-----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, AO94ixB/5X4xI2Lr6xglPBKctT9DojZQh5Iz7TOrp9sPJC73C8CCmFJ3s7RtHb3h 1wz+3skbIbi27ZBI8j1t9w== 0001133884-01-500743.txt : 20020410 0001133884-01-500743.hdr.sgml : 20020410 ACCESSION NUMBER: 0001133884-01-500743 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29042 FILM NUMBER: 1786689 BUSINESS ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 BUSINESS PHONE: 3172596400 MAIL ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 10-Q 1 g10q-26294.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 FORM 10-Q Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to ----------- ---------- Commission File Number: 0-29042 SYMONS INTERNATIONAL GROUP, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1707115 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4720 Kingsway Drive Indianapolis, Indiana 46205 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (317) 259-6300 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No As of November 1, 2001, there were 10,385,399 shares of Registrant's no par value common stock issued and outstanding. 1 FORM 10-Q INDEX FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets at September 30, 2001 (unaudited) and December 31, 2000....................................................... 3 Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 2001 and 2000............................................................. 4 Unaudited Consolidated Statements of Operations for the Nine Months ended September 30, 2001 and 2000............................................................. 5 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 .......................................... 6 Condensed Notes to Unaudited Consolidated Financial Statements.............................................................................. 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 15 Item 3 Quantitative and Qualitative Disclosures about Market Risk.............................. 20 PART II OTHER INFORMATION....................................................................... 20 Item 1 Legal Proceedings....................................................................... 20 Item 2 Changes in Securities and Use of Proceeds............................................... 22 Item 3 Defaults Upon Senior Securities ........................................................ 22 Item 4 Submission of Matters to a Vote of Security Holders .................................... 22 Item 5 Other Information ...................................................................... 22 Item 6 Exhibits and Reports on Form 8-K........................................................ 22 SIGNATURES ................................................................................... 23
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYMONS INTERNATIONAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
September 30, 2001 December 31, (Unaudited) 2000 ----------------- --------------- ASSETS Investments: Available for sale: Fixed maturities, at market $62,279 $99,506 Equity securities, at market 12,851 16,561 Short-term investments, at amortized cost, which approximates market 12,599 14,872 Mortgage loans, at cost - 1,870 Other invested assets 1,493 1,331 ----- ----- Total investments 89,222 134,140 Cash and cash equivalents 25,600 1,363 Receivables, net of allowance of $1,999 and $1,940 in 2001 and 2000, respectively 46,882 50,364 Reinsurance recoverable on paid and unpaid losses 26,025 48,315 Prepaid reinsurance premiums 28,787 24,773 Deferred policy acquisition costs 3,536 6,454 Property and equipment, net of accumulated depreciation 10,544 12,392 Investments in and advances to related parties 493 680 Intangible assets 4,419 4,547 Other assets 1,537 3,545 Net assets of discontinued operations - 1,384 -------- -------- Total Assets $237,045 $287,957 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities: Loss and loss adjustment expense reserves $86,435 $108,117 Unearned premiums 60,502 62,386 Reinsurance payables 43,068 62,059 Distributions payable on preferred securities 29,382 18,397 Deferred income 4,000 - Other liabilities 16,735 14,443 ------ ------- Total Liabilities 240,122 265,402 ------- ------- Minority interest: Company-obligated mandatory redeemable preferred stock of trust subsidiary holding solely parent debentures 135,000 135,000 ------- ------- Stockholders' Equity (Deficit): Common stock, no par value, 100,000,000 shares authorized 10,385,399 shares issued and outstanding in both 2001 and 2000 38,136 38,136 Additional paid-in capital 5,851 5,851 Unrealized loss on investments available for sale (4,149) (3,938) Retained (Deficit) (177,915) (152,494) --------- --------- Total Stockholders' (Deficit) (138,077) (112,445) --------- --------- Total Liabilities and Stockholders' (Deficit) $237,045 $287,957 ======== ========
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 SYMONS INTERNATIONAL GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Three Months Ended September 30 ------------- -------------- 2001 2000 ------------- -------------- Gross premiums written $27,268 $45,841 Less ceded premiums (12,664) (17,755) -------- -------- Net premiums written $14,604 $28,086 ======= ======= Net premiums earned $22,839 $30,857 Fee income 3,799 3,356 Net investment income 1,443 2,416 Net realized capital gain (loss) 793 (2,632) ------ ------- Total revenues 28,874 33,997 ------ ------ Expenses: Losses and loss adjustment expenses 19,072 25,629 Policy acquisition and general and administrative expenses 13,038 16,953 Amortization of intangibles 43 490 ------ ------ Total expenses 32,153 43,072 ------ ------ Loss from continuing operations before income taxes and minority interest (3,279) (9,075) ------- ------- Total income taxes - - ------- ------- Loss from continuing operations before minority interest (3,279) (9,075) ------- ------- Minority interest: Distributions on preferred securities, net of tax of $0 in both 2001 and 2000 3,545 3,454 ----- ----- Loss from continuing operations (6,824) (12,529) Discontinued operations: Loss from operations of discontinued segment, less applicable income taxes of $0 in both 2001 and 2000 - (12,387) -------- -------- Net loss $(6,824) $(24,916) ======== ========= Weighted average shares outstanding - basic and fully diluted 10,385 10,385 ====== ====== Net loss from continuing operations per share - basic and fully diluted $(0.66) $(1.21) ======= ======= Net loss of discontinued operations per share-basic and fully diluted $ - $(1.19) ======= ======= Net loss per share - basic and fully diluted $(0.66) $(2.40) ======= =======
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 SYMONS INTERNATIONAL GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Nine Months Ended September 30 ------------ --------------- 2001 2000 ------------ --------------- Gross premiums written $122,358 $135,732 Less ceded premiums (66,305) (57,831) -------- -------- Net premiums written $56,053 $77,901 ======= ======= Net premiums earned $64,598 $111,275 Fee income 10,265 10,921 Net investment income 4,615 7,826 Net realized capital loss (263) (3,949) ----- ------- Total revenues 79,215 126,073 ------ ------- Expenses: Losses and loss adjustment expenses 57,097 92,032 Policy acquisition and general and administrative expenses 34,269 54,290 Amortization of intangibles 128 1,470 ------- ------- Total expenses 91,494 147,792 ------ ------- Loss from continuing operations before income taxes and minority interest (12,279) (21,719) -------- -------- Total income taxes - 487 -------- ------- Loss from continuing operations before minority interest (12,279) (22,206) -------- -------- Minority interest: Distributions on preferred securities, net of tax of $0 in both 2001 and 2000 10,986 10,075 ------ ------ Loss from continuing operations (23,265) (32,281) Discontinued operations: Loss from operations of discontinued segment, less applicable income taxes of $0 in both 2001 and 2000 (2,156) (5,231) ------- ------- Net loss $(25,421) $(37,512) ========= ========= Weighted average shares outstanding - basic and fully diluted 10,385 10,385 ====== ====== Net loss from continuing operations per share - basic and fully diluted $(2.24) $(3.11) ======= ======= Net loss of discontinued operations per share - basic and fully diluted $(0.21) $ (.50) ======= ======== Net loss per share - basic and fully diluted $(2.45) $(3.61) ======= ======= SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5 SYMONS INTERNATIONAL GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended September 30 --------------------------------------- 2001 2000 ---------------- ------------------ Cash flows from operating activities: Net loss for the period $(25,421) $(37,512) Adjustments to reconcile net earnings to net cash provided by (used in) operations: Depreciation and amortization 1,987 5,416 Net realized capital loss 263 3,949 Net changes in operating assets and liabilities: Receivables 3,482 6,448 Reinsurance recoverable on paid and unpaid losses 22,290 (18,895) Prepaid reinsurance premiums (4,014) (19,557) Deferred policy acquisition costs 2,918 6,291 Other assets and liabilities 4,299 (7,968) Loss and loss adjustment expense reserves (21,682) (29,523) Unearned premiums (1,884) (14,031) Reinsurance payables (18,991) 40,236 Distribution payable on preferred securities 10,985 10,075 Deferred income 4,000 - Net assets from discontinued operations 2,277 21,321 ------- ------- Net cash used in operations (19,491) (33,750) -------- -------- Cash flows from investing activities, net of assets acquired: Net sale of short-term investments 2,273 4,073 Proceeds from sales, calls and maturities of fixed maturities 54,594 53,898 Purchase of fixed maturities (12,339) (3,562) Proceeds from sale of equity securities 9,842 14,212 Purchase of equity securities (10,486) (20,228) Proceeds from repayment of mortgage loans 1,870 90 Purchase of property and equipment (1,216) (950 Net investing activities from discontinued operations (1,322) (307) Other (104) (119) -------- ------- Net cash provided by investing activities 43,112 47,107 ------ ------ Cash flows from financing activities, net of assets acquired: Net financing activities from discontinued operations 429 (14,539) Repayment of related party loans 187 (65) ------ -------- Net cash provided by (used in) financing activities 616 (14,604) ------ -------- Decrease in cash and cash equivalents 24,237 (1,247) Cash and cash equivalents, beginning of period 1,363 2,139 ------- -------- Cash and cash equivalents, end of period $25,600 $892 ======= ========
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 SYMONS INTERNATIONAL GROUP, INC. CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Three and Nine Months Ended September 30, 2001 1. BASIS OF PRESENTATION The financial statements included in this report are the consolidated financial statements of Symons International Group, Inc. and its subsidiaries (the "Company"). The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In management's opinion, these financial statements include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements, unless significant changes have taken place since the end of the most recent fiscal year. For this reason, the accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes for the year ended December 31, 2000 included in the Company's 2000 Annual Report on Form 10-K. Results for any interim period are not necessarily indicative of results to be expected for the year. 2. PREFERRED SECURITIES The preferred securities represent company-obligated mandatorily redeemable preferred securities of a trust subsidiary holding solely parent debentures which have a term of 30 years with semi-annual interest payments commencing February 15, 1998 (the "Preferred Securities"). The holder may redeem the Preferred Securities in whole or in part after 10 years. Under the terms of the indenture, the Company is permitted to defer the semi-annual interest payments for up to five years. The Company began deferring the semi-annual interest payments in February 2000. The trust indenture for the Preferred Securities contains certain restrictive covenants. Some of these covenants are based upon the Company's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") whereby, if the Company's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Security distributions) for the most recent four quarters, the following restrictions become effective: o The Company may not incur additional indebtedness or guarantee additional indebtedness. o The Company may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock and the payment of dividends in excess of a stated limitation. o The Company may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply as the Company's consolidated coverage ratio was (0.85) as of September 30, 2001, and will continue to apply until the Company's consolidated coverage ratio exceeds the amount set forth in the indenture. The Company is in compliance with these additional restrictions. 3. REGULATORY AFFAIRS Two of the Company's insurance company subsidiaries, Pafco General Insurance Company ("Pafco") and IGF Insurance Company ("IGF") are domiciled in Indiana and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Indiana Department of Insurance ("IDOI"). While neither Pafco nor IGF has surplus from which to pay dividends, statutory requirements place limitations on the amount of funds that can be remitted to the Company from Pafco and IGF. The Indiana statute allows 10% of surplus in regard to policyholders or 100% of net income, whichever is greater, to be paid as dividends only from earned surplus; however, the Consent Orders with the IDOI, described below, prohibit the payment of dividends by Pafco and IGF. Another insurance company subsidiary, Superior Insurance Company ("Superior"), and Superior's insurance company subsidiaries, Superior American Insurance Company and Superior Guaranty Insurance Company, are domiciled in Florida and prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Florida Department of Insurance ("FDOI"). The Florida statute also contains limitations with regard to payment of dividends. Superior may pay dividends of up to 10% of surplus or 100% of 7 net income; whichever is greater, from earned surplus. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. As previously reported, on June 29, 2001, the IDOI and IGF entered into a Consent Order (the "Consent Order") relating to IGF. The entry of the Consent Order was a result of losses experienced by IGF in its crop insurance operations and followed the sale of substantially all of the crop insurance assets of IGF to Acceptance Insurance Companies Inc. ("Acceptance"). As previously reported, IGF has discontinued writing new business and its operations are presently in run off. The IDOI has continued to monitor the status of IGF. The Consent Order prohibits IGF from taking any of the following actions, without prior written consent of the IDOI: (i) sell or encumber any of its assets, property, or business in force; (ii) disburse funds, except to pay direct unaffiliated policyholder claims and normal operating expenses in the ordinary course of business (which does not include payment to affiliates except for the reimbursement of costs for running IGF by SIG, and does not include payments in excess of $10,000); (iii) lend its funds; (iv) make investments except in specified types of investments; (v) incur debts or obligations, except in the ordinary course of business to unaffiliated parties; (vi) merge or consolidate with another company; (vii) enter into new, or amend existing, reinsurance agreements; (viii) complete, enter into or amend any transaction or arrangement with an affiliate; or (ix) disburse funds or assets to any affiliate. The Consent Order requires IGF to provide the IDOI with monthly written updates and immediate notices of any material change regarding the status of litigation with Mutual Service Casualty Insurance Company and with Continental Casualty Company, statutory reserves, number of non-standard automobile insurance policies in-force by state, and reports of all non-claims related disbursements. IGF's failure to comply with the Consent Order could cause the IDOI to begin proceedings to have a rehabilitator or liquidator appointed for IGF to extend the provisions of the Consent Order. While IGF is prohibited from writing any new business pursuant to the Consent Order, the departments of insurance of Florida, Illinois, Minnesota, Missouri, Nebraska and Virginia have also issued orders that require IGF to cease writing business in those states without prior consent. South Carolina has also requested IGF cease writing business in that state. IGF has also agreed with the departments of insurance of Texas and Washington to stop writing business in those states. As a result of the Consent Order, IGF was prohibited from writing new non-standard automobile insurance in Pennsylvania after July 31, 2001. Prior to July 31, 2001, the non-standard automobile insurance policies written in Pennsylvania by IGF accounted for approximately 10% of the total gross written premiums of the Company. During the third quarter, the Pennsylvania Department of Insurance determined that it would not permit new business to be written in that state by Superior and other insurance company subsidiaries. Therefore, total written premiums for 2001 will be less than anticipated. On February 17, 2000, Pafco agreed to an order under which the IDOI may monitor more closely the ongoing operations of Pafco. Among other matters, Pafco must: o Refrain from doing any of the following without the IDOI's prior written consent: (i) selling assets or business in force or transferring property, except in the ordinary course of business; (ii) disbursing funds, other than for specified purposes or for normal operating expenses and in the ordinary course of business (which does not include payments to affiliates, other than under written contracts previously approved by the IDOI, and does not include payments in excess of $10,000); (iii) lending funds; (iv) making investments, except in specified types of investments; (v) incurring debt, except in the ordinary course of business and to unaffiliated parties; (vi) merging or consolidating with another company; or (vii) entering into new, or modifying existing, reinsurance contracts. o Reduce its monthly auto premium writings, or obtain additional statutory capital or surplus, such that the ratio of gross written premium to surplus and net written premium to surplus does not exceed 4.0 and 2.4, respectively; and provide the IDOI with regular reports demonstrating compliance with these monthly writings limitations. 8 o Continue to comply with prior IDOI agreements and orders to correct business practices under which Pafco must provide monthly financial statements to the IDOI, obtain prior IDOI approval of reinsurance arrangements and affiliated party transactions, submit business plans to the IDOI that address levels of surplus and net premiums written, and consult with the IDOI on a monthly basis. Pafco's inability or failure to comply with any of the above could result in the IDOI requiring further reductions in Pafco's permitted premium writings or in the IDOI instituting future proceedings against Pafco. Restrictions on premium writings result in lower premium volume. Management fees payable to Superior Insurance Group, Inc. ("Superior Group") are based on gross written premium; therefore lower premium volume results in reduced management fees paid by Pafco. Pafco informed the Iowa Department of Insurance ("IADOI") of its decision to stop writing new automobile business in Iowa while Pafco reviews and revises its program in the state. Pafco has agreed with the IADOI that it will not write any new non-standard business, until such time as Pafco has reduced its overall non-standard automobile policy counts in the state or has: (i) increased surplus; or (ii) achieved a net written premium to surplus ratio of less than three to one; and (iii) surplus reasonable to its risk. Pafco has continued to service existing policyholders and renew policies in Iowa and provide policy count information on a monthly basis in conformance with IADOI requirements. Superior and Pafco also provide monthly financial information to the departments of insurance in certain states in which they write business, and Pafco has agreed to obtain IDOI prior approval of any new affiliated party transactions. The financial review of Superior for the year ended December 31, 1999 by the FDOI has been completed and the FDOI issued its draft report on July 19, 2001. Superior believes it and the FDOI have agreed on language to be contained in the final report regarding the characterization of finance and service fee payments made by Superior to its parent. Superior anticipates the FDOI will issue its final report during the fourth quarter of 2001. As previously reported, the FDOI issued a notice of its intent to issue an order (the "Notice") which principally addressed certain policy and finance fee payments by Superior to Superior Group. A formal administrative hearing to review the Notice and a determination that the order contemplated by the Notice not be issued was held February 2001. The administrative law judge entered a recommended order on June 1, 2001 that was acceptable to the Company. On August 30, 2001 the FDOI issued its final order which the Company believes improperly characterized billing and policy fees paid by Superior to Superior Group. Superior filed an appeal of the final order to Florida District Court. Superior and the FDOI are presently in settlement discussions regarding the final order. Superior entered into a consent order with the Illinois Department of Insurance wherein Superior agreed it would not write business in that state. Superior also agreed to cease writing business in Texas without the prior approval of its department of insurance. The amount of business written by Superior in Illinois and Texas is not material. On October 9, 2001 the State Corporation Commission of Virginia issued an order to take notice regarding an order suspending Superior's license to write business in that state. A hearing for a determination that the suspension order not be issued is set for November 29, 2001. The Company's operating subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to regulation and oversight by the IDOI, the FDOI, and the insurance regulators of other states in which the subsidiaries write business. The Company is a holding company and all of its operations are conducted by its subsidiaries. Regulation and oversight of insurance companies and their transactions with affiliates is conducted by state insurance regulators primarily for the protection of policyholders and not for the protection of other creditors or of shareholders. Failure to resolve issues with the IDOI and the FDOI or other state insurance regulators in a mutually satisfactory manner could result in future regulatory actions or proceedings that materially and adversely affect the Company. The NAIC adopted the Codification of Statutory Accounting Principles guidance ("Codification"), which replaces the Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting effective January 1, 2001. The IDOI and FDOI have adopted Codification. 9 The changes in statutory accounting principles resulting from Codification which impact the Company's insurance subsidiaries, among other things, limit the statutory carrying value of electronic data processing equipment and deferred tax assets in determining statutory surplus. The consolidated statutory surplus of the Company's insurance subsidiaries as of December 31, 2000 was $39.4 million. The consolidated statutory surplus was approximately $38.1 million at September 30, 2001. 4. COMMITMENTS AND CONTINGENCIES As previously reported, IGF had been a party to a number of pending legal proceedings and claims relating to agricultural production interruption insurance policies (the "AgPI Program") which were sold by IGF during 1998. Sales of this product resulted in large underwriting losses for IGF. Approximately $29.1 million was paid through September 30, 2001 in settlement of legal proceedings and claims related to the AgPI Program, with payments totaling approximately $359,000 in the first three quarters of 2001. A reserve of approximately $5.6 million remains to pay future claims. All of the policies of insurance, which were issued in the AgPI Program, were issued by and under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota corporation with its principal place of business located in Arden Hills, Minnesota. A dispute arose between MSI and IGF with respect to the funding of the settlements of claims made on the AgPI Program. MSI and IGF currently are arbitrating their dispute over responsibility for over $60 million in claims paid by both companies to MSI's insureds. IGF is seeking a recovery of the $30 million in claims which it paid, and MSI is seeking a similar recovery of the claims which it paid. The arbitration commenced December 20, 2000. The parties subsequently selected an arbitration panel and had their first organizational meeting with the panel on May 22, 2001. At that meeting, MSI moved for an order requiring IGF to post pre-hearing security through the issuance of a letter of credit in the amount of $39 million. Over IGF's objection, in a two to one vote, the panel on June 9, 2001, ordered IGF to post the $39 million in security, which IGF was to have done by June 19, 2001. On or about June 11, 2001, IGF filed a motion in the United States District Court for the District of New Jersey seeking to vacate the arbitration panel's order requiring security. On June 19, 2001, MSI filed a motion in the same court for a ruling confirming that order. On July 26, 2001, the parties presented oral arguments on their cross-motions for vacation and confirmation of the order. On August 6, 2001 the court denied IGF's motion to vacate the arbitration panel's order. As of this date, IGF has not posted the required letter of credit, and it is financially incapable of satisfying that requirement. On November 7, 2001 the arbitration panel considered a petition for default judgment against IGF based on IGF's failure to post the pre-hearing security. In the event the arbitration panel orders a default judgment against IGF, IGF will appeal the order to the United States District Court of New Jersey. On June 25, 2001, MSI filed a complaint for preliminary and permanent injunctive relief and damages (the "MSI Complaint") against the Company, IGF, IGF Holdings, Inc. ("IGFH"), Granite Reinsurance Company Ltd. ("Granite Re"), Goran Capital Inc. ("Goran") and certain affiliates of those companies, as well as certain members of the Symons family, and Acceptance in the United States District Court for the Southern District of Indiana, Indianapolis Division. The MSI Complaint alleges that the previously reported June 6, 2001 transfer of IGF's assets to Acceptance and the payments by Acceptance to the Company, Goran and Granite Re violated Indiana law and are voidable. In addition, the MSI Complaint alleges that Acceptance, the Company, Goran, IGFH and the Symons family are liable to MSI for the entire $39 million claim which MSI is asserting against IGF in arbitration proceedings on theories of successor liability and "piercing the corporate veil." The MSI Complaint seeks preliminary and permanent injunctive relief against the defendants, an order voiding the various transactions between and among the defendants and an order determining that the defendants are directly responsible to MSI for MSI's $39 million claim against IGF. On July 26, 2001, the defendants filed answers to the MSI Complaint. In those answers, each of the defendants denied the material allegations contained in the MSI Complaint and asserted certain affirmative defenses to that complaint. Each of those defendants also filed briefs in opposition to MSI's Motion for Preliminary Injunctive Relief. A hearing on MSI's Motion for Preliminary Injunctive Relief was held Thursday, August 2, 2001. On August 3, 2001, the court denied MSI preliminary injunctive relief. 10 In the event MSI is successful in obtaining permanent injunctive relief against the Company and its affiliates, any such relief would have an adverse impact upon the Company and its affiliates and their respective assets and operations. Further, in the event MSI is successful in obtaining court orders voiding the various transactions between the defendants and determining that the defendants are directly responsible to MSI for MSI's $39 million claim against IGF, those orders and determinations could also have an adverse effect upon the Company and its affiliates and their respective assets and operations. As previously reported, the Company and two of its subsidiaries, IGFH and IGF, are parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired certain crop insurance operations of CNA. Through reinsurance agreements, CNA was to share in IGF's profits or losses on IGF's total crop insurance business. By letter dated January 3, 2001, CNA gave notice pursuant to the SAA of its exercise of the "Put Mechanism" under the SAA effective February 19, 2001. According to the SAA, upon exercise of the Put Mechanism, IGFH is obligated to pay CNA an amount equal to 5.85 times "Average Pre-Tax Income", an amount based in part upon payments made to CNA under the SAA. The SAA further provided that 30 days after exercise of the Put, IGF will execute a promissory note payable six months after the exercise of the Put in the principal amount equal to the amount owed, as specified by the SAA. In a letter dated March 20, 2001, CNA advised the Company that it calculated the principal amount due CNA to be in excess of $26 million. CNA also asserted a claim for amounts allegedly due under reinsurance agreements for the 2000 crop year. As previously reported, the Company believes it has claims against CNA and defenses to CNA's claim that may ultimately offset or reduce amounts owed to CNA. The Company and CNA have engaged in discussions regarding possible alternatives for the resolution of their respective claims against each other; however, those discussions ultimately proved unsuccessful. Following the failure of settlement discussions, on June 4, 2001, IGF, IGFH and the Company filed a complaint against CNA (the "IGF Complaint") in the United States District Court for the Southern District of Indiana, Indianapolis Division. The IGF Complaint asserts claims against CNA for fraud and constructive fraud in connection with the SAA and breach of contract and seeks relief against CNA for compensatory and punitive damages. On June 27, 2001, CNA filed its "Answer, Separate Defenses and Counterclaim", in which CNA generally denied the material allegations of the IGF Complaint and asserted various defenses to those claims. On June 6, 2001, CNA filed a complaint against IGF, IGFH and the Company (the "CNA Complaint") asserting claims based on the SAA and related agreements for approximately $25 million allegedly owed CNA by virtue of its exercise of the Put Mechanism, $3 million for amounts allegedly due under reinsurance agreements for the 2000 crop year, $1 million for certain "fronting costs," and $1 million pursuant to a note executed by IGFH to CNA's affiliate in connection with the acquisition by IGFH of North American Crop Underwriters, Inc. in 1998. CNA also asserts claims to the effect that the June 6, 2001 sale of IGF assets to Acceptance resulted in payments of funds to Goran, the Company and Granite Re, which funds allegedly should have been paid to IGF instead. On June 6, 2001, CNA asked the district court to enter a temporary restraining order preventing IGF, IGFH and the Company from disposing of the proceeds received by them in connection with the sale of IGF assets to Acceptance. In an emergency hearing, the court denied CNA the relief it requested, without prejudice to reconsideration of those issues at a future time. CNA has since amended the CNA Complaint to add Goran and Granite Re as defendants. CNA's counterclaim in response to the IGF Complaint asserts essentially the same claims against the same parties as the amended CNA Complaint. On September 20, 2001, the court ordered a consolidation of the two cases, and discovery is proceeding. Although the Company continues to believe that it has claims against CNA and defenses to CNA's claims which may offset or reduce amounts owing by the Company or its affiliates to CNA, there can be no assurance that the ultimate resolution of the claims asserted by CNA against the Company and its affiliates will not have a material adverse effect upon the Company and its affiliates financial condition or results of operations. During 2000, the discontinued crop operations sold a product that insured potato producers against lost revenue caused by depressed commodity prices for potatoes. The commodity price of potatoes at December 31, 2000 was lower than the expected price; therefore, the Company established a $4,500,000 gross loss reserve for its unpaid loss obligations on this product during the second quarter of 2001. As of September 30, 2001, the Company had settled substantially all of the policyholder claims and no reserve remains. 11 As previously reported, a complaint for a class action alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 was filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of Indiana. The Company intends to vigorously defend the claims brought against it. No material developments have occurred since last reported in the June 30, 2001 Form 10-Q. On June 29, 2001, the California Department of Insurance ("CDOI") filed a Notice of Non-Compliance against Superior, which alleges that broker fees were charged by independent brokers in violation of California law. The Company and the CDOI are presently engaged in settlement discussions, and the Company expects to settle with the CDOI during the fourth quarter of 2001. Although the ultimate outcome of the settlement discussions is unknown, the Company believes it will not owe more than $200,000 and has reserved this amount in its consolidated financial statements. Superior is a defendant in a case filed on May 8, 2001 in the United States District Court for the Southern District of Florida entitled The Chiropractic Centre, Inc. v. Superior Insurance Company which purports to be brought on behalf of a class consisting of healthcare providers allegedly paid improperly discounted rates on services to patients based upon a preferred provider contract with a third party. The plaintiff alleges that Superior breached a third party beneficiary contract, committed fraud and engaged in racketeering activity in violation of federal and Florida law by obtaining discounted rates offered by a third party with whom the plaintiff contracted directly. Superior believes that the allegations of wrongdoing as alleged in the complaint are without merit and intends to vigorously defend the claims brought against it. As previously reported, actions have been brought in Florida against Superior Guaranty Insurance Company (a subsidiary of Superior) purporting to be brought on behalf of a class of persons allegedly charged service charges or finance charges in violation of Florida law. No other material developments have occurred since last reported in the June 30, 2001 Form 10-Q. As previously reported, an action has been brought in Florida alleging that Superior improperly reduced medical benefits payable and improperly calculated interest in violation of Florida law. The case was brought on behalf of a purported class consisting of (i) healthcare providers that rendered treatment to Superior insureds and claimants of Superior insureds and (ii) such insureds and claimants. The Company believes the claim is without merit and intends to vigorously defend the charges brought against it. No other material developments have occurred since last reported in the June 30, 2001 Form 10-Q. As previously reported, an action has been brought in Florida against Superior on behalf of a purported class consisting of healthcare providers that rendered treatment to Superior insureds and obtained a valid assignment of benefits from Superior. The plaintiff alleges that Superior reduced or denied claims for medical expenses payable to the plaintiff without first obtaining a written report in violation of Florida law. The plaintiff also alleges that Superior inappropriately reduced the amount of benefits payable to the plaintiff in breach of Superior's contractual obligations to the plaintiff. Superior believes the allegations of wrongdoing in violation of law are without merit and intends to vigorously defend the claims brought against it. No material developments have occurred since last reported in the June 30, 2001 Form 10-Q. The Company is a 50% owner in a limited corporation ("LLC") established to provide business services to the Company and an unrelated, third party. The debt of the LLC exceeds the fair market value of its operating assets by approximately $2 million at September 20, 2001. The Company and its subsidiaries are named as defendants in various other lawsuits relating to their business. Legal actions arise from claims made under insurance policies issued by the Company's subsidiaries. The Company in establishing its loss reserves has considered these actions. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. 5. LOSS DEVELOPMENT ON PRIOR ACCIDENT YEARS During the third quarter of 2001, the Company experienced unfavorable development on its year-end 2000 loss and LAE reserves in the amount of $1.0 million. This increased the loss and loss adjustment expense ratio for the quarter by 4.0 percentage points. 12 6. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current year presentation. 7. EARNINGS PER SHARE Basic and diluted net earnings (loss) per share are computed by dividing net earnings (loss) as reported by the average number of shares outstanding as follows:
Three Months Ended September 30 ---------------------------- (in thousands) 2001 2000 ------------ ------------ Basic: Weighted-average common shares outstanding 10,385 10,385 ====== ====== Diluted: Weighted-average common shares outstanding 10,385 10,385 ====== ======
The Company has 1,890,000 stock options outstanding as of November 8, 2001. Common stock equivalents are anti-dilutive; therefore, fully diluted earnings per share are the same as basic earnings per share. 8. DISCONTINUED OPERATIONS In December 2000, the Company initiated the divestiture of its crop insurance segment. This business was predominantly written through IGF. The transaction was completed in June 2001 and transferred ownership of substantially all of the crop insurance assets of the Company and IGF, effective with the 2001 crop cycle, to Acceptance. Upon completion of the sale, the net assets of the discontinued operations were reduced to zero. IGF and its affiliates received approximately $27.4 million at closing and Acceptance assumed all of the crop insurance in-force policies for the 2001 crop year. For agreeing not to compete in the crop insurance industry for a period of three years from the date of sale, the Company received $4.5 million at closing that is being amortized to income on a straight-line basis over three years. An additional $9.0 million in reinsurance premium is payable to Granite Re under a multi-year reinsurance treaty whereby Granite Re has agreed to reinsure a portion of the crop insurance business of Acceptance and provide an indemnity on behalf of IGF. The results of the crop insurance segment have been reflected as "Discontinued Operations" in the accompanying unaudited consolidated financial statements in accordance with Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations --- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Summarized results of operations for discontinued operations were as follows: 13
STATEMENTS OF OPERATIONS: (in thousands) Three Months Ended September 30 --------------------------------- 2001 2000 --------------- ------------- Gross premiums written $56,236 $34,337 ======= ======= Net premiums written $154 $8,942 ==== ====== Net premiums earned $154 $14,155 Net investment and fee income (26) 372 Net realized capital gain (6) - --- ------ Total revenues 122 14,527 --- ------ Loss and loss adjustment expenses (1,546) 20,803 Policy acquisition and general and administrative expenses 1,424 5,812 Interest and amortization expense - 299 ------ ----- Total expenses (122) 26,914 ----- ------ Loss before income taxes - (12,387) Income tax expense - - -------- -------- Net loss from discontinued operations $ - $(12,387) ======== ========= STATEMENTS OF OPERATIONS: (in thousands) Nine Months Ended September 30 ---------------------------------- 2001 2000 --------------- ------------- Gross premiums written $239,195 $219,915 ======== ======== Net premiums written $(172) $26,891 ====== ======= Net premiums earned $(172) $23,589 Net investment and fee income 961 493 Net realized capital gain 636 1 --- ----- Total revenues 1,425 24,083 ----- ------ Loss and loss adjustment expenses 5,238 31,137 Policy acquisition and general and administrative expenses (300) (2,634) Interest and amortization expense (1,357) 811 ------- ------ Total expenses 3,581 29,314 ----- ------ Loss before income taxes (2,156) (5,231) Income tax expense - - ------- -------- Net loss from discontinued operations $(2,156) $(5,231) ======== ========
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OF THE COMPANY Symons International Group, Inc. (the "Company") owns insurance companies that underwrite and market non-standard private passenger automobile insurance. The Company's principal insurance company subsidiaries are Pafco General Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance Company ("IGF"). The Company is a 73% owned subsidiary of Goran Capital Inc. ("Goran"). As previously announced, the Company completed the sale of its crop insurance operations in June 2001. Pafco, Superior, Superior Guaranty Insurance Company ("Superior Guaranty") and Superior American Insurance Company ("Superior American") are engaged in the writing of insurance coverage for automobile physical damage and liability policies for non-standard risks. Non-standard risk insureds are those individuals who are unable to obtain insurance coverage through standard market carriers due to factors such as poor premium payment history, driving experience or violations, particular occupation or type of vehicle. The Company offers several different policies that are directed to different classes of risk within the non-standard market. Premium rates for non-standard risks are higher than for standard risks. Since it can be viewed as a residual market, the size of the non-standard private passenger automobile insurance market changes with the insurance environment and grows when the standard carriers become more restrictive. Non-standard 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 non-standard policies is shorter than many other types of insurance. Also, since the non-standard automobile insurance business typically experiences lower rates of retention than standard automobile insurance, the number of new policyholders underwritten by non-standard automobile insurance carriers each year is substantially greater than the number of new policyholders underwritten by standard carriers. FORWARD LOOKING STATEMENTS AND CERTAIN RISKS All statements, trend analyses, and other information herein contained, relative to markets for the Company's products and/or trends in the Company's operations or financial results, as well as other statements including words such as "anticipate," "could," "feel(s)," "believe," "believes," "plan," "estimate," "expect," "should," "intend," "will," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks; uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions, including prevailing interest rate levels and stock market performance; (ii) factors affecting the Company's non-standard automobile operations such as rate increase approval, policy renewals, new business written, and premium volume; and (iii) the factors described in this section and elsewhere in this report. SIGNIFICANT LOSSES HAVE BEEN REPORTED AND ARE LIKELY TO CONTINUE For the three months ended September 30, 2001, losses from continuing operations were $(6,824,000) compared to losses of $(12,529,000) in the comparable period of 2000. For the nine months ended September 30, 2001, losses from continuing operations were $(23,265,000) compared to losses of $(32,281,000) for the same period of 2000. The Company previously reported losses from continuing operations of $(71,384,000) for the entire year 2000 compared to losses from continuing operations of $(65,443,000) for 1999. The 2000 loss includes a one-time charge for the write-off of goodwill of $33.5 million. The Company is continuing to seek and implement rate increases and other underwriting actions to achieve profitability. A number of systems have been automated and service problems have been eliminated or significantly reduced. Although the Company has taken a number of actions to address factors contributing to these past losses, there can be no assurance that operating losses will not continue. 15 RECENT AND FURTHER REGULATORY ACTIONS MAY ADVERSELY AFFECT THE COMPANY'S FUTURE OPERATIONS The Company's insurance company subsidiaries, their business operations, and their transactions with affiliates, including the Company, are subject to extensive regulation and oversight by the Indiana Department of Insurance ("IDOI"), the Florida Department of Insurance ("FDOI"), and the insurance regulators of other states in which the insurance company subsidiaries write business. Moreover, the insurance company subsidiaries' losses, adverse trends and uncertainties discussed in this report have been and continue to be matters of concern to the domiciliary and other insurance regulators of the Company's insurance company subsidiaries and have resulted in enhanced scrutiny, suspensions, orders and other regulatory actions by several regulators. The primary purpose of insurance regulation is the protection of policyholders rather than stockholders. Failure to resolve issues with the IDOI, FDOI, and other regulators, in a manner satisfactory to the Company could impair the Company's ability to execute its business strategies or result in future regulatory actions or proceedings that could have a material adverse effect on the Company's operations. THE COMPANY IS SUBJECT TO A NUMBER OF PENDING LEGAL PROCEEDINGS The Company is involved in a number of pending legal proceedings. The Company intends to vigorously defend all of the claims brought against it. Although the Company believes that it has claims and defenses that may offset or reduce potential liability and that many of these actions are without merit, there can be no assurance that such proceedings will not have a material adverse effect on the Company's operations. THE TERMS OF THE TRUST PREFERRED SECURITIES MAY RESTRICT THE COMPANY'S ABILITY TO ACT The Company has issued, through a wholly owned trust subsidiary, $135 million aggregate principal amount in Trust Originated Preferred Securities (the "Preferred Securities"). The Preferred Securities have a term of 30 years with annual interest payments of 9.5% paid semi-annually. The obligations of the Preferred Securities are funded from the Company's non-standard automobile management company. The Company began deferring the semi-annual interest payments in February 2000 and may continue to defer such payments for up to five years as permitted by the indenture for the Preferred Securities. Although there is no present event of default under the indenture that would accelerate the payment of the Preferred Securities, the indenture contains a number of covenants that restrict the Company's ability to act in the future. These covenants include restrictions on the Company's ability to: incur or guarantee debt; make payments to affiliates; repurchase its common stock; pay dividends on common stock; and increase its level of certain investments in other than investment grade, fixed income securities. There can be no assurance that compliance with these restrictions and other provisions of the indenture for the Preferred Securities will not adversely affect the cash flow of the Company. REVIEW OF CONSOLIDATED OPERATIONS NET LOSS The net loss for the three months ended September 30, 2001 was $(6,824,000) or $(.66) per share (basic and diluted). This is a decrease of $18,092,000 or $1.74 per share from the net loss for the same period of 2000. The decreased net loss is due primarily to the loss from operations of the discontinued crop insurance segment of $(12,387,000) realized in the third quarter of 2000 as well as improvement in realized capital gains, loss and loss adjustment expenses, and policy acquisition and general and administrative expenses. The loss on discontinued operations in 2000 also decreased the net loss for the nine months ended September 30, 2001 over the same period in 2000 by $12,091,000 or $1.16 per share. Refer to Note 8. "Discontinued Operations" of the Condensed Notes to Consolidated Financial Statements for additional information. The loss from continuing operations before taxes and distributions on preferred securities was $(3,279,000) for the three months ended September 30, 2001 compared to a loss of $(9,075,000) for the comparable period in 2000, an improvement of $5,796,000. For the nine months ended September 30, 2001, the loss from continuing operations before taxes and distributions on preferred securities improved by $9,440,000. GROSS PREMIUMS WRITTEN Gross premiums written decreased 41% for the third quarter of 2001 as compared to the third quarter of 2000. Gross premiums written in the third quarter of 2000 declined 16% from the third quarter of 1999. Both yearly declines resulted from the Company exiting certain highly competitive markets and instituting other underwriting initiatives intended to increase profitability, as well as, being limited by regulatory action from writing in certain states and general surplus 16 levels. For the first nine months of 2001, gross premium written decreased 10% over the same period in 2000, due primarily to the aforementioned rate increases and a reduction in policies in force. NET PREMIUMS WRITTEN Net premiums written represent the portion of premiums that are being retained by the Company after consideration for risk sharing through reinsurance contracts. As a result of losses in the Company's insurance subsidiaries and to manage overall risk retention, the Company entered into a reinsurance agreement to cede a portion of its gross written premiums to a third party. In the third quarter of 2001, the Company ceded approximately 46% of its gross written premiums under a quota share reinsurance contract that was effective January 1, 2000. For the first nine months of 2001, approximately 54% of gross premiums written were ceded to the reinsurer. NET PREMIUMS EARNED Net premiums earned have decreased 26% and 42% for the three and nine months ended September 30, 2001, respectively, as compared to the same periods in 2000. Premiums are earned ratably over the term of the underlying insurance contracts and the reduction in net premiums earned is a result of the decrease in written premium and the increase in ceded premiums. FEE INCOME Fee income is derived from installment billings and other services provided to policyholders. In the third quarter of 2001, fee income was 13% higher than in 2000, while fee income for the nine months of 2001 was 6% lower than in 2000. The addition of new fee types, including insufficient funds (NSF), reinstatement, and cancellation fees, as well as the earned portion of service and finance fees, accounts for the third quarter increase. The approximate overall decline in fee income of 10% equates to the overall decline in written premium in the first nine months of 2001. NET INVESTMENT INCOME Net investment income decreased 40% and 41% for the three and nine months ended September 30, 2001 compared to the same periods in 2000. This decrease is reflective of the decline in invested assets during a period of declining premiums and the payout of prior year losses settled in 2001. NET REALIZED CAPITAL GAINS AND (LOSSES) Net realized capital gains/(losses) were $793,000 and $(263,000) for the three and nine months ended September 30, 2001 respectively, as compared to net realized capital losses of $(2,632,000) and $(3,949,000) in the comparable periods of 2000. Capital gains resulted from the liquidation of longer duration fixed income securities in the third quarter of 2001in order to rebalance the portfolio. These transactions resulted in a higher cash balance at September 30, 2001 that was reinvested in the fourth quarter in shorter maturities. Capital losses were realized due to the continued liquidation of investments to fund operations and claim payments under unfavorable market conditions. LOSSES AND LOSS ADJUSTMENT EXPENSES The loss and loss adjustment expense (LAE) ratio for the Company for the three and nine months ending September 30, 2001, was 83.5% and 88.4% of net premiums earned respectively, as compared to 83.1% and 82.7% for the similar period of 2000, and to 82.3% for the entire year of 2000. A portion of LAE, unallocated loss adjustment expenses (ULAE), is not ceded as part of the quota share reinsurance contract mentioned above and accounts for the increased percentages. During the 3rd quarter of 2001 the Company experienced unfavorable development on its year-end 2000 loss and LAE reserves in the amount of $1.0 million. This increased the loss and loss adjustment expense ratio for the quarter by 4.0 percentage points. POLICY ACQUISITION AND GENERAL AND ADMINISTRATIVE EXPENSE Policy acquisition and general and administrative expenses for the three and nine months ended September 30, 2001 declined to $13,038,000 and $34,269,000, respectively, from the comparable periods of 2000. A reduction for the third quarter and first nine months of 2001 of 23% and 37%, respectively, over the same periods in 2000. This reflects an increase in ceding commissions associated with the quota share reinsurance contract and overall operating expense reductions. 17 As a percentage of gross premiums written, the Company experienced an increase in its 2001 expense ratio of 11% over 2000 for the three months ended September 30, 2001. This increase is the result of a true-up of ceding commissions earned between the second and third quarters, as year-to-date ceding percentages equal 54%, while only 46% of written premium was ceded in the third quarter. For the nine months ended September 30, 2001, the decrease in the expense ratio of 12% is the result of reduced operating expenses, the effect of increased operating expenses allocated to LAE, and an increase in ceding commissions earned under the quota share reinsurance contract over 2000. PROVISION (BENEFIT) FOR INCOME TAXES At September 30, 2001, the Company's net tax assets are fully offset by a 100% valuation allowance that resulted in no tax benefit for either the three or nine months ended September 30, 2001. REVIEW OF CONSOLIDATED FINANCIAL CONDITION CASH AND INVESTMENTS Total investments at September 30, 2001 and December 31, 2000 were $89.2 million and $134.1 million, respectively. The decline in invested assets results from continued liquidations to fund claim payments and operating expenses as well as the portfolio rebalancing mentioned above. Composition of investments is comparable between these periods and the Company's market risk exposure has not changed materially since December 31, 2000. Refer to "Net Realized Capital Gains and (Losses)" above for a discussion of other changes in cash and investment balances. REINSURANCE RECEIVABLES AND PAYABLES The Company negotiated a third-party quota share reinsurance agreement that became effective January 1, 2000. Under the quota share agreement, the Company may cede a portion of its non-standard automobile insurance premiums and related losses based on a variable percentage of up to 75% of Superior's and up to 90% of Pafco's earned premiums in 2001. The average ceding percentage over the year 2000 was 33%, with 41% being ceded in the fourth quarter of 2000. In aggregate, the Company's ceding percentage for 2001 was increased to approximately 54%. The increase in the amount of premiums and losses ceded under this contract directly affect reinsurance balances due and payable on the face of the financial statements. RECEIVABLES The receivables have decreased by $3,482,000 or 7% from December 31, 2000. This decrease is attributable to the collection of premiums from periods in which written premiums were higher and the general decline in premium volume in 2001. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Total loss and loss adjustment expense reserves decreased from $108,117,000 as of December 31, 2000 to $86,435,000 as of September 30, 2001, a reduction of approximately $21.7 million. This decrease is consistent with the Company's declining volume of business. UNEARNED PREMIUMS At September 30, 2001, unearned premiums were $60,502,000, a decrease of $1,884,000 from December 31, 2000, consistent with the decrease in written premiums discussed above. DEFERRED INCOME In connection with the sale of the crop insurance book of business to Acceptance on June 6, 2001, the Company received a payment of $4.5 million for agreeing not to engage in the crop insurance business for three years from the sale date. The payment is being amortized to income on a straight-line basis over the three-year period with four months of amortization taken ($500,000) through September 30, 2001. STOCKHOLDERS' (DEFICIT) Stockholders' (deficit) and the increase in the realized loss on investment of $(211,000) has increased by $(25,632,000) from December 31, 2000. This increase is the result of the net loss of $(25,421,000) for the nine months ended September 30, 2001. 18 LIQUIDITY AND CAPITAL RESOURCES The primary source of funds available to the management and holding companies are fees from policyholders, management fees and dividends from its primary subsidiaries. The Company collects billing fees charged to policyholders that elect to make their premium payments in installments and also receives management fees pursuant to a management agreement between Superior Insurance Group, Inc. ("Superior Group") and Superior Insurance Company ("Superior"). Superior may pay dividends of up to 10% of surplus or 100% of net income, whichever is greater, from earned surplus as permitted by Florida statute. During 2000 and 2001 Superior has had no net income from which to pay dividends. As a result of regulatory actions taken by the Indiana Department of Insurance ("IDOI") with respect to Pafco and IGF, those subsidiaries may not pay dividends without prior approval by the IDOI. Extraordinary dividends, within the meaning of the Indiana Insurance Code, cannot be paid by Pafco without the prior approval of the Indiana Insurance Commissioner. The management fees charged to Pafco, IGF and Superior are subject to review by the IDOI and FDOI. The non-standard automobile insurance subsidiaries' primary sources of funds are premiums, investment income and proceeds from the maturity or sale of invested assets. Such funds are used principally for the payment of claims, payment of claims settlement costs, operating expenses (primarily management fees), commissions to independent agents, premium taxes, dividends and the purchase of investments. There is variability to cash outflows because of uncertainties regarding settlement dates for liabilities for unpaid losses. Accordingly, the Company maintains investment programs intended to provide adequate funds to pay claims. During the third quarter of both 2001 and 2000, due to reduced premium volume, the Company has liquidated investments to pay claims. The Company historically has tried to maintain duration averages of 3.5 years. However, the reduction in new funds due to lower premium volume has and will cause the Company to shorten duration. The Company may incur the cost of selling longer bonds to pay claims as claim payments tend to lag premium receipts. Due to the decline in premium volume, the Company has experienced a reduction in its investment portfolio, but to date has not experienced any problems meeting its obligations for claims payments. On August 12, 1997, the Company issued through a wholly owned trust subsidiary $135 million aggregate principal amount in Trust Originated Preferred Securities ("Preferred Securities"). The Preferred Securities have a term of 30 years with annual interest payments of $6.5 million, which commenced February 15, 1998. The Preferred Securities may be redeemed in whole or in part after 10 years. The Company began deferring the semi annual interest payments in February 2000. The Company may continue to defer interest payments in accordance with the terms of the trust indenture for up to five years. The unpaid interest installment amounts accrue interest at 9.5%. The Company last deferred the interest payment due in August 2001. The trust indenture contains certain restrictive covenants. These covenants are based upon the Company's consolidated coverage ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) whereby if the Company's EBITDA falls below 2.5 times consolidated interest expense (including Preferred Security distributions) for the most recent four quarters, the following restrictions become effective: o The Company may not incur additional indebtedness or guarantee additional indebtedness. o The Company may not make certain restricted payments including making loans or advances to affiliates, repurchasing common stock and the payment of dividends in excess of a stated limitation. o The Company may not increase its level of non-investment grade securities defined as equities, mortgage loans, real estate, real estate loans and non-investment grade fixed income securities. These restrictions currently apply as the Company's consolidated coverage ratio was .86 at September 30, 2001, and will continue to apply until the Company's consolidated coverage ratio is in compliance with the terms of the trust indenture. The Company is in compliance with these additional restrictions. Net cash used in operating activities in the first nine months of 2001 aggregated $(19.5) million compared to cash used of $(33.8) million in the comparable period of 2000. Management believes cash flows from premiums, investment income, billing fees and the liquidation of investments, as necessary, in the non-standard automobile operations will be sufficient to meet obligations to policyholders and operating 19 expenses for the foreseeable future. This is due primarily to the lag time between receipt of premiums and claims payments. 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 operating debt service (not including the Preferred Securities) for the foreseeable future. GAAP stockholders' equity reflected a deficit of $(138,077,000) at September 30, 2001, which does not reflect the statutory equity upon which the Company conducts its various insurance operations. The Company's insurance subsidiaries, after the effects of Codification (See Note 3 to the consolidated financial statements), had statutory surplus of approximately $38.1 million at September 30, 2001. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Information related to Qualitative and Quantitative Disclosures about Market Risk was included under Item 1. Business in the December 31, 2000 Form 10-K. No material changes have occurred in market risk since this information was disclosed in the December 31, 2000 Form 10-K. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported, IGF, which is a wholly owned subsidiary of the Company, had been a party to a number of pending legal proceedings and claims relating to agricultural production interruption insurance policies (the "AgPI Program") which were sold during 1998. Sales of this product resulted in large underwriting losses by IGF. Approximately $29,147,278 was paid through September 30, 2001 in settlement of legal proceedings and claims related to the AgPI Program, with payments totaling approximately $359,114 for the first three quarters of 2001. A reserve of approximately $5,635,079 remains to pay future claims. All of the policies of insurance, which were issued in the AgPI Program, were issued by and under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota corporation with its principal place of business located in Arden Hills, Minnesota. A dispute arose between MSI and IGF with respect to the funding of the settlements of claims made on the AgPI Program. MSI and IGF currently are arbitrating their dispute over responsibility for over $60 million in claims paid by both companies to MSI's insureds. IGF is seeking a recovery of the $30 million in claims which it paid, and MSI is seeking a similar recovery of the claims which it paid. The arbitration commenced on December 20, 2000. The parties subsequently selected an arbitration panel and had their first, organizational meeting with the panel on May 22, 2001. At that meeting, MSI moved for an order requiring IGF to post pre-hearing security through the issuance of a letter of credit in the amount of $39 million. Over IGF's objection, in a two to one vote, the panel on June 9, 2001, ordered IGF to post the $39 million in security, which IGF was to have done by June 19, 2001. On or about June 11, 2001, IGF filed a motion in the United States District Court for the District of New Jersey seeking to vacate the arbitration panel's order requiring security. On June 19, 2001, MSI filed a motion in the same court for a ruling confirming that order. On July 26, 2001, the parties presented oral arguments on their cross-motions for vacation and confirmation of the order. On August 6, 2001 the court denied IGF's motion to vacate the arbitration panel's order. As of this date, IGF has not posted the required letter of credit, and it is financially incapable of satisfying that requirement. On November 7, 2001 the arbitration panel considered a petition for default judgment against IGF based on IGF's failure to post the pre-hearing security. In the event the arbitration panel orders a default judgment against IGF, IGF will appeal the order to the United States District Court of New Jersey. On June 25, 2001, MSI filed a complaint for preliminary and permanent injunctive relief and damage (the "MSI Complaint") against the Company, IGF, IGFH, Granite Re, Goran and certain affiliates of those companies, as well as certain members of the Symons family, and Acceptance in the United States District Court for the Southern District of Indiana, Indianapolis Division. The MSI Complaint alleges that the previously reported June 6, 2001 transfer of IGF's assets to Acceptance and the payments by Acceptance to the Company, Goran and Granite Re violated Indiana law and are avoidable. In addition, the MSI Complaint alleges that Acceptance, the Company, Goran, IGFH and the Symons Family are liable to MSI for the entire $39 million claim which MSI is asserting against IGF in arbitration proceedings 20 on theories of successor liability and "piercing the corporate veil." The MSI Complaint seeks preliminary and permanent injunctive relief against the defendants, an order voiding the various transactions between and among the defendants and an order determining that the defendants are directly responsible to MSI for MSI's $39 million claim against IGF. July 26, 2001, the defendants filed answers to the MSI Complaint. In those answers, each of the defendants denied the material allegations contained in the MSI Complaint and asserted certain affirmative defenses to that complaint. Each of those defendants also filed briefs in opposition to MSI's Motion for Preliminary Injunctive Relief. A hearing on MSI's Motion for Preliminary Injunctive Relief was held Thursday, August 2, 2001. On August 3, 2001, the court denied MSI preliminary injunctive relief. In the event MSI is successful in obtaining permanent injunctive relief against the Company and its affiliates, any such relief would have an adverse impact upon the Company and its affiliates and their respective assets and operations. Further, in the event MSI is successful in obtaining court orders voiding the various transactions between the defendants and determining that the defendants are directly responsible to MSI for MSI's $39 million claim against IGF, those orders and determinations also could have an adverse effect upon the Company and its affiliates and their respective assets and operations. As previously reported, the Company and two of its subsidiaries, IGFH and IGF, are parties to a "Strategic Alliance Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company ("CNA"), pursuant to which IGF acquired certain crop insurance operations of CNA. Through reinsurance agreements, CNA was to share in IGF's profits or losses on IGF's total crop insurance business. By letter dated January 3, 2001, CNA gave notice pursuant to the SAA of its exercise of the "Put Mechanism" under the SAA effective February 19, 2001. According to the SAA, upon exercise of the Put Mechanism, IGFH is obligated to pay CNA an amount equal to 5.85 times "Average Pre-Tax Income", an amount based in part upon payments made to CNA under the SAA. The SAA further provided that 30 days after exercise of the Put, IGF will execute a promissory note payable six months after the exercise of the Put in the principal amount equal to the amount owed, as specified by the SAA. In a letter dated March 20, 2001CNA also asserted a claim for amounts allegedly due under reinsurance agreements for the 2000 crop year. Also, as previously reported, the Company believes it has claims against CNA and defenses to CNA's claim that may ultimately offset or reduce amounts owed to CNA. The Company and CNA engaged in discussions regarding possible alternatives for the resolution of their respective claims against each other. However, those discussions ultimately proved to be unsuccessful. Following the failure of settlement discussions, on June 4, 2001, IGF, IGFH and the Company filed a complaint against CNA (the "IGF Complaint") in the United States District Court for the Southern District of Indiana, Indianapolis Division. The IGF Complaint asserts claims against CNA for fraud and constructive fraud in connection with the SAA and breach of contract and seeks relief against CNA for compensatory and punitive damages. On June 27, 2001, CNA filed its "Answer, Separate Defenses and Counterclaim", in which CNA generally denied the material allegations of the IGF Complaint and asserted various defenses to those claims. On June 6, 2001, CNA filed a complaint against IGF, IGFH and the Company (the "CNA complaint") asserting claims based on the SAA and related agreements for approximately $25 million allegedly owed CNA by virtue of its exercise of the Put Mechanism, $3 million for amounts allegedly due under reinsurance agreements for the 2000 crop year, $1 million for certain "fronting costs," and $1 million pursuant to a note executed by IGFH to CNA's affiliate in connection with the acquisition by IGFH of North American Crop Underwriters, Inc. in 1998. CNA also asserted claims to the effect that the June 6, 2001 sale of IGF assets to Acceptance resulted in payments of funds to Goran, the Company and Granite Re, which funds allegedly should have been paid to IGF instead. On June 6, 2001, CNA asked the district court to enter a temporary restraining order preventing IGF, IGFH and the Company from disposing of the proceeds received by them in connection with the sale of IGF assets to Acceptance. In an emergency hearing, the court denied CNA the relief it requested, without prejudice to reconsideration of those issues at a future time. CNA has since amended the CNA Complaint to add Goran and Granite Re as defendants. CNA's counterclaim in response to the IGF Complaint asserts essentially the same claims against the same parties as the amended CNA Complaint. On September 20, 2001, the court ordered a consolidation of the two cases. Discovery in the case is proceeding. 21 Although the Company continues to believe that it has claims against CNA and defenses to CNA's claims which may offset or reduce amounts owing by the Company of its affiliates to CNA, there can be no assurance that the ultimate resolution of the claims asserted by CNA against the Company and its affiliates will not have a material adverse effect upon the Company and its affiliates financial condition or results of operations. As previously reported, the California Department of Insurance ("CDOI") filed a Notice of Non-Compliance against Superior on June 29, 2001, which alleges that broker fees were charged by independent brokers in violation of California law. The Company and the CDOI are presently in settlement discussions, and the Company expects to settle with the CDOI during the fourth quarter. Although the ultimate outcome of the settlement discussions is unknown, the Company believes it will settle for an amount less than $200,000 and therefore has accrued this amount in its consolidated financial statements. Superior is a defendant in a case filed on May 8, 2001 in the United States District Court for the Southern District of Florida entitled The Chiropractic Centre, Inc. v. Superior Insurance Company which purports to be brought on behalf of a class consisting of healthcare providers improperly paid discounted rates on services to patients based upon a preferred provider contract with a third party. The plaintiff alleges that Superior breached a third party beneficiary contract, committed fraud and engaged in racketeering activity in violation of federal and Florida law by obtaining discounted rates offered by an third party with whom the plaintiff contracted directly. Superior believes that the allegations of wrongdoing as alleged in the complaint are without merit and intends to vigorously defend the claims brought against it. See footnote 4, "Commitment and Contingencies", and footnote 3, "Regulatory Affairs", to the Company's consolidated financial statements in Part I of this report, incorporated herein by reference, for additional legal matters. Except as set forth above, there have been no other material developments in any of the pending legal proceedings previously reported by the Company in the June 30, 2001 Form 10-Q. The Company's insurance subsidiaries are parties to other 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 estimate costs of litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS Employment agreement by and between the Company and Mark A. Paul dated July 30, 2001. REPORTS ON FORM 8-K On August 2, 2001 the Company filed a Form 8-K describing recent legal proceedings and regulatory actions regarding the Registrant and its affiliates as discussed above under "Legal Proceedings," "Commitments and Contingencies," and "Regulatory Affairs." 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 12, 2001. By: /s/ Douglas H. Symons --------------------- Douglas H. Symons Chief Executive Officer By: /s/ Mark A. Paul -------------------------- Mark A. Paul Vice President, Chief Financial Officer, and Treasurer 23 EX-6 3 gex6-26294.txt EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into by and between Symons International Group, Inc. (the "Company") and Mark A. Paul ("You", "Your"or "Executive") with reference to the following: WHEREAS, the Company considers it essential to its best interests and the best interests of its stockholders to employ Mark A. Paul, upon the terms and conditions hereinafter set forth; and WHEREAS, the Executive desires to be employed by the Company upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the covenants and agreements set forth below, the parties agree as follows: 1. EMPLOYMENT 1.1 TERM OF AGREEMENT. The Company agrees to employ Executive as Vice President, Chief Financial Officer and Treasurer, effective as of July 30, 2001 and continuing until such employment is terminated pursuant to Section 3 below PROVIDED, HOWEVER, that the term of this Agreement shall automatically be extended without further action of either party for additional one (1) year periods thereafter unless, not later than one hundred twenty (120) days prior to the end of the then effective term, either the Company or the Executive shall have given written notice that such party does not intend to extend this Agreement ("Notice of Non-Renewal"). If Company gives Executive such a Notice of Non-Renewal, Executive's employment shall be deemed to be a termination without cause and Executive's employment shall terminate as of the expiration date of this Agreement. It is expressly understood and agreed that a Notice of Non-Renewal issued by the Company shall not extinguish the Executive's obligations pursuant to Section 4 herein, nor shall such Notice of Non-Renewal extinguish Executive's right to severance pay pursuant to Section 3 herein. 1.2 TERMS OF EMPLOYMENT. During the term of this Agreement, You agree to be a full-time employee of the Company serving in the position of Vice President, Chief Financial Officer and Treasurer of the Company and further agree to devote substantially all of Your working time and attention to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities associated with Your position as Vice President, Chief Financial Officer and Treasurer of the Company, to use Your best efforts to perform faithfully and efficiently such responsibilities. Executive shall perform such duties and responsibilities as may be determined from time to time by the Vice Chairman, Chief Executive Officer or Executive Vice President of the Company and the Board of Directors of the Company, which duties shall be consistent with the position of Vice President, Chief Financial Officer and Treasurer of the Company, which shall grant Executive authority, responsibility, title and standing comparable to that of the Vice President, Chief Financial Officer and Treasurer of a stock insurance holding company of similar standing. Nothing herein shall prohibit You from devoting Your time to civic and community activities or managing personal investments, as long as the foregoing do not interfere with the performance of Your duties hereunder. 1.3 APPOINTMENT AND RESPONSIBILITY. The Board of Directors of the Company shall, following the effective date of this Agreement, elect and appoint Executive as Vice President, Chief Financial Officer and Treasurer. 2. COMPENSATION, BENEFITS AND PERQUISITES 2.1 SALARY. Company shall pay Executive a salary, in equal bi-weekly installments, equal to an annualized salary rate of One Hundred Twenty Thousand Dollars ($120,000). Executive's salary payable pursuant to this Agreement may be increased from time to time as mutually agreed upon by Executive and the Company. The Company shall pay Executive the salary applicable in twenty-six (26) bi-weekly installments. Notwithstanding any other provision of this Agreement, Executive's salary paid by Company for any year covered by this Agreement shall not be less than such salary paid to Executive for the immediately preceding calendar year. All salary and bonus amounts paid to Executive pursuant to this Agreement shall be in U.S. dollars. 2.2 BONUS. The Company and Executive understand and agree that the Company expects to achieve significant growth during the term of this Agreement and that Executive will make a material contribution to that growth which will require certain personal and familial sacrifices on the part of Executive. Accordingly, it is the desire and intention of the Company to reward Executive for the attainment of that growth through bonus and other means (including, but not limited to, stock options, stock appreciation rights and other forms of incentive compensation). Therefore, the Company may, in its discretion, pay Executive an annual bonus of up to an additional thirty percent (30%) of Executive's salary based upon goals established by Executive and the Vice Chairman, Chief Executive Officer or Executive Vice President of SIG. 2.3 EMPLOYEE BENEFITS. Executive shall be entitled to receive health plan benefits which are provided to other executive employees of Company under the applicable Company plans and policies, and to future benefits and health plan benefits made generally available to executive employees of the Company with duties and compensation comparable to that of Executive upon the same terms and conditions as other Company participants in such plans. 2.4 ADDITIONAL PERQUISITES. During the term of this Agreement, Company shall provide Executive with not less than three (3) weeks paid vacation during each calendar year. In addition, Executive shall receive THE USE OF A VOLVO S80 AND THE COMPANY WILL REIMBURSE EXECUTIVE FOR ALL OPERATIONAL EXPENSES. AT THE EXPIRATION OF THE LEASE OF THE VOLVO S80 IN MAY, 2002, EXECUTIVE WILL BE PROVIDED A MOTOR VEHICLE ALLOWANCE OF $600 PER MONTH. 2.5 EXPENSES. During the period of his employment hereunder, Executive shall be entitled to receive reimbursement from the Company (in accordance with the policies and procedures in effect for the Company's employees) for all reasonable travel, entertainment and other business expenses incurred by him in connection with his services hereunder. 3. TERMINATION OF EXECUTIVE'S EMPLOYMENT 3.1.1 TERMINATION OF EMPLOYMENT AND SEVERANCE PAY. Executive's employment under this Agreement may be terminated by either party at any time for any reason; PROVIDED, HOWEVER, that if Executive's employment is terminated by the Company for any reason other than for cause, he shall receive, as severance pay, up to six (6) month's then current salary paid in regular bi-weekly payments (the "Salary Continuation"), subject to reduction as provided in Section 3.1.2. Further, if Executive shall be terminated without cause, receipt of severance payments described in the preceding sentence is conditioned upon execution by Executive and the Company of that mutual Waiver and Release attached hereto as Exhibit A. Further, Executive shall receive severance pay in accordance with this Section 3.1 if Executive shall terminate this Agreement due to a breach thereof by the Company or if Executive is directed by the Company (including, if applicable, any successor) to engage in any act or action constituting fraud or any unlawful conduct relating to the Company or its business as may be determined by application of applicable law. For purposes of this Section 3.1, termination of employment shall include a change of employment such that Executive shall no longer be employed by the Company as a Vice President or as its senior executive responsible for the accounting and finance function of the Company or at a salary less than Executive's current salary. 3.1.2 REDUCTION OF SALARY CONTINUATION. It is expressly understood and agreed that the amount of any payment to Executive required pursuant to Section 3.1.1 shall be reduced (but not below zero) by the amount of any compensation received by Executive or attributable to services performed by Executive during the Salary Continuation period. During the Salary Continuation, Executive shall provide the Company with a bi-weekly report which shall specify all services performed by Executive for third parties, the identity of the person or entity for which services were performed and any compensation paid or expected to be paid to or for the benefit of Executive. Executive shall use his reasonable best efforts during the Salary Continuation period to obtain employment comparable to that with the Company. 3.2 CAUSE. For purposes of this Section 3, "cause" shall mean: (a) the Executive being convicted in the United States of America, any State therein, or the District of Columbia, or in Canada or any Province therein (each, a "Relevant Jurisdiction"), of a crime for which the maximum penalty may include imprisonment for one year or longer (a "felony") or the Executive having entered against him or consenting to any judgment, decree or order (whether criminal or otherwise) based upon fraudulent conduct or violation of securities laws; (b) the Executive's being indicted for, charged with or otherwise the subject of any formal proceeding (criminal or otherwise) in connection with any felony, fraudulent conduct or violation of securities laws, in a case brought by a law enforcement or securities regulatory official, agency or authority in a Relevant Jurisdiction; (c) the Executive engaging in fraud, or engaging in any unlawful conduct relating to the 3 Company or its business, in either case as determined under the laws of any Relevant Jurisdiction; (d) the Executive breaching any provision of this Agreement; or (e) the Executive "Grossly Neglects" his duty to the Company. For purposes of this Agreement, "Gross Neglect" means the failure to perform the functions of the Executive's job or the failure by Executive to carry out reasonable directions with respect to material duties after the Executive has been notified in writing that the Executive is failing to perform these functions or failing to carry out reasonable directions. Such notice shall specify the functions or directions that the Executive is failing to perform and what steps need to be taken to cure and shall set forth the reasonable time frame, which shall be at a minimum forty-five (45) days, within which to cure. If Executive fails to cure within the time frame, the Company may terminate Executive's employment for cause by giving him thirty (30) days notice or pay in lieu thereof. 3.3.1 CHANGE OF CONTROL. Notwithstanding any other provision of this Agreement, if (i) a Change of Control (as defined below) shall occur; and (ii) within six (6) months of any such Change of Control, Executive (a) terminates his employment with the Company; (b) is terminated by the Company for any reason other than for cause; or (c) the Company (including its successors, if any) is in breach of this Agreement, then Executive shall continue to receive his current salary (in bi-weekly payments) until the expiration of six (6) months from the date of Executive's termination of employment. For purposes of this Section 3.3, termination of employment shall include a change of employment such that Executive shall no longer be employed by the Company as a Vice President or as its senior executive responsible for the accounting and finance function of the Company or at a salary less than Executive's current salary. 3.3.2 CONDITION OR REDUCTION OF SALARY CONTINUATION. The receipt by Executive of payments pursuant to Section 3.3.1 is specifically conditioned upon, and no payments pursuant to Section 3.3.1 shall be made to Executive if he is, at the time of his termination of employment, in breach of any provision (specifically including, but not limited to the provisions of this Agreement pertaining to non-competition, nonsolicitation and confidentiality) of this Agreement and, further, if such payments have already begun the continuation of payments to Executive pursuant to Section 3.3.1 shall cease at the time Executive shall fail to comply with the non-competition, nonsolicitation and confidentiality provisions of Article 4. It is expressly understood and agreed that the amount of any payment to Executive required pursuant to Section 3.3.1 shall be reduced (but not below zero) by any employment compensation received by Executive during the period called for in Section 3.3.1. Executive shall use his reasonable best efforts during the salary continuation period set forth in Section 3.3.1 to obtain employment comparable to that with the Company. 3.3.3 CHANGE OF CONTROL. A "Change of Control" shall mean (i) a change of ownership of Goran Capital Inc. ("Goran") such that the Symons family collectively owns, including indirect and beneficial ownership, less than thirty-five percent (35%) of the stock of Goran; (ii) the inability of 4 the Symons family to cause the election of a majority of the members of the Board of Directors of either Goran, the Company, or their respective successors; or (iii) a change in the ability of the Symons family to direct the management of the day to day operations of Goran, the Company or their respective successors. 3.4 DISABILITY. So long as otherwise permitted by law, if Executive has become permanently disabled from performing his duties under this Agreement, the Company's Chairman of the Board, may, in his discretion, determine that Executive will not return to work and terminate his employment as provided below. Upon any such termination for disability, Executive shall be entitled to such disability, medical, life insurance, and other benefits as may be provided generally for disabled employees of Company during the period he remains disabled. Permanent disability shall be determined pursuant to the terms of Executive's long term disability insurance policy provided by the Company. If Company elects to terminate this Agreement based on such permanent disability; such termination shall be for cause. 3.5 INDEMNIFICATION. Executive shall be indemnified by Company (and, where applicable, its subsidiaries) to the maximum extent permitted by applicable law for actions undertaken for, or on behalf of, the Company and its subsidiaries. 4. NON-COMPETITION, NON-SOLICITATION, CONFIDENTIALITY AND TRADE SECRETS 4.1 NONCOMPETITION. In consideration of the Company's entering into this Agreement and the compensation and benefits to be provided by the Company to You hereunder, and further in consideration of Your exposure to proprietary information of the Company, You agree that until the date of termination or expiration of this Agreement for any reason (the "Date of Termination") not to enter into competitive endeavors and not to undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including, directly or indirectly, becoming an employee, consultant, owner (except for passive investments of not more than one percent (1%) of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities market), officer, agent or director of, or otherwise participating in the management, operation, control or profits of (a) any firm or person engaged in the operation of a business engaged in the acquisition of insurance businesses or (b) any firm or person which either directly competes with a line or lines of business of the Company accounting for five percent (5%) or more of the Company's gross sales, revenues or earnings before taxes or derives five percent (5%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company. Notwithstanding any provision of this Agreement to the contrary, You agree that Your breach of the provisions of this Section 4.1 shall permit the Company to terminate Your employment for cause. 5 4.2 CONFIDENTIALITY. YOU SHALL NOT KNOWINGLY DISCLOSE OR REVEAL TO ANY UNAUTHORIZED PERSON, DURING OR AFTER THE TERM, ANY TRADE SECRET OR OTHER CONFIDENTIAL INFORMATION (AS OUTLINED IN THE INDIANA UNIFORM TRADE SECRETS ACT) RELATING TO THE COMPANY OR ANY OF ITS AFFILIATES, OR ANY OF THEIR RESPECTIVE BUSINESSES OR PRINCIPALS, AND YOU CONFIRM THAT SUCH INFORMATION IS THE EXCLUSIVE PROPERTY OF THE COMPANY AND ITS AFFILIATES. YOU AGREE TO HOLD AS THE COMPANY'S PROPERTY ALL MEMORANDA, BOOKS, PAPERS, LETTERS AND OTHER DATA, AND ALL COPIES THEREOF OR THEREFROM, IN ANY WAY RELATING TO THE BUSINESS OF THE COMPANY AND ITS AFFILIATES, WHETHER MADE BY YOU OR OTHERWISE COMING INTO YOUR POSSESSION AND, ON TERMINATION OF YOUR EMPLOYMENT, OR ON DEMAND OF THE COMPANY AT ANY TIME, TO DELIVER THE SAME TO THE COMPANY. ANY IDEAS, PROCESSES, CHARACTERS, PRODUCTIONS, SCHEMES, TITLES, NAMES, FORMATS, POLICIES, ADAPTATIONS, PLOTS, SLOGANS, CATCHWORDS, INCIDENTS, TREATMENT, AND DIALOGUE WHICH YOU MAY CONCEIVE, CREATE, ORGANIZE, PREPARE OR PRODUCE DURING THE PERIOD OF YOUR EMPLOYMENT AND WHICH IDEAS, PROCESSES, ETC. RELATE TO ANY OF THE BUSINESSES OF THE COMPANY, SHALL BE OWNED BY THE COMPANY AND ITS AFFILIATES WHETHER OR NOT YOU SHOULD IN FACT EXECUTE AN ASSIGNMENT THEREOF TO THE COMPANY, BUT YOU AGREE TO EXECUTE ANY ASSIGNMENT THEREOF OR OTHER INSTRUMENT OR DOCUMENT WHICH MAY BE REASONABLY NECESSARY TO PROTECT AND SECURE SUCH RIGHTS TO THE COMPANY. 4.3 NONSOLICITATION. During Executive's employment with the Company and for one (1) year following termination of Executive's employment, Executive will not directly or indirectly solicit, divert or interfere with the relationship between Company or its affiliates and any employee of Company or its affiliates. 5. MISCELLANEOUS 5.1 AMENDMENT. This Agreement may be amended only in writing, signed by both parties. 5.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard to the employment of Executive or the obligations of the Company or the Executive. This Agreement supersedes all prior employment contracts and non-competition agreements between the parties. 5.3 NOTICES. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to the Company, to: Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: Chief Executive Officer 6 If to Executive, to: Mark A. Paul 112 West 44th Street Indianapolis, IN 46208 or to such other addresses as one party may designate in writing to the other party from time to time. 5.4 WAIVER OF BREACH. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 5.5 VALIDITY. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH SHALL REMAIN IN FULL FORCE AND EFFECT. 5.6 GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Indiana, without giving effect to conflict of law principles. 5.7 HEADINGS. The headings of articles and sections herein are included solely for convenience and reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 5.8 COUNTERPARTS. This Agreement may be executed by either of the parties in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. 5.9 SURVIVAL. Company's obligations under Section 3.1 and Executive's obligations under Section 4 shall survive the termination and expiration of this Agreement in accordance with the specific provisions of those Paragraphs and Sections and this Agreement in its entirety shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto. 5.10 MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by You and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. SYMONS INTERNATIONAL GROUP, INC. By: /s/ DOUGLAS H. SYMONS ------------------------------- Douglas H. Symons, Chief Executive Officer 7 By: /s/ Mark A. Paul ------------------------------- Mark A. Paul 8 -----END PRIVACY-ENHANCED MESSAGE-----