - - - - - - 1,646,413 26.9% David L. Bates10 15,000 * 4,866 * Gary P. Hutchcraft11 12,500 * 1,450 * All Executive Officers and Directors as a Group (9 Persons) 814,500 7.2% 3,709,641 60.1% *Less than 1% of class 1With respect to Symons International Group, Inc., 10,000 shares are owned directly and 375,000 are subject to option. With respect to the shares of Goran Capital Inc., 890,167 shares are held by trusts of which Mr. Symons is the beneficiary, 280,500 are subject to option and 1,646,413 of the shares indicated are owned by Symons International Group Ltd., of which Mr. Symons is the controlling shareholder. 2 With respect to Symons International Group, Inc., 27,500 shares are owned directly and 200,000 shares are subject to option. With respect to the shares of Goran Capital Inc., 449,183 are owned directly and 92,374 are subject to option. 3 With respect to Symons International Group, Inc., 20,500 shares are owned directly and 120,000 shares are subject to option. With respect to the shares of Goran Capital Inc., 197,483 are owned directly and 101,885 are subject to option. 4 Mr. Whiting owns 5,000 shares of Symons International Group, Inc. directly and 5,000 shares are subject to option. With respect to Goran Capital Inc., all shares indicated are owned directly. 5 Mr. Torrance owns 2,000 shares of Symons International Group, Inc. directly and 5,000 shares are subject to option. With respect to Goran Capital Inc., 2,000 shares are owned directly and 2,000 shares are subject to option. 6 Mr. Doyle owns 5,000 shares of Symons International Group, Inc. directly and 5,000 shares are subject to option. With respect to Goran Capital Inc., all shares indicated are owned directly. 7 Mr. McKeating owns 2,000 shares of Symons International Group, Inc. directly and 5,000 shares are subject to option. With respect to Goran Capital Inc., 2,000 shares are subject to option. 8 Mr. Gordon's shares of Goran Capital Inc. are owned directly. 9 Mr. G. Gordon Symons is the controlling shareholder of Symons International Group Ltd., a private company. 10 Mr. Bates owns 5,000 shares of Symons International Group, Inc. directly and 10,000 shares are subject to option. With respect to Goran Capital Inc., 997 are held in Mr. Bates' 401(k) account pursuant to the Symons International Group, Inc. Retirement Savings Plan and 3,869 shares are subject to option. 11 Mr. Hutchcraft owns 2,500 shares of Symons International Group, Inc. directly and 10,000 shares are subject to option. Mr. Hutchcraft also owns 450 shares of Goran Capital Inc. directly and 1,000 shares are subject to option. SECTION 16(a) REPORTING 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 1996, all filing requirements applicable to its Officers, Directors and greater than 10% shareholders were met and, with the exception of an approximate two week delay in filing Form 3s (Statement of Initial Ownership), all required filings were made on a timely basis. PROPOSALS Proposal No. 1: Election Of Directors The Directors of the Company are divided into three classes and are elected to hold office for a three year term or until their successors are elected and qualified. The election of each class of Directors is staggered over each three-year period. With the exception of Jerome B. Gordon, all other current Directors of the Company were elected by Goran Capital Inc. ("Goran") as the sole shareholder of the Company prior to the Initial Public Offering ("IPO") of the Company which occurred on November 5, 1996. On March 19, 1997, Mr. Jerome B. Gordon was elected by the Board to fill a vacancy created when the Board amended the Company's Bylaws to increase the number of Directors from seven to eight. Present Principal Director Term to Name Age Occupation Since Expire G. Gordon Symons 75 Chairman of the 1987 1999 Board of the Company and Goran Capital Inc. James G. Torrance, 68 Partner Emeritus, 1996 1998 Q.C. Smith, Lyons Alan G. Symons 50 CEO of the 1995 1997 Company and President and CEO of Symons International Group, Inc. John K. McKeating 61 Owner, Vision 1996 1999 2120 Robert C. Whiting 64 President, Prime 1996 1997 Advisors Ltd. Douglas H. Symons 44 President and COO 1987 1998 of the Company and COO of Goran Capital Inc. David R. Doyle 50 Vice President, 1996 1999 Finance and Administration, Avantec, Inc. Jerome B. Gordon 58 President, Lutine 1997 1997 Corporation G. Gordon Symons has been Chairman of the Board of Directors of the Company since its formation in 1987. He founded the predecessor to Goran Capital Inc. the 67% Shareholder of the Company ("Goran") in 1964 and has served as the Chairman of the Board of Goran since its formation in 1986. Mr. Symons also served as the President of Goran until 1992 and the Chief Executive Officer of Goran until 1994. Mr. Symons currently serves as a Director of Symons International Group Ltd. ("SIGL"), a federally- chartered Canadian corporation controlled by him which, together with members of the Symons family, controls Goran. Mr. Symons also serves as Chairman of the Board of Directors of all of the subsidiaries of Goran. Mr. Symons is the father of Alan G. Symons and Douglas H. Symons. Alan G. Symons has served as a Director of the Company since 1995 and was named its Chief Executive Officer in 1996. Mr. Symons has been a Director of Goran since 1986, and has served as Goran's President and Chief Executive Officer since 1994. Prior to becoming the President and Chief Executive Officer of Goran, Mr. Symons held other executive positions within Goran since its inception in 1986. Mr. Symons is the son of G. Gordon Symons and the brother of Douglas H. Symons. Douglas H. Symons has served as a Director and as President of the Company since its formation in 1987 and as it Chief Operating Officer since July, 1996. Mr. Symons served as Chief Executive Officer of the Company from 1989 until July, 1996. Mr. Symons has been a Director of Goran since 1989, and has served as Goran's Chief Operating Officer and Vice President since 1989. Mr. Symons is the son of G. Gordon Symons and the brother of Alan G. Symons. Mr. McKeating has served as a Director of the Company since 1996 and as a Director of Goran since 1995. Mr. McKeating retired in January, 1996 after serving as President and owner of Vision 2120 Optometric Clinics ("Vision 2120") for 36 years. Vision 20/20, located in Montreal, Quebec, is a chain of Canadian full-service retail clinics offering all aspects of professional eye care. Mr. Whiting has served as a Director of the Company since 1996. Since July, 1994, Mr. Whiting has served as President of Prime Advisors, Ltd., a Bermuda-based insurance consulting firm. From its inception until June, 1994, Mr. Whiting served as President and Chairman of the Board of Jardine Pinehurst Management Co., Ltd., a Bermuda-based insurance management and brokerage firm. Mr. Torrance has served as a Director of the Company since 1996. Mr. Torrance was a founding partner in the Canadian law firm of Smith Lyons in 1962 and in April, 1993, was named a Partner Emeritus in that firm. Mr. Torrance was re-elected as a Director of Goran in 1995 after having left the Board of Directors of Goran in 1991. He also serves as a Director of Dynacare, Inc., Mitsui & Co. (Canada) Ltd., Potash Company of Canada Limited, Sakura Bank (Canada), Toyota Canada Inc. and Wintershall Canada Ltd. Mr. Doyle has served as a Director of the Company since 1996. Since January, 1996, Mr. Doyle has been Vice president, Finance and Administration, and a Director of Avantec, Inc., a Carmel, Indiana-based company which provides data management services for the pharmaceutical industry in connection with clinical trials. From May, 1994 to January, 1996, Mr. Doyle served as Vice President - Financial Consultant of Raffensberger Hughes & Co., which provides securities brokerage and financial consulting services. From December, 1992 to May, 1994, Mr. Doyle was employed by Prudential Securities, Inc. as Vice President - Investments. Prior to that, Mr. Doyle was employed by INB National Bank of Indianapolis, Indiana from 1973 to 1992, including his service as First Vice President and Department Manager from 1989 to 1992. Mr. Doyle has served on the boards of numerous civic organizations, including the Children's Bureau of Indianapolis, the Children's Bureau Foundation and Child Advocates, Inc. Mr. Gordon. Managing Director of Lutine Corporation, Fairfield, Connecticut since June, 1995. Mr. Gordon has served as a financial advisor to the Company and its parent, Goran Capital Inc., on various financing and acquisition projects since 1987. From 1989 to June 1995, Mr. Gordon was managing director of Schwartz, Gordon & Heslin. Prior to that time, Mr. Gordon served as a Vice President of Nesbitt, Burns Securities, Inc., a wholly owned subsidiary of the Bank of Montreal. Mr. Gordon has held various other positions with finance and investment banking concerns and served a 2 year term as a Special Assistant to the Commissioner of Insurance for the State of New Jersey. Consistent with the provisions of IND. CODE Section 23-1-39-1, the Company's Board of Directors at its meeting on March 19, 1997 amended the Bylaws of the Company to provide that the Company's Board of Directors shall consist of eight (8) persons. Unless otherwise directed, each proxy executed and returned by a shareholder will be voted for the election of the nominees listed below. If any person named as a nominee shall be unable or unwilling to stand for election at the time of the Annual Meeting, the proxy holders will nominate and vote for a replacement nominee recommended by the Board. At this time, the Board knows of no reason why the nominees listed below may not be able to serve as Directors if elected. The Board of Directors unanimously recommends the election of the following nominees for a three (3) year term to expire in the year 2000: Present Principal Director Name Age Occupation Since Alan G. Symons 50 CEO of the Company 1995 Robert C. Whiting 64 President, Prime 1996 Advisors, Ltd. Jerome B. Gordon 58 President, Lutine 1997 Corporation Meetings And Committees Of The Board During the year ended December 31, 1996, the Board of Directors of the Company met six (6) times, including teleconferences, in addition to taking a number of actions by unanimous written consent. During 1996, no incumbent Director of the Company attended fewer than 75% of the Board meetings and Committee meetings of the Board on which such Directors served. The Board of Directors of the Company has an Audit Committee, a Compensation Committee and an Executive Committee. The Company's Audit Committee is responsible for recommending the appointment of the Company's independent auditors, meeting with the independent auditors to outline the scope, and review the results of, the annual audit and reviewing with the auditor the systems of internal control and audit reports. The current members of this Committee are Messrs. Torrance, McKeating and Alan G. Symons. During 1996, the Compensation Committee of the Company's Board of Directors was comprised of Messrs. Torrance, Doyle and Douglas H. Symons. At its meeting on March 19, 1997, the Board reconstituted the Compensation Committee to consist of Messrs. Douglas H. Symons, Doyle, Whiting and Gordon. The Committee makes recommendations concerning executive compensation and benefit levels to the Board of Directors and has the authority to approve all specific transactions pursuant to the Symons International Group, Inc. 1996 Stock Option Plan (the "Plan"). The Executive Committee is comprised of Messrs. G. Gordon Symons, Alan G. Symons and Douglas H. Symons. The Executive Committee is empowered by the board to take action on behalf of the board when the need arises. Directors of the Company who are not employees of the Company or its affiliates receive a flat annual retainer of $10,000. The annual retainer is paid currently in cash. In addition, the Company reimburses 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 Board meeting or Board Committee meeting attended. Compensation Committee Report During 1996, the Compensation Committee met one (1) time during 1996 wherein it reviewed and recommended approval of the Symons International Group, Inc. Stock Option Plan. At that same meeting, the Committee recommended (and the Board of Directors of the Company subsequently awarded) stock options pursuant to the Plan to certain directors, executive officers and other key employees of the Company and its subsidiaries. The objectives of the Plan are to align executive and shareholder long-term interests by creating a strong and direct link between executive compensation and shareholder return and to enable executive officers and other key employees to develop and maintain a long-term ownership position in the Company's common stock. A total of 1 million shares of the Company's common stock have been reserved for issuance under the Plan, of which Options for 830,000 shares were granted by the Board to Directors, executive officers and other key employees on October 21, 1996. The grants to senior executives of the Company and its subsidiaries were as follows: Name Options G. Gordon Symons 375,000 Alan G. Symons 200,000 Douglas H. Symons 120,000 Dennis G. Daggett (President of IGF Insurance Company) 20,000 Thomas F. Gowdy (Executive Vice President of IGF Insurance Company) 20,000 Robert C. Sullivan (Executive Vice President of Superior Insurance Company) 10,000 David L. Bates 10,000 Gary P. Hutchcraft 10,000 Donald J. Goodenow (Executive Vice President of Pafco General 10,000 Insurance Company) 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. Each element of total compensation is designed to work in concert. The total 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 1996 achieves these objectives and is fair and reasonable. At its meeting on March 19, 1997, the Board of Directors of the Company voted to retain an independent compensation consultant to review the Company's executive compensation plan and to make recommendations concerning the compensation levels and type necessary to achieve the Company's stated objectives. Consistent with that, certain of the Company's Officers have entered into employment contracts with the Company or one of its subsidiaries. Alan G. Symons, Chief Executive Officer of the Company and Douglas H. Symons, President and Chief Operating Officer of the Company, have entered into employment agreements with GGS Management Holdings, Inc. ("GGSH"), a 52% owned subsidiary of the Company, with such agreements calling for a base salary of not less than $200,000 per year for Alan G. Symons and $150,000 for Douglas H. Symons. These agreements became effective on April 30, 1996 and continue in effect for an initial period of five (5) years. Upon the expiration of the initial five (5) year period, the term of each agreement is automatically extended from year to year thereafter and are cancelable (after the expiration of the initial five (5) year term) upon six (6) months' notice. These two agreements contain customary restrictive covenants respecting confidentiality and non-competition which, among other things, prevent the executives from competing with GGSH in various capacities both during the term of their employment and for a period of two (2) years after the termination of the agreement. In addition to annual salary, the agreements with Alan G. Symons and Douglas H. Symons stipulate that Alan G. Symons may earn a bonus in an amount ranging from 25% to 100% of base salary and that Douglas H. Symons may earn a bonus in an amount ranging from 25% to 50% of base salary. Based upon the performance of the Company's business units in exceeding budgeted operating income, both Alan G. Symons and Douglas H. Symons received the maximum bonus permitted by their employment agreement of $133,333 and $50,000, respectively. At the discretion of the Board, bonus awards may be greater than the amounts indicated if agreed upon financial targets are exceeded. Goran has entered into an employment agreement with Gary P. Hutchcraft pursuant to which Mr. Hutchcraft has agreed to serve as Vice President and Chief Financial Officer of Goran and its subsidiaries, including the Company. Pursuant to the term of this Agreement, Mr. Hutchcraft is entitled to a base salary of not less than $120,000 per year and may earn a bonus in an amount ranging from 10% to 30% of his base salary. In 1993, Congress enacted Section 162(m) of the Internal Revenue Code that 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. The Compensation Committee does not anticipate that the compensation paid to any executive officer in the form of base salaries, bonus and stock options will exceed $1 Million in the near future. However, 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. Compensation Committee Interlocks And Insider Participation The Company's Compensation Committee consists of Messrs. Whiting, Gordon, Doyle and Douglas H. Symons. Neither Messrs. Whiting or Gordon, nor Mr. Doyle, have any interlocks reportable under Item 402(j)(3) and (4) of Regulation S-K. Douglas H. Symons has served as a Director and Executive Officer of the Company since its formation in 1987 and as a Director and Chief Operating Officer of Goran since 1989. Douglas H. Symons is also an Executive Officer of each of the Company's subsidiaries. Since Alan G. Symons, the Chief Executive Officer of the Company, is a Director of each of the Company's subsidiaries and is empowered to determine the compensation of the managers of the Company's subsidiaries, Douglas and Alan Symons have reportable interests under Item 402(j)(3) (i)-(iii) of Regulation S-K. Remuneration Of Executive Officers The following table sets forth the compensation awarded to, earned by or paid to the Chief Executive Officer and the four most highly compensated executive officers of the Company other than the Chief Executive Officer (collectively, the "Named Executive Officers") during the last two (2) years. SUMMARY COMPENSATION TABLE Securities All Name and Underlying Other Principal Position Year Salary Bonus Options Compensation G. Gordon Symons, 1996 $ 0 $ 0 375,000 $ 27,999(3) Chairman 1995 $ 0 $ 0 - - - - $ 26,000 Alan G. Symons, 1996 $142,786 $133,333 200,000 Chief Executive 1995 $ 50,000 $ 0 - - - - Officer Douglas H. Symons, 1996 $195,973 $ 50,000 120,000 President and Chief 1995 $149,982 $100,000 - - - - Operating Officer Gary P. Hutchcraft, 1996(1) $ 55,415 $ 28,000 10,000 Vice President, 1995 $ 0 $ 0 - - - - Chief Financial Officer and Treasurer David L. Bates, 1996 $ 95,162 $97,076 10,000 Vice President, 1995(2) $ 62,237 $ 0 - - - - General Counsel and Secretary 1Mr. Hutchcraft joined the Company on July 1, 1996. 2Mr. Bates joined the Company on April 1, 1995. 3Consulting fees paid to companies owned by Mr. G. Gordon Symons. STOCK OPTION GRANTS The following table provides details regarding stock options granted to the Company's Executive Officers in 1996. In addition there are shown the hypothetical gains or "option spreads" that would exist for the respective options. These gains are based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the options were granted over the full option term. These amounts represent certain assumed rates of appreciation only. Actual gains,if any, on stock option exercises and common stock holdings are dependent on the future performance of the Company's common stock and the overall stock market conditions. There can be no assurance that the amounts reflected on this table will be achieved. Percentage of Total Options Exercise Potential Realized Granted To Price At Assumed Annual Options Employees Per Expiration Rates of Stock Name Granted During 1996 share Date Appreciation for Option Term 5% 10% G. Gordon Symons 375,000 45.18 $12.50 11-1-2007 $2,947,500 $7,470,000 Alan G. Symons 200,000 24.10 $12.50 11-1-2007 $1,572,000 $3,484,000 Douglas H. Symons 120,000 14.46 $12.50 11-1-2007 $ 943,200 $2,390,400 Gary P. Hutchcraft 10,000 1.2 $12.50 11-1-2007 $ 78,600 $ 199,200 David L. Bates 10,000 1.2 $12.50 11-1-2007 $ 78,600 $ 199,200 The options in the immediately preceeding table were issued at the IPO price for the Company's stock. The options granted to Mr. G. Gordon Symons vest one (1) year from the date of grant. All other options to purchase the Company's stock vest ratably over three (3) years and all options expire ten (10) years from date of grant. OPTION EXERCISES AND YEAR-END VALUES The following table shows stock options held by the Company's Named Executive Officers during 1996. In addition, this table includes the number of shares covered by both exercisable and non-exercisable stock options. As of December 31, 1996, none of the options granted pursuant to the Plan were exercisable. Also reported are the value of unexercised in-the-money options as of December 31, 1996. 1996 STOCK OPTIONS OUTSTANDING GRANTS AND VALUE AS OF DECEMBER 31, 1996 Value Number of Value of Shares Realized Shares Underlying Unexercised In-The- Acquired At Unexercised Options Money Options at on Exercise at 12-31-96 12-31-96 Name Exercise Date Exer- Unexer- Exer- Unexer- cisable(1) cisable(2) cisable cisable(3) G. Gordon Symons 0 $0.00 0 375,000 $0.00 $1,593,750 Alan G. Symons 0 $0.00 0 200,000 $0.00 $ 850,000 Douglas H. Symons 0 $0.00 0 120,000 $0.00 $ 510,000 Gary P. Hutchcraft 0 $0.00 0 10,000 $0.00 $ 42,500 David L. Bates 0 $0.00 0 10,000 $0.00 $ 42,500 1None of the Options granted to date by the Company are yet exercisable. 2The shares represented could not be acquired by the respective executive as of December 31, 1996. 3Amount reflecting gains on outstanding options are based on the December 31, 1996 closing NASDAQ stock price which was $16.75 per share. INDEBTEDNESS OF MANAGEMENT The following Directors and Executive Officers of the Company were indebted to the Company, or its parent or subsidiaries, in amounts exceeding $60,000 during 1996. Date of Largest Loan Balance Present Name Loan During 1996 Balance G. Gordon Symons June 27, 1986 $148,000 $148,000 June 30, 1986 $200,000 $200,000 May 31, 1988 $ 52,729 (US) $ 52,729 (US) Alan G. Symons June 30, 1986 $ 48,172 $ 29,772 February 25,1988 $ 27,309 (US) $ 27,309 (US) Douglas H. Symons June 30, 1986 $ 15,000 $ 15,000 February 25, 1988 $ 2,219 (US) $ 2,219 (US) The foregoing loans to Messrs. G. Gordon Symons, Alan G. Symons and Douglas H. Symons are on account of loans to purchase common stock of Goran. Such loans are collateralized by pledges of the common shares of Goran acquired and are payable on demand and are interest-free. In addition, G. Gordon Symons has an unsecured loan payable to Goran in the amount of $70,000 not relating to the purchase of common shares of Goran. This loan was taken out on January 2, 1988 and is payable on demand and is interest-free. Douglas H. Symons has a demand loan payable to the Company in the amount of $39,377 plus accrued interest of $21,169 collateralized by a second mortgage on his personal residence. Interest on this loan is prime plus 1%. In addition, the Company held a mortgage note of G. Gordon Symons collateralized by a second mortgage on his personal residence. This mortgage loan was originally incurred on October 3, 1988 and when paid off in full during February of 1997, had a principal balance of $277,502. David L. Bates received a $100,000 relocation loan to facilitate his move to the Company's Indianapolis headquarters. This loan was repaid upon the closing of the sale of his former residence in February, 1996. Coincident with the closing of the Company's IPO, the Company retired an outstanding debt owing to Goran and its affiliates in the approximate amount of $7.5 Million. The Company incurred this debt in 1992 and, prior to its retirement, carried an interest rate of 10%. PROPOSAL #2 - RATIFICATION OF APPOINTMENT OF AUDITORS The Board of Directors proposes the ratification by the Shareholders at the Annual Meeting of the appointment of the accounting firm of Coopers & Lybrand L.L.P. ("Coopers") as independent auditors for the Company's year ending December 31, 1997. Coopers has served as auditors for the Company for the year 1996 and worked with the Company in effecting its Initial Public Offering. A representative of Coopers is expected to be present at the Annual Meeting with the opportunity to make a statement if he or she so desires. This individual will also be available to respond to any appropriate questions the shareholders may have. RATIFICATION OF THE APPOINTMENT OF AUDITORS REQUIRES THAT THE VOTES CAST (IN PERSON OR BY PROXY) AT THE ANNUAL MEETING OR AT ANY ADJOURNMENT THEREOF IN FAVOR OF RATIFICATION EXCEED THOSE CAST AGAINST. CERTAIN RELATIONSHIPS/RELATED TRANSACTIONS Simultaneously with the acquisition of Superior Insurance Company, Goran, the Company, GGS Management Holdings, Inc. ("GGSH") and certain investment funds affiliated with Goldman Sachs & Co. ("GS Funds") entered into an agreement to capitalize GGSH and cause GGSH to issue its capital stock to the Company and to the GS Funds. This transaction gave the Company a 52% ownership interest in GGSH and the GS Funds a 48% interest in GGSH. Pursuant to this transaction, the Company contributed to GGSH all of the common stock of Pafco General Insurance Company ("Pafco"), the Company's right to acquire Superior Insurance Company and certain fixed assets with an approximately value of $350,000. The GS Funds contributed $21.2 Million in cash. Prior to the transfer of the stock of Pafco to GGSH, Pafco transferred all of the outstanding capital stock of IGF Insurance Company ("IGF") to the Company in order to improve the risk-based capital rating of Pafco and to permit GGSH to focus exclusively on the nonstandard auotmobile insurance business. Pafco accomplished this transfer by forming a wholly-owned subsidiary, IGF Holdings, Inc., ("IGF Holdings") to which Pafco contributed all of the outstanding shares of capital stock of IGF. The stock of IGF Holdings was then distributed to the Company. Prior to the transfer of the stock of IGF Holdings to the Company, Pafco received a dividend from IGF Holdings in cash and a note from IGF having an aggregate value of approximately $11 Million. Jerome B. Gordon, a nominee to the Board of Directors of the Company, received fees in the amount of $177,994 (including reimbursement of expenses) for his consulting service to the Company during 1996 as well as 4,000 shares of Goran stock worth approximately $80,000 at the time of receipt. Two (2) of the Company's subsidiaries, IGF and Pafco, have entered into reinsurance agreements with Granite Reinsurance Company Ltd., ("Granite Re"), an affiliate of Goran. Granite Re reinsures all Pafco insurance policies which were previously issued through Symons International Group, Inc. - Florida, ("SIGF"), a former subsidiary of the Company and now a subsidiary of Goran. This agreement is in respect of business other than nonstandard automobile insurance. Granite Re reinsures 100% of this SIGF business on a quota share basis. Also, IGF reinsures a portion of its crop insurance with Granite Re and for 1996, Granite Re reinsured 15% of IGF's multi-peril crop insurance stop loss protection ("MPCI") underwriting losses to the extent that aggregate losses of its insureds nationwide exceed 100% of MPCI Retention up to 125% of MPCI Retention and 95% of IGF's MPCI underwriting losses to the extent that aggregate losses of its insureds nationwide exceed 125% of MPCI Retention up to 150% of MPCI Retention. Further, for 1996, Granite Re had a 5% participation in 95% of IGF's crop-hail losses in excess of an 80% pure loss ratio up to a 100% pure loss ratio and a 10% participation in 95% of IGF crop-hail losses in excess of 100% pure loss ratio up to a 120% pure loss ratio. SHAREHOLDER PROPOSALS AND NOMINATIONS Any shareholder of the Company wishing to have a proposal considered for inclusion in the Company's 1998 proxy solicitation materials must set forth such proposal in writing and file it with the Secretary of the Company on or before December 11, 1997. In order to be considered in the 1998 Annual Meeting, shareholder proposals not included in the Company 1998 Proxy Solicitation materials, as well as shareholder nominations for Directors, must be submitted in writing to the Secretary of the Company at least sixty (60) days before the date of the 1998 Annual Meeting, or, if the 1998 Annual Meeting is held prior to March 31, 1998, within ten (10) days after notice of the Annual Meeting as mailed to shareholders. The Board of Directors of the Company will review any shareholder proposals that are filed as required, and will determine whether such proposals meet applicable criteria for inclusion in its 1998 Proxy Solicitation materials or consideration at the 1998 Annual Meeting. OTHER MATTERS Management is not aware of any business to come before the Annual Meeting other than those matters described in the Proxy Statement. However, if any other matters should properly come before the Annual Meeting, it is intended that the proxies solicited hereby will be voted with respect to those matters in accordance with the judgment of the persons voting the proxies. The cost of solicitation of proxies will be borne by the Company. The Company will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy material to the beneficial owners of common stock of the Company. In addition to solicitation by mail, Directors, Officers and employees of the Company may solicit proxies personally or by telephone without additional compensation. Each Shareholder is urged to complete, date and sign the proxy and return it promptly in the enclosed return envelope. Insofar as any of the information in this Proxy Statement may rest peculiarly within the knowledge of persons other than the Company, the Company relies upon information furnished by others for the accuracy and completeness thereof. Signed by Order of the Board of Directors /s Alan G. Symons Alan G. Symons Chief Executive Officer [Graph Comparison of 2 month cumulative total return among Symons International Group, Inc., the S & P 500 Index and the S & P Insurance (Property-Casualty) Index] -----END PRIVACY-ENHANCED MESSAGE-----