-----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, SRdujiklfGuoI0E5ichhvas9fdjOJBlsZ3e2q8ZjKFKRRPYfWRNY19EVYmthuCPB JxzZzVeARWXvF66hX1JTSQ== 0000925600-97-000002.txt : 19970430 0000925600-97-000002.hdr.sgml : 19970430 ACCESSION NUMBER: 0000925600-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 DATE AS OF CHANGE: 19970409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GORAN CAPITAL INC CENTRAL INDEX KEY: 0000925600 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24366 FILM NUMBER: 97572242 BUSINESS ADDRESS: STREET 1: 181 UNIVERSITY AVE - STE 1101 STREET 2: BOX 11 CITY: TORONTO ONTARIO CANA STATE: A6 BUSINESS PHONE: 4165941155 MAIL ADDRESS: STREET 1: 4720 KINGSWAY DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46205 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) ( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the year ended December 31, 1996. ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________. Commission File Number: 000-24366 GORAN CAPITAL INC. (Exact name of registrant as specified in its charter) CANADA Not Applicable (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 181 University Avenue, Suite 1101 M5H 3M7 Toronto, Ontario Canada (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (416) 594-1155 (Canada) (317) 259-6300 (U.S.A.) Securities registered pursuant to Section 12(b) of the Act: Common Shares Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the Issuer's Common Stock held by nonaffiliates, as of March 25, 1997 was $128,101,996 (US). The number of shares of Common Stock of the Registrant, without par value, outstanding as of March 25, 1997 was 5,569,652. Documents Incorporated By Reference: Portions of the Annual Report to Shareholders and the Proxy Statement for the 1997 Annual Meeting of Shareholders are incorporated into Parts II and III. Exchange Rate Information The Company's accounts and financial statements are maintained in U.S. Dollars. In this Report all dollar amounts are expressed in U.S. Dollars except where otherwise indicated. The following table sets forth, for each period indicated, the average exchange rates for U.S. Dollars expressed in Canadian Dollars on the last day of each month during such period, the high and the low exchange rate during that period and the exchange rate at the end of such period, based upon the noon buying rate in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"). Foreign Exchange Rates U.S. to Canadian Dollars For The Years Ended December 31, 1996 1995 1994 1993 1992 Average .7339 .7287 .7322 .7733 .8342 Period End .7301 .7325 .7129 .7544 .7865 High .7472 .7465 .7642 .8046 .8757 Low .7270 .7099 .7097 .7439 .7761 Accounting Principles The financial information contained in this document is stated in U.S. Dollars and is expressed in accordance with Canadian Generally Accepted Accounting Principles unless otherwise stated. GORAN CAPITAL INC. ANNUAL REPORT ON FORM 10-K December 31, 1996 PART I ITEM 1. BUSINESS FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SIGNATURES ITEM 1 - BUSINESS (figures stated in U.S. dollars) General Goran Capital Inc. ("Goran" or the "Company") is a Canadian federally incorporated holding company principally engaged in the business of underwriting property and casualty insurance through its insurance sub- sidiaries Pafco General Insurance Company ("Pafco"), Superior Insurance Company ("Superior") and IGF Insurance Company ("IGF"), which maintain their headquarters in Indianapolis, Indiana, Atlanta, Georgia and Des Moines, Iowa, respectively. Goran owns 67% of a U.S. holding company, Symons International Group, Inc. ("SIG"). SIG owns 100% of IGF and owns 52% of GGS Management Holdings, Inc. ("GGS Holdings") and GGS Management, Inc. ("GGS") which are the holding company and management company for Pafco and Superior. The remaining 48% is owned by funds affiliated with Goldman Sachs & Co. Goran sold 33% of SIG in an Initial Public Offering in November, 1996. The Company's other subsidiaries include Granite Reinsurance Company Ltd. ("Granite Re"), Granite Insurance Company ("Granite"), a Canadian federally licensed insurance company and Symons International Group, Inc. - Florida ("SIGF"), a surplus lines underwriter located in Florida. The Company writes business in the U.S. exclusively through independent agencies and seeks to distinguish itself by offering high quality, technology based services for its agents and policyholders. The Company's nonstandard automobile insurance business, with its principal offices in Indianapolis, Indiana, Atlanta, Georgia, and Tampa, Florida, writes insurance through approximately 4,500 independent agencies in 18 states. IGF with its principal office in Des Moines, Iowa and regional offices in California, Indiana, Kansas, Mississippi and North Dakota, writes MPCI and crop hail insurance through approximately 1,200 independent agencies in 31 states. Based on a Company analysis of gross premiums written in 1995 as reported by A.M. Best, the Company believes that the combination of Pafco and Superior makes the Company's nonstandard automotive group the sixteenth largest under- writer of nonstandard automobile insurance in the United States. Based on premium information compiled in 1995 by the Federal Crop Insurance Corporation ("FCIC") and National Crop Insurance Service, Inc. ("NCIS"), the Company believes that IGF is the fifth largest underwriter of MPCI in the United States. Granite Re is a specialized reinsurance company that underwrites niche products such as nonstandard automobile, crop, property casualty reinsurance and offers (on a non-risk bearing, fee basis), rent-a-captive facilities for Bermudian, Canadian and U.S. reinsurance companies. Through a rent-a-captive program, Granite Re offers the use of its capital and its underwriting facilities to write specific programs on behalf of its clients, including certain programs ceded from IGF and Pafco. Granite Re alleviates the need for its clients to establish their own insurance company and also offers this facility in an offshore environment. Granite sold its book of business in January 1990 to an affiliate which subsequently sold to third parties in June 1990. Granite currently has approximately 40 outstanding claims and maintains an investment portfolio sufficient to support those claim liabilities which will likely be settled between now and the year 2000. On January 31, 1996, Goran, SIG, Fortis, Inc. and its wholly-owned subsidiary, Interfinancial, Inc., a holding company for Superior entered into a Stock Purchase Agreement (the "Superior Purchase Agreement") pursuant to which SIG agreed to purchase Superior from Interfinancial, Inc. (the "Acquisition") for a purchase price of approximately $66.6 million. Simultaneously with the execution of the Superior Purchase Agreement, Goran, SIG, GGSH and GS Capital Partners II, L.P. ("GS Funds"), a Delaware limited partnership, entered into an agreement (the "GGS Agreement") to capitalize GGSH and to cause GGSH to issue its capital stock to SIG and to the GS Funds, so as to give SIG a 52% ownership interest and the GS Funds a 48% ownership interest (the "Formation Transaction"). Pursuant to the GGS Agreement (a) SIG contributed to GGSH (i) all the outstanding common stock of Pafco General Insurance Company ("Pafco"), with a book value of $16.9 Million, (ii) its right to acquire Superior pursuant to the Superior Purchase Agreement, and (iii) certain fixed assets, including office furniture and equipment, having value of approximately $350,000, and (b) the GS Funds contributed to GGSH $21.2 Million in cash. The Formation Transaction and the Acquisition were completed on April 30, 1996. Pursuant to the GGS Agreement, prior to the SIG's contribution of Pafco to GGSH, Pafco transferred all of the outstanding capital stock of IGF Insurance Company ("IGF") (the "Transfer") in order to improve the risk-based capital rating of Pafco and to permit GGSH to focus exclusively on the nonstandard automobile insurance business. Pafco accomplished the Transfer by forming a wholly-owned subsidiary, IGF Holdings, Inc. ("IGF Holdings"), to which Pafco contributed all of the outstanding shares of capital stock of IGF. Prior to the distribution of the IGF Holdings capital stock to the SIG, IGF Holdings paid to Pafco a dividend in the aggregate amount of approximately $11.0 Million (the "Dividend"), consisting of $7.5 Million in cash and a subordinated promissory note in the principal amount of approximately $3.5 Million (the "IGF Note"). Pafco then distributed the outstanding capital stock of IGF Holdings to SIG. IGF Holdings funded the cash portion of the Dividend with bank debt in the principal amount of $7.5 Million (the "IGFH Bank Debt"). The IGFH Bank Debt and the IGF Note were repaid with a portion of the proceeds from the Offering. Prior to the Offering, the Company, through Symons International Group, Inc. - - - - Florida ("SIGF"), its specialized surplus lines underwriting unit based in Florida, provided certain commercial insurance products through retail agencies, principally in the southeast United States. SIGF writes these specialty products through a number of different insurers including Pafco, United National Insurance Group, Munich American Reinsurance Corp. and underwriters at Lloyd's of London. Effective January 1, 1996, SIG transferred to Goran all of the issued and outstanding shares of capital stock of SIGF (the "Distribution"). The following table sets forth the premiums written by line of business for the periods indicated: Goran Capital Inc. For The Years Ended December 31, (In Thousands) 1994 1995 1996 Nonstandard Automobile Gross Premiums Written $ 45,593 $49,005 $187,176 Net Premiums Written 28,114 37,302 186,579 Crop Hail Gross Premiums Written $ 10,130 $16,966 $ 27,957 Net Premiums Written 4,565 11,608 23,013 MPCI Gross Premiums Written $ 44,325 $53,408 $ 82,102 Net Premiums Written 0 0 0 Commercial Gross Premiums Written $ 3,086 $ 5,255 $ 9,034 Net Premiums Written 2,460 4,537 9,034 Finite Reinsurance Gross Premiums Written $ 23,844 $27,083 $ 1,365 Net Premiums Written 23,334 32,914 1,806 Total Gross Premiums Written $126,978 $151,717 $307,634 Net Premiums Written $ 58,473 $ 86,361 $220,432 [FN] Does not reflect net premiums written for Superior for the years ended December 31, 1994 and 1995 and for the four months ended April 30, 1996. For the years ended December 31, 1994 and 1995, Superior and its subsidiaries had gross premiums written of $112.9 million and $94.8 million, respectively, and net premiums written of $112.5 million and $94.1 million, respectively. For the four months ended April 30, 1996, Superior and its subsidiaries had gross premiums written of $44.0 million and net premiums written of $43.6 million. Most crop hail insurance policies are sold in the second and third quarters of the calendar year. For a discussion of the accounting treatment of MPCI premiums, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company". For additional financial segment information concerning the Company's nonstandard automobile and crop insurance operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company". Nonstandard Automobile Insurance Industry Background The Company, through its 52% owned subsidiaries, Pafco and Superior, is engaged in the writing of insurance coverage on automobile physical damage and lia- bility policies for "nonstandard risks". Nonstandard risks are those individuals who are unable to obtain insurance through standard market carriers due to factors such as poor premium payment history, driving experience, record of prior accidents or driving violations, particular occupation or type of vehicle. Premium rates for nonstandard risks are generally higher than for standard risks. Total private passenger automobile insurance premiums written by insurance carriers in the United States in 1995 have been estimated by A.M. Best to be approximately $106 billion. Since it can be viewed as a residual market, the size of the nonstandard private passenger automobile insurance market changes with the insurance environment and grows when standard coverage becomes more restrictive. Although this factor, as well as industry differences in the criteria which distinguish standard from nonstandard insurance, make it difficult to estimate the size of the nonstandard market, management of the Company believes that the voluntary nonstandard market has accounted for approximately 15% of total private passenger automobile insurance premiums written in recent years. According to statistical information derived from insurer annual statements compiled by A.M. Best, the nonstandard automobile market accounted for $17.4 billion in annual premium volume for 1995. Strategy The Company has multiple strategies with respect to its nonstandard automobile insurance operations, including: 1. Through GGS Holdings, the Company seeks to achieve profitability through a combination of internal growth and the acquisition of other insurers and blocks of business. The Company regularly evaluates acquisition opportunities. There can be no assurance, however, that any suitable business opportunities will arise. 2. The Company is committed to the use of integrated technologies which permit it to rate, issue, bill and service policies in an efficient and cost effective manner. 3. The Company competes primarily on the basis of underwriting criteria and service to agents and insureds and generally does not match price decreases implemented by competitors which are directed towards obtaining market share. 4. The Company encourages agencies to place a large share of their profitable business with Pafco and Superior by offering, in addition to fixed commissions, a contingent commission based on a combination of volume and profitability. 5. The Company promptly responds to claims in an effort to reduce the costs of claims settlements by reducing the number of pending claims and uses computer databases to verify repair and vehicle replacement costs and to increase subrogation and salvage recoveries. 6. The Company will seek to expand the multi-tiered marketing approach currently employed by Superior and its subsidiaries in Florida and other states in order to offer to its independent agency network a broader range of products with different premium and commission structures. Products The Company offers both liability and physical damage coverage in the insurance marketplace, with policies having terms of three to twelve months, with the majority of policies having a term of six months. Most nonstandard automobile insurance policyholders choose the basic limits of liability coverage which, though varying from state to state, generally are $25,000 per person and $50,000 per accident for bodily injury, and in the range of $10,000 to $20,000 for property damage. Of the approximately 228,000 combined policies of Pafco and Superior in force on December 31, 1996, fewer than 9% had policy limits in excess of these basic limits of coverage. Of the 63,000 policies of Pafco in force on December 31, 1996, approximately 88% had policy periods of six months or less. Of the approximately 165,000 policies of Superior in force as of December 31, 1996, approximately 74% had policy periods of six months and approximately 26% had policy periods of twelve months. The Company offers several different policies which are directed toward different classes of risk within the nonstandard market. The Superior Choice policy covers insureds whose prior driving record, insurability and other relevant characteristics indicate a lower risk profile than other risks in the nonstandard marketplace. The Superior Standard policy is intended for risks which do not qualify for Superior Choice but which nevertheless present a more favorable risk profile than many other nonstandard risks. The Superior Specialty policies cover risks which do not qualify for either the Superior Choice or the Superior Standard. Pafco offers only a single nonstandard policy which includes multiple discounts and surcharges designed to recognize proof of prior insurance, driving violations, accident history and other factors relevant to the level of risk insured. Superior offers a product similar to the Pafco product in states in which it is not offering a multi-tiered product. Marketing The Company's nonstandard automobile insurance business is concentrated in the states of Florida, California, Indiana, Missouri, Kentucky, Colorado, Texas and Virginia, and the Company writes nonstandard automobile insurance in eleven additional states. Management plans to continue to expand selectively into additional states. GGS Holdings will select states for expansion based on a number of criteria, including the size of the nonstandard automobile insurance market, state-wide loss results, competition and the regulatory climate. The following tables sets forth the geographic distribution of gross premiums written for SIG and Superior, individually, and for SIG and Superior on a combined basis for the periods indicated. Goran Capital Inc. For The Years Ended December 31, (In Thousands of U.S. Dollars) SIG Superior 1994 1995 1996 1994 1995 1996 State Arkansas $ 1,619 $ 1,796 $ 2,004 $ 0 $ 0 $ 0 California 0 0 0 13,422 15,350 25,131 Colorado 5,629 9,257 10,262 0 0 0 Florida 0 0 0 55,282 54,535 97,659 Georgia 0 0 0 7,342 5,927 7,398 Illinois 0 80 1,380 3,894 2,403 1,614 Indiana 13,648 13,710 16,599 414 132 0 Iowa 3,769 3,832 5,818 0 0 0 Kentucky 9,573 7,840 11,065 0 0 0 Mississippi 0 0 0 4,411 2,721 2,250 Missouri 8,163 8,513 13,423 0 0 0 Nebraska 3,192 3,660 5,390 0 0 0 Ohio 0 0 0 4,325 3,164 3,643 Oklahoma 0 317 2,559 0 0 0 Tennessee 0 0 0 1,829 332 (2) Texas 0 0 0 10,660 3,464 10,122 Virginia 0 0 0 7,500 5,035 14,733 Washington 0 0 0 3,827 1,693 106 Totals 45,593 49,005 68,500 112,906 94,756 162,654 Goran Capital Inc. and Superior Insurance Company (Combined) For The Years Ended December 31, (In Thousands of U.S. Dollars) 1994 1995 1996 State Arkansas $ 1,619 $ 1,796 $ 2,004 California 13,422 15,350 25,131 Colorado 5,629 9,257 10,262 Florida 55,282 54,535 97,659 Georgia 7,342 5,927 7,398 Illinois 3,894 2,483 2,944 Indiana 14,062 13,842 16,599 Iowa 3,769 3,832 5,818 Kentucky 9,573 7,840 11,065 Mississippi 4,411 2,721 2,250 Missouri 8,163 8,513 13,423 Nebraska 3,192 3,660 5,390 Ohio 4,325 3,164 3,643 Oklahoma 0 317 2,559 Tennessee 1,829 332 (2) Texas 10,660 3,464 10,122 Virginia 7,500 5,035 14,733 Washington 3,827 1,693 106 Totals $158,499 $143,761 $231,154 SIG and Superior market their nonstandard products exclusively through approximately 4,500 independent agencies and focus their marketing efforts in rural areas and the peripheral areas of metropolitan centers. As part of its strategy, management is continuing its efforts to establish the Company as a low cost deliverer of nonstandard automobile insurance while maintaining a commitment to provide quality service to both agents and insureds. This element of the Company's strategy is being accomplished primarily through the automation of certain marketing, underwriting and administrative functions. In order to maintain and enhance its relationship with its agency base, the Company has twenty-six territorial managers, each of whom resides in a specific marketing region and has access to the technology and software necessary to provide marketing, rating and administrative support to the agencies in his or her region. The Company attempts to foster strong service relationships with its agencies and customers. The Company is currently developing computer software that will provide on-line communication with its agency force. In addition, to delivering prompt service while ensuring consistent underwriting, the Company offers rating software to its agents in some states which permits them to evaluate risks in their offices. The agent has the authority to sell and bind insurance coverages in accordance with procedures established by the Company, which is a common practice in the property and casualty insurance business. The Company reviews all coverages bound by the agents promptly and generally accepts all coverages which fall within its stated underwriting criteria. In most jurisdictions, the Company has the right, within a specified time period, to cancel any policy even if the risk falls within its underwriting criteria. See "Business - Nonstandard Automobile Insurance - Underwriting". Pafco and Superior compensate their agents on a commission basis based on a percentage of premiums produced. Pafco also offers its agents a contingent commission based on volume and profitability, thereby encouraging the agents to enhance the placement of profitable business with the Company. Superior has recently incorporated the contingent commission into the compensation package for its agents. The Company believes that the combination of Pafco with Superior and its two Florida domiciled insurance subsidiaries will allow the Company the flexibility to engage in multi-tiered marketing efforts in which specialized automobile insurance products are directed toward specific segments of the market. Since certain state insurance laws prohibit a single insurer from offering similar products with different commission structures or, in some cases, premium rates, it is necessary to have multiple licenses in certain states in order to obtain the benefits of market segmentation. The Company is currently offering multi- tiered products in Florida, Texas, Virginia, California and Missouri. The Company intends to expand the marketing of its multi-tiered products into other states and to obtain multiple licenses for its subsidiaries in these states to permit maximum flexibility in designing commission structures. Underwriting The Company underwrites its nonstandard automobile business with the goal of achieving adequate pricing. The Company seeks to classify risks into narrowly defined segments through the utilization of all available underwriting criteria. The Company maintains an extensive, proprietary database which contains statistical records with respect to its insureds on driving and repair experience by location, class of driver and type of automobile. Management believes this database gives the Company the ability to be more precise in the underwriting and pricing of its products. Further, the Company uses motor vehicle accident reporting agencies to verify accident history information included in applications. The Company utilizes many factors in determining its rates. Some of the characteristics used are type, age and location of the vehicle, number of vehicles per policyholder, number and type of convictions or accidents, limits of liability, deductibles, and, where allowed by law, age, sex and marital status of the insured. The rate approval process varies from state to state; some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and use of rates, while others, such as Florida, Arkansas and California, require approval of the insurance department prior to the use of the rates. The Company has begun to integrate its automated underwriting process with the functions performed by its agency force. For example, the Company has recently introduced a rating software package for use by agents in some states. In many instances, this software package, combined with agent access to the automated retrieval of motor vehicle reports, ensures accurate underwriting and pricing at the point of sale. The Company believes the automated rating and under- writing system provides a significant competitive advantage because it (i) improves efficiencies for the agent and the Company, further linking the agent to the Company, (ii) makes more accurate and consistent underwriting decisions possible, and (iii) can be changed easily to reflect new rates and underwriting guidelines. Underwriting results of insurance companies are frequently measured by their combined ratios. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are generally considered profitable when the combined ratio is under 100% and unprofitable when the combined ratio is over 100%. The following table sets forth loss and LAE ratios, underwriting expense ratios and combined ratios for the periods indicated for the nonstandard automobile insurance business of the Company and Superior individually and on a combined basis. The ratios shown in the table below are computed based upon GAAP, not SAP. Goran Capital Inc. For The Years Ended December 31, Company Superior 1994 1995 1996 1994 1995 1996 Loss Ratio 62.3% 65.8% 61.8% 72.3% 64.2% 66.1% LAE Ratio 9.8% 8.0% 8.6% 9.6% 9.9% 9.5% Underwriting Expense Ratio 34.3% 37.5% 33.3% 34.5% 33.5% 23.9% Combined Ratio 106.4% 111.3% 103.7% 116.4% 107.6% 99.5% Goran Capital Inc. and Superior Insurance Company (Combined) For The Years Ended December 31, 1994 1995 1996 Loss Ratio 70.5% 64.6% 65.1% LAE Ratio 9.6% 9.4% 8.6% Underwriting Expense Ratio 34.5% 34.8% 27.7% Combined Ratio 114.6% 108.8% 101.4% [FN] These ratios have not been computed on a pro-forma basis but rather have been derived by adding the premiums, expenses, losses and LAE of each of the Company and Superior through December 31, 1996. In an effort to maintain and improve underwriting profits, the territorial managers regularly monitor loss ratios of the agencies in their regions and meet periodically with the agencies in order to address any adverse trends in loss ratios. Claims The Company's nonstandard automobile claims department handles claims on a regional basis from its Indianapolis, Indiana; Atlanta, Georgia; Tampa, Florida and Anaheim, California locations. Management believes that the employment of salaried claims personnel, as opposed to independent adjusters, results in reduced ultimate loss payments, lower LAE and improved customer service. The Company's generally retains independent appraisers and adjusters on an as needed basis for estimation of physical damage claims and limited elements of investigation. The Company uses the Audapoint, Audatex and Certified Collateral Corporation computer programs to verify, through a central database, the cost to repair a vehicle and to eliminate duplicate or "overlap" costs from body shops. Autotrak, which is a national database of vehicles, allows the Company to locate vehicles nearly identical in model, color and mileage to the vehicle damaged in an accident, thereby reducing the frequency of disagreements with claimants as to the replacement value of damaged vehicles. In 1995, the Company implemented new claims handling procedures designed to reduce the number of pending claims. Claims settlement authority levels are established for each adjuster or manager based on the employee's ability and level of experience. Upon receipt, each claim is reviewed and assigned to an adjuster based on the type and severity of the claim. All claims-related litigation is monitored by a home office supervisor or litigation manager. The claims policy of the Company emphasizes prompt and fair settlement of meritorious claims, adequate reserving for claims and controlling claims adjustment expenses. Reinsurance The Company follows the customary industry practice of reinsuring a portion of its risks and paying for that protection based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce the Company's exposure on large individual risks and to provide protection against large losses, including catastrophic losses. Although reinsurance does not legally discharge the ceding insurer from its primary obligation to pay the full amount of losses incurred under policies reinsured, it does render the reinsurer liable to the insurer to the extent provided by the terms of the reinsurance treaty. As part of its internal procedures, the Company evaluates the financial condition of each prospective reinsurer before it cedes business to that carrier. Based on the Company's review of its reinsurers' financial health and reputation in the insurance marketplace, the Company believes its reinsurers are financially sound and that they therefore can meet their obligations to the Company under the terms of the reinsurance treaties. Reserves for uncollectible reinsurance are provided as deemed necessary. In 1995, Pafco maintained a 25% quota share reinsurance treaty on its nonstandard automobile insurance business, as well as an excess of loss treaty covering 100% of losses on an individual occurrence basis in excess of $200,000 up to a maximum of $1,050,000. As of January 1, 1996, Pafco has terminated all third party quota share reinsurance with respect to its nonstandard automobile insurance business. Pafco has entered into a quota share reinsurance agreement with Superior whereby Pafco shall cede 100% of its gross premiums written on or after May 1, 1996 that are in excess of three times outstanding capital and surplus. See "Certain Relationships and Related Transactions - Reinsurance Arrangements". In 1996, Pafco continues to maintain an excess of loss treaty on its nonstandard automobile insurance business covering 100% of losses on an individual occurrence basis in excess of $200,000 up to a maximum of $1,050,000. Of such reinsurers, those having A.M. Best ratings of A or better provided 83% of such coverage. The following table provides information with respect to material third party reinsurers on the foregoing Pafco nonstandard automobile reinsurance treaties: Goran Capital Inc. For The Year Ended December 31, 1996 (In Thousands of U.S. Dollars) Reinsurers A.M. Best Rating Reinsurance Recoverables Chartwell Reinsurance Company A $ 290 Constitution Reinsurance Corporation A+ $1,210 [FN] Only recoverables greater than $200 are shown. Total nonstandard automobile reinsurance recoverables as of December 31, 1996 were approximately $2,565. An A.M. Best rating of "A" is the third highest of 15 ratings. An A.M. Best rating of "A+" is the second highest of 15 ratings. In 1995, Superior maintained both automobile casualty and property catastrophe excess reinsurance. Superior's casualty excess of loss treaties covered losses in excess of $100,000 up to a maximum of $2 million. Superior's first casualty excess layer contained limits of $200,000 excess of $100,000, its second casualty excess layer contained limits of $700,000 excess of $300,000 and its third casualty excess layer had a limit of $1 million excess of $1 million. Superior's first layer of property catastrophe excess reinsurance covered 95% of $500,000 excess of $500,000 with an annual limit of $1 million and its second layer of property catastrophe excess reinsurance covered 95% of $2 million excess of $1 million with an annual limit of $4 million. In 1996, Superior maintained the same levels of coverage, except as follows: (i) as to its third casualty excess layer, the limit was increased to $4 million, and (ii) Superior added a third layer of property catastrophe excess reinsurance covering 95% of $2 million excess of $3 million with an annual limit of $4 million. Superior had no quota share reinsurance on its nonstandard automobile business in either 1995 or 1996. In 1995, Superior placed all of its reinsurance with Prudential Reinsurance Company (now Everest Reinsurance Company). In 1996, Superior placed all of its reinsurance with Everest Reinsurance Company, except for its third layer casualty excess of loss treaty, which was placed as follows: Zurich Reinsurance Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%; Transatlantic Reinsurance Company, 15%; SOREMA North American Reinsurance Company, 10%; and Winterthur Reinsurance Corporation of America, 10%. The foregoing reinsurers have the following A.M. Best ratings: Everest Reinsurance Company - "A"; Skandia America Reinsurance Corporation - "A-" (the fourth highest of 15 ratings); SOREMA North American Reinsurance Company - "A-"; Transatlantic Reinsurance Company - "A+"; Winterthur Reinsurance Company of America - "A"; and Zurich Reinsurance Centre, Inc. - "A". For the year ended December 31, 1996, Superior had $737,000 of ceded premiums to unaffiliated reinsurers. On April 29, 1996, Pafco retroactively ceded all of its commercial business relating to 1995 and previous years to Granite Reinsurance Company Ltd. ("Granite Re"), an affiliate, with an effective date of January 1, 1996. On this date, Pafco also entered into a 100% quote share reinsurance agreement with Granite Re, whereby all of Pafco's commercial business from 1996 and forward was ceded to Granite Re effective January 1, 1996. Pafco has a reinsurance recoverable at December 31, 1996 from Granite Re for $9,230,000, of which $770,000 is uncollateralized. Neither Pafco nor Superior has any facultative reinsurance with respect to its nonstandard automobile insurance business. Competition The Company competes with both large national writers and smaller regional companies in each state in which it operates. The Company's competitors include other companies which, like the Company, serve the agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and, potentially, reduced acquisition costs. The Company's primary competitors are Progressive Casualty Insurance Company, Guaranty National Insurance Company, Integon Corporation Group, Deerbrook Insurance Company (a member of the Allstate Insurance Group) and the companies of the American Financial Group. Generally, these competitors are larger and have greater financial resources than the Company. The nonstandard automobile insurance business is price sensitive and certain competitors of the Company have, from time to time, decreased their prices in an apparent attempt to gain market share. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management of the Company believes that it is generally not in the Company's best interest to match such price decreases, choosing instead to compete on the basis of underwriting criteria and superior service to its agents and insureds. Crop Insurance Industry Background The two principal components of the Company's crop insurance business are MPCI and private named peril, primarily crop hail insurance. Crop insurance is purchased by farmers to reduce the risk of crop loss from adverse weather and other uncontrollable events. Farms are subject to drought, floods and other natural disasters that can cause widespread crop losses and, in severe cases, force farmers out of business. Because many farmers rely on credit to finance their purchases of such agricultural inputs as seed, fertilizer, machinery and fuel, the loss of a crop to a natural disaster can reduce their ability to repay these loans and to find sources of funding for the following year's operating expenses. MPCI was initiated by the federal government in the 1930s to help protect farmers against loss of their crops as a result of drought, floods and other natural disasters. In addition to MPCI, farmers whose crops are lost as a result of natural disasters have, in the past, sometimes been supported by the federal government in the form of ad hoc relief bills providing low interest agricultural loans and direct payments. Prior to 1980, MPCI was available only on major crops in major producing areas. In 1980, Congress expanded the scope and coverage of the MPCI program. In addition, the delivery system for MPCI was expanded to permit private insurance companies and licensed agents and brokers to sell MPCI policies, and the FCIC was authorized to reimburse parti- cipating companies for their administrative expenses and to provide federal reinsurance for the majority of the risk assumed by such private companies. Although expansion of the federal crop insurance program in 1980 was expected to make crop insurance the farmer's primary risk management tool, participation in the MPCI program was only 32% of eligible acreage in the 1993 crop year. Due in part to low participation in the MPCI program, Congress provided an average of $1.5 billion per year in ad hoc disaster payments over the six years prior to 1994. In view of the combination of low participation rates in the MPCI program and large federal payments on both crop insurance (with an average loss ratio of 147%) and ad hoc disaster payments since 1980, Congress has, since 1990, considered major reform of its crop insurance and disaster assistance policies. The Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act") was enacted in order to increase participation in the MPCI program and eliminate the need for ad hoc federal disaster relief payments to farmers. The 1994 Reform Act required farmers for the first time to purchase at least CAT Coverage (i.e., the minimum available level of MPCI providing coverage for 50% of farmers' historic yield at 60% of the price per unit for such crop set by the FCIC) in order to be eligible for other federally sponsored farm benefits, including, but not limited to, low interest loans and crop price supports. The 1994 Reform Act also authorized the marketing and selling of CAT Coverage by the local United States Department of Agriculture ("USDA") offices. The Federal Agriculture Improvement and Reform Act of 1996 (the "1996 Reform Act"), signed into law by President Clinton in April, 1996, limits the role of the USDA offices in the delivery of MPCI coverage beginning in July, 1996, which is the commencement of the 1997 crop year, and also eliminates the linkage between CAT Coverage and qualification for certain federal farm program benefits. This limitation should provide the Company with the opportunity to realize increased revenues from the distribution and servicing of its MPCI product. In accordance with the 1996 Reform Act, the USDA announced in July, 1996, the following fourteen states in which CAT Coverage will no longer be available through USDA offices but rather will be solely available through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and Wyoming. The FCIC has transferred to the Company approximately 8,900 insureds for CAT Coverage who previously purchased such coverage from USDA field offices. The Company believes that any future potential negative impact of the delinkage mandated by the 1996 Reform Act will be mitigated by, among other factors, the likelihood that farmers will continue to purchase MPCI to provide basic protection against natural disasters since ad hoc federal disaster relief programs have been reduced or eliminated. In addition, the Company believes that (i) lending institutions will likely continue to require this coverage as a condition to crop lending; and (ii) many of the farmers who entered the MPCI program as a result of the 1994 Reform Act have come to appreciate the reasonable price of the protection afforded by CAT Coverage and will remain with the program regardless of delinkage. There can, however, be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. Strategy The Company has multiple strategies for its crop insurance operations, including the following: 1. The Company will seek to enhance underwriting profits and reduce the volatility of its crop insurance business through geographic diversification and the appropriate allocation of risks among the federal reinsurance pools and the effective use of federal and third-party catastrophic reinsurance arrangements. 2. The Company also limits the risks associated with crop insurance through selective underwriting of crops based on its historical loss experience database. 3. The Company continues to develop and maintain a proprietary knowledge-based underwriting system which utilizes a database of Company-specific underwriting rules. 4. The Company has further strengthened its independent agency network by using technology to provide fast, efficient service to its agencies and providing application documentation designed for simplicity and convenience. 5. Unlike many of its competitors, the Company employs a number of full-time claims adjusters in order to reduce the losses experienced by IGF. 6. The Company stops selling its crop hail policies after the date on which the plant growth emerges from the ground in order to prevent farmers from adversely selecting against IGF when a storm is forecast or hail damage has already occurred. 7. The Company continues to explore growth opportunities and product diversification through new specialty coverages, including crop revenue coverage and named peril insurance. 8. The Company continues to explore new opportunities for advances in administrative efficiencies and product underwriting presented by advances in Precision Farming software, Global Positioning System (GPS) software and Geographical Information System (GIS) technology, all of which continue to be adopted by insureds in their farming practices. Products Description of MPCI Insurance Program MPCI is a federally-subsidized program which is designed to provide parti- cipating farmers who suffer insured crop damage with funds needed to continue operating and plant crops for the next growing season. All of the material terms of the MPCI program and of the participation of private insurers, such as the Company, in the program are set by the FCIC under applicable law. MPCI provides coverage for insured crops against substantially all natural perils. Purchasing an MPCI policy permits a farmer to insure against the risk that his crop yield for any growing season will be less than 50% to 75% (as selected by the farmer at the time of policy application or renewal) of his historic crop yield. If a farmer's crop yield for the year is greater than the yield coverage he selected, no payment is made to the farmer under the MPCI program. However, if a farmer's crop yield for the year is less than the yield coverage selected, MPCI entitles the farmer to a payment equal to the yield shortfall multiplied by 60% to 100% of the price for such crop (as selected by the farmer at the time of policy application or renewal) for that season as set by the FCIC. In order to encourage farmers to participate in the MPCI program and thereby reduce dependence on traditional disaster relief measures, the 1994 Reform Act established CAT Coverage as a new minimum level of MPCI coverage, which farmers may purchase upon payment of a fixed administrative fee of $50 per policy instead of any premium. CAT Coverage insures 50% of historic crop yield at 60% of the FCIC-set crop price for the applicable commodities standard unit of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private insurers such as the Company or, in certain states, from USDA field offices. In addition to CAT Coverage, MPCI policies which provide a greater level of protection than the CAT Coverage level are also offered ("Buy-up Coverage"). Most farmers purchasing MPCI have historically purchased at Buy-up Coverage levels, with the most frequently sold policy providing coverage for 65% of historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up Coverages require payment of a premium in an amount determined by a formula set by the FCIC. Buy-up Coverage can only be purchased from private insurers. The Company focuses its marketing efforts on Buy-up Coverages, which have higher premiums and which the Company believes will continue to appeal to farmers who desire, or whose lenders encourage or require, revenue protection. The number of MPCI Buy-up Coverage policies written has historically tended to increase after a year in which a major natural disaster adversely affecting crops occurs, and to decrease following a year in which favorable weather conditions prevail. The Company, like other private insurers participating in the MPCI program, generates revenues from the MPCI program in two ways. First, it markets, issues and administers policies, for which it receives administrative fees; and second, it participates in a profit-sharing arrangement in which it receives from the government a portion of the aggregate profit, or pays a portion of the aggregate loss, in respect of the business it writes. The Company's share of profit or loss on the MPCI business it writes is determined under a complex profit sharing formula established by the FCIC. Under this formula, the primary factors that determine the Company's MPCI profit or loss share are (i) the gross premiums the Company is credited with having written; (ii) the amount of such credited premiums retained by the Company after ceding premiums to certain federal reinsurance pools; and (iii) the loss experience of the Company's insureds. The following discussion provides more detail about the implementation of this profit sharing formula. Gross Premiums For each year, the FCIC sets the formulas for determining premiums for different levels of Buy-up Coverage. Premiums are based on the type of crop, acreage planted, farm location, price per bushel for the insured crop as set by the FCIC for that year, and other factors. The federal government will generally subsidize a portion of the total premium set by the FCIC and require farmers to pay the remainder. Cash premiums are received by the Company from farmers only after the end of a growing season and are then promptly remitted to the federal government. Although applicable federal subsidies change from year to year, such subsidies will range up to approximately 40% of the Buy-up Coverage premium for 1996 depending on the crop insured and the level of Buy-up Coverage purchased, if any. Federal premium subsidies are recorded on the Company's behalf by the government. For purposes of the profit sharing formula, the Company is credited with having written the full amount of premiums paid by farmers for Buy-up Coverages, plus the amount of any related federal premium subsidies (such total amount, its "MPCI Premium"). As previously noted, farmers pay an administrative fee of $50 per policy but are not required to pay any premium for CAT Coverage. However, for purposes of the profit sharing formula, the Company is credited with an imputed premium (its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount of such MPCI Imputed Premium credited is determined by formula. In general, such MPCI Imputed Premium will be less than 50% of the premium that would be payable for a Buy-up Coverage policy that insured 65% of historic crop yield at 100% of the FCIC-set crop price per standard unit of measure for the commodity, historically the most frequently sold Buy-up Coverage. For income statement purposes under GAAP, the Company's gross premiums written for MPCI consist only of its MPCI Premiums and do not include MPCI Imputed Premiums. Reinsurance Pools Under the MPCI program, the Company must allocate its MPCI Premium or MPCI Imputed Premium in respect of a farm to one of three federal reinsurance pools, at its discretion. These pools provide private insurers with different levels of reinsurance protection from the FCIC on the business they have written. For insured farms allocated to the "Commercial Pool", the Company, at its election, generally retains 50% to 100% of the risk and the FCIC assumes 0% - 50% of the risk; for those allocated to the "Developmental Pool", the Company generally retains 35% of the risk and the FCIC assumes 65%; and for those allocated to the "Assigned Risk Pool", the Company retains 20% of the risk and the FCIC assumes 80%. The MPCI Retention is protected by private third party stop loss treaties. Although the Company in general must agree to insure any eligible farm, it is not restricted in its decision to allocate a risk to any of the three pools, subject to a minimum aggregate retention of 35% of its MPCI Premiums and MPCI Imputed Premiums written. The Company uses a sophisticated methodology derived from a comprehensive historical data base to allocate MPCI risks to the federal reinsurance pools in an effort to enhance the underwriting profits realized from this business. The Company has crop yield history information with respect to over 100,000 farms in the United States. Generally, farms or crops which, based on historical experience, location and other factors, appear to have a favorable net loss ratio and to be less likely to suffer an insured loss, are placed in the Commercial Pool. Farms or crops which appear to be more likely to suffer a loss are placed in the Developmental Pool or Assigned Risk Pool. The Company has historically allocated the bulk of its insured risks to the Commercial Pool. The Company's share of profit or loss depends on the aggregate amount of MPCI Premium and MPCI Imputed Premium on which the Company retains risk after allocating farms to the foregoing pools (its "MPCI Retention"). As previously described, the Company purchases reinsurance from third parties other than the FCIC to further reduce its MPCI loss exposure. Loss Experience of Insureds Under the MPCI program the Company pays losses to farmers through a federally funded escrow account as they are incurred during the growing season. The Company requests funding of the escrow account when a claim is settled, and the escrow account is funded by the federal government within three business days. After a growing season ends, the aggregate loss experience of the Company's insureds in each state for risks allocated to each of the three reinsurance pools is determined. If, for all risks allocated to a particular pool in a particular state, the Company's share of losses incurred is less than its aggregate MPCI Retention, the Company shares in the gross amount of such profit according to a schedule set by the FCIC for each year. The profit and loss sharing percentages are different for risks allocated to each of the three reinsurance pools, and private insurers will receive or pay the greatest percentage of profit or loss for risks allocated to the Commercial Pool. The percentage split between private insurers and the federal government of any profit or loss which emerges from an MPCI Retention is set by the FCIC and generally is adjusted from year to year. For 1995, 1996 and 1997 crop years, the FCIC increased the maximum potential profit share of private insurers for risks allocated to the Commercial Pool above the maximum potential profit share set for 1994, without increasing the maximum potential share of loss for risks allocated to that pool for 1995. This change increased the potential profit- ability of risks allocated to the Commercial Pool by private insurers. The following table presents MPCI Premiums, MPCI Imputed Premiums, and underwriting gains or losses of IGF for the periods indicated: Goran Capital Inc. For The Years Ended December 31, (In Thousands of U.S. Dollars) 1994 1995 1996 MPCI Premiums $44,325 $53,408 $82,102 MPCI Imputed Premiums 2,171 19,552 29,744 Gross Underwriting Gain 4,344 10,870 15,801 Net Private Third-Party Reinsurance Expense And Other (1,087) (1,217) (3,524) Net Underwriting Gain 3,257 9,653 12,277 MPCI Fees and Reimbursement Payments The Company receives Buy-up Expense Reimbursement Payments from the FCIC for writing and administering Buy-up Coverage policies. These payments provide funds to compensate the Company for its expenses, including agents' commissions and the costs of administering policies and adjusting claims. In 1994, the Buy-up Expense Reimbursement Payments were set at 31% of the MPCI Premium. In 1995 and 1996, this payment has also been set at 31% of the MPCI Premium, but it is scheduled to be reduced to 29% in 1997, 28% in 1998, and 27.5% in 1999. Although the 1994 Reform Act directs the FCIC to alter program procedures and administrative requirements so that the administrative and operating costs of private insurance companies participating in the MPCI program will be reduced in an amount that corresponds to the reduction in the expense reimbursement rate, there can be no assurance that the Company's actual costs will not exceed the expense reimbursement rate. Farmers are required to pay a fixed administrative fee of $50 per policy in order to obtain CAT Coverage. This fee is retained by the Company to defray the cost of administration and policy acquisition. The Company also receives, from the FCIC, a separate CAT LAE Reimbursement Payment equal to approximately 13.0% of MPCI Imputed Premiums in respect of each CAT Coverage policy it writes and a small MPCI Excess LAE Reimbursement Payment. In general, fees and payments received by the Company in respect of CAT Coverage are significantly lower than those received for Buy-up Coverage. In addition to premium revenues, the Company received the following fees and commissions from its crop insurance segment for the periods indicated: Goran Capital Inc. For The Years Ended December 31, (In Thousands of U.S. Dollars) 1994 1995 1996 CAT Coverage Fees $ 74 $ 1,298 $ 1,181 Buy-up Expense Reimbursement Payments 13,845 16,366 24,971 CAT LAE Reimbursement Payments and MPCI Excess LAE Reimbursement Payments 107 3,427 5,753 Total $14,026 $21,091 $31,905 Crop Revenue Coverage The Company has recently introduced a new product in its crop insurance business called Crop Revenue Coverage ("CRC"). In contrast to standard MPCI coverage, which features a yield guarantee or coverage for the loss of pro- duction, CRC provides the insured with a guaranteed revenue stream by combining both yield and price variability protection. CRC protects against a grower's loss of revenue resulting from fluctuating crop prices and/or low yields by providing coverage when any combination of crop yield and price results in revenue that is less than the revenue guarantee provided by the policy. CRC was approved by the FCIC as a pilot program for revenue insurance coverage plans for the 1996 crop year, and has been available for corn and soybeans in all counties in Iowa and Nebraska beginning with such crop year. CRC policies represent approximately 30% of the combined corn policies written by IGF in Iowa and Nebraska for the 1996 crop year. In July, 1996, the FCIC announced that CRC will be made available in the fall of 1996 for winter wheat in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas and Washington and in parts of Montana. Revenue insurance coverage plans such as CRC are the result of the 1994 Reform Act, which directed the FCIC to develop a pilot crop insurance program providing coverage against loss of gross income as a result of reduced yield and/or price. CRC was developed by a private insurance company other than the Company under the auspices of this pilot program, which authorizes private companies to design alternative revenue coverage plans and to submit them for review, approval and endorsement by the FCIC. As a result, although CRC is administered and reinsured by the FCIC and risks are allocated to the federal reinsurance pools, CRC remains partially influenced by the private sector, particularly with respect to changes in its rating structure. CRC plans to use the policy terms and conditions of the Actual Production History ("APH") plan of MPCI as the basic provisions for coverage. The APH provides the yield component by utilizing the insured's historic yield records. The CRC revenue guarantee is the producer's approved APH times the coverage level, times the higher of the spring futures price or harvest futures price (in each case, for post-harvest delivery) of the insured crop for each unit of farmland. The coverage levels and exclusions in a CRC policy are similar to those in a standard MPCI policy. As with MPCI policies, the Company receives from the FCIC an expense reimbursement payment equal to 31% of gross premiums written in respect of each CRC policy it writes. See " - MPCI Fees and Reimbursement Payments". This expense reimbursement payment is scheduled to be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999. CRC protects revenues by extending crop insurance protection based on APH to include price as well as yield variability. Unlike MPCI, in which the crop price component of the coverage is set by the FCIC prior to the growing season and generally does not reflect actual crop prices, CRC uses the commodity futures market as the basis for its pricing component. Pricing occurs twice in the CRC plan. The spring futures price is used to establish the initial policy revenue guarantee and premium, and the harvest futures price is used to establish the crop value to count against the revenue guarantee and to recompute the revenue guarantee (and resulting indemnity payments) when the harvest price is higher than the spring price. The industry (including the Company) and the FCIC are reviewing the current rating structure supporting the CRC product. The Company is studying this issue and other factors as part of its MPCI underwriting and risk allocation plan, although the Company currently expects to offer CRC in the regions where it can be sold for winter wheat in 1996 because of high interest in the product among farmers. Based on crop performance to date in the regions where it has written CRC for spring planted crops, the Company does not believe that any potential underpricing of CRC policies it has written for such crops will adversely affect its results of operations. Crop Hail In addition to MPCI, the Company offers stand alone crop hail insurance, which insures growing crops against damage resulting from hail storms and which involves no federal participation, as well as its proprietary HAILPLUS product which combines the application and underwriting process for MPCI and hail coverages. The HAILPLUS product tends to produce less volatile loss ratios than the stand alone produce since the combined product generally insures a greater number of acres, thereby spreading the risk of damage over a larger insured area. Approximately 50% of IGF's hail policies are written in combination with MPCI. Although both crop hail and MPCI provide insurance against hail damage, under crop hail coverages farmers can receive payments for hail damage which would not be severe enough to require a payment under an MPCI policy. The Company believes that offering crop hail insurance enables it to sell more MPCI policies than it otherwise would. Named Peril In addition to crop hail insurance, the Company also sells a small volume of insurance against crop damage from other specific named perils. These products cover specific crops, including hybrid seed corn, cranberries, cotton, tomatoes and onions, and are generally written on terms that are specific to the kind of crop and farming practice involved and the amount of actuarial data available. The Company plans to seek potential growth opportunities in this niche market by developing basic policies on a diverse number of named crops grown in a variety of geographic areas, and to offer these polices primarily to large producers through certain select agents. The Company's experienced product development team will develop the underwriting criteria and actuarial rates for the named peril coverages. As with the Company's other crop insurance products, loss adjustment procedures for named peril policies are handled by full-time professional claims adjusters who have specific agronomy training with respect to the crop and farming practice involved in the coverage. Third Party Reinsurance In Effect For 1996 In order to reduce the Company's potential loss exposure under the MPCI program, the Company purchases stop loss reinsurance from other private insurers in addition to reinsurance obtained from the FCIC. In addition, since the FCIC and state regulatory authorities require IGF to limit its aggregate writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of capital, and retain a net loss exposure of not in excess of 50% of capital, IGF may also obtain reinsurance from private insurers in order to permit it to increase its premium writings. Such private reinsurance would not eliminate the Company's potential liability in the event a reinsurer was unable to pay or losses exceeded the limits of the stop loss coverage. For crop hail insurance, the Company has in effect quota share reinsurance of 10% of premiums, although the reinsurer is only liable to participate in losses of the Company up to a 150% pure loss ratio. The Company also has stop loss treaties for its crop hail business which reinsure approximately 45% of losses in excess of an 80% pure loss ratio up to a 100% pure loss ratio and 95% of losses in excess of a 100% pure loss ratio up to a 140% pure loss ratio. With respect to its MPCI business, the Company has stop loss treaties which reinsure 93.75% of the underwriting losses experienced by the Company to the extent that aggregate losses of its insureds nationwide are in excess of 100% of the Company's MPCI Retention up to 125% of MPCI Retention. The Company also has an additional layer of MPCI stop loss reinsurance which covers 95% of the underwriting losses experienced by the Company to the extent that aggregate losses of its insureds nationwide are in excess of 125% of MPCI Retention up to 150% of MPCI Retention. Based on a review of the reinsurers' financial health and reputation in the insurance marketplace, the Company believes that the reinsurers for its crop insurance business are financially sound and that they therefore can meet their obligations to the Company under the terms of the reinsurance treaties. Reserves for uncollectible reinsurance are provided as deemed necessary. The following table provides information with respect to all reinsurers on the aforementioned IGF reinsurance agreements: Goran Capital Inc. For The Year Ended December 31, 1996 (In Thousands of U.S. Dollars) Reinsurers A.M. Best Rating Ceded Premiums Folksam International Insurance Co. Ltd. A- $ 587 Frankona Ruckversicherungs AG A $ 400 Granite Re NR $1,609 Insurance Corporation Of Hannover A- $1,159 Liberty Mutual Insurance Co. (UK) Ltd A $ 364 Partner Reinsurance Company Ltd. A $1,587 R & V Versicherung AG NR $ 852 Scandinavian Reinsurance Company Ltd. A+ $1,393 [FN] For the year ended December 31, 1996, total ceded premiums were $86,393. An A.M. Best rating of "A-" is the fourth highest of 15 ratings. An A.M. Best rating of "A" is the third highest of 15 ratings. Granite Re, a subsidiary of the Company, is an insurer domiciled in Barbados which has never applied for or requested such a rating. R + V Versicherung AG is an insurer domiciled outside of the United States and, as such, does not have a rating from A.M. Best. An A.M. Best rating of "A+" is the second highest of 15 ratings. Marketing; Distribution Network IGF markets its products to the owners and operators of farms in 31 states through approximately 2,500 agents associated with approximately 1,200 independent insurance agencies, with its primary geographic concentration in the states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has, however, begun to diversify outside of the Midwest and Texas in order to reduce the risk associated with geographic concentration. IGF is licensed in 20 states and markets its products in additional states through a fronting agreement with a third party insurance company. IGF has a stable agency base and it experienced negligible turnover in its agencies in 1996. Through its agencies, IGF targets farmers with an acreage base of at least 1,000 acres. Such larger farms typically have a lower risk exposure since they tend to utilize better farming practices and to have noncontiguous acreage, thereby making it less likely that the entire farm will be affected by a particular occurrence. Many farmers with large farms tend to buy or rent acreage which is increasingly distant from the central farm location. Accordingly, the like- lihood of a major storm (wind, rain or hail) or a freeze affecting all of a particular farmer's acreage decreases. The following table presents MPCI Premiums written by IGF by state for the years ended December 31, 1994, 1995 and 1996. Goran Capital Inc. For The Years Ended December 31, (In Thousands of U.S. Dollars) 1994 1995 1996 State Texas $ 6,751 $11,075 $12,361 Iowa 8,506 9,296 15,205 Illinois 7,302 7,305 11,228 Kansas 2,003 3,476 5,249 Minnesota 1,965 2,026 2,244 Nebraska 1,536 1,992 3,206 Indiana 1,486 1,875 3,870 Colorado 1,526 1,771 3,334 Missouri 1,785 1,718 2,427 North Dakota 1,153 1,638 2,796 All Other 10,312 11,236 20,182 Total $44,325 $53,408 $82,102 The following table presents gross premiums written by IGF by state for crop hail coverages for the years ended December 31, 1994, 1995 and 1996. Goran Capital Inc. For The Years Ended December 31, (In Thousands of U.S. Dollars) 1994 1995 1996 State Iowa $ 3,954 $ 4,667 $6,590 Minnesota 318 2,162 2,300 Colorado 964 1,775 1,651 Nebraska 1,022 1,477 1,567 Montana 239 1,355 5,632 North Dakota 1,087 1,283 2,294 Kansas 765 846 661 South Dakota 124 756 1,457 Wisconsin 315 458 370 Mississippi 277 400 482 All Other 1,065 1,787 4,953 Total $10,130 $16,966 $27,957 The Company seeks to maintain and develop its agency relationships by providing agencies with faster, more efficient service as well as marketing support. IGF owns an IBM AS400 along with all peripheral and networking equipment and has developed its own proprietary software package, Aplus, which allows agencies to quote and examine various levels of coverage on their own personal computers. The Company has seven regional managers who are responsible for the Company's field operations within an assigned geographic territory, including maintaining and enhancing relationships with agencies in those territories. IGF also uses application documentation which is designed for simplicity and convenience. The Company believes that IGF is the only crop insurer which has created a single application for MPCI and hail coverage. IGF generally compensates its agents based on a percentage of premiums produced and, in the case of CAT Coverage and crop hail insurance, a percentage of underwriting gain realized with respect to business produced. This compensation structure is designed to encourage agents to place profitable business with IGF (which tends to be insurance coverages for larger farms with respect to which the risk of loss is spread over larger, frequently noncontiguous insured areas). Underwriting Management Because of the highly regulated nature of the MPCI program and the fact that rates are established by the FCIC, the primary underwriting functions performed by the Company's personnel with respect to MPCI coverage are (i) selecting of marketing territories for MPCI based on the type of crops being grown in the area, typical weather patterns and loss experience of both agencies and farmers within a particular area, (ii) recruiting agencies within those marketing territories which service larger farms and other more desirable risks, and (iii) ensuring that policies are underwritten in accordance with the FCIC rules. With respect to its hail coverage, IGF seeks to minimize its underwriting losses by maintaining an adequate geographic spread of risk by rate group. In addition, IGF establishes sales closing dates after which hail policies will not be sold. These dates are dependent on planting schedules, vary by geographic location and range from May 15 in Texas to July 15 in North Dakota. Prior to these dates, crops are either seeds in the ground or young growth newly emerged from the ground and hail damage to crops in either of these stages of growth is minimal. The cut-off dates prevent farmers from adversely selecting against IGF by waiting to purchase hail coverage until a storm is forecast or damage has occurred. For its hail coverage, IGF also sets limits by policy ($400,000 each) and by township ($2.0 million per township). The Company also uses a daily report entitled "Severe Weather Digest" which shows the time and geographic location of all extraordinary weather events to check incoming policy applications against possible previous damage. Claims/Loss Adjustments In contrast to most of its competitors who retain independent adjusters on a part-time basis for loss adjusting services, IGF employs full-time professional claims adjusters who are agronomy trained as well as part-time adjusters. Management believes that the professionalism of the IGF full-time claims staff coupled with their exclusive commitment to IGF helps to ensure that claims are handled in a manner so as to reduce overpayment of losses experienced by IGF. The adjusters are located throughout IGF's marketing territories. In order to promote a rapid claims response, the Company has deployed several small four wheel drive vehicles for use by its adjusters. The adjusters report to a field service representative in their territory who manages adjusters' assignments, assures that all preliminary estimates for loss reserves are accurately reported and assists in loss adjustment. Within 72 hours of reported damage, a loss notice is reviewed by an IGF service office claims manager and a preliminary loss reserve is determined which is based on the representative's and/or adjuster's knowledge of the area or the particular storm which caused the loss. Generally, within approximately two weeks, hail and MPCI claims are examined and reviewed on site by an adjuster and the insured signs a proof of loss form containing a final release. As part of the adjustment process, IGF's adjusters use Global Positioning System Units, which are hand held devices using navigation satellites to determine the precise location where a claimed loss has occurred. IGF has a team of catastrophic claims specialists who are available on 48 hours notice to travel to any of IGF's six regional service offices to assist in heavy claim work load situations. Competition The crop insurance industry is highly competitive. The Company competes against other private companies and, with respect to CAT Coverage, USDA field service offices in certain areas. However, under the 1996 Reform Act, effective for the 1997 crop year, USDA field service offices may offer CAT Coverage in a state only if the Secretary of Agriculture determines that there is an insufficient number of approved insurance providers operating in the state to provide CAT Coverage to producers adequately. Many of the Company's competitors have substantially greater financial and other resources than the Company, and there can be no assurance that the Company will be able to compete effectively against such competitors in the future. The Company competes on the basis of the commissions paid to agents, the speed with which claims are paid, the quality and extent of services offered, the reputation and experience of its agency network and, in the case of private insurance, policy rates. Because the FCIC establishes the rates that may be offered for MPCI policies, the Company believes that quality of service and level of commissions offered to agents are the principal factors on which it competes in the area of MPCI. The Company believes that the crop hail and other named peril crop insurance industry is extremely rate-sensitive and the ability to offer competitive rate structures to agents is a critical factor in the agent's ability to write crop hail and other named peril premiums. Because of the varying state laws regarding the ability of agents to write crop hail and other named peril premiums prior to completion of rate and form filings (and, in some cases, state approval of such filings), a company may not be able to write its expected premium volume if its rates are not competitive. The crop insurance industry has become increasingly consolidated. From the 1985 crop year to the 1996 crop year, the number of insurance companies having agreements with the FCIC to sell and service MPCI policies has declined from 50 to 16. The Company believes that IGF is the fifth largest MPCI crop insurer in the U.S. based on premium information compiled in 1995 by the FCIC and NCIS. The Company's primary competitors are Rain & Hail Insurance Service, Inc. (affiliated with Cigna Insurance Company), Rural Community Insurance Services, Inc. (which is owned by Norwest Corporation), American Growers Insurance Company (Redland), Crop Growers Insurance, Inc., Great American Insurance Company, Blakely Crop Hail (an affiliate of Farmers Alliance Mutual Insurance Company) and North Central Crop Insurance, Inc. The Company believes that in order to compete successfully in the crop insurance business it will have to market and service a volume of premiums sufficiently large to enable the Company to continue to realize operating efficiencies in conducting its business. No assurance can be given that the Company will be able to compete successfully if this market further consolidates. Reserves for Losses and Loss Adjustment Expenses Loss reserves are estimates, established at a given point in time based on facts then known, of what an insurer predicts its exposure to be in connection with incurred losses. LAE reserves are estimates of the ultimate liability associated with the expense of settling all claims, including investigation and litigation costs resulting from such claims. The actual liability of an insurer for its losses and LAE reserves at any point in time will be greater or less than these estimates. The Company maintains reserves for the eventual payment of losses and LAE with respect to both reported and unreported claims. Nonstandard automobile reserves for reported claims are established on a case-by-case basis. The reserving process takes into account the type of claim, policy provisions relating to the type of loss and historical paid loss and LAE for similar claims. Reported crop insurance claims are reserved based upon preliminary notice to the Company and investigation of the loss in the field. The ultimate settlement of a crop loss is based upon either the value or the yield of the crop. Under the second method, loss and LAE reserves for claims that have been incurred but not reported are estimated based on many variables including historical and statistical information, inflation, legal developments, economic conditions, trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. The following loss reserve development tables illustrate the change over time of reserves established for claims and claims expense at the end of various calendar years for the nonstandard automobile segment of the Company (not including Superior), and for Superior separately. The first three line items show the reserves as originally reported at the end of the stated year. The table also includes the cumulative amounts paid as of the end of successive years with respect to that reserve liability. The "liabilities reestimated" section indicates reestimates of the original recorded reserve as of the end of each successive year based on additional information pertaining to such liabilities. The last portion of the table compares the latest reestimated reserve to the reserve amount as originally established and indicates whether or not the original recorded amount was adequate or inadequate to cover the estimated costs of unsettled claims. The reserve for claims and claims expense is an accumulation of the estimated amounts necessary to settle all outstanding claims as of the date for which the reserve is stated. The reserve and payment data shown below have been reduced for estimated subrogation and salvage recoveries. The reserve estimates are based upon the factors in each case and experience with similar cases. No attempt is made to isolate explicitly the impact of inflation from the multi- tude of factors influencing the reserve estimates though inflation is implicitly included in the estimates. Pafco and Superior regularly update their reserve forecasts by type of claim as new facts become known and events occur which affect unsettled claims. Pafco and Superior do not discount their reserves for unpaid claims and claims expense. The following loss reserve development tables are cumulative and, therefore, ending balances should not be added since the amount at the end of each calen- dar year includes activity for both the current and prior years. Conditions and trends that have affected the development of liability in the past may not necessarily reoccur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies from the table. Goran Capital Inc. Nonstandard Automobile Insurance Only (Not Including Superior) For The Years Ended December 31, (In Thousands of U.S. Dollars)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gross Reserves For Unpaid Losses And LAE $29,125 $26,819 $30,844 $27,145 Deduct: Reinsurance Recoverable 12,581 10,927 9,921 8.124 Reserve For Unpaid Losses And LAE, Net Of Reinsurance $4,748 $10,775 $14,346 $17,083 $17,449 $18,706 $16,544 $16,522 $20,923 $19,021 Paid Cumulative As Of: One Year Later 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059 8.082 Two Years Later 4,318 7,510 10,388 10,930 12,723 14,934 12,966 8,806 Three Years Later 4,433 7,875 12,107 12,497 14,461 16,845 13,142 Four Years Later 4,146 8,225 12,863 13,271 15,071 16,641 Five Years Later 4,154 8,513 13,147 13,503 14,903 Six Years Later 4,297 8,546 13,237 13,500 Seven Years Later 4,297 8,561 13,238 Eight Years Later 4,295 8,561 Nine Years Later 4,295 Liabilities Reestimated As Of: One Year Later 3,434 11,208 15,060 15,103 16,797 18,872 16,747 17,000 21,748 Two Years Later 4,588 11,413 14,178 14,745 16,943 19,599 17,023 17,443 Three Years Later 4,702 10,923 14,236 14,993 16,914 19,662 17,009 Four Years Later 4,311 10,791 14,479 14,809 16,750 19,651 Five Years Later 4,234 10,877 14,436 14,659 16,746 Six Years Later 4,320 10,825 14,468 14,659 Seven Years Later 4,278 10,922 14,468 Eight Years Later 4,309 10,921 Nine Years Later 4,309 Net Cumulative (Deficiency) Or Redundancy 439 (146) (22) 2,424 695 (945) (465) (921) (825) Expressed As A Percentage Of Unpaid Losses And LAE 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.8%) (5.6%) (3.9%)
Net reserves for the nonstandard automobile business of Pafco increased substantially in 1988, 1989, 1990 and 1995. Such changes were due entirely to changes in the premium volume of the nonstandard automobile business for those years. In general, Pafco's nonstandard automobile segment has not developed significant redundancies or deficiencies as compared to original reserves. A deficiency of $956,000, or 5.1%, of original reserves developed with respect to loss reserves at December 31, 1992 due to an unexpected increase in loss severity and average claim cost. Superior Insurance Company For The Years Ended December 31, (In Thousands of U.S. Dollars)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gross Reserves For Unpaid Losses And LAE $54,577 $47,112 $52,413 Deduct: Reinsurance Recoverable 68 1,099 987 Reserve For Unpaid Losses And LAE, Net Of Reinsurance $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125 $52,413 Paid Cumulative As Of: One Year Later 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227 25,454 Two Years Later 25,526 34,122 43,547 44,128 40,513 41,231 38,908 35,141 Three Years Later 29,670 39,524 48,037 47,442 44,183 43,198 41,107 Four Years Later 32,545 41,257 49,064 49,256 44,708 44,010 Five Years Later 33,242 41,492 49,522 49,365 45,196 Six Years Later 33,395 41,716 49,327 49,476 Seven Years Later 33,535 41,576 49,425 Eight Years Later 33,469 41,621 Nine Years Later 33,408 Liabilities Reestimated As Of: One Year Later 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564 37,933 Two Years Later 37,118 49,327 53,715 56,626 50,520 50,474 50,006 42,989 Three Years Later 37,932 49,051 53,022 55,147 51,854 46,624 46,710 Four Years Later 38,424 49,436 52,644 57,720 49,739 44,823 Five Years Later 38,580 49,297 54,030 56,824 48,592 Six Years Later 38,584 50,701 53,697 55,770 Seven Years Later 39,965 50,515 53,683 Eight Years Later 39,861 50,521 Nine Years Later 39,998 Net Cumulative (Deficiency) Or Redundancy (13,553)(12,670) 2,741 4,348 11,980 5,832 10,489 8,193 8,192 Expressed As A Percentage Of Unpaid Losses And LAE (51.6%) (33.5%) 4.9% 7.2% 19.9% 10.3% 20.0% 15.3% 17.8%
Net reserves for Superior increased substantially through 1990 before de- creasing in 1992. Such changes were due to changes in premium volume and reduction of reserve redundancies. The decrease in 1995 reflects Superior's curtailment of marketing efforts and writings in Illinois, Mississippi, Tennessee, Texas and Washington resulting from more restrictive underwriting criteria, inadequately priced business in these states and other unfavorable marketing conditions. Significant deficiencies developed in reserves estab- lished as of December 31 of each of 1986 through 1988 which were substantially offset by reserve additions in 1989 due to changes in reserve methodology. With respect to reserves established as of December 31, 1991 and 1992, Superior developed significant redundancies due to conservative levels of case basis and IBNR reserves. Beginning in 1993, Superior began to adjust its reserving methodology to reduce its redundancies and to take steps to close older claim files which still carried redundant reserves. Pafco and Superior employ an independent actuary to annually evaluate and certify the adequacy of their loss and LAE reserves. Investments Insurance company investments must comply with applicable laws and regulations which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common securities, real estate mortgages and real estate. The Company's investment policies are determined by the Company's Board of Directors and are reviewed on a regular basis. The Company's investment strategy is to maximize the after-tax yield of the portfolio while emphasizing the stability and preservation of the Company's capital base. Further, the portfolio is invested in types of securities and in an aggregate duration which reflect the nature of the Company's liabilities and expected liquidity needs. The investment portfolios of the Company are managed by third party professional administrators, including Goldman Sachs & Co., in accordance with pre-established investment policy guidelines established by the Company. The investment portfolios of the Company at December 31, 1996 consisted of the following: Goran Capital Inc. For The Year Ended December 31, 1996 (In Thousands of U.S. Dollars) Amortized Estimated Type of Investment Cost Market Value Fixed Maturities: U.S. and Canadian Treasury Securities and Obligations of U.S. and Canadian Government Corporation and Agencies $ 57,804 $ 57,826 Obligations of States, Provinces and Political Subdivisions 3,587 3,651 Corporate Securities 76,421 76,906 Total Fixed Maturities $137,812 $138,383 Equity Securities: Preferred stocks Common Stocks 28,075 28,729 Short Term Investments 29,052 29,052 Real Estate 4,548 4,548 Mortgage Loans 2,430 2,430 Other Loans 75 75 Total Investments $201,992 $203,217 [FN] Due to the nature of crop insurance, the Company must maintain short-term investments to fund amounts due under the MPCI program. The following table sets forth, as of December 31, 1995 and 1996 the compo- sition of the fixed maturity securities portfolio of the Company by time to maturity. Goran Capital Inc. For The Years Ended December 31, (In Thousands of U.S. Dollars) 1995 1996 Market Percent Total Market Percent Total Time to Maturity Value Market Value Value Market Value 1 Year or Less $ 8,797 31.3% $ 9,169 6.6% More Than 1 Year Through 5 Years 15,546 55.4% 79,042 57.1% More Than 5 Years Through 10 Years 3,737 13.3% 43,404 31.4% More Than 10 Years - - - - - - 6,768 4.9% Total $28,080 100.0% $138,383 100.0% The investment results of the Company for the periods indicated are set forth below: Goran Capital Inc. For The Years Ended December 31, (In Thousands of U.S. dollars) 1994 1995 1996 Net Investment Income $ 3,372 $ 3,530 $ 7,877 Average Investment Portfolio $48,712 $50,347 $130,519 Pre-tax Return On Average Investment Portfolio 6.9% 7.0% 6.0% Net Realized Gains (Losses) $ (358) $ (198) $ (637) [FN] Includes dividend income received in respect of holdings of common stock. Average investment portfolio represents the average (based on amortized cost) of the beginning and ending investment portfolio. Ratings A.M. Best has currently assigned a B+ rating to Superior and a B- rating to Pafco. Pafco's rating has been confirmed by A.M. Best at a B- rating sub- sequent to the Acquisition. Superior's rating was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting from indebtedness assumed in connection with the Acquisition. IGF recently received an "NA-2" rating (a "rating not assigned" category for companies that do not meet A.M. Best's minimum size requirement) from A.M. Best but intends to seek a revised rating after the infusion of capital from the proceeds of the Offering, although there can be no assurance that a revised rating will be obtained or as to the level of any such rating. A.M. Best's ratings are based upon a comprehensive review of a company's financial performance, which is supplemented by certain data, including responses to A.M. Best's questionnaires, phone calls and other correspondence between A.M. Best analysts and company management, quarterly NAIC filings, state insurance department examination reports, loss reserve reports, annual reports, company business plans and other reports filed with state insurance departments. A.M. Best undertakes a quantitative evaluation, based upon profitability, leverage and liquidity, and a qualitative evaluation, based upon the compo- sition of a company's book of business or spread of risk, the amount, appropri- ateness and soundness of reinsurance, the quality, diversification and estimated market value of its assets, the adequacy of its loss reserves and policyholders' surplus, the soundness of a company's capital structure, the extent of a company's market presence, and the experience and competence of its management. A.M. Best's ratings represent an independent opinion of a company's financial strength and ability to meet its obligations to policy- holders. A.M. Best's ratings are not a measure of protection afforded investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest rating classifications, respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated very good overall performance when compared to the standards established by the A.M. Best Company" and "have a good ability to meet their obligations to policyholders over a long period of time." A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate overall performance when compared to the standards established by the A.M. Best Company" and "generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions". There can be no assurance that such ratings or changes therein will not in the future adversely affect the Company's competitive position. Regulation General As a general rule, an insurance company must be licensed to transact insurance business in each jurisdiction in which it operates, and almost all significant operations of a licensed insurer are subject to regulatory scrutiny. Licensed insurance companies are generally known as "admitted" insurers. Most states provide a limited exemption from licensing for insurers issuing insurance coverages that generally are not available from admitted insurers. These coverages are referred to as "surplus lines" insurance and these insurers as "surplus lines" or "non-admitted" companies. The Company's admitted insurance businesses are subject to comprehensive, detailed regulation throughout the United States, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. The primary purpose of such regulations and supervision is the protection of policyholders and claimants rather than stockholders or other investors. Depending on whether the insurance company is domiciled in the state and whether it is an admitted or non-admitted insurer, such authority may extend to such things as (i) periodic reporting of the insurer's financial condition; (ii) periodic financial examination; (iii) approval of rates and policy forms; (iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers and their agents; (vii) restrictions on the payment of dividends and other distributions; (viii) approval of changes in control; and (ix) the type and amount of permitted investments. Pafco, IGF and Superior are subject to triennial examinations by state insurance regulators. Such examinations were last conducted for Pafco as of June 30, 1992 (covering the period to that date from September 30, 1990), for IGF as of March 31, 1992 (covering the period to that date from December 31, 1987), and Superior as of December 31, 1993 (covering the period to that date from January 1, 1991). The two subsidiaries of Superior, Superior American Insurance Company and Superior Guaranty Insurance Company, had examinations conducted as of October 31, 1996 (covering the period to that date from the subsidiaries' inception on December 9, 1994). Pafco will have a triennial examination in 1997. Superior and IGF have not been notified of the dates of their next examination. Insurance Holding Company Regulation The Company also is subject to laws governing insurance holding companies in Florida and Indiana, where they are domiciled. These laws, among other things, (i) require the Company to file periodic information with state regulatory authorities including information concerning its capital structure, ownership, financial condition and general business operations; (ii) regulate certain transactions between the Company, its affiliates and IGF, Pafco and Superior (the "Insurers"), including the amount of dividends and other distributions and the terms of surplus notes; and (iii) restrict the ability of any one person to acquire certain levels of the Company's voting securities without prior regulatory approval. Any purchaser of 10% or more of the outstanding shares of Common Stock of SIG would be presumed to have acquired control of IGF unless the Indiana Commissioner, upon application, has determined otherwise. In addition, any purchaser of approximately 10% or more of the outstanding shares of Common Stock of the Company will be presumed to have acquired control of Pafco and Superior unless the Commissioner of Insurance of the State of Indiana (the "Indiana Commissioner") and the Commissioner of Insurance of the State of Florida (the "Florida Commissioner"), upon application, have determined otherwise. Indiana law defines as "extraordinary" any dividend or distribution which, together with all other dividends and distributions to shareholders within the preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as regards policyholders as of the end of the preceding year, or (ii) the prior year's net income. Dividends which are not "extraordinary" may be paid ten days after the Indiana Department of Insurance receives notice of their declaration. "Extraordinary" dividends and distributions may not be paid without prior approval of the Indiana Commissioner or until the Indiana Commissioner has been given thirty days prior notice and has not disapproved within that period. The Indiana Department of Insurance must receive notice of all dividends, whether "extraordinary" or not, within five business days after they are declared. Notwithstanding the foregoing limit, a domestic insurer may not declare or pay a dividend of funds other than earned surplus without the prior approval of the Indiana Department of Insurance. "Earned surplus" is defined as the amount of unassigned funds set forth in the insurer's most recent annual statement, less surplus attributable to unrealized capital gains or reevaluation of assets. As of December 31 1996, IGF and Pafco had earned surplus of $29,412,000 and $18,112,000, respectively. Further, no Indiana domiciled insurer may make payments in the form of dividends or otherwise to shareholders as such unless it possesses assets in the amount of such payment in excess of the sum of its liabilities and the aggregate amount of the par value of all shares of its capital stock; provided, that in no instance shall such dividend reduce the total of (i) gross paid-in and contributed surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal to 50% of the aggregate amount of the par value of all shares of the insurer's capital stock. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to stock- holders without prior approval of the Florida Department of Insurance if the dividend or distribution does not exceed the larger of (i) the lesser of (a) 10% of surplus, or (b) net income, not including realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net investment income plus a 3-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department of Insurance if (1) the dividend is equal to or less than the greater of (i) 10% of the insurer's surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains, or (ii) the insurer's entire net operating profits (including unrealized gains or losses) and realized net capital gains derived during the immediately preceding calendar year; (2) the insurer will have policyholder surplus equal to or exceeding 115% of the minimum required statutory surplus after the dividend or distribution; (3) the insurer files a notice of the dividend or distri- bution with the department at least ten business days prior to the dividend payment or distribution; and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department of Insurance, or (ii) 30 days after the Florida Department of Insurance has received notice of such dividend or distribution and has not disapproved it within such time. In the Consent Order approving the Acquisition, the Florida Department of Insurance has prohibited Superior from paying any dividends (whether extraordinary or not) for four years without the prior written approval of the Florida Department of Insurance. Under these laws, the maximum aggregate amounts of dividends to SIG in 1997 by IGF and Pafco without prior regulatory approval is $12,122,000 and $561,000, respectively, none of which has been paid. Although SIG believes that amounts required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Liquidity and Capital Resources". Further, there can be no assurance that, if requested, the Indiana Department of Insurance will approve any request for extraordinary dividends from Pafco or IGF or that the Florida Department of Insurance will allow any dividends to be paid by Superior during the four year period described above. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory consider- ations, such as the impact of dividends on surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory surplus of an insurance company following any dividend or distribution by such company be reasonable in relation to its outstanding liabilities and adequate for its financial needs. While the non-insurance company subsidiaries are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount which a subsidiary within the holding company system may charge any of the Insurers for services (e.g., management fees and commissions). These regulations may affect the amount of management fees which may be paid by Pafco and Superior to GGS Holdings. See "The Company - Formation of GGS Holdings; Acquisition of Superior". The management agreement formerly in place between SIG and Pafco which provides for an annual management fee equal to 15% of gross premiums has been assigned to GGS Management, Inc. ("GGS Management"), a wholly-owned subsidiary of GGS Holdings. A similar management agreement with a management fee of 17% of gross premiums has been entered into between GGS Management and Superior. Employees of the Company relating to the nonstandard automobile insurance business and all Superior employees became employees of GGS Management effective April 30, 1996. As part of the approval of the Formation Transaction, the Indiana Department of Insurance has required Pafco to resubmit its management agreement for review by the Indiana Department of Insurance no later than May 1, 1997 (the first anniversary of the Formation Transaction), together with supporting evidence that management fees charged to Pafco are fair and reasonable in comparison to fees charged between unrelated parties for similar services. In the Consent Order approving the Acquisition, the Florida Department of Insurance has reserved, for three years, the right to reevaluate the reasonableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department of Insurance's consid- eration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department of Insurance or the Florida Department of Insurance will not in the future require a reduction in these management fees. Federal Regulation The Company's MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. Consequently, the MPCI program is subject to oversight by the legislative and executive branches of the federal government, including the FCIC. The MPCI program regulations generally require compliance with federal guidelines with respect to underwriting, rating and claims administration. The Company is required to perform continuous internal audit procedures and is subject to audit by several federal government agencies. The MPCI program has historically been subject to change by the federal government at least annually since its establishment in 1980, some of which changes have been significant. The most recent significant changes to the MPCI program came as a result of the passage by Congress of the 1994 Reform Act and the 1996 Reform Act. Certain provisions of the 1994 Reform Act, when implemented by the FCIC, may increase competition among private insurers in the pricing of Buy-up Coverage. The 1994 Reform Act authorizes the FCIC to implement regulations permitting insurance companies to pass on to farmers in the form of reduced premiums certain cost efficiencies related to any excess expense reimbursement over the insurer's actual cost to administer the program, which could result in increased price competition. To date, the FCIC has not enacted regulations implementing these provisions but is currently collecting information from the private sector regarding how to implement these provisions. The 1994 Reform Act required farmers for the first time to purchase at least CAT Coverage in order to be eligible for other federally sponsored farm benefits, including but not limited to low interest loans and crop price supports. The 1994 Reform Act also authorized for the first time the marketing and selling of CAT Coverage by the local USDA offices. Partly as a result of the increase in the size of the MPCI market resulting from the 1994 Reform Act, the Company's MPCI Premium increased to $53.4 million in 1995 from $44.3 million in 1994. However, the 1996 Reform Act, signed into law by President Clinton in April, 1996, eliminates the linkage between CAT Coverage and quali- fication for certain federal farm program benefits and also limits the role of the USDA offices in the delivery of MPCI coverage. In accordance with the 1996 Reform Act, the USDA announced in July, 1996, 14 states where CAT Coverage will no longer be available through USDA offices but rather would solely be available through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota, Washington and Wyoming. The limitation of the USDA's role in the delivery system for MPCI should provide the Company with the opportunity to realize increased revenues from the distribution and servicing of its MPCI product. The Company has not experienced any material negative impact in 1996 from the delinkage mandated by the 1996 Reform Act. In addition, the FCIC has transferred to the Company approximately 8,900 insureds for CAT Coverage who previously purchased such coverage from USDA field offices. The Company believes that any future potential negative impact of the delinkage mandated by the 1996 Reform Act will be mitigated by, among other factors, the likelihood that farmers will continue to purchase MPCI to provide basic protection against natural disasters since ad hoc federal disaster relief programs have been reduced or eliminated. In addition, the Company believes that (i) lending institutions will likely continue to require this coverage as a condition to crop lending, and (ii) many of the farmers who entered the MPCI program as a result of the 1994 Reform Act have come to appreciate the reasonable price of the protection afforded by CAT Coverage and will remain with the program regardless of delinkage. There can, however, be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. Underwriting and Marketing Restrictions During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid- term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals, and (iv) limitations upon or decreases in rates permitted to be charged. Insurance Regulatory Information System The NAIC Insurance Regulatory Information System ("IRIS") was developed primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. Insurance companies submit data on an annual basis to the NAIC, which analyzes the data using ratios concerning various categories of financial data. IRIS ratios consist of 12 ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC. If the NAIC determines that more attention may be warranted, one of several priority designations is assigned, and the insurance department of the state of domicile is then responsible for follow-up action. During 1996 Pafco had a net premiums to surplus ratio of 3.03 to 1 which was in excess of the high end range of 3.0 to 1. The excess was not material and Pafco has the ability to cede business to Superior to maintain compliance with this ratio. Pafco's change in net writings was 61% compared to 33% at the high end of the range. This result was expected given growth in gross premiums and elimination of quota share reinsurance. Pafco also had positive surplus growth of 64% outside the high end of the range at 50%. Pafco planned for higher premium volume given the more profitable results than in prior years. During 1996, Pafco's investment yield as calculated under the IRIS tests was 3.8% which was below the low end of the range at 4.5%. However, this IRIS test is a simple average of beginning and end of year investments. Pafco's value fell below the range due to the following: (i) inclusion of investment in IGF prior to the Transfer during the first four months of the year when no investment income was received; (ii) growth in the portfolio in the latter part of the year not taken into account by the IRIS test; (iii) change during the course of the year to reduce ratio of equities to total investments in favor of fixed income securities; (iv) contribution to surplus of $3.7 million at the end of 1996 included in the IRIS test; and (v) inclusion of the home office building in the investment base. If a weighted average was calculated using monthly balances and excluding the IGF investment and real estate from the calcu- lation, Pafco's return would have been 5.7%. Based on current investment levels and mix it is expected that this test will be met in 1997. During 1996, Pafco's ratio of reserve deficiency to surplus was 62% which exceeds the upper range of 25%. This IRIS test calculates the average of claims liability to premiums for the preceding two years and compares the resultant percentage to the current year's percentage with a corresponding analysis to surplus. During 1994 and 1995, Pafco's claims liability to premiums ratio was approximately 55% and decreased to approximately 35% in 1996, resulting in the unusual IRIS result. This situation was a result of commercial claims liabilities in 1994 and 1996 that have now been ceded to an affiliate. Thus, claims liability at December 31, 1996 is entirely for nonstandard automobile. The reserves for the commercial liability business were at a much higher ratio of premiums and are paid at a much slower rate than nonstandard auto- mobile claims. Thus, although premiums grew in 1996, the increase in non- standard automobile claims liability was offset by ceded commercial claims. As this IRIS test uses a two year average of claims liabilities to premiums, it is likely that Pafco may exceed the normal ratio in 1997. It should be noted that Pafco did not have unusual IRIS values for the one and two year reserve development to surplus tests. During 1996 IGF had unusual values for three IRIS tests. IGF's surplus increased by 237% which exceeded the high end of the range of 50%. However, this is a very positive development due to growth in profits and the capital infusion from the proceeds of the Offering. IGF continued to have unusual values in the liabilities to liquid assets and agents balances to surplus tests. IGF generally has an unusual value in these tests due to the reinsurance program mandated by the FCIC for the distribution of the MPCI program and the fact that agents' balances at December 31 are usually not settled until late February. During 1996 Superior had a ratio of net premiums written to surplus of 3.07 to 1 compared to the IRIS test upper limit of 3.0 to 1. During 1996, Superior's net premium writings increased by 116% which exceeded the upper limit of the IRIS range of 33%. Superior had a reserve deficiency to surplus ratio of 29% which was in excess of the upper IRIS limit of 25%. All these matters were a function of the strong growth of Superior. Such results may continue in the future if growth continues. See Management's Discussion and Analysis for further discussion on impact of premium writings to surplus ratio. Risk-Based Capital Requirements In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement risk-based capital ("RBC") requirements for property and casualty insurance companies designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. Indiana and Florida have substantially adopted the NAIC model law, and Indiana has directly, and Florida has indirectly, adopted the NAIC model formula. The RBC formula for property and casualty insurance companies measures four major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks; and (iv) off-balance sheet risk arising from adverse experience from non- controlled assets, guarantees for affiliates, contingent liabilities and reserve and premium growth. Pursuant to the model law, insurers having less statutory surplus than that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC model law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC falls. The first level, the Company Action Level (as defined by the NAIC), requires an insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory Action Level (as defined by the NAIC) requires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform an examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized Control Level (as defined by the NAIC) gives the relevant insurance commissioner the option either to take the aforementioned actions or to rehabilitate or liquidate the insurer if surplus falls below 100% of the RBC amount. The fourth action level is the Mandatory Control Level (as defined by the NAIC) which requires the relevant insurance commissioner to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. Based on the foregoing formulae, as of December 31, 1996, the RBC ratios of the Insurers were in excess of the Company Action Level, the first trigger level that would require regulatory action. Guaranty Funds The Insurers also may be required under the solvency or guaranty laws of most states in which they do business to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insolvent or rehabil- itated insurance companies. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. Some state laws and regulations further require participation by the Insurers in pools or funds to provide some types of insurance coverages which they would not ordinarily accept. The Company recognizes its obligations for guaranty fund assessments when it receives notice that an amount is payable to the fund. The ultimate amount of these assessments may differ from that which has already been assessed. It is not possible to predict the future impact of changing state and federal regulation on the Company's operations, and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws. Stockholder Agreement with GS Funds The Stockholder Agreement among the Company, GS Funds, SIG and GGS Holdings provides that the Board of Directors of GGS Holdings consists of five members, of whom three shall be designated by the Company and two shall be designated by GS Funds. However, in the event that (x) at any time the Company and its affiliates shall own less than 25% of the issued and outstanding common stock of GGS Holdings by reason of the issuance of shares of common stock to GS Funds in satisfaction of the indemnification obligations of the Company or SIG pursuant to the GGS Agreement (the "Indemnity Date") or (y) at any time (i) SIG, Goran or GGS Holdings is in violation of any term of the Stockholder Agreement, or (ii) GGS Holdings or GGS Management shall remain in violation of any covenant with respect to indebtedness incurred by GGSH to partially fund the Acquisition (the "GGS Senior Credit Facility") (whether or not such violation is waived) after the expiration of any applicable cure period or there shall occur an event of default under the GGS Senior Credit Facility (whether or not waived), the size of the Board shall be reduced to four members (a "Board Reduction"). At December 31, 1996, GS Funds waived their right to this Board Reduction for the covenants violations of the GGSH Senior Credit Facility. The covenants contained in the GGS Senior Credit Facility are customary commercial loan covenants relating to the maintenance of financial ratios and restrictions on dividends, significant corporate transactions and other matters. In such event, so long as the Indemnity Date has not occurred, SIG shall be entitled to designate only two directors and GS Funds shall be entitled to designate two directors. After the occurrence of the Indemnity Date, SIG shall be entitled to designate one director and GS Funds shall be entitled to designate three directors. Prior to a Board Reduction, action may be taken by the Board only with the approval of a majority of the members of the Board. After a Board Reduction, prior to the Indemnity Date, action may only be taken with the approval of at least one GS Funds designee and one SIG designee. After the Indemnity Date following a Board Reduction, action may only be taken by the Board with the approval of a majority of the entire Board. Prior to a Board Reduction, GGS Holdings may not take the following actions, among others, without first obtaining approval by the Board and at least one GS Funds designee: (i) consolidate or merge with any person, (ii) purchase the capital stock or substantially all of the assets of any person, (iii) enter into any joint venture or partnership or establish any non-wholly owned subsidiaries in which the consideration paid by or invested by GGS Holdings is in excess of $1 million, (iv) voluntarily liquidate or dissolve, (v) offer any type of insurance other than nonstandard automobile insurance (other than certain policies issued on behalf of IGF or SIGF), (vi) sell, lease or transfer assets for an aggregate consideration in excess of $1 million, (vii) subject to certain exceptions, enter into any contract with a director or officer of Goran (or any relative or affiliate of such person) or with any affiliate of Goran, (viii) create or suffer to exist any indebtedness for borrowed money in an aggregate amount in excess of $1 million excluding certain existing indebted- ness, (ix) mortgage or encumber its assets in an amount in excess of $1 million, (x) make or commit to make any capital expenditure in an amount in excess of $1 million, (xi) redeem or repurchase its outstanding capital stock, (xii) issue or sell any shares of capital stock of GGS Holdings or its subsid- iaries, (xiii) enter into, adopt or amend any employment agreement or benefit plan, (xiv) amend its Certificate of Incorporation or Bylaws, (xv) amend or waive any provision of the Stockholder Agreement or the GGS Agreement, (xvi) change its independent certified accountants or actuaries, (xvii) register any securities under the Securities Act, (xviii) enter into one or more agreements to reinsure a substantial portion of the liability of GGS Holdings or any of its subsidiaries, or (xix) adopt or change the reserve policy or the investment policy of GGS Holdings or any of its subsidiaries. The Company's representatives on the Board of Directors of GGS Holdings are G. Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief Executive Officer of the Company and Douglas H. Symons, President and Chief Operating Officer of the Company. Pursuant to their power under the Stock- holder Agreement to designate the Chairman of the Board of GGS Holdings, GS Funds has named G. Gordon Symons as Chairman of the Board of GGS Holdings. The Stockholder Agreement designates Alan G. Symons as the Chief Executive Officer of GGS Holdings and gives him the right to designate and determine the compensation for all management personnel, provided that the designation of, removal of, and determination of compensation for, any person earning $100,000 or more per annum is subject to the prior approval of the board. GS Funds has the right at any time to designate a chief operating officer for GGS Holdings but have currently not elected to exercise this right. Upon request, GS Funds has the right to appoint one designee to each of the committees of the Board of Directors of GGS Holdings. The Stockholder Agreement does not give GS Funds the right to appoint any designees to the board of directors of any of the subsidiaries of GGS Holdings. Certain Rights Of The GS Funds To Cause A Sale of GGS Holdings Events Which Trigger the Rights of the GS Funds to Cause A Sale of GGS Holdings. The Stockholder Agreement establishes certain rights of GS Funds to cause a sale of GGS Holdings upon the occurrence of certain triggering events, including (i) the failure to consummate a registered initial public offering of GGS Holdings stock representing, on a fully diluted basis, at least 20% of all such stock issued and outstanding, and generating at least $25 million in net proceeds to the sellers of such securities, by April 30, 2001, (ii) the third separate occasion, during the term of the Stockholder Agreement, on which an equity financing or acquisition transaction proposed by GS Funds is rejected by the GGS Holdings Board of Directors, (iii) the loss of voting control of Goran or SIG (defined, with respect to Goran, as being direct or indirect ownership of more than 40% of the outstanding voting stock of Goran if any other holder or group holds in excess of 10% of the outstanding voting stock of Goran, and otherwise 25% thereof; and defined, with respect to SIG, as requiring both (a) direct ownership by Goran in excess of 50% of SIG's voting stock and (b) retention by Alan G. Symons and his family members of voting control of Goran) by Alan G. Symons or his family members or affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS Holdings for any reason. Upon the occurrence of any of such events, and at any time or from time to time thereafter, GS Funds may, by notifying SIG in writing, initiate the process of seeking to effect a sale of GGS Holdings on terms and conditions which are acceptable to GS Funds. However, within thirty days after SIG receives notice of GS Funds' intention to initiate the sale of GGS Holdings, SIG may provide written notice to GS Funds that it wishes to acquire or combine with GGS Holdings. SIG's notice to GS Funds must include the proposed purchase price and other material terms and conditions with such specificity as is necessary to permit GS Funds to evaluate SIG's offer. If, within 90 days of delivery of the notice by SIG, GS Funds accepts SIG's offer, SIG will be obligated to acquire or combine with GGS Holdings. In the event GS Funds rejects SIG's proposal, (i) any sale to a third party effected within 180 days after receipt of such proposal must not contain terms that are in the aggregate less favorable to the GGS Holdings stockholders than those set forth in SIG's proposal, (ii) any sale must provide for the same consideration to be paid to each stock- holder, and (iii) no sale may constitute an acquisition by or a combination with an affiliate of GS Funds. Accordingly, under certain circumstances, GS Funds may have the ability to force SIG to divest itself of its nonstandard automobile operations. Further, a forced sale of GGS Holdings may also cause SIG to be characterized as an investment company within the meaning of the Investment Company Act of 1940 (the "1940 Act") unless the proceeds are redeployed into other business operations or another exemption from registration under the 1940 Act is available. Canadian Federal Income Tax Considerations This summary is based upon the current provisions of the Income Tax Act (Canada) (the "Canadian Tax Act"), the regulations thereunder, proposed amendments thereto publicly announced by the Department of Finance, Canada prior to the date hereof and the provisions of the Canada-U.S. Income Tax Convention (1980) (the "Convention") as amended by the Third Protocol (1995). A purchase of common shares by the Company (other than a purchase of common shares by the Company on the open market) will give rise to a deemed dividend under the Canadian Tax Act equal to the amount paid by the Company on the purchase in excess of the paid-up capital of such shares determined in accordance with the Canadian Tax Act. Any such dividend deemed to have been received by a person not resident in Canada will be subject to nonresident withholding tax as described above. The amount of any such deemed dividend will reduce the proceeds of disposition to a holder of common shares for purposes of computing the amount of his capital gain or loss under the Canadian Tax Act. A holder of common shares who is not a resident of Canada within the meaning of the Canadian Tax Act will not be subject to tax under the Canadian Tax Act in respect of any capital gain on a disposition of common shares (including on a purchase by the Company) unless such shares constitute taxable Canadian property of the shareholder for purposes of the Canadian Tax Act and such shareholder is not entitled to relief under an applicable tax treaty. Common shares will generally not constitute taxable Canadian property of a shareholder who is not a resident of Canada for purposes of the Canadian Tax Act in any taxation year in which such shareholder owned common shares unless such shareholder uses or holds or is deemed to use or hold such shares in or in the course of carrying on business in Canada or, a share of the capital stock of a corporation resident in Canada, that is not listed on a prescribed stock exchange or a share that is listed on prescribed stock exchange, if at any time during the five year period immediately preceding the disposition of the common shares owned, either alone or together with persons with whom he does not deal at arm's length, not less than 25% of the issued shares of any class of the capital stock of the Company. In any event, under the Convention, gains derived by a resident of the United States from the disposition of common shares will generally not be taxable in Canada unless 50% or more of the value of the common shares is derived principally from real property situated in Canada. Currently, under the Convention, the rate of Canadian non-resident withholding tax on the gross amount of dividends beneficially owned by a person who is a resident of the United States for the purpose of the Convention and who does not have a "permanent establishment" or "fixed base" in Canada is 15%. However, where such beneficial owner is a company which owns at least 10% of the voting stock of the company, the rate of such withholding is 5%. Amounts in respect of common shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends to a shareholder who is not a resident in Canada within the meaning of the Canadian Tax Act will generally be subject to Canadian non-resident withholding tax. Such withholding tax is levied at a basic rate of 25% which may be reduced pursuant to the terms of an applicable tax treaty between Canada and the country of resident of the non-resident. U.S. Federal Income Tax Considerations The following is a general summary of certain U.S. federal income tax consequence to U.S. Holders of the purchase, ownership and disposition of common shares. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date hereof and all of which are subject to change. This summary does not address all aspects of U.S. federal income taxation that may be relevant to a particular U.S. Holder based on such U.S. Holder's particular circumstances. In particular, the following summary does not address the tax treatment of U.S. Holders who are broker dealers or who own, actually or constructively, 10% or more of the Company's oustanding voting stock, and certain U.S. Holders (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions and persons subject to the alternative minimum tax) may be subject to special rules not discussed below. For U.S. federal income tax purposes, a U.S. Holder of common shares generally will realize, to the extent of the Company's current and accumulated earnings and profits, ordinary income on the receipt of cash dividends on the common shares equal to the U.S. dollar value of such dividends on the date of receipt (based on the exchange rate on such date) without reduction for any Canadian withholding tax. Dividends paid on the common shares will not be eligible for the dividends received deduction available in certain cases to U.S. corp- orations. In the case of foreign currency received as a divdend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollars value on the date of receipt. Any gain or loss recognized upon a subsequent sale or other disposition of the foregin currency, including an exchange for U.S. dollars, will be ordinary income or loss. Subject to certain requirements and limitations imposed by the Code, a U.S. Holder may elect to claim the Canadian tax withheld or paid with respect to dividends on the common shares either as a deduction or as a foreign tax credit against the U.S. federal income tax liability of such U.S. Holder. The requirements and limitations imposed by the Code with respect to the foreign tax credit are complex and beyond the scope of this summary, and consequently, prospective purchasers of common shares should consult with their own tax advisors to determine whether and to what extent they would be entitled to such credit. For U.S. federal income tax purposes, upon a sale or exchange of a common share, a U.S. Holder will recognize gain or loss equal to the difference between the amount realized on such sale or exchange and the tax basis of such common share. If a common share is held as a capital asset, any such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder has held such common share for more than one year. Under current Treasury regulations, dividends paid on the common share to U.S. Holders will not be subject to the 31% U.S. backup withholding tax. Proposed Treasury regulations which are not yet in effect and which will only apply prospectively, however, would subject dividends paid on the common shares through a U.S. or U.S. related broker to the 31% U.S. backup withholding tax unless certain information reporting requirements are satisfied. Whether and when such proposed Treasury regulations will become effective cannot be determined at this time. The payment of proceeds of a sale or other dispo- sition of common shares in the U.S. through a U.S. or U.S. related broker generally will be subject to U.S. information reporting requirements and may also be subject to the 31% U.S. backup withholding tax, unless the U.S. Holder furnishes the broker with a duly completed and signed Form W-9. Any amounts withheld under the U.S. backup withholding tax rules may be refunded or credited against the U.S. Holder's U.S. federal income tax liability, if any, provided that the required information is furnished to the U.S. Internal Revenue Service. Employees At December 31, 1996 the Company and its subsidiaries employed approximately 600 persons. The Company believes that relations with its employees are excellent. FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS The statements contained in this Annual Report which are not historical facts, including but not limited to, statements concerning (i) the impact of federal and state laws and regulations, including but not limited to, the 1994 Reform Act and 1996 Reform Act, on the Company's business and results of operations, (ii) the competitive advantage afforded to IGF by approaches adopted by management in the areas of information, technology, claims handling and under- writing, (iii) the sufficiency of the Company's cash flow to meet the operating expenses, debt service obligations and capital needs of the Company and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense Reim- bursements on the Company's results of operations, are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time the Company may also issue other statements either orally or in writing, which are forward looking within the meaning of these statutory provisions. Forward looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "plan" and similar expressions. These statements involve a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from the forward looking statements in this Form 10-K or from other forward looking statements made by the Company. In addition to the risks and uncertainties of ordinary business operations, some of the facts that could cause actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements are the risks and uncertainties (i) discussed herein, (ii) contained in the Company's other filings with the Securities and Exchange Commission and public statements from time to time, and (iii) set forth below: Uncertain Pricing and Profitability One of the distinguishing features of the property and casualty industry is that its products generally are priced, before its costs are known, because premium rates usually are determined before losses are reported. Premium rate levels are related in part to the availability of insurance coverage, which varies according to the level of surplus in the industry. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. The nonstandard automobile insurance business in recent years has experienced very competitive pricing conditions and there can be no assurance as to the Company's ability to achieve adequate pricing. Changes in case law, the passage of new statutes or the adoption of new regulations relating to the interpretation of insurance contracts can retroactively and dramatically affect the liabilities associated with known risks after an insurance contract is in place. New products also present special issues in establishing appropriate premium levels in the absence of a base of experience with such products' performance. The number of competitors and the similarity of products offered, as well as regulatory constraints, limit the ability of property and casualty insurers to increase prices in response to declines in profitability. In states which require prior approval of rates, it may be more difficult for the Company to achieve premium rates which are commensurate with the Company's underwriting experience with respect to risks located in those states. In addition, the Company does not control rates on its MPCI business, which are instead set by the FCIC. Accordingly, there can be no assurance that these rates will be sufficient to produce an underwriting profit. The reported profits and losses of a property and casualty insurance company are also determined, in part, by the establishment of, and adjustments to, reserves reflecting estimates made by management as to the amount of losses and loss adjustment expenses ("LAE") that will ultimately be incurred in the settlement of claims. The ultimate liability of the insurer for all losses and LAE reserved at any given time will likely be greater or less than these estimates, and material differences in the estimates may have a material adverse effect on the insurer's financial position or results of operations in future periods. Nature of Nonstandard Automobile Insurance Business The nonstandard automobile insurance business is affected by many factors which can cause fluctuation in the results of operations of this business. Many of these factors are not subject to the control of the Company. The size of the nonstandard market can be significantly affected by, among other factors, the underwriting capacity and underwriting criteria of standard automobile insurance carriers. In addition, an economic downturn in the states in which the Company writes business could result in fewer new car sales and less demand for automobile insurance. Severe weather conditions could also adversely affect the Company's business through higher losses and LAE. These factors, together with competitive pricing and other considerations, could result in fluctuations in the Company's underwriting results and net income. Nature of Crop Insurance Business The Company's operating results from its crop insurance program can vary substantially from period to period as a result of various factors, including timing and severity of losses from storms, drought, floods, freezes and other natural perils and crop production cycles. Therefore, the results for any quarter or year are not necessarily indicative of results for any future period. The underwriting results of the crop insurance business are recognized through- out the year with a reconciliation for the current crop year in the fourth quarter. The Company expects that for the foreseeable future a majority of its crop insurance will continue to be derived from MPCI business. The MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. As such, legislative or other changes affecting the MPCI program could impact the Company's business prospects. The MPCI program has historically been subject to modification at least annually since its establishment in 1980, and some of these modifications have been significant. No assurance can be given that future changes will not significantly affect the MPCI program and the Company's crop insurance business. The 1994 Reform Act also reduced the expense reimbursement rate payable to the Company for its costs of servicing MPCI policies that exceed the basic CAT Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and 1999 crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium serviced, a decrease from the 31% level established for the 1994, 1995 and 1996 crop years. Although the 1994 Reform Act directs the FCIC to alter program procedures and administrative requirements so that the administrative and operating costs of private insurance companies participating in the MPCI program will be reduced in an amount that corresponds to the reduction in the expense reimbursement rate, there can be no assurance that the Company's actual costs will not exceed the expense reimbursement rate. The FCIC has appointed several committees comprised of members of the insurance industry to make recommendations concerning this matter. The 1994 Reform Act also directs the FCIC to establish adequate premiums for all MPCI coverages at such rates as the FCIC determines are actuarially sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss ratio has exceeded this target ratio. There can be no assurance that the FCIC will not increase rates to farmers in order to achieve the targeted loss ratio in a manner that could adversely affect participation by farmers in the MPCI program above the CAT Coverage level. The 1996 Reform Act, signed into law by President Clinton in April, 1996, provides that, MPCI coverage is not required for federal farm program benefits if producers sign a written waiver that waives eligibility for emergency crop loss assistance. The 1996 Reform Act also provides that, effective for the 1997 crop year, the Secretary of Agriculture may continue to offer CAT Coverage through USDA offices if the Secretary of Agriculture determines that the number of approved insurance providers operating in a state is insufficient to adequately provide catastrophic risk protection coverage to producers. There can be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. Total MPCI Premium for each farmer depends upon the kinds of crops grown, acreage planted and other factors determined by the FCIC. Each year, the FCIC sets, by crop, the maximum per unit commodity price ("Price Election") to be used in computing MPCI Premiums. Any reduction of the Price Election by the FCIC will reduce the MPCI Premium charged per policy, and accordingly will adversely impact MPCI Premium volume. The Company's crop insurance business is also affected by market conditions in the agricultural industry which vary depending on such factors as federal legislation and administration policies, foreign country policies relating to agricultural products and producers, demand for agricultural products, weather, natural disasters, technologic advances in agricultural practices, inter- national agricultural markets and general economic conditions both in the United States and abroad. For example, the number of MPCI Buy-up Coverage policies written has historically tended to increase after a year in which a major natural disaster adversely affecting crops occurs, and to decrease following a year in which favorable weather conditions prevail. Highly Competitive Businesses Both the nonstandard automobile insurance and crop insurance businesses are highly competitive. Many of the Company's competitors in both the nonstandard automobile insurance and crop insurance business segments have substantially greater financial and other resources than the Company, and there can be no assurance that the Company will be able to compete effectively against such competitors in the future. In its nonstandard automobile business, the Company competes with both large national writers and smaller regional companies. The Company's competitors include other companies which, like the Company, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than an independent agency and, potentially, reduced acquisition costs. In addition, certain competitors of the Company have from time to time decreased their prices in an apparent attempt to gain market share. Also, in certain states, state assigned risk plans may provide nonstandard automobile insurance products at a lower price than private insurers. In the crop insurance business, the Company competes against other crop insurance companies and, with respect to CAT Coverage, USDA field service offices in certain areas. In addition the crop insurance industry has become increasingly consolidated. From the 1985 crop year to the 1996 crop year, the number of insurance companies that have entered into agreements with the FCIC to sell and service MPCI policies has declined from 50 to 16. The Company believes that to compete successfully in the crop insurance business it will have to market and service a volume of premiums sufficiently large to enable the Company to continue to realize operating efficiencies in conducting its business. No assurance can be given that the Company will be able to compete successfully if this market consolidates further. Nature of Nonstandard Automobile Insurance Business The nonstandard automobile insurance business is affected by many factors which can cause fluctuations in the results of operations of this business. Many of these facts are not subject to the control of the Company. The size of the nonstandard market can be significantly affected by, among other factors, the underwriting capacity and underwriting criteria of standard automobile insurance carriers. In addition, an economic downturn in the states in which the Company writes business could result in fewer new car sales and less demand for automobile insurance. Severe weather conditions could also adversely affect the Company's business through higher losses and LAE. These factors, together with competitive pricing and other considerations, could result in fluctuations in the Company's underwriting results and net income. Nature of Crop Insurance Business The Company's operating results from its crop insurance program can vary sub- stantially from period to period as a result of various factors, including timing and severity of losses from storms, droughts, floods, freezes and other natural periods and crop production cycles. Therefore, the results for any quarter or year are not necessarily indicative of results for any future period. The underwriting results of the crop insruance business are recognized throughout the year with a reconciliation for the current crop year in the fourth quarter. The Company expects that for the foreseeable future a majority of its crop insurance business will continue to be derived from MPCI business. The MPCI program is federally regulated and supported by the federal government by means of premium subsidies to farmers, expense reimbursement and federal reinsurance pools for private insurers. As such, legislative or other changes affecting the MPCI program could impact the Company's business prospects. The MPCI program has historically been subject to modification at least annually since its establishment in 1980, and some of these modifications have been significant. No assurance can be given that future changes will not significantly affect the MPCI program and the Company's crop insurance business. The Company's crop insruance business is also affected by market conditions in the agricultural industry which vary depending on such factors as federal legislation and administration policies, foreign country policies relating to agricultural products and producers, demand for agricultural products, weather, natural disasters, technological advances in agricultural practices, international agricultural markets and general economic conditions both in the United States and abroad. For example, the number of MPCI Buy-up Coverage policies written has historically tended to increase after a year in which a major natural disaster adversely affecting crops occurs, and to decrease following a year in which favorable weather conditions prevail. For further information about the Company's MPCI business, see "Business- Crop Insurance-Products". Importance of Ratings A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco a B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting from indebtedness in connection with the Acquisition. A "B+" and a "B-" rating are A.M. Best's sixth and eighth highest rating classifications, respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated very good overall performance when compared to the standards established by the A.M. Best Company" and "have a good ability to meet their obligations to policyholders over long period of time". A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate overall performance when compared to the standards established by the A.M. Best Company" and "generally have an adequate ability to meet their obli- gations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions." IGF recently received an "NA-2" rating (a "rating not assigned" category for companies that do not meet A.M. Best's minimum size requirement) from A.M. Best. IGF intends to seek a revised rating after the infusion of capital from the proceeds of the Offering, although there can be no assurance that a revised rating will be obtained or as to the level of any such rating. A.M. Best bases its ratings on factors that concern policyholders and agents and not upon factors concerning investor protection. Such ratings are subject to change and are not recommendations to buy, sell or hold securities. One factor in an insurer's ability to compete effectively is its A.M. Best rating. The A.M. Best ratings for the Company's rated Insurers are lower than for many of the Company's competitors. There can be no assurance that such ratings or future changes therein will not affect the Company's competitive position. Geographic Concentration The Company's nonstandard automobile insurance business is concentrated in the states of Florida, California, Indiana, Missouri and Virginia; consequently the Company will be significantly affected by changes in the regulatory and business climate in those states. The Company's crop insurance business is concentrated in the states of Iowa, Texas, Illinois, Kansas and Minnesota and the Company will be significantly affected by weather conditions, natural perils and other factors affecting the crop insurance business in those states. Future Growth and Continued Operations Dependent on Access to Capital Property and casualty insurance is a capital intensive business. The Company must maintain minimum levels of surplus in the Insurers in order to continue to write business, meet the other related standards established by insurance regulatory authorities and insurance rating bureaus and satisfy financial ratio covenants in loan agreements. Historically, the Company has achieved premium growth as a result of both acquisitions and internal growth. It intends to continue to pursue acquisition and new internal growth opportunities. Among the factors which may restrict the Company's future growth is the availability of capital. Such capital will likely have to be obtained through debt or equity financing or retained earnings. There can be no assurance that the Company's insurance subsidiaries will have access to sufficient capital to support future growth and also satisfy the capital requirements of rating agencies, regulators and creditors. In addition, the Company will require additional capital to finance future acquisitions. If the Company's representatives on the Board of Directors of GGS Holdings cause GGS Holdings to decline acquisition opportunities because the Company is unable to raise sufficient capital to fund its pro-rata share of the purchase price, the GS Funds may be able to force a sale of GGS Holdings. The ability of each of the Company and GGS Holdings to raise capital through an issuance of voting securities may be affected by conflicts of interest between each of them and their respective control persons and other affiliates. Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE The reserves for unpaid losses and LAE established by the Company are estimates of amounts needed to pay reported and unreported claims and related LAE based on facts and circumstances then known. These reserves are based on estimates of trends in claims severing judicial theories of liability and other factors. Although the nature of the Company's insurance business is primarily short- tail, the establishment of adequate reserves is an inherently uncertain process, and there can be no assurance that the ultimate liability will not materially exceed the Company's reserves for losses and LAE and have a material adverse effect on the Company's results of operations and financial condition. Due to the inherent uncertainty of estimating these amounts, it has been necessary, and may over time continue to be necessary, to revise estimates of the Company's reserves for losses and LAE. The historic development of reserves for losses and LAE may not necessarily reflect future trends in the development of these amounts. Accordingly, it may not be appropriate to extrapolate redundancies or deficiencies based on historical information. Reliance Upon Reinsurance In order to reduce risk and to increase its underwriting capacity, the Company purchases reinsurance. Reinsurance does not relieve the Company of liability to its insureds for the risks ceded to reinsurers. As such, the Company is subject to credit risk with respect to the risks ceded to reinsurers. Although the Company places its reinsurance with reinsurers, including the FCIC, which the Company generally believes to be financially stable, a significant reinsurer's insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on the Company's financial condition or results of operations. The amount and cost of reinsurance available to companies specializing in property and casualty insurance are subject, in large part, to prevailing market conditions beyond the control of such companies. The Company's ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends upon its ability to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position. Due to continuing market uncertainties regarding reinsurance capacity, no assurances can be given as to the Company's ability to maintain its current reinsurance facilities, which generally are subject to annual renewal. If the Company is unable to renew such facilities upon their expiration and is unwilling to bear the associated increase in net exposures, the Company may need to reduce the levels of its underwriting commitments. Risks Associated with Investments The Company's results of operations depend in part on the performance of its invested assets. Certain risks are inherent in connection with fixed maturity securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors. Equity securities involve risks arising from the financial performance of, or other developments affecting, particular issuers as well as price volatility arising from general stock market conditions. Comprehensive State Regulation The Company's insurance subsidiaries are subject to comprehensive regulation by government agencies in the states in which they operate. The nature and extent of that regulation vary from jurisdiction to jurisdiction but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, limitations on dividends, approval or filing of premium rates and policy forms for many lines of insurance, solvency standards, minimum amounts of capital and surplus which must be maintained, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, limitation of the right to cancel or non-renew policies in some lines, regulation of the right to withdraw from markets or agencies, requirements to participate in residual markets, licensing of insurers and agents, deposits of securities for the benefit of policyholders, reporting with respect to financial condition, and other matters. In addition, state insurance department examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders. No assurance can be given that future legis- lative or regulatory changes will not adversely affect the Company. Holding Company Structure; Dividend And Other Restrictions; Management Fees Holding Company Structure. The Company is a holding company whose principal asset is the capital stock of the subsidiaries. The Company relies primarily on dividends and other payments from its subsidiaries, including its insurance subsidiaries to meet its obligations to creditors and to pay corporate expenses. The Insurers are domiciled in the states of Indiana and Florida and each of these states limits the payment of dividends and other distributions by insurance companies. In addition, a significant portion of the invested assets of the reinsurance company domiciled in Barbados are held in trust accounts to secure its obligations to the cedents. Dividend and Other Restrictions. Indiana law defines as "extraordinary" any dividend or distribution which, together with all other dividends and distributions to shareholders within the preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as regards policyholders as of the end of the preceding year, or (ii) the prior year's net income. Dividends which are not "extraordinary" may be paid ten days after the Indiana Department of Insurance ("Indiana Department") receives notice of their declaration. "Extraordinary" dividends and distributions may not be paid without the prior approval of the Indiana Commissioner or until the Indiana Commissioner has been given thirty days' prior notice and has not disapproved within that period. The Indiana Department must receive notice of all dividends, whether "extraordinary" or not, within five business days after they are declared. Notwithstanding the foregoing limit, a domestic insurer may not declare or pay a dividend from any source of funds other than "Earned Surplus" without the prior approval of the Indiana Department. "Earned Surplus" is defined as the amount of unassigned funds set forth in the insurer's most recent annual statement, less surplus attributable to unrealized capital gain or re-evaluation of assets. Further, no Indiana domiciled insurer may make payments in the form of dividends or otherwise to its shareholders unless it possesses assets in the amount of such payments in excess of the sum of its liabilities and the aggregate amount of the par value of all shares of capital stock; provided, that in no instance shall such dividend reduce the total of (i) gross paid-in and contributed surplus, plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an amount equal to 50% of the aggregate amount of the par value of all shares of the insurer's capital stock. Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its stockholders except out of that part of its available and accumulated surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may make dividend payments or distributions to stockholders without prior approval of the Florida Department of Insurance ("Florida Department") if the dividend or distribution does not exceed the larger of: (i) the lesser of (a) 10% of surplus or (b) net investment income, not including realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net investment income plus a 3-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Department if (1) the dividend is equal to or less than the greater of (i) 10% of the insurer's surplus as regards policy- holders derived from net operating profits on its business and net realized capital gains, or (ii) the insurer's entire net operating profits (including unrealized gains or losses) and realized net capital gains derived during the immediately preceding calendar year; (2) the insurer will have policyholder surplus equal to or exceeding 115% of the minimum required statutory surplus after the dividend or distribution; (3) the insurer files a notice of the dividend or distribution with the Florida Department at least ten business days prior to the dividend payment or distribution; and (4) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Department, or (ii) thirty days after the Florida Department has received notice of such dividend or distribution and has not disapproved it within such time. In the consent order approving the Acquisition (the "Consent Order"), the Florida Department has prohibited Superior from paying any dividends (whether extraordinary or not) for four years without the prior written approval of the Florida Department. Although the Company believes that funds required for it to meet its financial and operating obligations will be available, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Indiana Department will approve any request for extraordinary dividends from Pafco or IGF or that the Florida Department will allow any dividends to be paid by Superior during the four year period described above. Payment of dividends by IGF requires prior approval by the lender under the credit agreement to which IGF is a party. There can be no assurance that IGF will be able to obtain this consent. The Company is in the process of seeking regulatory approval for a new arrangement whereby underwriting, marketing and administrative functions of IGF will be assumed by, and employees will be transferred to, IGF Holdings. As a result of this restructuring, management fees would be paid by IGF to IGF Holdings, thereby providing an additional source of liquidity for the Company to the extent these payments exceed the operating and other expenses of IGF Holdings. There can be no assurance that this regulatory approval will be obtained. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory consid- erations, such as the impact of dividends on surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regu- lations require that the statutory surplus of an insurance company following any dividend or distribution by such company be reasonable in relation to its outstanding liabilities and adequate for its financial needs. Management Fees. The management agreement originally entered into between the Company and Pafco was assigned as of April 30, 1996 by the Company to GGS Management, a wholly-owned subsidiary of GGS Holdings. This agreement provides for an annual management fee equal to 15% of gross premiums written. A similar management agreement with a management fee of 17% of gross premiums written has been entered into between GGS Management and Superior. Employees of the Company relating to the nonstandard automobile insurance business and all Superior employees became employees of GGS Management effective April 30, 1996. As part of the approval of the transaction relating to the formation of GGS Holdings, the Indiana Department has required Pafco to resubmit its management agreement for review by the Indiana Department no later than May 1, 1997 (the first anniversary of the Formation Transaction), together with supporting evidence that management fees charged to Pafco are fair and reasonable in comparison to fees charged between unrelated parties for similar services. In the Consent Order approving the Acquisition, the Florida Department has reserved, for a period of three years, the right to re-evaluate the reason- ableness of fees provided for in the Superior management agreement at the end of each calendar year and to require Superior to make adjustments in the management fees based on the Florida Department's consideration of the performance and operating percentages of Superior and other pertinent data. There can be no assurance that either the Indiana Department or the Florida Department will not in the future require a reduction in these management fees. Furthermore, as a result of certain restrictive covenants with respect to dividends and other payments contained in the GGS Senior Credit Facility, GGS Holdings and its subsidiaries, Pafco and Superior, are not expected to constitute a significant source of funds for the Company. In addition, since the GS Funds own 48% of the outstanding capital stock of GGS Holdings, the Company would only be entitled to receive 52% of any dividend or distribution paid by GGS Holdings to its stockholders. Certain Rights of the GS Funds to Cause A Sale of GGS Holdings The Stockholder Agreement establishes certain rights of the GS Funds to cause a sale of GGS Holdings upon the occurrence of certain triggering events, including (i) the failure to consummate a registered initial public offering of GGS Holdings stock representing, on a fully diluted basis, at least 20% of all such stock issued and outstanding, and generating at least $25 million in net proceeds to the sellers of such securities, by April 30, 2001, (ii) the third separate occasion, during the term of the Stockholder Agreement on which an equity financing or acquisition transaction proposed by the GS Funds is rejected by the GGS Holdings Board of Directors, (iii) the loss of voting control of Goran or SIG (defined, with respect to Goran as being direct or indirect ownership of more than 40% of the outstanding voting stock of Goran if any other holder or group holds in excess of 10% of the outstanding voting stock of Goran and otherwise 25% thereof, and defined, with respect to SIG, as requiring both (a) direct ownership by Goran in excess of 50% of SIG's voting stock, and (b) retention by Alan G. Symons and his family members of voting control of Goran by Alan G. Symons or his family members or affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS Holdings for any reason. As a result of the considerations arising under the Investment Company Act of 1940 (the "1940 Act"), with respect to GGS Holdings, any public offering by GGS Holdings would probably be required to consist solely of a secondary offering of shares held by stockholders. Upon the occurrence of any of such events, and at any time or from time to time thereafter, GS Funds may, by notifying SIG in writing, initiate the process of seeking to effect a sale of GGS Holdings on terms and conditions which are acceptable to GS Funds. However, within thirty days after SIG receives notice of GS Funds' intention to initiate the sale of GGS Holdings, SIG may provide written notice to the GS Funds that it wishes to acquire or combine with GGS Holdings. SIG's notice to GS Funds must include the proposed purchase price and other material terms and conditions with such specificity as is necessary to permit GS Funds to evaluate SIG's offer. If, within ninety days of delivery of the notice by SIG, GS Funds accept SIG's offer, SIG will be obligated to acquire or combine with GGS Holdings. In the event GS Funds rejects SIG's proposal, (i) any sale to a third party effected within 180 days after receipt of such proposal must not contain terms that are in the aggregate less favorable to the GGS Holdings stockholders than those set forth in SIG's proposal, (ii) any sale must provide for the same consideration to be paid to each stockholder, and (iii) no sale may constitute an acquisition by or a combination with an affiliate of GS Funds. Accordingly, under certain circumstances, GS Funds may have the ability to force SIG to divest itself of its nonstandard automobile operations. Further, a forced sale of GGS Holdings may also cause SIG to be characterized as an investment company within the meaning of the 1940 Act unless the proceeds are redeployed into other business operations or another exemption from registration under the 1940 Act is available. ITEM 2 - PROPERTIES The headquarters for the Company, SIG, GGS Holdings and Pafco are located at 4720 Kingsway Drive, Indianapolis, Indiana. The building is an 80,000 square foot multilevel structure approximately 50% of which is utilized by Pafco. The remaining space is leased to third parties at a price of approximately $10 per square foot. Pafco also owns an investment property located at 2105 North Meridian, Indianapolis, Indiana. The property is a 21,700 square foot, multilevel building leased out entirely to third parties. Superior's operations are conducted at leased facilities located in Atlanta, Georgia, Tampa, Florida and Orange, California. Under a lease term which extends through February, 1998, Superior leases office space at 280 Interstate North Circle, N.W., Suite 500 Atlanta, Georgia. Superior occupies 43,448 square feet at this location and subleases an additional 3,303 square feet to third party tenants. Superior also has an office located at 3030 W. Rocky Point Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of space leased for a term extending through February 2000. In addition, Superior occupies an office at 1745 West Orangewood, Orange, California consisting of 3,264 square fee under a lease extending through May 1997. IGF owns a 17,500 square foot office building located at 2882 106th Street, des Moines, Iowa which serves as its corporate headquarters. The building is fully occupied by IGF. IGF also owns certain improved commercial property which is adjacent to its corporate headquarters. IGF has entered into a purchase agreement to acquire an office building in Des Moines, Iowa, to be used as its crop insurance division home office. The purchase price was $2.6 million, of which $2.4 million was escrowed on February 1, 1997. The terms include a floating closing date whereby the transaction will close on the earlier of February 1, 1998 or thirty days after the closing of the sale of the Company's currently occupied home office building, also located in Des Moines. The purchase of the new building is not contingent on the sale of the current building. ITEM 3 - LEGAL PROCEEDINGS The Company's insurance subsidiaries are parties to litigation arising in the ordinary course of business. The Company believes that the ultimate resolution of these lawsuits will not have a material adverse effect on its financial condition or results of operations. The Company, through its claims reserves, reserves for both the amount of estimated damages attributable to these lawsuits and the estimated costs of litigation. IGF is the administrator of a run-off book of business. The FCIC has requested that IGF take responsibility for the claims liabilities of these policies under its administration. IGF has requested reimbursement of certain expenses from the FCIC with respect to this run-off activity. IGF instituted litigation against the FCIC on March 23, 1995 in the United States District Court for the Southern District of Iowa seeking $4.3 million as reimbursement for these expenses. The FCIC has counterclaimed for approximately $1.2 million in claims payments for which FCIC contends IGF is responsible as successor to the run-off book of business. While the outcome of this lawsuit cannot be predicted with certainty, the Company believes that the final resolution of this lawsuit will not have a material adverse effect on the financial condition of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during 1996 to a vote of security holders of the Registrant, through the solicitation of proxies or otherwise. SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT Presented below is certain information regarding the executive officers of the Company who are not also directors. Their respective ages and their respective positions with the Company are listed as follows: Name Age Position David L. Bates 37 Vice President, General Counsel and Secretary of the Company Gary P. Hutchcraft 35 Vice President, Chief Financial Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and Secretary of SIG since November, 1995 after having been named Vice President and General Counsel of the Company in April, 1995. Mr. Bates served as a member of the Fort Howard Corporation Legal Department from September, 1988 through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager with Deloitte & Touche. Mr. Hutchcraft, C.P.A., has served as Vice President,Chief Financial Officer and Treasurer of SIG and the Company since July, 1996. Prior to that time, Mr. Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP from July, 1988 to July, 1996. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the trading market for the Company's Common Shares, the range of selling prices for each quarterly period for the years ended December 31, 1996 and 1995 with respect to the Common Shares and the approximate number of holders of Common Shares as of December 31, 1996 the Common Shares and other matters is included under the caption Market Information on Page 35 of the 1996 Annual Report, included as Exhibit 13, which information is incorporated herein by reference. The Company currently intends to retain earnings for use in the operation and expansion of its business and therefore does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend, among other things, upon earnings, capital requirements, any financing agreement covenants and the financial condition of the Company. In addition, regulatory restrictions and provisions of the GGS Senior Credit Facility limit distributions to shareholders. ITEM 6 - SELECTED FINANCIAL DATA Selected Financial Data of the Company follows: GORAN CAPITAL INC. Selected Financial Data As of the Year Ended December 31, (In Thousands of U.S. Dollars) 1996 1995 1994 1993 1992 Gross Premium Revenue $307,634 $151,717 $126,978 $114,135 $128,440 Reported Net Earnings 31,296 7,171 3,940 1,397 4,413 US/Canada GAAP Differences: Discounting on Outstanding Claims 62 (161) 88 49 143 Deferred Income Taxes (64) (344) 1,180 562 0 Revised Net Earnings 31,294 6,666 5,208 2,008 4,556 Earnings Per Share $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94 EPS-Before Extraordinary Item $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94 EPS-Fully Diluted $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94 Dividends Per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Reported Total Assets 381,342 160,816 115,240 128,690 96,573 US/Canada GAAP Differences: Loans to Purchase Shares (595) (563) (593) (741) (774) Deferred Income Taxes 1,357 1,466 1,742 548 0 Outstanding Claims Ceded 0 0 0 0 0 Unearned Premiums Ceded 0 0 0 0 0 Unrealized gain (loss) on Investments 1,225 (221) (1,383) 0 0 Revised Total Assets 383,329 161,498 115,006 128,497 95,799 Long Term Bonds and Debentures 0 9,237 10,787 12,936 14,633 Reported Shareholders' Equity 47,258 12,622 5,067 1,088 (739) US/Canada GAAP Differences: Deferred Income Taxes 1,357 1,466 1,742 548 0 Discounting on claims (1,261) (1,327) (1,134) (1,292) (1,396) Loans to Purchase Shares (595) (563) (593) (741) (774) Unrealized Gain (Loss) on Investments 1,225 (221) (1,383) 0 0 Revised Shareholders' Equity 47,984 11,977 3,699 (397) (2,909) Shares Outstanding 5,724,476 5,567,644 5,399,463 5,242,101 4,834,160 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 0PERATIONS The discussion entitled "Management Discussion and Analysis of Financial Condition and Results of Operations" in the 1996 Annual Report on pages 5 through 13, included as Exhibit 13 is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements included in the 1996 Annual Report, included as Exhibit 13, and listed in Item 14 of this Report are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item regarding Directors of the Company is incorporated herein by reference to the Company's definitive proxy statement for its 1996 annual meeting of common stockholders filed with the Commission pursuant to Regulation 14A (the "1996 Proxy Statement"). ITEM 11 - EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Company's 1996 Proxy Statement. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Company's 1996 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Company's 1996 Proxy Statement. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The documents listed below are filed as a part of this Report except as otherwise indicated: 1. Financial Statements. The following described consolidated financial statements found on the pages of the 1996 Annual Report indicated below are incorporated into Item 8 of this Report by reference. Description of Financial Statement Item Report of Indpendent Accountants Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Earnings, Years Ended December 31, 1996 and 1995 Consolidated Statements of Retained Earnings (Deficit), Years Ended December 31, 1996 and 1995 Consolidated Statements of Cash Resources, Years Ended December 31, 1996 and 1995 Notes to Consolidated Financial Statements, Years Ended December 31, 1996 and 1995 2. Financial Statement Schedules. The following financial statement schedules are included herein. Description of Financial Statement Item Report of Independent Account On Differences Between Canadian and United States Generally Accepted Accounting Principles and Supplementary Schedules Differences Between Canadian And United States Generally Accepted Accounting Principles Exhibit 1 - Consolidated Statement of Changes In Cash Resources Exhibit 2 - Summary of Investments That Exceed 10% Of Shareholders' Equity Exhibit 3 - Summary of Non Income Producing Investments Exhibit 4 - Amounts Due From Insurance Companies In Excess of 10% of Shareholders' Equity Exhibit 5 - Analysis Of Changes In Shareholders' Equity Schedule I - Summary Of Investments Other Than Investments In Related Parties Schedule II - Condensed Financial Information Of Registrant Schedule IV - Reinsurance Schedule V - Valuation And Qualifying Accounts Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations Schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto or because such schedules are not required or applicable. 3. Exhibits. The Exhibits set forth on the Index to Exhibits are incorporated herein by reference. 4. Reports on Form 8-K. Registrant filed no reports on Form 8-K during the quarter ended December 31, 1996. GORAN CAPITAL INC. Differences Between Canadian And United States General Accepted Accounting Principles For The Years Ended December 31, 1996, 1995 and 1994 A reconciliation of financial statement amounts from Canadian Generally Accepted Accounting Principles to U.S. Generally Accepted Accounting Principles is as follows: 1996 1995 1994 Net Earnings In Accordance With Canadian Generally Accepted Accounting Principles $31,296 $7,171 $3,940 Add Effect Of Difference In Accounting For: Deferred Income Taxes (See Note (e)) (64) (344) 1,180 Outstanding Claims (See Note (f)) 62 (161) 88 Net Earnings In Accordance With United States Generally Accepted Accounting Principles $31,294 $6,666 $5,208 Applying United States Generally Accepted Accounting Principles, deferred income tax assets would be increased by $1,357, $1,466 and $1,742, outstanding claims would be increased by $1,261, $1,327 and $1,134 and cumulative trans- lation adjustment would be increased by $41, $36, and $14, as at December 31, 1996, 1995 and 1994, respectively. As a result of these adjustments, retained earnings would be increased by $96, $139 and $608 as at December 31, 1996, 1995 and 1994, respectively. The effect of the above noted differences on other individual balance sheet items and on working capital is not significant. B. Earnings Per Share Earnings per share, as determined in accordance with United States Generally Accepted Accounting Principles, are set out below. Primary earnings per share are computed based on the weighted average number of common shares outstanding during the year plus common share equivalents consisting of stock options and warrants. Primary and fully diluted earnings per share are calculated using the Treasury Stock method and assume conversion of securities when the result is dilutive. The following average number of shares were used for the compilation of primary and fully diluted earnings per share: 1996 1995 1994 Primary $5,724,476 $5,567,644 $5,399,463 Fully Diluted 5,724,476 5,567,644 5,399,463 Earnings per share, as determined in accordance with U.S. Generally Accepted Accounting Principles, are as follows: 1996 1995 1994 Primary Earnings Per Share $5.47 $1.20 $0.96 Fully Diluted Earnings Per Share 5.47 1.20 0.96 C. Statement Of Changes In Cash Resources U.S. Generally Accepted Accounting Principles require that the components of the changes in cash resources, in most cases, be reported on a gross basis. Exhibit 1 is a Statement of Cash Resources that incorporates the necessary added disclosure detail. D. Supplemental Cash Flow Information Cash paid for interest and income taxes is summarized as follows: 1996 1995 1994 Cash Paid For Interest $4,005 $1,548 $1,773 Cash Paid For Income Taxes, Net of Refunds 9,825 1,953 166 E. Income Taxes The difference in accounting for deferred income taxes reflects the adoption for U.S. Generally Accepted Accounting Principles, effective January 1, 1993, of Statement of Financial Accounting Standards No. 109 ("SFAS" No. 109"), "Accounting for Income Taxes". This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported in the balance sheet. Deferred tax assets recognized under Canadian Generally Accepted Accounting Principles and Accounting Principles Board Opinion No. 11, which require realization beyond a reasonable doubt in order to record the assets, amounted to $NIL, $73 and $214 at December 31, 1996, 1995 and 1994, respectively, and pertained to Canadian operations only. The adoption of SFAS No. 109 results in additional deferred tax assets recognized for deductible temporary differences and loss carry-forwards in the amount of $3,531, $2,581 and $2,375 net of valuation allowances of NIL, $69 and $260 and deferred tax liabilities recognized for taxable temporary differences in the amount of $2,174, $1,114 and $633 at December 31, 1996, 1995 and 1994, respectively. F. Outstanding Claims The difference in accounting for outstanding claims reflects the application for U.S. Generally Accepted Accounting Principles of SEC Staff Accounting Bulletin No. 62, "Discounting By Property/Casualty Insurance Companies". This standard does not allow discounting of unpaid claim lia- bilities by public companies, except in specific circumstances that are not applicable to the Company. G. Receivables From Sale Of Capital Stock The SEC Staff Accounting Bulletins require that accounts or notes receivable arising from transactions involving capital stock should be presented as deductions from shareholders' equity and not as assets. According, in order to comply with U.S. Generally Accepted Accounting Principles, shareholders' equity would be reduced by $595, $563 and $593 at December 31, 1996, 1995 and 1994, respectively, to reflect the loans due from certain shareholders which relate to the purchase of common shares of the Company. H. Concentration Of Investments U.S. Generally Accepted Accounting Principles require that disclosure be made of significant concentrations of investments and of investments that are non-income producing. The Company considers investments whose value exceeds 10% of shareholders' equity to be significant. The relevant dis- closures are provides in Exhibits 2 and 3, respectively. I. Concentrations of Credit Risk U.S. Generally Accepted Accounting Principles require disclosure of significant concentrations of credit risk. The Company's credit risk is with respect to amounts receivable from other insurance companies. The Company considers credit risks in excess of 10% of shareholders' equity to be significant. The relevant disclosure is provided in Exhibit 4. J. Unrealized Loss On Investments U.S. Generally Accepted Accounting Principles require that unrealized losses on investment portfolios be included as a component in determining shareholders' equity. In addition, SFAS No. 115 permits prospective recognition of unrealized gains on investment portfolios for year-ends commencing after December 15, 1993. As a result, shareholders' equity would be increased by $1,225 as at December 31, 1996 and reduced by $221 and $1,383 as at December 31, 1995 and 1994, respectively. K. Changes In Shareholders' Equity An analysis of the components of the change in shareholders' equity, determined in accordance with Canadian Generally Accepted Accounting Principles, is provided in Exhibit 5. A reconciliation of shareholders' equity from Canadian Generally Accepted Accounting Principles to U.S. Generally Accepted Accounting Principles is as follows: 1996 1995 1994 Shareholders' Equity In Accordance With Canadian Generally Accepted Accounting Principles $47,258 $12,622 $ 5,067 Add (deduct) Effect Of Difference In Accounting For: Deferred Income Taxes (See Note (a)) 1,357 1,466 1,742 Outstanding Claims (See Note (a)) (1,261) (1,327) (1,134) Receivables From Sale Of Capital Stock (See Note (g)) (595) (563) (593) Unrealized Gain (Loss) On Investments (See Note (j)) 1,225 (221) (1,383) Shareholders' Equity (Deficiency) In Accordance With U.S. Generally Accepted Accounting Principles $47,984 $11,977 $ 3,699 GORAN CAPITAL INC. Consolidated Statement of Changes In Cash Resources For the Year Ended December 31, (In Thousands of U.S. Dollars) 1996 1995 1994 Cash Provided By Operating Activities: Net income for the period $ 31,296 $7,171 $3,941 Items Not Affecting Cash Resources: Amortization 2,438 693 566 Minority Interest In Net Income Of Consolidated Subsidiary 2,801 (16) 16 Loss (gain) On Sale Of Investments 637 198 (358) Loss (gain) On Sale Of Capital Assets (4) (7) (1) Increase in Unearned Premiums 13,178 9,247 (7,037) Increase (Decrease) In Outstanding Losses (4,545) 29,289 (18,341) Decrease (Increase) In Deferred Policy Acquisition Costs 1,649 (3,058) (864) Decrease In Deferred Income Taxes 73 147 214 Decrease In Goodwill 0 0 0 Decrease (Increase) in Reinsurance Recoverable on outstanding claims 8,464 (25,930) 22,259 Decrease (Increase) in prepaid reinsurance premiums (8,785) 916 (3,548) Decrease (Increase) In Other Assets (2,433) (470) 78 Items Not Involving Cash 13,473 11,009 7,058 Increase (Decrease) In Accounts Payable 5,576 (2,291) 1,352 Decrease (Increase) In Accounts Receivable (19,448) (6,252) (13,775) Changes In Operating Working Capital (13,872) (8,543) (12,423) 30,897 9,637 (1,424) Financing Activities: Issue Of Share Capital 599 303 34 Reduction Of Subordinated Debenture (11,085) (1,462) (1,047) Increase (Decrease) Of Borrowed Funds 42,189 220 722 Increase (Decrease) in Contributed Surplus 2,775 0 0 Increase (Decrease) in Minority Interest 38,225 0 0 Investing Activities: Net (Purchase) Sale Of Marketable Securities (11,996) (4,147) 2,118 Acquisition of subsidiary (66,590) 0 0 Proceeds On Sale Of Capital Assets 14 11 5 Net Purchase Of Capital Assets (2,473) (1,692) (634) Other 563 155 (401) Change In Cash Resources During The Year 23,118 3,025 (627) Cash Resources, Beginning Of Year 10,613 7,588 8,215 Cash Resources, End Of Year 33,731 10,613 7,588 Cash Resources Are Comprised Of: Cash 4,679 4,171 (116) Short-Term Investments 29,052 6,442 7,704 33,731 10,613 7,588 GORAN CAPITAL INC. CONSOLIDATED SUMMARY OF INVESTMENTS THAT EXCEED 10% OF SHAREHOLDERS' EQUITY For The Year Ended December 31, 1996 (In Thousands of U.S. Dollars) Fixed Short-Term Total Maturities Investments Investment Federal Home Loan Bank $ 9,770 $ $ 9,770 Federal National Mortgage Association $14,885 $ $14,885 U.S. Treasury Notes $26,318 $ $26,318 U.S. Treasury Bills $ $10,292 $61,265 GORAN CAPITAL INC. Consoldiated Shareholders' Equity In Accordance With United States GAAP As At December 31, 1996 (In Thousands of U.S. Dollars) Consolidated Shareholders' Equity in Accordance with U.S. GAAP $47,983,000 Threshold (Rounded) 4,798,300 GORAN CAPITAL INC. Concentration of Credit Risk Amounts Due From Other Insurance Companies Paid and Unpaid Claims As At December 31, 1996 (In Thousands of U.S. Dollars) Company Name Amount Centre Reinsurance (Bermuda) Limited $16,764 Federal Crop Insurance Corporation $21,800 Total $38,564 Notes: Accounts listed above are amounts greater than $4,798,000 (U.S.) which is approximately 10% of Shareholders' Equity at December 31, 1996. Amounts are net of trust accounts posted as collateral with original cedents, with respect to certain retrocession agreements in which the Company is a retrocessionnaire. GORAN CAPITAL INC. ANALYSIS OF CHANGES IN SHAREHOLDERS' EQUITY As at December 31, (In Thousands of U.S. Dollars) 1996 1995 1994 Capital Stock $16,875 $ 16,126 $ 16,091 Contributed Surplus 0 0 0 Deficit (3,895) (11,066) (15,007) Cumulative Translation Adjustment (358) 7 (173) Shareholders' Equity - Opening Balance $12,622 $ 5,067 $ 911 Activity For The Year Issue Of Share Capital 541 749 35 Contributed Surplus 2,775 0 0 Net Income For The Year 31,296 7,171 3,941 Translation Adjustment for The Year 24 (365) 180 Shareholders' Equity - Ending Balance 47,258 12,622 5,067 Comprised Of: Capital Stock 17,416 16,875 16,126 Contributed Surplus 2,775 0 0 Retained Earnings (Deficit) 27,401 (3,895) (11,066) Cumulative Translation Adjustment (334) (358) 7 Shareholders' Equity - Ending Balance 47,258 12,622 5,067 GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE 1 - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES As at December 31, 1996 (In Thousands of U.S. Dollars) Estimated Amount On Type of Investment Cost Market Value Balance Sheet Fixed Maturities: Bonds: Government and Government Agencies $ 57,804 $ 57,826 $ 57,804 States and Municipalities 3,587 3,651 3,587 Public Utilities 350 379 350 All Other Corporate Bonds 76,071 76,527 76,071 Total Fixed Maturities $137,812 $138,383 $137,812 Equity Securities: Common Stocks $ 28,075 $ 28,729 $ 28,075 Preferred Stocks 0 0 0 Total Equity Securities $ 28,075 $ 28,729 $ 28,075 Mortgage Loans on Real Estate 2,430 2,430 2,430 Real Estate 4,548 4,548 4,548 Other Long-Term Investments 75 75 75 Short Term Investments 29,052 29,052 29,052 Total Investments $201,992 $203,217 $201,992 GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Company) Balance Sheet As At December 31, (In Thousands U.S. Dollars) 1995 1996 Assets Cash $ 319 $ 812 Accounts Receivable 419 379 Capital and Other Assets 543 750 Investment In Subsidiaries 10,772 10,807 Total Assets $ 12,054 $ 12,748 Liabilities and Shareholders' Equity Accounts Payable $ 9,758 $ 1,225 Other Payables 973 757 Subordinated Debenture 0 11,084 Total Liabilities 10,731 13,066 Shareholders' Equity Common Shares 18,473 18,002 Deficit (17,150) (18,320) Total Shareholders' Equity 1,323 (318) Total Liabilities and Shareholders' Equity $12,054 $12,748 GORAN CAPITAL INC. Statement of Earnings (Loss) For The Years Ended December 31, (In Thousands of U.S. Dollars) 1996 1995 1994 Revenues Management Fees $ 352 $ 796 $ 901 Royalty Income 0 0 69 Dividend Income 3,500 0 0 Other Income 0 0 1,449 Net Investment Income 264 448 399 Total Revenues 4,116 1,244 2,818 Expenses Debenture Interest Expense 868 998 1,089 Amortization 200 114 160 General, Administrative And Acquisition Expenses 1,879 1,338 1,170 Total Expenses 2,946 2,450 2,419 Net Income (Loss) $ 1,170 $ (1,206) 399 Deficit, beginning of year (18,320) (17,114) (17,513) Deficit, end of year (17,150) (18,320) (17,114) GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 1994, 1995 and 1996 (In Thousands of U.S. Dollars) 1994 1995 1996 Cash Flows From Operations: Net Income (Loss) $ 1,170 $ (1,206) $ 399 Items Not Involving Cash: Amortization 199 114 160 Gain on Sale of Capital Assets (4) (7) 0 Decrease (Increase) in Accounts Receivable (40) 1,822 40 Decrease (Increase) in Other Assets (3) (29) (2) Increase (Decrease) in Accounts Payable 8,533 1,227 (164) Increase (Decrease) in Other Payables 0 (141) (214) Net Cash Provided (Used) by Operations 10,071 1,780 219 Cash Flows From Financing Activities: Redemption of Share Capital by Subsidiary 0 0 623 Proceeds on Sale of Capital Assets 14 11 0 Issue of Common Shares 599 305 35 Net Cash Provided By Financing Activities 613 316 658 Cash Flows From Investing Activities: Purchase of Fixed Assets 0 (3) 0 Other, net (93) 3 0 Reduction of Debentures (11,084) (1,454) (1,076) Net Cash Used by Investing Activities: (11,177) (1,454) (1,076) Net Increase (Decrease) in Cash (493) 642 (199) Cash at Beginning of Year 812 170 369 Cash At End of Year 319 812 170 Cash Resources are Comprised of: Cash 187 109 (29) Short-Term Investments 132 703 199 319 812 170 GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT For The Years Ended December 31, 1994, 1995 and 1996 Basis of Presentation The condensed financial information should be read in conjunction with the consolidated financial statements of Goran Capital Inc. The condensed financial information includes the accounts and activities of the Parent Company which acts as the holding company for the insurance subsidiaries. GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE IV - REINSURANCE For The Years Ended December 31, (In Thousands of U.S. Dollars) 1996 1995 1994 Direct Amount $102,178 $122,088 $298,596 Assumed From Other Companies $ 24,800 $ 29,629 $ 9,038 Ceded To Other Companies $ 68,505 65,356 87,202 Net Amount $ 58,473 $ 86,361 $220,432 Percentage Of Amount Assumed To Net 42.4% 34.3% 4.1% GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, (In Thousands of U.S. Dollars) 1994-Allowance 1995-Allowance 1996-Allowance for Doubtful for Doubtful for Doubtful Accounts Accounts Accounts Additions: Balance At Beginning Of Period $1,179 $1,209 $ 927 Charged To Costs And Expenses (86) 2,523 5,034 Charged to Other Accounts - - - - - - 0 Deductions From Reserves (116) 2,805 4,981 Balance At End Of Period $1,209 $ 927 $1,480 [FN] In 1993, the Company began to direct bill policyholders rather than agents for premiums. Therefore, bad debt expenses in 1993 increased accordingly. During late 1994 and into 1995, the Company experienced an increase in premiums written. During 1995, the Company further evaluated the collectibility of this business and incurred a bad debt expense of approxi- mately $2.5 million. The Company continually monitors the adequacy of its allowance for doubtful accounts and believes the balance of such allowance at December 31, 1993, 1994 and 1995 was adequate. Uncollectible accounts written off, net of recoveries. GORAN CAPITAL INC. - CONSOLIDATED SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS For The Years Ended December 31, (In Thousands of U.S. Dollars) 1996 1995 1994 Deferred Policy Acquisition Costs $ 12,800 $ 2,379 $ 1,479 Reserves for Losses and Loss Adjustment Expenses 101,719 59,421 29,269 Unearned Premiums 87,825 17,497 14,416 Earned Premiums 191,759 49,641 32,126 Net Investment Income 6,738 1,173 1,241 Losses And Loss Adjustment Expenses Incurred Related To: Current Years 137,895 35,184 26,268 Prior Years (570) 787 202 Paid Losses And Loss Adjustment Expenses 130,895 31,075 26,995 Amortization Of Deferred Policy Acquisition Costs 27,657 7,150 4,852 Premiums Written 305,499 $124,634 $103,134 Note: All amounts in the above table are net of the effects of reinsurance and related commission income, except for net investment income regarding which reinsurance is not applicable, premiums written liabilities for losses and loss adjustment expenses, and unearned premiums which are stated on a gross basis. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. GORAN CAPITAL INC. March 15, 1997 By: /s/ Alan G. Symons, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 29, 1996, on behalf of the registrant in the capacities indicated: (1) Principal Executive Officer: /s/ Alan G. Symons Chief Executive Officer (2) Principal Financial/Accounting Officer: /s/Gary P. Hutchcraft Vice President and Chief Financial Officer (3) The Board of Directors: /s/G. Gordon Symons /s/David B. Shapira Chairman of the Board Director /s/John K. McKeating /s/James G. Torrance Director Director /s/J. Ross Schofield /s/Douglas H. Symons Director Director /s/Alan G. Symons Director EXHIBIT INDEX Reference to Regulation S-K Exhibit No. Document 1 Final Draft of the Underwriting Agreement dated November 4 1996 among Registrant, Symons International Group, Inc., Advest, Inc. and Mesirow Financial, Inc. 3.1 The Registrant's Articles of Incorporation are incorporated by reference to Exhibit 1 of the Registrant's Form 20-F, filed October 31, 1994. 3.2 Registrant's Restated Bylaw 1 4.1 Sample Share Certificate and Articles of Amalgamation defining rights attaching to common shares are incorporated by reference to Exhibit 2 of Registrant's Form 20-F filed October 31, 1994. 10.1 The Stock Purchase Agreement among Registrant, Symons International Group, Inc., Fortis, Inc. and Interfinancial, Inc. dated January 31, 1996 is incorporated by reference to Exhibit 10.1 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(1) The Stock Purchase Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Symons International Group, Inc. dated January 31, 1996 is incorporated by reference to Exhibit 10.2(1) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(2) The First Amendment to the Stock Purchase Agreement by and among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Symons International Group, Inc. dated March 28, 1996 is incorporated by reference to Exhibit 10.2(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(3) The Second Amendment to the Stock Purchase Agreement by and among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Symons International Group, Inc. dated April 30, 1996 is incorporated by reference to Exhibit 10.2(3) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.2(4) The Third Amendment to the Stock Purchase Agreement by and among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant, Symons International Group, Inc. and Pafco General Insurance Company dated September 24, 1996 is incorporated by reference to Exhibit 10.2(4) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.3(1) The Stockholders Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Symons International Group, Inc. and Registrant dated April 30, 1996 is incorporated by reference to Exhibit 10.3(1) of the Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.3(2) The Amended and Restated Stockholder Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Symons International Group, Inc. and Registrant dated September 24, 1996 is incorporated by reference to Exhibit 10.3(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.4 The Registration Rights Agreement among GGS Management Holdings, Inc., GS Capital Partners II, L.P., Registrant and Symons International Group, Inc. dated April 30, 1996 is incorporated by reference to Exhibit 10.4 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.5 The Management Agreement among Superior Insurance Company, Superior American Insurance Company, Superior Guaranty Insurance Company and GGS Management, Inc. dated April 30, 1996 is incorporated by reference to Exhibit 10.5 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.6 The Management Agreement between Pafco General Insurance Company and Symons International Group, Inc. dated May 1, 1987, as assigned to GGS Management, Inc. effective April 30, 1996, is incorporated by reference to Exhibit 10.6 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.7 The Administration Agreement between IGF Insurance Company and Symons International Group, Inc. dated February 26, 1990, as amended, is incorporated by reference to Exhibit 10.7 of the Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.8 The Agreement between IGF Insurance Company and Symons International Group, Inc. dated November 1, 1990 is incorporated by reference to Exhibit 10.8 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(1) The Credit Agreement between GGS Management, Inc., various Lenders and The Chase Manhattan Bank (National Association), as Administrative Agent, dated April 30, 1996 is incorporated by reference to Exhibit 10.11(1) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(2) The Pledge Agreement between GGS Management Holdings, Inc. and Chase Manhattan Bank, N.A. dated April 30, 1996 is incorporated by reference to Exhibit 10.11(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(3) The Pledge Agreement between GGS Management, Inc. and Chase Manhattan Bank, N.A. dated April 30, 1996 is incorporated by reference to Exhibit 10.11(3) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.9(4) The First Amendment to the Credit Agreement between GGS Management, Inc., various Lenders and Chase Manhattan Bank, N.A., as Administrative Agent, dated September 26, 1996 10.9(5) The Second Amendment to the Credit Agreement between GGS Management, Inc., various Lenders and Chase Manhattan Bank, N.A., as Administrative Agent, dated December 31, 1996 10.9(6) The Third Amendment to the Credit Agreement between GGS Management, Inc., various Lenders and Chase Manhattan Bank, N.A., as Administrative Agent, dated March 26, 1997 10.10 The Registration Rights Agreement between Registrant and Symons International Group, Inc. dated May 29, 1996 is incorporated by reference to Exhibit 10.13 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.11(1) The License, Improvement and Support Agreement between Tritech Financial Systems, Inc. and Symons International Group, Inc. dated August 30, 1995 is incorporated by reference to Exhibit 10.14(1) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.11(2) The License of Computer Software between Tritech Financial Systems, Inc. and Symons International Group, Inc. dated August 30, 1995 is incorporated by reference to Exhibit 10.14(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(1) The Agreement among Cliffstan Investments, Inc., Pafco General Insurance Company and Gage North Holdings, Inc. dated September 1, 1989 is incorporated by reference to Exhibit 10.15(1) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(2) The Purchase of Promissory Note and Assignment of Security Agreement between Pafco General Insurance Company and Granite Reinsurance Company, Ltd., dated September 30, 1992 is incorporated by reference to Exhibit 10.15(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(3) The Guarantee of Alan G. Symons dated April 22, 1994 is incorporated by reference to Exhibit 10.15(3) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.12(4) The Share Pledge Agreement between Symons International Group, Ltd. and Pafco General Insurance Company dated April 22, 1994 is incorporated by reference to Exhibit 10.15(4) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.13(1) The Employment Agreement between GGS Management Holdings, Inc. and Alan G. Symons dated January 31, 1996 is incorporated by reference to Exhibit 10.16(1) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.13(2) The Employment Agreement between GGS Management Holdings, Inc. and Douglas H. Symons dated January 31, 1996 is incorporated by reference to Exhibit 10.16(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.14(1) The Employment Agreement between IGF Insurance Company and Dennis G. Daggett effective February 1, 1996 is incorporated by reference to Exhibit 10.17(1) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.14(2) The Employment Agreement between IGF Insurance Company and Thomas F. Gowdy effective February 1, 1996 is incorporated by reference to Exhibit 10.17(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.15 The Employment Agreement between Superior Insurance Company and Roger C. Sullivan, Jr. dated May 9, 1996 is incorporated by reference to Exhibit 10.18 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.16 The Employment Agreement between Registrant and Gary P. Hutchcraft effective June 30, 1996 is incorporated by reference to Exhibit 10.19 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.17 The Goran Capital Inc. Stock Option Plan is incorporated by reference to Exhibit 10.20 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.18 The GGS Management Holdings, Inc. 1996 Stock Option Plan is incorporated by reference to Exhibit 10.21 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.19 The Symons International Group, Inc. 1996 Stock Option Plan is incorporated by reference to Exhibit 10.22 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.20 The Symons International Group, Inc. Retirement Savings Plan is incorporated by reference to Exhibit 10.24 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.21 The Insurance Service Agreement between Mutual Service Casualty Company and IGF Insurance Company dated May 20, 1996 is incorporated by reference to Exhibit 10.25 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(1) The Automobile Third Party Liability and Physical Damage Quota Share Reinsurance. Contract between Pafco General Insurance Company and Superior Insurance Company is incorporated by reference to Exhibit 10.27(1) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(2) The Crop Hail Quota Share Reinsurance Contract and Crop Insurance Service Agreement between Pafco General Insurance Company and IGF Insurance Company is incorporated by reference to Exhibit 10.27(2) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(3) The Automobile Third Party Liability and Physical Damage Quota Share Reinsurance Contract between IGF Insurance Company and Pafco General Insurance Company is incorporated by reference to Exhibit 10.27(3) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(4) The Multiple Line Quota Share Reinsurance Contract between IGF Insurance Company and Pafco General Insurance Company is incorporated by reference to Exhibit 10.27(4) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.22(5) The Standard Revenue Agreement between Federal Crop Insurance Corporation and IGF Insurance Company is incorporated by reference to Exhibit 10.27(5) of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.23 The Commitment Letter, effective October 24, 1996, between Fifth Third Bank of Central Indiana and Symons International Group, Inc. is incorporated by reference to Exhibit 10.28 of Symons International Group, Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129. 10.24 The Reinsurance Agreement No. 1000-91 (Quota Share Agreement) and Reinsurance agreement No. 1000-90 (Stop Loss Reinsurance and Reserves Administration Agreement) are incorporated by reference to Exhibit 3(c) of Registrant's Form 20-F filed October 31, 1994. 10.25 The Form of Share Option Agreement is incorporated by reference to Exhibit 10.05 of Registrant's Form 10-K for the year ended December 31, 1994. 10.26 The Share Pledge Agreement between Symons International Group, Ltd and Registrant is incorporated by reference to Exhibit 10.06 of Registrant's Form 10-K for the year ended December 31, 1994. 10.27 The MPCI Mulit-Year Stop Loss Reinsurance Agreement is incorporated by reference to Exhibit 10.07 of Registrant's Form 10-K for the year ended December 31, 1994. 10.28 The Automobile Liability and Physical Damage Quota Share Reinsurance Agreement, as amended, is incorporated by reference to Exhibit 10.08 of Registrant's Form 10-K for the year ended December 31, 1994. 11 Statement re Computation of Per Share Earnings 13 Annual Report to Security Holders, 1996 and 1995 21 The Subsidiaries of the Registrant are incorporated by reference to Footnote 1 of the Registrant's consolidated financial statements contained in its Annual Report to Security Holders filed hereunder as Exhibit 13. 99 Management Proxy Circular with respect to 1997 Annual Meeting of Shareholders of Registrant EX-1 2 UNDERWRITING AGREEMENT 3,000,000 Shares (plus 450,000 Shares to cover overallotments, if any) SYMONS INTERNATIONAL GROUP, INC. Common Stock UNDERWRITING AGREEMENT November 4, 1996 ADVEST, INC. MESIROW FINANCIAL, INC. As Representatives (the "Representatives") of the Several Underwriters Named in Schedule I Hereto c/o Advest, Inc. 90 State House Square Hartford, CT 06103 Dear Sirs: Symons International Group, Inc., an Indiana corporation (the "Company") and a wholly owned subsidiary of Goran Capital Inc., a Canadian federally chartered corporation ("Parent"), proposes, subject to the terms and conditions stated herein, to sell to the Underwriters (the "Underwriters") named in Schedule I hereto an aggregate of Three Million (3,000,000) shares (the "Company Shares") of the Company's Common Stock, no par value ("Common Stock"). In addition, in order to cover overallotments in the sale of the Company Shares, the Underwriters may, at the Underwriters' election and subject to the terms and conditions stated herein, purchase ratably in proportion to the amounts set forth opposite their respective names in Schedule I hereto, up to Four Hundred Fifty Thousand (450,000) additional shares of Common Stock from the Company (such additional shares of Common Stock, the "Optional Shares"). The Company Shares and the Optional Shares are referred to collectively herein as the "Shares." As part of the offering contemplated by this Agreement, Advest, Inc. has agreed to reserve out of the Shares set forth opposite its name on Schedule I to this Agreement, up to 150,000 Shares, for sale to certain officers, directors and employees of the Company and its affiliates, certain family members of the foregoing and other persons having business relationships with 1 the Company or its affiliates (collectively, "Participants"), as set forth in the Prospectus under the heading "Underwriting" (the "Directed Share Program"). The Shares to be sold by Advest, Inc. pursuant to the Directed Share Program (the "Directed Shares") will be sold by Advest, Inc. pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the first business day after the date on which this Agreement is executed will be offered to the public by Advest, Inc. as set forth in the Prospectus. The Company hereby confirms its engagement of each of Advest, Inc. and Mesirow Financial, Inc. as, and each of Advest, Inc. and Mesirow Financial, Inc. hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the Shares. Each of Advest, Inc. and Mesirow Financial, Inc., solely in its capacity as qualified independent underwriter and not otherwise, is referred to herein as a "QIU" (and together with the other QIU, as the "QIUs"). Each of the Company and Parent, intending to be legally bound, hereby confirms its agreement with the Underwriters as follows: 1. Representations and Warranties of the Company and Parent. (a) Each of the Company and Parent, and IGF Holdings, Inc., an Indiana corporation and a wholly owned subsidiary of the Company ("IGFH") (to the extent that the following representations and warranties relate directly to IGFH or its subsidiaries), jointly and severally represent and warrant to, and agree with, each of the Underwriters that: (i) A registration statement on Form S-1 (File No. 333-09129) with respect to the Shares, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (A) if such registration statement, as it may have been amended, has become effective under the Act and information has been omitted therefrom in accordance with Rule 430A under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement) with such changes or insertions as 2 are required by Rule 430A or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Representatives, or (B) if such registration statement, as it may have been amended, has not become effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been provided to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including (i) all financial statements, schedules and exhibits thereto, (ii) all documents (or portions thereof) incorporated by reference therein, and (iii) any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion included in such registration statement or any amendment or post-effective amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement at the time it was or is declared effective), including all documents (or portions thereof) incorporated by reference therein; and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be so filed, such term means the prospectus included in the Registration Statement, in either case, including all documents (or portions thereof) incorporated by reference therein. As used herein, any reference to any statement or information as being "made," "included," "contained," "disclosed" or "set forth" in any Preliminary Prospectus, a Prospectus or any amendment or supplement thereto, or the Registration Statement or any amendment thereto (or other similar references) shall refer both to information and statements actually appearing in such document as well as information and statements incorporated by reference therein. (ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued and no proceeding for that purpose has been instituted or threatened by the Commission or the securities authority of any state or other jurisdiction. If the Registration Statement has become effective under the Act, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceeding for that purpose has been instituted or threatened or, to the best knowledge of the Company, contemplated by the Commission or the securities authority of any state or other jurisdiction. (iii) When any Preliminary Prospectus was filed with the Commission it (A) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the 3 rules and regulations of the Commission thereunder and (B) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, and at each Time of Delivery (as hereinafter defined), it (A) contained and will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not and will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and at each Time of Delivery, the Prospectus, as amended or supplemented at any such time, (A) contained and will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not and will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (iii) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you specifically for use therein. It is understood that the statements set forth in each Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto (W) in the last paragraph of the cover page, (X) on the inside cover page with respect to stabilization and passive market making, (Y) under the section entitled "Underwriting" regarding the Underwriters and the underwriting arrangements, and (Z) under the section entitled "Legal Matters" regarding the identity of the counsel for the Underwriters, constitute the only written information furnished to the Company by or on behalf of any Underwriter through you specifically for use in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus and any amendment or supplement thereto, as the case may be. (iv) The descriptions in the Registration Statement and the Prospectus of laws, statutes, regulations, 4 legal and governmental proceedings, contracts and other documents are accurate in all material respects; and there are no laws, statutes, regulations, or legal or governmental proceedings required to be described in the Registration Statement or the Prospectus that are not described as required and no contracts or documents of a character that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described and filed as required. (v) Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has full power and authority (corporate and other) to own or lease its properties and conduct its business as described in the Prospectus. Each of the Company and Parent has full power and authority (corporate and other) to enter into this Agreement and to perform its obligations hereunder. Each of the Company and its subsidiaries is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole (a "Material Adverse Event"). (vi) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the descriptions of the Common Stock contained in the Prospectus. None of the issued shares of capital stock of the Company or any of its subsidiaries has been issued or is owned or held in violation of any statutory (or to the knowledge of the Company, any other) preemptive rights of shareholders, and no person or entity (including any holder of outstanding shares of capital stock of the Company or its subsidiaries) has any statutory (or to the knowledge of the Company, any other) preemptive or other rights to subscribe for any of the Shares. None of the capital stock of the Company has been issued in violation of applicable federal or state securities laws. (vii) All of the issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company or a subsidiary of the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, defects, shareholders' agreements, voting agreements, proxies, voting trusts, equities 5 or claims of any nature whatsoever except for (A) the pledge by GGS Management, Inc., a Delaware corporation ("GGS Management") of all of the outstanding shares of capital stock of Pafco General Insurance Company, an Indiana insurance company, and Superior Insurance Company, a Florida insurance company, as collateral to secure the GGS Senior Credit Facility (as such term is defined in the Prospectus), (B) the pledge by GGS Management Holdings, Inc., a Delaware corporation, of all of the outstanding shares of capital stock of GGS Management as collateral to secure the GGS Senior Credit Facility, (C) the pledge by IGFH of 29,614 shares of Common Stock of IGF Insurance Company ("IGF") and 2,494,000 shares of IGF Preferred Stock as collateral to secure both the IGFH Bank Debt and the IGF Note (as such terms are defined in the Prospectus) and (D) the pledge by the Company of shares of IGFH and GGS Management Holdings, Inc. as security for the obligations of Parent under the Amended and Restated Trust Indenture dated as of December 29, 1992, as amended by the First Supplemental Indenture dated as of April 30, 1996 which will be released prior to the closing of the sale and purchase of the Shares (the pledges described in clauses (A), (B), (C) and (D) being hereinafter referred to as the "Pledges") and (E) the Stockholder Agreement (as such term is defined in the Prospectus). Other than the subsidiaries listed on Exhibit 21 to the Registration Statement and the equity securities held in the investment portfolios of such subsidiaries (the composition of which is not materially different than the disclosures in the Prospectus as of specific dates), the Company does not own, directly or indirectly, any capital stock or other equity securities of any other corporation or any ownership interest in any partnership, joint venture or other association. (viii) Except as disclosed in the Prospectus, there are no outstanding (A) securities or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (ix) Since the date of the most recent audited financial statements included in the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as disclosed in or contemplated by the Prospectus and other than pursuant to claims 6 made by insureds in the ordinary course of business under policies issued by the Company's subsidiaries. (x) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) neither the Company nor any of its subsidiaries has incurred any liabilities or obligations, direct or contingent, or entered into any transactions, not in the ordinary course of business, that are material to the Company and its subsidiaries, (B) the Company has not purchased any of its outstanding capital stock or declared, paid or otherwise made any dividend or distribution of any kind on its capital stock, (C) there has not been any change in the capital stock, long-term debt or short-term debt of the Company or any of its subsidiaries, and (D) there has not been any material adverse change, or any development involving a prospective material adverse change, in or affecting the financial position, results of operations or business of the Company and its subsidiaries, in each case other than as disclosed in or contemplated by the Prospectus. (xi) Except for the Goran Registration Rights Agreement (as such term is defined in the Prospectus), there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement (or any such right has been effectively waived) or any securities being registered pursuant to any other registration statement filed by the Company under the Act. (xii) Neither the Company nor any of its subsidiaries is, or with the giving of notice or passage of time or both would be, in violation of its Articles of Incorporation or Bylaws or in default in any material respect under any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or to which any of their respective properties or assets are subject. (xiii) The Company and its subsidiaries have good and marketable title in fee simple to all real property, if any, and good title to all personal property owned by them, in each case free and clear of all liens, security interests, pledges, charges, encumbrances, mortgages and defects, except such as are disclosed in the Prospectus or such as do not constitute a Material Adverse Event and do not interfere with the use made or proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held 7 under lease by the Company or any of its subsidiaries are held under valid, subsisting and enforceable leases, with such exceptions as are disclosed in the Prospectus or are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary. (xiv) Neither the Company nor Parent requires any consent, approval, authorization, order or declaration of or from, or registration, qualification or filing with, any court or governmental agency or body in connection with the sale of the Shares or the consummation of the transactions contemplated by this Agreement in order for the Company to be permitted to increase the capital and surplus of the Company's insurance company subsidiaries as contemplated in the "Use of Proceeds" section of the Prospectus, the registration of the Shares under the Act (which, if the Registration Statement is not effective as of the time of execution hereof, shall be obtained as provided in this Agreement) and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such as may be required under state securities or blue sky laws in connection with the offer, sale and distribution of the Shares by the Underwriters. (xv) Other than as disclosed in the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation (including without limitation, any insurance regulatory proceeding) pending or, to the best of the Company's or Parent's knowledge, as the case may be, threatened in which the Company or any of its subsidiaries or Parent is a party or of which any of their respective properties or assets are the subject which, if determined adversely to the Company or any such subsidiary or Parent, would individually or in the aggregate constitute a Material Adverse Event. Neither the Company nor any of its subsidiaries nor Parent is in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate constitute a Material Adverse Event, and neither the Company nor any of its subsidiaries nor Parent is required to take any action in order to avoid any such violation or default. (xvi) To the best of the Company's knowledge, Coopers & Lybrand L.L.P., who have certified certain financial statements of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus, are independent public accountants as required by the Act, the Exchange Act and the respective rules and regulations of the Commission thereunder. (xvii) The consolidated financial statements and schedules (including the related notes) of the Company and 8 its consolidated subsidiaries included in the Registration Statement, the Prospectus and/or any Preliminary Prospectus were prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved and fairly present the financial position and results of operations of the Company and its subsidiaries, on a consolidated basis, at the dates and for the periods presented. The selected financial data set forth under the captions "Summary Company Consolidated Financial Data," "Summary Superior Consolidated Financial Data," "Selected Consolidated Historical Financial Data of Symons International Group, Inc.," "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company," "Selected Consolidated Historical Financial Data of Superior Insurance Company" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Superior" in the Prospectus fairly present, on the basis stated in the Prospectus, the information included therein, and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The supporting notes and schedules included in the Registration Statement, the Prospectus and/or any Preliminary Prospectus fairly state in all material respects the information required to be stated therein in relation to the financial statements taken as a whole. The unaudited interim consolidated financial statements included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of Rule 10-01 of Regulation S-X under the Act. (xviii) This Agreement has been duly authorized, executed and delivered by each of the Company and Parent, and, assuming due execution by the Representatives of the Underwriters, constitutes the valid and binding agreement of each of the Company and Parent, enforceable against the Company and Parent in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles and except as the enforceability of rights to indemnity and contribution under this Agreement may be limited under applicable securities laws or the public policy underlying such laws. (xix) The sale of the Shares and the performance of this Agreement and the consummation of the transactions herein contemplated will not (with or without the giving of notice or the passage of time or both) (A) conflict with any term or provision of the articles of incorporation or bylaws, or other organizational documents, of the Company or Parent, (B) result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement 9 or instrument to which the Company or Parent is a party or to which any of their respective properties or assets are subject, (C) conflict with or violate any provision of the governing instruments of the Company or Parent or any law, statute, rule or regulation or any order, judgment or decree of any court or governmental agency or body having jurisdiction over the Company or Parent or any of the properties or assets of the Company or Parent or (D) result in a breach, termination or lapse of the corporate power and authority of the Company or Parent to own or lease and operate its assets and properties and conduct its business as described in the Prospectus. (xx) When the Shares have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and non-assessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The certificates representing the Shares are in proper legal form under, and conform in all respects to the requirements of, the Indiana Business Corporation Law, as amended. Neither the filing of the Registration Statement nor the offering or sale of Shares as contemplated by this Agreement gives any security holder of the Company any rights for or relating to the registration of any shares of Common Stock or any other capital stock of the Company, except such as have been satisfied or waived. (xxi) The Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, a Preliminary Prospectus, the Prospectus and other material, if any, permitted by the Act. (xxii) Neither the Company nor any of its officers, directors or affiliates nor Parent has (A) taken, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company or Parent to facilitate the sale or resale of the Shares or (B) since the filing of the Registration Statement (1) sold, bid for, purchased or paid anyone any compensation for soliciting purchases of, the Shares or (2) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company or Parent. (xxiii) Neither the Company, any of its subsidiaries, nor any director, officer, employee or other person associated with or acting on behalf of the Company or any such subsidiary has, directly or indirectly, violated any provision of the Foreign Corrupt Practices Act of 1977, as amended. 10 (xxiv) The operations of the Company and its subsidiaries with respect to any real property currently leased or owned or by any means controlled by the Company or any subsidiary (the "Real Property") are in compliance in all material respects with all federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Laws"), and the Company and its subsidiaries have not violated any Laws in a way which would give rise to a Material Adverse Event. Except as disclosed in the Prospectus, there is no pending or, to the best of the Company's knowledge, threatened claim, litigation or any administrative agency proceeding, nor has the Company or any subsidiary received any written or oral notice from any governmental entity or third party, that: (A) alleges a material violation of any Laws by the Company or any subsidiary or (B) alleges the Company or any subsidiary is a liable party under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss. 9601 et seq. or any state superfund law. (xxv) The Company and each of its subsidiaries owns or has the right to use trademarks, trademark applications, trade names, service marks, franchises, trade secrets, proprietary or other confidential information and intangible properties and assets (collectively, "Intangibles"); and, to the best knowledge of the Company, neither the Company nor any subsidiary has infringed or is infringing, and neither the Company nor any subsidiary has received notice of infringement with respect to, asserted Intangibles of others. (xxvi) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a comparable cost, except as disclosed in the Prospectus. The foregoing representation is not intended to and does not relate to any reinsurance contracts, agreements or treaties to which the Company or any of its subsidiaries is a party. (xxvii) Each of the Company and its subsidiaries makes and keeps accurate books and records reflecting its assets and maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of the Company's consolidated financial statements in accordance with generally 11 accepted accounting principles and to maintain accountability for the assets of the Company, (C) access to the assets of the Company and each of its subsidiaries is permitted only in accordance with management's authorization and (D) the recorded accountability for assets of the Company and each of its subsidiaries is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxviii)The Company and its subsidiaries have filed all foreign, federal, state and local tax returns that are required to be filed by them and have paid all taxes shown as due on such returns as well as all other taxes, assessments and governmental charges that are due and payable; and no material deficiency with respect to any such return has been assessed or proposed. (xxix) Except for such plans that are expressly disclosed in the Prospectus, the Company and its subsidiaries do not maintain, contribute to or have any material liability with respect to any employee benefit plan, profit sharing plan, employee pension benefit plan, employee welfare benefit plan, equity-based plan or deferred compensation plan or arrangements (collectively, "Plans") that are subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder ("ERISA"). All Plans are in compliance in all material respects with all applicable laws, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), and have been operated and administered in all material respects in accordance with their terms. No Plan is a defined benefit plan or multiemployer plan. The Company does not provide retiree life and/or retiree health benefits or coverage for any employee or any beneficiary of any employee after such employee's termination of employment, except as required by Section 4980B of the Code or under a Plan which is intended to be "qualified" under Section 401(a) of the Code. No Plan has been involved in any prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. Full payment has been made of all amounts which the Company or any of its subsidiaries were required under the terms of the Plans to have paid as contributions to such Plans on or prior to the date hereof (excluding any amounts not yet due). No material liability, claim, action or litigation, has been incurred, made, commenced or, to the knowledge of the Company, threatened, by or against the Company or any of its subsidiaries with respect to any Plan (other than for benefits payable in the ordinary course). No material liability has been, or could reasonably be expected to be, incurred under Title IV of ERISA or Section 412 of the Code by any entity required to be aggregated with the Company or any of its subsidiaries pursuant to Section 4001(b) of ERISA and/or Section 414(b) or (c) of the Code (and the 12 regulations promulgated thereunder) with respect to any "employee pension benefit plan" which is not a Plan. As used in this subsection, the terms "defined benefit plan," "employee benefit plan," "employee pension benefit plan," "employee welfare benefit plan" and "multiemployer plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA. (xxx) No material labor dispute exists with the Company's or any of its subsidiary's employees, and no such labor dispute is threatened. The Company has no knowledge of any existing or threatened labor disturbance by the employees of any of its principal agents, suppliers, contractors or customers that would give rise to a Material Adverse Event. (xxxi) Each contract or other instrument (however characterized or described) to which the Company or any subsidiary is a party or by which any of its properties or business is bound or affected and which is material to the conduct of the Company's business as described in the Prospectus has been duly and validly executed by the Company or such subsidiary, and, to the knowledge of the Company, by the other parties thereto. Each such contract or other instrument is in full force and effect and is enforceable against the parties thereto in accordance with its terms, and the Company and each of its subsidiaries are not, and to the knowledge of the Company, no other party is, in default thereunder, nor has any event occurred that, with the lapse of time or the giving of notice, or both, would constitute a default under any such contract or other instrument. All necessary consents under such contracts or other instruments to disclosure in the Prospectus with respect thereto have been obtained. (xxxii) The Company and its subsidiaries have received all permits, licenses, franchises, authorizations, registrations, qualifications and approvals (collectively, "Permits") of governmental or regulatory authorities (including, without limitation, state and/or other insurance regulatory authorities) as may be required of them to own their properties and conduct their businesses in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; and the Company and its subsidiaries have fulfilled and performed all of their material obligations with respect to such Permits, and no event has occurred which allows or, after notice or lapse of time or both, would allow revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, such Permits contain no restrictions that materially affect the ability of the Company and its subsidiaries to conduct their businesses. 13 (xxxiii)The Company and each of its subsidiaries have filed, or has had filed on its behalf, on a timely basis, all materials, reports, documents and information, including but not limited to annual reports and reports of examination with each applicable insurance regulatory authority, board or agency, which are required to be filed by it, except where the failure to have timely filed such materials, reports, documents and information would not constitute a Material Adverse Event. (xxxiv) Neither Parent nor the Company nor any of the Company's subsidiaries is an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and, if the Company conducts its business as set forth in the Registration Statement and the Prospectus, will not become an "investment company" and will not be required to register under the Investment Company Act. (xxxv) To the best knowledge of the Company, none of the officers, directors (except as previously disclosed to you by the Company in writing) or shareholders holding 5% or more of any class of the Company's capital stock are affiliated with any member of the National Association of Securities Dealers, Inc. (the "NASD"). (xxxvi) The common stock of Parent is registered under the Exchange Act and Parent is in substantial compliance with the requirements of the United States federal securities laws (including, without limitation, the requirements of the Exchange Act), the Nasdaq National Market and the Toronto Stock Exchange. No document that has been filed by Parent with the Commission pursuant to the Exchange Act including, without limitation, any Form 10-K, 10-Q or 8-K, annual report to stockholders or proxy statement, (a) contained at the time of such filing or, except to the extent corrected or modified by a subsequent filing under the Exchange Act, contains an untrue statement of material fact or (b) omitted at the time of filing or, except to the extent corrected or modified by a subsequent filing under the Exchange Act, omits to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (xxxvii)The Company and each of its subsidiaries is in compliance with all provisions of Section 1 of the Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba. (xxxviii The Company has not offered, or caused the Underwriters to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully 14 influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products or services. Any certificate signed by any officer of the Company or any subsidiary in such capacity and delivered to the Representatives or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company or such subsidiary to the several Underwriters as to the matters covered thereby. 2. Purchase and Sale of Shares. (a) Subject to the terms and conditions herein set forth, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of Eleven Dollars and Fifty Cents ($11.50) per share (reflecting a seven percent underwriting discount and a one percent non-accountable expense allowance payable to the Representatives on behalf of the Underwriters pursuant to Section 6) (the "Per Share Price"), the number of Company Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Shares to be sold by the Company as set forth in the first paragraph of this Agreement by a fraction, the numerator of which is the aggregate number of Company Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto, and the denominator of which is the aggregate number of Company Shares to be purchased by the several Underwriters hereunder. (b) The Company hereby grants to the Underwriters the right to purchase at their election in whole or in part from time to time up to Four Hundred Fifty Thousand (450,000) Optional Shares, at the Per Share Price, for the sole purpose of covering overallotments in the sale of the Company Shares. Any such election to purchase Optional Shares may be exercised by written notice from the Representatives to the Company, given from time to time within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as hereinafter defined) or, unless you otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. In the event you elect to purchase all or a portion of the Optional Shares, the Company agrees to furnish or cause to be furnished to you the certificates, letters and opinions, and to satisfy all 15 conditions, set forth in Section 7 hereof at each Subsequent Time of Delivery (as hereinafter defined). (c) In making this Agreement, each Underwriter is contracting severally, and not jointly, and except as provided in Sections 2(b) and 9 hereof, the agreement of each Underwriter is to purchase only that number of shares specified with respect to that Underwriter in Schedule I hereto. No Underwriter shall be under any obligation to purchase any Optional Shares prior to an exercise of the option with respect to such Shares granted pursuant to Section 2(b) hereof. 3. Offering by the Underwriters. Upon the authorization by you of the release of the Shares, the several Underwriters propose to offer the Shares for sale upon the terms and conditions disclosed in the Prospectus. 4. Delivery of Shares; Closing. (a) Certificates in definitive form for the Shares to be purchased by each Underwriter hereunder, and in such denominations and registered in such names as you may request upon at least 48 hours' prior notice to the Company, shall be delivered by or on behalf of the Company, to you for the account of such Underwriter, against payment by such Underwriter on its behalf of the purchase price therefor by (at the Representatives' election) wire transfer of immediately available funds to such accounts as the Company (as the case may be) shall designate in writing, or by official bank check or checks (payable in next day funds), payable to the order of the Company in next-day available funds. The closing of the sale and purchase of the Shares shall be held at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York 10019, except that physical delivery of such certificates shall be made at the office of The Depository Trust Company, 55 North Water Street, New York, New York 10041. The time and date of such delivery and payment shall be, with respect to the Company Shares, at 10:00 a.m., New York, New York time, on the third (3rd) full business day after this Agreement is executed or at such other time and date as you and the Company may agree upon in writing, and, with respect to the Optional Shares, at 10:00 a.m., New York, New York time, on the date specified by you in the written notice given by you of the Underwriters' election to purchase all or part of such Optional Shares, or at such other time and date as you and the Company may agree upon in writing. Such time and date for delivery of the Company Shares is herein called the "First Time of Delivery," such time and date for delivery of any Optional Shares, if not the First Time of Delivery, is herein called a "Subsequent Time of Delivery," and each such time and date for delivery is herein called a "Time of Delivery." The Company will make such certificates available for checking and 16 packaging at least 24 hours prior to each Time of Delivery at the office of The Depository Trust Company, 55 North Water Street, New York, New York 10041 or at such other location specified by you in writing at least 48 hours prior to such Time of Delivery. 5. Covenants of the Company. (a) The Company and the Parent covenant and agree with each of the Underwriters that: (i) The Company will use its best efforts to cause the Registration Statement, if not effective prior to the execution and delivery of this Agreement, to become effective. If the Registration Statement has been declared effective prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by you, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifth business day after the date on which the Registration Statement is declared effective. The Company will advise you promptly of any such filing pursuant to Rule 424(b). The Company will file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering, sale and distribution of the Shares. (ii) The Company will not file with the Commission the prospectus or the amendment referred to in the second sentence of Section 1(a)(i) hereof, any amendment or supplement to the Prospectus or any amendment to the Registration Statement unless you have received a reasonable period of time to review any such proposed amendment or supplement and consented to the filing thereof and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective as promptly as possible. Upon the request of the Representatives or counsel for the Underwriters, the Company will promptly prepare and file with the Commission, in accordance with the rules and regulations of the Commission, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the several Underwriters and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective as promptly as possible. If required, the Company will file any amendment or supplement to the Prospectus with the Commission in the manner and within the time period required by Rule 424(b) under the Act. The Company will advise the Representatives, promptly after 17 receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence to the Representatives of each such filing or effectiveness. (iii) The Company will advise you promptly after receiving notice or obtaining knowledge of (A) when any post-effective amendment to the Registration Statement is filed with the Commission, (B) the receipt of any comments from the Commission concerning the Registration Statement, (C) when any post-effective amendment to the Registration Statement becomes effective, or when any supplement to the Prospectus or any amended Prospectus has been filed, (D) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any part thereof or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (E) the suspension of the qualification of the Shares for offer or sale in any jurisdiction or of the initiation or threatening of any proceeding for any such purpose, (F) any request made by the Commission or any securities authority of any other jurisdiction for amending the Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order or suspension and, if any such stop order or suspension is issued, to obtain the withdrawal thereof as promptly as possible. (iv) If the delivery of a prospectus relating to the Shares is required under the Act at any time prior to the expiration of nine months after the date of the Prospectus and if at such time any events have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any reason it is necessary during such same period to amend or supplement the Prospectus, the Company will promptly notify you and upon your request (but at the Company's expense) prepare and file with the Commission an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance and will furnish without charge to each Underwriter and to any dealer in securities as many copies of such amended or supplemented Prospectus as you may from time to time reasonably request. If the delivery of a prospectus relating to the Shares is required under the Act at any time nine months or more after the date of the Prospectus, upon your request but at the expense of such Underwriter, the Company will prepare and deliver to such Underwriter as many 18 copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act. (v) The Company promptly from time to time will take such action as you may reasonably request to qualify the Shares for offering and sale under the securities or blue sky laws of such jurisdictions as you may request and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction. (vi) The Company will promptly provide you, without charge, (A) three manually executed copies of the Registration Statement as originally filed with the Commission and of each amendment thereto, including all exhibits and all documents or information incorporated by reference therein, (B) for each other Underwriter a conformed copy of the Registration Statement as originally filed and of each amendment thereto, without exhibits but including all documents or information incorporated by reference therein and (C) so long as a prospectus relating to the Shares is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as you may reasonably request. (vii) As soon as practicable, but in any event not later than the last day of the thirteenth month after the effective date of the Registration Statement, the Company will make generally available to its security holders an earnings statement of the Company and its subsidiaries, if any, covering a period of at least 12 months beginning after the effective date of the Registration Statement (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations thereunder. (viii) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, the Company and Parent will not, without your prior written consent, offer, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exercisable or exchangeable for shares of Common Stock, except as provided in Section 2. (ix) During the period of three years after the effective date of the Registration Statement, the Company will furnish to you and, upon request, to each of the other Underwriters, without charge, (A) copies of all reports or other communications (financial or other) furnished to shareholders and 19 (B) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission, the National Association of Securities Dealers, Inc. or any national securities exchange. (x) Prior to the termination of the underwriting syndicate contemplated by this Agreement, neither the Company nor any of its officers, directors or affiliates nor Parent will (A) take, directly or indirectly, any action designed to cause or to result in, or that might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Shares or (B) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of, the Shares other than as contemplated under the Directed Share Program. (xi) If at any time during the period beginning on the date the Registration Statement becomes effective and ending on the later of (A) the date 30 days after such effective date and (B) the date that is the earlier of (1) the date on which the Company first files with the Commission a Quarterly Report on Form 10-Q after such effective date and (2) the date on which the Company first issues a quarterly financial report to shareholders after such effective date, (x) any publication or event relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such publication or event necessitates an amendment of or supplement to the Prospectus), or (y) any rumor relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor necessitates an amendment of or supplement to the Prospectus), the Company will consult with you concerning the necessity of a press release or other public statement, and, if the Company determines that a press release or other public statement is necessary, the Company will forthwith prepare and consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such publication, event or rumor. (xii) The Company will comply with the Act, the Exchange Act and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Shares for as long as may be necessary to complete the distribution of the Shares as contemplated hereby. (xiii) In case of any event, at any time within the period during which a prospectus is required to be delivered 20 under the Act, as a result of which any Preliminary Prospectus or the Prospectus, as then amended or supplemented, would contain an untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or, if it is necessary at any time to amend any Preliminary Prospectus or the Prospectus to comply with the Act or any applicable securities or blue sky laws, the Company promptly will prepare and file with the Commission, and any applicable state securities commission, an amendment, supplement or document that will correct such statement or omission or effect such compliance and will furnish to the several Underwriters such number of copies of such amendment(s), supplement(s) or document(s) as the Representatives may reasonably request. For purposes of this subsection, the Company will provide such information to the Representatives, the Underwriters' counsel and counsel to the Company as shall be necessary to enable such persons to consult with the Company with respect to the need to amend or supplement the Registration Statement, any Preliminary Prospectus or the Prospectus or file any document, and shall furnish to the Representatives and the Underwriters' counsel such further information as each may from time to time reasonably request. (xiv) The Company will use its best efforts to maintain the qualification or listing of the shares of Common Stock (including, without limitation, the Shares) on the Nasdaq National Market. (xv) In connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. Advest, Inc. will notify the Company as to which Participants will need to be so restricted. At the request of Advest, Inc., the Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (xvi) The Company will pay all fees and disbursements incurred by the Underwriters in connection with the offer of any Directed Shares outside of the United States under the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. (b) The Company and Parent covenant with Advest, Inc. that the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign 21 jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. 6. Expenses. The Company will pay all costs and expenses incident to the performance of the obligations of the Company under this Agreement, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated pursuant to Section 10 hereof, including, without limitation, all costs and expenses incident to (i) the printing of and mailing expenses associated with the Registration Statement, the Preliminary Prospectus and the Prospectus and any amendments or supplements thereto, this Agreement, the Agreement among Underwriters, the underwriters' questionnaire submitted to each of the Underwriters by the Representatives in connection herewith, the power of attorney executed by each of the Underwriters in favor of Advest, Inc. in connection herewith, the Dealer Agreement and related documents (collectively, the "Underwriting Documents") and the preliminary Blue Sky memorandum relating to the offering prepared by LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Underwriters (collectively with any supplement thereto, the "Preliminary Blue Sky Memorandum"); (ii) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation and, if applicable, filing of the Registration Statement (including all amendments thereto), any Preliminary Prospectus, the Prospectus and any amendments and supplements thereto, the Underwriting Documents and the Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing documents to the Underwriters; (iv) the filing fees of the Commission and the NASD relating to the Shares; (v) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Shares, including transfer agent's and registrar's fees; (vi) the qualification of the Shares for offering and sale under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters (and local counsel therefor) relating thereto; (vii) any listing of the Shares on the Nasdaq National Market; (viii) any expenses for travel, lodging and meals incurred by the Company and any of its officers, directors and employees in connection with any meetings with prospective investors in the Shares; (ix) the costs of advertising the offering, including, without limitation, with respect to the placement of "tombstone" advertisements in publications selected by the Representatives; and (x) all other costs and expenses reasonably incident to the performance of the Company's obligations hereunder that are not otherwise specifically provided for in this Section 6. In addition, the Company has agreed to pay to Advest, Inc., on behalf of the Underwriters, at each Time of Delivery, a non-accountable expense allowance in the amount of 1% of the gross 22 proceeds from the sale of the Shares to be applied to the reimbursement of underwriting syndicate expenses. 7. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder to purchase and pay for the Shares to be delivered at each Time of Delivery shall be subject, in their discretion, to the accuracy of the representations and warranties of each of the Company and Parent contained herein as of the date hereof and as of such Time of Delivery, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by each of the Company and Parent of its covenants and agreements hereunder, and to the following additional conditions precedent: (a) If the registration statement as amended to date has not become effective prior to the execution of this Agreement, such registration statement shall have been declared effective not later than 11:00 a.m., Hartford, Connecticut time, on the date of this Agreement or such later date and/or time as shall have been consented to by you in writing. The Prospectus and any amendment or supplement thereto shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing and in accordance with Section 5(a) of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceedings for that purpose shall have been instituted, threatened or, to the knowledge of the Company, Parent or the Representatives, contemplated by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction. (b) All corporate proceedings and other matters incident to the authorization, form and validity of this Agreement, the Shares and the form of the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby, shall be satisfactory in all material respects to counsel to the Underwriters. (c) The Representatives shall have received copies of executed lock-up agreements from each of Parent, the Company and the Company's officers and directors who own shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or who may be issued shares of Common Stock under an option plan or other arrangement to the effect that such individuals and entities will not offer, sell, contract to sell, or otherwise dispose of, any such shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock for a period of 180 days after the 23 date of the Prospectus without the written consent of Advest, Inc. (d) The Representatives shall have received at or prior to the First Time of Delivery from the Underwriters' counsel the Preliminary Blue Sky Memorandum, such memorandum to be in form and substance satisfactory to the Representatives. (e) LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Underwriters, shall have furnished to you such opinion or opinions, dated such Time of Delivery, with respect to the incorporation of the Company, the validity of the Shares being delivered at such Time of Delivery, the Registration Statement, the Prospectus, and other related matters as you may reasonably request, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (f) The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of any of the Shares. (g) You shall have received an opinion, dated such Time of Delivery, of Barnes & Thornburg, counsel for the Company, in form and substance satisfactory to you and your counsel, to the effect that: (i) The Company has been duly incorporated, is validly existing as a corporation under the laws of the State of Indiana and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and to enter into this Agreement and perform its obligations hereunder. (ii) Each of the subsidiaries listed on Exhibit 21 to the Registration Statement (the "Subsidiaries") of the Company is validly existing as a corporation in good standing (where applicable) under the laws of its jurisdiction of incorporation and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus. (iii) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description of the Common Stock contained in the Prospectus. None of the outstanding shares of Common Stock have been issued in violation of the preemptive or other similar rights of any shareholder or warrantholder of the Company arising by operation of law, under the Articles of 24 Incorporation or Bylaws of the Company or, to our knowledge, under any agreement to which the Company or any of its Subsidiaries is a party. The issuance of the shares of Common Stock is not subject to preemptive or other similar rights under the Articles of Incorporation or Bylaws of the Company or, to our knowledge, under any agreement to which the Company or any of its Subsidiaries is a party. (iv) All of the issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and, to such counsel's knowledge, are owned beneficially by the Company or its subsidiaries, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements, voting agreements, proxies, voting trusts, defects, equities or claims of any nature whatsoever (collectively, "Encumbrances"), including, without limitation, Encumbrances arising or resulting from any indenture, mortgage, deed of trust, loan agreement, lease or other agreement of or entered into by Parent, except for the Pledges and the Stockholder Agreement (as such term is defined in the Prospectus). (v) When the Shares have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be duly authorized, validly issued and fully paid and nonassessable, the holders thereof will not be subject to personal liability solely by reason of being such holders and the Shares will conform to the description of the Common Stock contained in the Prospectus; the certificates evidencing the Shares will comply with all applicable requirements of Indiana law; and the Shares will have been listed on the Nasdaq National Market. (vi) To such counsel's knowledge, neither the Company nor any of its subsidiaries is, or with the giving of notice or passage of time or both, would be, in violation of its Articles of Incorporation or Bylaws, in each case as amended to date. (vii) The sale of the Shares being sold at such Time of Delivery and the performance of this Agreement and the consummation of the transactions herein contemplated will not violate any provision of the Articles of Incorporation or Bylaws of the Company or any of its Subsidiaries, in each case as amended to date, or to such counsel's knowledge, any existing law, statute, rule or regulation, or conflict with, or (with or without the giving of notice or the passage of time or both) result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel to which the Company or any such Subsidiary 25 is a party or to which any of their respective properties or assets is subject (except for any conflicts with, breaches of or violations of any such indentures, mortgages, deeds of trust, loan agreements, leases or other agreements or instruments which would not, individually or in the aggregate, have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole), or, conflict with or violate any order, judgment or decree known to such counsel, of any court or governmental agency or body having jurisdiction over the Company or any of its Subsidiaries or any of their respective properties or assets, except with respect to any statute, rule or regulation of any regulatory authority imposing any obligation on the part of the Underwriters by way of their purchase of the Shares, as to which no opinion need be rendered. (viii) To such counsel's knowledge, no consent, approval, authorization, order or declaration of or from, or registration, qualification or filing with, any court or governmental agency or body is required for the sale of the Shares or the consummation of the transactions contemplated by this Agreement, except such as have been or will have been obtained and are or will be in effect, and except the registration of the Shares under the Act, the Exchange Act and such as may be required under state securities or blue sky laws in connection with the offer, sale and distribution of the Shares by the Underwriters, as to which such counsel expresses no opinion. (ix) To such counsel's knowledge and other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which the Company or any of its Subsidiaries is a party or of which any of their respective properties or assets is the subject which, if determined adversely to the Company or any such Subsidiary, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. (x) The statements in the Prospectus under "Business -- Regulation," "Business -- Legal Proceedings," "Description of Capital Stock" and "Shares Eligible for Future Sale" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations, or legal conclusions, are correct in all material respects. (xi) This Agreement has been duly authorized, executed and delivered by the Company. 26 (xii) Neither the Company nor any of its subsidiaries nor Parent is an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as amended. (xiii) The Registration Statement and the Prospectus and each amendment or supplement thereto (other than the financial statements, the notes and schedules thereto and other financial data included therein, to which such counsel need express no opinion), as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the respective rules and regulations thereunder. The descriptions in the Registration Statement and the Prospectus of contracts and other documents are accurate in all material respects and fairly present the information required to be shown; and such counsel do not know of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required. (xiv) Such counsel has been advised by the Division of Corporation Finance of the Commission that the Registration Statement has become effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to such counsel's knowledge, (A) no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and (B) no proceedings for that purpose have been instituted or threatened or are contemplated by the Commission. Such counsel shall also state that they have participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and representatives of and counsel to the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel has not passed upon or assumed any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, and although such counsel has not undertaken to verify independently the accuracy or completeness of the statements in the Registration Statement or the Prospectus and, therefore, would not necessarily have become aware of any material misstatement of fact or omission to state a material fact, on the basis of and subject to the foregoing, nothing has come to such counsel's attention to lead them to believe that the Registration Statement, or any further 27 amendment thereto made prior to such Time of Delivery, on its effective date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, or any amendment or supplement thereto made prior to such Time of Delivery, as of its issue date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements, the notes and schedules thereto and other financial and statistical data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deem proper, on certificates of officers of the Company and public officials and letters from officials of the NASD and on the opinions of other counsel reasonably satisfactory to you and your counsel as to matters which are governed by laws other than the laws of the State of Indiana and the Federal laws of the United States; provided that such counsel shall state in their opinion that they are so relying, and they are justified in relying on such other opinions. Copies of such certificates of officers of the Company and other opinions shall be addressed and furnished to the Underwriters and furnished to counsel for the Underwriters. (h) You shall have received an opinion, dated such Time of Delivery, of David L. Bates, Esquire, General Counsel of the Company and Parent, in form and substance satisfactory to you and your counsel, to the effect that: (i) The Company has been duly incorporated, is validly existing as a corporation under the laws of the State of Indiana and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and to enter into this Agreement and perform its obligations hereunder. The Company is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases property, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. Parent has been duly incorporated, is validly existing as a federally chartered corporation in good standing under the laws of Canada and has the 28 corporate power and authority to enter into this Agreement and perform its obligations hereunder. (ii) Each of the subsidiaries of the Company is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus. Each such subsidiary is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each other jurisdiction in which it owns or leases property, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole. (iii) Except as disclosed in the Prospectus, there are, to such counsel's knowledge, no outstanding (A) securities or obligations of Parent, the Company or any of the Company's subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from Parent, the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations of Parent, the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (iv) Except for the Goran Registration Rights Agreement (as such term is defined in the Prospectus), to such counsel's knowledge, there are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement (or any such right has been effectively waived) or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (v) To such counsel's knowledge, neither the Company nor any of its subsidiaries nor Parent is, or with the giving of notice or passage of time or both, would be, in violation of its Articles of Incorporation or Bylaws, in each case as amended to date, or, in default in any material respect under any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel to 29 which the Company, any such subsidiary or Parent is a party or to which any of their respective properties or assets is subject. (vi) To such counsel's knowledge and other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which the Company, any of its subsidiaries or Parent is a party or of which any of their respective properties or assets is the subject which, if determined adversely to the Company, any such subsidiary or Parent, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole; and, to the best of such counsel's knowledge, neither the Company nor any of its subsidiaries nor Parent is in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole, nor is the Company, any such subsidiary or Parent required to take any action in order to avoid any such violation or default. (vii) This Agreement has been duly authorized, executed and delivered by each of the Company and Parent. (viii) All offers and sales of the Company's capital stock prior to the date hereof were at all relevant times duly registered or exempt from the registration requirements of the Act, and were duly registered or the subject of an available exemption from the registration requirements of the applicable state securities or blue sky laws, or any actions in respect thereof are barred by the applicable statutes of limitations. (ix) To such counsel's knowledge, the Company and each of its subsidiaries have received all permits, licenses, franchises, authorizations, registrations, qualifications and approvals (collectively, "permits") of governmental or regulatory authorities (including, without limitation, state and/or other insurance regulatory authorities) as may be required of them to own their properties and to conduct their businesses in the manner described in the Prospectus, subject to such qualification as may be set forth in the Prospectus; to the best of such counsel's knowledge, the Company and each of its subsidiaries have fulfilled and performed all of their material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time or both would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such permits, subject in each case to such qualifications as may be set forth 30 in the Prospectus; and other than as described in the Prospectus, such permits contain no restrictions that materially affect the ability of the Company and its subsidiaries to conduct their businesses. Such counsel shall also state that he has participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and representatives of and counsel to the Underwriters at which the contents of the Registration Statement, the Prospectus and related matters were discussed and, although such counsel has not passed upon or assumed any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, and although such counsel has not undertaken to verify independently the accuracy or completeness of the statements in the Registration Statement or the Prospectus and, therefore, would not necessarily have become aware of any material misstatement of fact or omission to state a material fact, on the basis of and subject to the foregoing, nothing has come to such counsel's attention to lead him to believe that the Registration Statement, or any further amendment thereto made prior to such Time of Delivery, on its effective date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, or any amendment or supplement thereto made prior to such Time of Delivery, as of its issue date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements, the notes and schedules thereto and other financial and statistical data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deem proper, on certificates of officers of the Company and Parent, and public officials and letters from officials of the NASD and on the opinions of other counsel reasonably satisfactory to you and your counsel as to matters which are governed by laws other than the laws of the State of Indiana and the Federal laws of the United States; provided that such counsel shall state in his opinion that he is so relying, and he is justified in relying on such other opinions. Copies of such certificates of officers of the 31 Company and Parent and other opinions shall be addressed and furnished to the Underwriters and furnished to counsel for the Underwriters. (i) You shall have received an opinion, dated such Time of Delivery, of Smith Lyons, counsel for the Parent, in form and substance satisfactory to you and your counsel, to the effect that: (i) Parent has been duly incorporated and is validly existing under the laws of Canada and has the corporate power and authority to enter into this Agreement and perform its obligations hereunder. (ii) The execution, delivery and performance by Parent of this Agreement does not result in, and with the giving of notice or passage of time or both, would not result in, a violation of its Articles of Amalgamation or Bylaws, in each case as amended to date. (iii) To such counsel's knowledge and other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which Parent is a party or of which any of its properties or assets is the subject which, if determined adversely to Parent, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole; and, to such counsel's knowledge, Parent is not in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole, nor is Parent required to take any action in order to avoid any such violation or default. (iv) This Agreement has been duly authorized, executed and delivered by Parent. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel may deem proper, on certificates of officers of Parent and public officials. Copies of such certificates of officers of Parent and other opinions shall be addressed and furnished to the Underwriters and furnished to counsel for the Underwriters. (j) You shall have received from Coopers & Lybrand L.L.P., letters dated, respectively, the date hereof (or, if the Registration Statement has been declared effective prior 32 to the execution and delivery of this Agreement, dated such effective date and the date of this Agreement) and each Time of Delivery, in form and substance satisfactory to you, which letters shall cover such matters as you shall request as well as: (i) confirming that they are independent certified public accountants (within the meaning of the Act) with respect to the Company and its subsidiaries; (ii) stating that, in their opinion, the financial statements, certain summary and selected consolidated financial and operating data, and any supplementary financial information and schedules audited by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act; and they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, and any supplementary financial information and schedules, selected financial data, and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, and, as indicated in their report thereon, copies of which have been furnished to the Representatives; (iii) stating that, on the basis of specified procedures, which included the procedures specified by the American Institute of Certified Public Accountants ("AICPA") for a review of interim financial information, as described in SFAS No. 71, Interim Financial Information (with respect to the latest unaudited consolidated financial statements of the Company included in the Registration Statement), a reading of the latest available unaudited interim consolidated financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the meetings of the shareholders and the Board of Directors of the Company and its subsidiaries, and audit and compensation committees of such Boards, if any, and inquiries to certain officers and other employees of the Company and its subsidiaries responsible for operational, financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention that would cause them to believe that (A) the unaudited consolidated financial statements included in the Registration Statement (1) do not comply in form in all material respects with the applicable accounting requirements of the Act or (2) any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available unaudited interim consolidated financial statements of the Company and a specified date not more than five business days prior to the date of such letter, there 33 was any change in the capital stock and other items specified by the Representatives, increase in long-term debt, decrease in net current assets, total assets, investments or shareholders' equity of the Company and its subsidiaries, as compared with the amounts shown in the June 30, 1996 unaudited consolidated balance sheet of the Company included in the Registration Statement, or that for the periods from June 30, 1996 to the date of the latest available unaudited financial statements of the Company and to a specified date not more than five days prior to the date of the letter, there were any decreases, as compared to the corresponding periods in the prior year, in gross premiums written, net investment income, net realized capital gains, or total or per share amounts of net income, or other items specified by the Representatives, except in all instances for changes, decreases or increases which the Registration Statement discloses have occurred or may occur and except for such other changes, decreases or increases which the Representatives shall in their sole discretion accept; or (C) any other unaudited income statement data and balance sheet items included in the Registration Statement do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included or incorporated by reference in the Registration Statement; (iv) stating that, on the basis of a reading of the unaudited pro forma financial statements included in the Registration Statement and the Prospectus (the "pro forma financial statements"), carrying out certain specified procedures, inquiries of certain officials of the Company and its subsidiary, Superior Insurance Company who have responsibility for financial and accounting matters, and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing has come to their attention that would cause them to believe that the pro forma financial statements do not comply in all material respects with the applicable accounting requirements of Rule 11- 02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements; (v) stating that they have compared specific dollar amounts, numbers of shares, percentage of revenues and earnings statements and other numerical data and financial information pertaining to the Company and its subsidiaries set forth in the Registration Statement and all of the dollar amounts and percentages in the Registration Statement, in each case to the extent that such information is derived from the accounting records subject to the internal control structure, policies and 34 procedures of the Company's and its subsidiaries' accounting system, or has been otherwise derived in a manner permitted by AICPA Statement on Auditing Standards No. 72 with the results obtained from the application of specific readings, inquiries and other appropriate procedures (which procedures do not constitute an audit in accordance with generally accepted auditing standards) set forth in the letter and with the accounting records of the Company and its subsidiaries, and found them to be in agreement. In the event that the letters referred to in this Section 7(h) set forth any changes, decreases or increases in the items identified by you, it shall be a further condition to the obligations of the Underwriters that (i) such letters shall be accompanied by a written explanation by the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary and (ii) such changes, decreases or increases do not, in your sole judgment, make it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date of such letter. (k) Since the date of the latest audited financial statements included in the Prospectus and except pursuant to claims made by insureds in the ordinary course of business under policies of insurance issued by the Company's subsidiaries which claims are reasonably consistent with the Company's historical claims experience, neither the Company nor any of its subsidiaries shall have sustained (i) any loss or interference with their respective businesses from fire, explosion, flood, hurricane or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as disclosed in or contemplated by the Prospectus, or (ii) any change, or any development involving a prospective change (including, without limitation, a change in management or control of the Company), in or affecting the position (financial or otherwise), results of operations, net worth or business prospects of the Company and its subsidiaries, otherwise than as disclosed in or contemplated by the Prospectus, the effect of which, in either such case, is in your sole judgment so material and adverse as to make it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date hereof. (l) Subsequent to the date hereof, there shall not have occurred any of the following: (i) any suspension or limitation in trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on 35 such exchange, or in the Common Stock of the Company by the Commission or the National Association of Securities Dealers Automated Quotation National Market System (except for suspensions or limitations that last only a portion of one business day); (ii) a moratorium on commercial banking activities in New York, Indiana or Connecticut declared by either federal or state authorities; or (iii) any outbreak or escalation of hostilities involving the United States, declaration by the United States of a national emergency or war or any other national or international calamity or emergency if the effect of any such event specified in this clause (iii) in your sole judgment makes it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares being delivered at such Time of Delivery as contemplated by the Registration Statement, as amended as of the date hereof. (m) The Company shall have furnished to you at such Time of Delivery certificates of the chief executive and chief financial officers of the Company satisfactory to you, as to the accuracy in all material respects of the respective representations and warranties of the Company herein at and as of such Time of Delivery with the same effect as if made at such Time of Delivery, as to the performance by the Company of all of their respective obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates of such officers as to such matters as you may reasonably request. (n) The representations and warranties of each of the Company and Parent in this Agreement and in the certificates delivered by each of the Company and Parent pursuant to this Agreement shall be true and correct in all material respects when made and on and as of each Time of Delivery as if made at such time, and each of the Company and Parent shall have performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by each of the Company and Parent at or before such Time of Delivery. (o) The Shares shall continue to be listed on the National Association of Securities Dealers Automated Quotation National Market System. (p) The Representatives shall have received copies of executed lock-up agreements from each of Parent, Parent's principal shareholders and Parent's officers and directors who own shares of common stock of Parent or securities convertible into or exchangeable or exercisable for common stock of Parent to the effect that such individuals and entities will not offer, sell, contract to sell, or otherwise dispose of, any such shares of common stock of Parent or securities convertible 36 into or exchangeable or exercisable for common stock of Parent for a period of 180 days after the date of the Prospectus without the prior written consent of Advest, Inc. 8. Indemnification and Contribution. (a) Each of the Company and Parent agrees to jointly and severally indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company or Parent in Section 1(a) of this Agreement; (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (B) any application or other document, or amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"); or (iii) the omission of or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that neither the Company nor Parent shall be liable in any such case to the extent that any such loss, claim, damage, liability or action (i) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you expressly for use therein (which information is solely as set forth in Section 1(a)(iii) hereof) or (ii) is asserted by a person who purchased any of the Shares which are the subject thereof from an Underwriter and if a copy of the Prospectus (as amended or supplemented) which corrected the untrue statement or alleged untrue statement or omission or alleged omission which is the basis of the loss, claim, damage, liability or action for which indemnification is sought was not delivered or given to such person at or prior to the written 37 confirmation of the sale to such person. Neither the Company nor Parent will, without the prior written consent of the Representatives of the Underwriters, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding (or related cause of action or portion thereof) in respect of which indemnification may be sought hereunder (whether or not any Underwriter is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Underwriter from all liability arising out of such claim, action, suit or proceeding (or related cause of action or portion thereof). (b) Each of the Company and Parent agrees to jointly and severally indemnify and hold harmless each QIU, in its capacity as QIU, against any losses, claims, damages or liabilities, joint or several, to which such QIU may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company or Parent in Section 1(a) of this Agreement; (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (B) any Application; (iii) the omission of or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) other than as referred to in the preceding clauses (i) through (iii), such QIU's actions as a QIU, except insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arising under this clause (iv) result from such QIU's willful misconduct or gross negligence, and will reimburse each QIU for any legal or other expenses reasonably incurred by such QIU in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that neither the Company nor Parent shall be liable in any such case to the extent that any such loss, claim, damage, liability or action (i) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information relating to such QIU furnished to the Company by or on behalf of such QIU in such capacity through you expressly for use therein (it being understood and acknowledged by the Company that such written information shall consist solely 38 of the three sentences that are set forth in the second to last paragraph of the section entitled "Underwriting" in the Prospectus) or (ii) is asserted by a person who purchased any of the Shares which are the subject thereof from an Underwriter and if a copy of the Prospectus (as amended or supplemented) which corrected the untrue statement or alleged untrue statement or omission or alleged omission which is the basis of the loss, claim, damage, liability or action for which indemnification is sought was not delivered or given to such person at or prior to the written confirmation of the sale to such person. (c) Each Underwriter, severally but not jointly, agrees to indemnify and hold harmless the Company and Parent against any losses, claims, damages or liabilities to which the Company and Parent may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through you expressly for use therein; and will reimburse the Company and Parent for any legal or other expenses reasonably incurred by the Company and Parent in connection with investigating or defending any such loss, claim, damage, liability or action. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party); provided, however, that if the defendants in any such action include both the indemnified 39 party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party and such indemnified party shall have the right to select separate counsel to defend such action on behalf of such indemnified party. After such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence or (ii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. Nothing in this Section 8(d) shall preclude an indemnified party from participating at its own expense in the defense of any such action so assumed by the indemnifying party. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and Parent on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and Parent on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and Parent on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and Parent bear to the total underwriting discounts and commissions received by the 40 Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and Parent on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Parent and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless a QIU under subsection (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such QIU as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and Parent on the one hand and the QIUs on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable by such QIU in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and Parent on the one hand and the QIUs on the other in connection with the statements or 41 omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and Parent on the one hand and the QIUs on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and Parent bear to the underwriting discounts and commissions received by the QIUs. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and Parent on the one hand or the QIUs on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Parent and the QIUs agree that it would not be just and equitable if contributions pursuant to this subsection (f) were determined by pro rata allocation (even if the QIUs were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), no QIUs shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it as shown on Schedule I and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The QIUs' obligations in this subsection (f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) The obligations of the Company and Parent under this Section 8 shall be in addition to any liability which the Company and Parent may otherwise have and shall extend, upon the same terms and conditions, and to each officer, director and employee of the Underwriters (including the QIUs) and to each person, if any, who controls any Underwriter (including the QIUs) within the meaning of the Act or the Exchange Act; and the obligations of the Underwriters (including the QIUs) under this Section 8 shall be in addition to any liability which the respective Underwriters (including the QIUs) may otherwise have 42 and shall extend, upon the same terms and conditions, to each officer and director of the Company and Parent and to each person, if any, who controls the Company or Parent within the meaning of the Act or the Exchange Act. 9. Default of Underwriters. (a) If any Underwriter defaults in its obligation to purchase Shares at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six (36) hours after such default by any Underwriter you do not arrange for the purchase of such Shares, the Company shall be entitled to a further period of thirty-six (36) hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone a Time of Delivery for a period of not more than seven (7) days in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus that in your opinion may thereby be made necessary. The cost of preparing, printing and filing any such amendments shall be paid for by the Underwriters. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you or the Company as provided in subsection (a) above, if any, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made. 10. Termination. (a) This Agreement may be terminated with respect to the Company Shares or any Optional Shares in the sole 43 discretion of the Representatives by notice to the Company given prior to the First Time of Delivery or any Subsequent Time of Delivery, respectively, in the event that (i) any condition to the obligations of the Underwriters set forth in Section 7 hereof has not been satisfied, or (ii) the Company shall have failed, refused or been unable to deliver such party's respective Shares or the Company or Parent shall have failed, refused or been unable to perform all obligations and satisfy all conditions on their respective parts to be performed or satisfied hereunder at or prior to such Time of Delivery, in either case other than by reason of a default by any of the Underwriters. If this Agreement is terminated pursuant to this Section 10(a), the Company and/or Parent will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in Section 9(a), the aggregate number of such Shares which remains unpurchased exceeds one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in Section 9(b) to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to a Subsequent Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 11. Survival. The respective indemnities, agreements, representations, warranties and other statements of the Company, Parent and their officers and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person referred to in Section 8(e) or the Company, Parent or any officer or director or controlling person of the Company or Parent referred to in Section 8(e), and shall survive delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 44 12. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed, delivered or telegraphed and confirmed in writing to you in care of Advest, Inc., 90 State House Square, Hartford, CT 06103, Attention: David Minot (with a copy to LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, NY 10019, Attention: Lars Bang-Jensen, Esquire); and if sent to the Company, shall be mailed, delivered or telegraphed and confirmed in writing to Symons International Group, Inc., 4720 Kingsway Drive, Indianapolis, IN 46205, Attention: Alan G. Symons (with a copy to Barnes & Thornburg, 11 South Meridian Street, Indianapolis, IN 46205, Attention: Catherine Bridge, Esquire). 13. Representatives. You will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by you jointly or by Advest, Inc. will be binding upon all the Underwriters. 14. Binding Effect. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company, Parent and to the extent provided in Sections 8 and 10 hereof, the officers, directors and employees and controlling persons referred to therein and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to any provisions regarding conflicts of laws. 16. Counterparts. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 45 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us one of the counterparts hereof, and upon the acceptance hereof by Advest, Inc., on behalf of each of the Underwriters, this letter will constitute a binding agreement among the Underwriters, Parent and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in the Agreement among Underwriters, a copy of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, SYMONS INTERNATIONAL GROUP, INC. By:/s/ Alan G. Symons ----------------------------------- Name: Alan G. Symons Title:Chief Executive Officer GORAN CAPITAL INC. By:/s/ Alan G. Symons ----------------------------------- Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first written above at Hartford, Connecticut. ADVEST, INC. MESIROW FINANCIAL, INC. By: ADVEST, INC. By:/s/ Phil M. Skidmore ----------------------------------- Name: Phil M. Skidmore Title: Group Vice President Director Investment Banking On behalf of each of the Underwriters 46 JOINDER The following subsidiary of the Company, intending to be legally bound, hereby joins this Agreement for purposes of Sections 1 and 8 hereof. IGF HOLDINGS, INC. By:/s/ David L. Bates ------------------------ Title VP & Sec 47 SCHEDULE I Number of Optional Total Number Shares to be of Company Purchased if Shares Maximum to be Option Underwriter Purchased Exercised Advest, Inc. 920,000 138,000 Mesirow Financial, Inc. 920,000 138,000 Dean Witter Reynolds Inc. 60,000 9,000 Deutsche Morgan Grenfell Inc. 60,000 9,000 Donaldson, Lufkin & Jenrette Securities Corporation 60,000 9,000 Dresdner Kleinwort Benson North America LLC 60,000 9,000 A.G. Edwards & Sons, Inc. 60,000 9,000 Goldman, Sachs & Co. 60,000 9,000 Lehman Brothers Inc. 60,000 9,000 Morgan Stanley & Co. Incorporated 60,000 9,000 Oppenheimer & Co., Inc. 60,000 9,000 NatCity Investments, Inc. 60,000 9,000 J.C. Bradford & Co. 35,000 5,250 Brean Murray & Co., Inc. 35,000 5,250 City Securities Corporation 35,000 5,250 Dominick & Dominick, Inc. 35,000 5,250 EVEREN Securities, Inc. 35,000 5,250 First of Michigan Corporation 35,000 5,250 Friedman, Billings, Ramsey & Co., Inc. 35,000 5,250 Janney Montgomery Scott Inc. 35,000 5,250 Ladenburg, Thalmann & Co. Inc. 35,000 5,250 Legg Mason Wood Walker, Incorporated 35,000 5,250 McDonald & Company Securities, Inc. 35,000 5,250 Morgan Keegan & Company, Inc. 35,000 5,250 The Robinson-Humphrey Company, Inc. 35,000 5,250 Sands Brothers & Co., Ltd. 35,000 5,250 Stephens Inc. 35,000 5,250 Wheat, First Securities, Inc. 35,000 5,250 --------- ------- Total 3,000,000 450,000 ========= ======= EX-3.(2) 3 BY-LAW I BY-LAW I A by-law relating generally to the transaction of the business and affairs of GORAN CAPITAL INC. (the "Corporation") CONTENTS Page No. Article One Interpretation 1 Article Two Business of the Corporation 2 Article Three Directors 4 Article Four Committees of the Board 6 Article Five Remuneration of Directors, Officers 7 and Employees Article Six Officers 7 Article Seven Conduct of Directors and Officers and Indemnity 9 Article Eight Shares 11 Article Nine Dividends and Rights 13 Article Ten Meetings of Shareholders 14 Article Eleven Notices 18 -1- BY-LAW I ARTICLE ONE INTERPRETATION 1.01. Definitions: In this by-law and all other by-laws, unless the context requires: otherwise (a) "Act" means the Canada Business Corporations Act or any successor statute, as amended from time to time, and the regulations thereunder; (b) "board' means the board of directors of the Corporation, and includes the sole director when the required number of directors is one; (c) "business day" means any day with the exception of Saturday, Sunday and any other day that is defined as a holiday in the Interpretation Act (Canada) or any successor statute, as amended from time to time; (d) "by-laws" means all by-laws of the Corporation from time to time in effect; (e) "contracts or documents" includes deeds, mortgages, hypothecs, charges, conveyances, transfers and assignments of property (real or personal, immovable or movable, legal or equitable), agreements, releases, receipts and discharges for the payment of money, share certificates and other securities, warrants and all instruments in writing; (f) "Corporation" means Goran Capital Inc.; (g) "Director" means the Director appointed under the Act; (h) "directors" means the directors of the Corporation; (i) "meeting of shareholders" includes an annual meeting of shareholders, a special meeting of shareholders and a meeting of the holders of any class or series of shares of the Corporation; (j) "officer" means an officer of the Corporation; (k) "person" includes an individual, partnership, association, body corporate, trustee, executor, administrator or legal representative; -2- (1) "recorded address" means, with respect to a single shareholder, his latest address as recorded in the securities register of the Corporation; with respect to joint shareholders, the first address appearing in the securities register in respect of their joint holding; and with respect to any other person, but subject to the Act, his latest address as recorded in the records of the Corporation or otherwise known to the secretary; (m) "securities register" means any register or branch register of securities of the Corporation; (n) "signing officer" means, in relation to any contract or document, any one of the persons authorized to sign the same on behalf of the Corporation by this by-law or by a resolution passed pursuant to it; and (o) subject to the foregoing, all terms that are defined in the Act have the meanings given to such terms in the Act. 1.02. Primacy: Despite any provision of this or any other by-law, where any such provision conflicts with the articles, the articles shall govern. 1.03. Rules of Interpretation: In this or any other by-law, unless the context indicates otherwise, the singular includes the plural and vice-versa; and the neuter includes the masculine and feminine and vice-versa. 1.04. Effective Headings: The division of this by-law into articles and the insertion of headings are for convenience only and shall not affect the construction or interpretation hereof. ARTICLE TWO BUSINESS OF THE CORPORATION 2.01. Registered Office: The Corporation may from time to time: (a) by resolution of the directors change the address of the registered office of the Corporation within the place in Canada specified in its articles; and (b) by an amendment to its articles, change the place within Canada in which its registered office is situated. 2.02. Seal: The Corporation may have a seat in such form as the directors shall from time to time determine by resolution. 2.03. Financial Year: The financial year of the Corporation shall end on such day of the year as the directors shall from time to time determine by resolution. -3- 2.04. Execution of Instruments: (a) Unless the directors otherwise determine by resolution, contracts or documents requiring execution by the Corporation may be signed by any director or by any officer of the Corporation except an assistant officer and all contracts or documents so signed shall be binding upon the Corporation without further authorization or formality. The directors may from time to time determine by resolution the manner in which and the person or persons by whom contracts or documents shall be signed by the Corporation or any particular contract or document or class of contracts or documents shall be signed. (b) Subject to the provisions of this by-law and the Act, and if authorized by resolution of the directors, the corporate seal, if any, of the Corporation and the signature of any director or officer of the Corporation or any other person authorized by resolution of the directors to sign contracts and documents may be mechanically or electronically reproduced upon any contracts or documents of the Corporation. Any such mechanically or electronically reproduced signature shall be deemed to have been manually signed by such directors, officers or persons whose signature or signatures is or are so reproduced and shall be valid to all intents and purposes as if they had been signed manually and shall bind the Corporation notwithstanding that the person whose signature is so reproduced may have ceased to hold a particular office or position at the date of delivery or issue of such contracts or documents. 2.05. Exercise of Corporation's Voting Rights: Except as otherwise determined by resolution of the directors, the persons or persons authorized to sign contracts or documents on behalf of the Corporation may execute and deliver instruments of proxy and may arrange for the issuance of voting certificates or other evidence of the right to exercise the voting rights attaching to any securities held by the Corporation and such instruments, certificates or other evidence shall be in favour of such person as may be determined by such person or persons authorized to sign contracts or documents on behalf of the Corporation. 2.06. Banking Arrangements: (a) Subject to subsection 2.06(b) of this by-law, the banking business of the Corporation shall be transacted with such banks, trust companies or other persons as the directors may from time to time by resolution designate. (b) All the banking business of the Corporation shall be transacted on behalf of the Corporation by such officer or other individuals and to such extent as the directors may from time to time determine by resolution determine and, if so authorized by a resolution of the directors, any such officer or other individual may transact the -4- banking business of the Corporation with such banks, trust companies or other persons as such officer or other individual may from time to time determine. 2.07. Borrowing Powers: Without restricting any powers of the directors, whether derived from the Act or otherwise, the articles of the Corporation are deemed to state that the directors may, without authorization of the shareholders, (a) borrow money on the credit of the Corporation; (b) issue, reissue, sell or pledge debt obligations of the Corporation; (c) subject to section 44 of the Act, give a guarantee on behalf of the Corporation to secure performance of an obligation of any person; and (d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the Corporation, owned or subsequently acquired, to secure any obligation of the Corporation. ARTICLE THREE DIRECTORS 3.01. Powers of the Directors: Subject to any unanimous shareholder agreement, the directors shall manage the business and affairs of the Corporation. 3.02. Qualifications: The following persons are disqualified from being a director of the Corporation: (a) anyone who is less than eighteen years of age; (b) anyone who is of unsound mind and has been so found by a court in Canada or elsewhere; (c) a person who is not an individual; or (d) a person who has the status of bankrupt. 3.03. Number and Quorum of Directors: Subject to the Act, the Corporation shall have one or more directors. The number of directors, including the number to be elected at the annual meeting, shall be the number from time to time fixed by the articles or the number within the minimum and maximum number provided for in the articles. Subject to subsection 105(4)of the Act, a majority of the directors must be resident Canadians (as defined in the Act). The number of directorsfrom time to time required to constitute a quorum for the transaction of business at a meeting of the board shall be 51% of the directors or the minimum number of -5- directors required by the articles (or, if that is a fraction, the next largest whole number of directors). Reference is made to sections 3.07 and 3.12. 3.04. Election and Term: A director's term of office (subject to the provisions, if any, of the Corporation's articles, and subject to his election for an expressly stated term) shall be from the date of the meeting at which he is elected or appointed until the close of the annual meeting of shareholders next following his election or appointment or until his successor is elected or appointed. 3.05. Resignation: A resignation of any director becomes effective at the time a written resignation is sent to the Corporation, or at the time specified in the resignation, whichever is later. 3.06. Removal: Subject to the Act and the articles, the shareholders of the Corporation may by ordinary resolution at a special meeting remove any director from office. A vacancy created by the removal of a director may be filled at the meeting of the shareholders at which the director is removed. 3.07. Vacancies: Notwithstanding any vacancy among the directors, a quorum of directors may exercise all the powers of the directors. 3.08. Calling Meetings: Meetings of directors, or of any committee of directors, shall be held from time to time at such places, on such days and at such times as any director of the Corporation may determine, and the secretary of the Corporation shall give notice of any such meeting when directed by the person calling it as aforesaid. 3.09. Notice: Notice of the time and place of any meeting of directors shall be sent in accordance with Article Eleven hereof to each director not less than two business days before the date of the meeting. A meeting of directors may resume without further notice following an adjournment if the time and place for resuming the meeting are announced at the meeting prior to the adjournment. 3.10. First Meeting of New Directors: For the first meeting of directors to be held following the election of directors at an annual or special meeting of the shareholders or for a meeting of directors at which a director is appointed to fill a vacancy in the board, no notice of such meeting need be given to the newly elected or appointed director or directors in order for the meeting to be duly constituted, provided a quorum of the directors is present. 3.11. Regular Meetings: The directors may by resolution appoint a day or days in any months for regular meetings of directors to be held at a place or by communications facilities and at an hour to be named. A copy of any resolution of the directors fixing the time and place or manner of participation for such regular meetings shall be sent to each director immediately after being passed and to each director elected or appointed thereafter, but no other notice shall be required for any such regular meeting. -6- 3.12. Canadian Majority: No business other than the filling of a vacancy among the directors shall be transacted at a meeting of directors unless a majority of the directors present are resident Canadians, except as permitted by the Act or where a resident Canadian director who is unable to be present approves in writing or by telephone or other communication facilities the business transacted at the meeting and a majority of resident Canadian directors would have been present had that director been present at the meeting. 3.13. Meetings by Telephone: A director may, if all the directors of the Corporation consent, participate in a meeting of directors or of a committee of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other, and a director participating in such a meeting by such means is deemed for the purposes of the Act to be present at the meeting. 3.14. Chairman: The chairman of the board or in his absence the president if a director, or in their absence a vice-president who is a director, shall be chairman of any meeting of directors. If no such officer is present, the directors present shall choose one of their number to be chairman of the meeting. 3.15. Voting: Questions arising at any meeting of directors shall be decided by a majority of the votes cast at such meeting. If equal votes are cast in favour of and against any issue, the chairman of the meeting shall be entitled to a casting vote to decide the issue. 3.16. Adjournment: Any meeting of directors or of any committee of directors may be adjourned from time to time by the chairman of the meeting, with the consent of the meeting, to a fixed time and place and no notice of the time and place for the holding of the adjourned meeting need be given to any director if the time and place of the adjourned meeting is announced at the original meeting. Any adjourned meeting shall be duly constituted if held in accordance with the terms of the adjournment and a quorum is present thereat. The directors who formed a quorum at the original meeting are not required to form the quorum at the adjourned meeting. If there is no quorum present at the adjourned meeting, the original meeting shall be deemed to have terminated forthwith after its adjournment. 3.17. Signed Resolutions: A resolution in writing, signed by all the directors entitled to vote on that resolution at a meeting of directors or committee of directors, is as valid as if it had been passed at a meeting of directors or committee of directors. Any such resolution may be signed in counterparts and if signed as of any date shall be deemed to have been passed on such date. ARTICLE FOUR COMMITTEES OF THE BOARD 4.01. Audit Committee: The directors may, and where required by the Act shall, appoint from among their number an audit committee composed of such number of directors, being not less than -7- three, as the directors may from time to time by resolution determine. Except as permitted by the Act, a majority of the members of the audit committee shall not be officers or employees of the Corporation or of any affiliate of the Corporation. The audit committee shall review the annual financial statements of the Corporation and report thereon to the directors before such financial statements are approved by the directors, and may exercise any other powers lawfully delegated to it by the directors under the Act. 4.02. Other Committees: From time to time the directors may by resolution also appoint from among their number one or more other committees, a majority of each of which shall be resident Canadians except as permitted by the Act. Each committee may exercise those powers lawfully delegated to it by the directors under the Act. 4.03. Procedure: The members of each committee shall hold office while directors during the pleasure of the directors or until their successors shall have been appointed. The board may fill any vacancy in a committee from among their number. Unless otherwise determined by the directors, each committee may fix its quorum, elect its chairman and adopt rules to regulate its procedure. Subject to the foregoing, the procedure of each committee shall be governed by the provisions of this by-law which govern proceedings of the directors so far as the same can apply except that a meeting of a committee may be called by any member thereof (or by any member or the auditor, in the case of the audit committee), notice of any such meeting shall be given to each member of the committee (or each member and the auditor, in the case of the audit committee) and the meeting shall be chaired by the chairman of the committee or, in his absence, some other member of the committee. Each committee shall keep records of its proceedings and transactions and shall report all such proceedings and transactions to the directors in a timely manner. ARTICLE FIVE REMUNERATION OF DIRECTORS, OFFICERS AND EMPLOYEES 5.01 Remuneration: The remuneration to be paid to the directors of the Corporation shall be such as the directors shall from time to time determine by resolution and such remuneration shall be in addition to the salary paid to any officer or employee of the Corporation who is also a director. The directors may also by resolution award special remuneration to any director in undertaking any special services on the Corporation's behalf other than the normal work ordinarily required of a director of the Corporation. The confirmation of any such resolution or resolutions by the shareholders shall not be required. The directors may fix the remuneration of the officers and employees of the Corporation. The directors, officers and employees shall also be entitled to be paid their traveling and other expenses properly incurred by them in connection with the affairs of the Corporation. ARTICLE SIX OFFICERS -8- 6.01. Appointment of Officers: From time to time the directors may appoint a chairman of the board of directors, a president, one or more vice-presidents (to which title may be added words indicating seniority or function), a secretary, a treasurer, a controller and such other officers as the directors may by resolution determine, including one or more assistants to any of the officers so appointed. One person may hold more than one office. Except for the chairman of the board and the managing director, the officers so appointed need not be directors. 6.02. Appointment of Non-Officers: The directors may also appoint other persons to serve the Corporation in such other positions and with such titles, powers and duties as the directors may by resolution determine from time to time. 6.03. Terms of Employment: The directors may from time to time by resolution settle the terms of employment of the officers and other persons appointed by them and may remove at their pleasure any such person without prejudice to his rights, if any, to compensation under any employment contract. Otherwise each such person shall hold his office or position until he resigns or ceases to be qualified for his office or position or until his successor is appointed. 6.04. Powers and Duties of Officers: The directors may from time to time by resolution specify the duties of each officer, delegate to him powers to manage any business or affairs of the Corporation (including the power to sub-delegate) and change such duties and powers, all insofar as not prohibited by the Act. To the "tent not otherwise so specified or delegated, and subject to the Act, the duties and powers of the officers of the Corporation shall be as follows: (a) Chairman of the Board: The chairman of the board shall, when present, preside at all meetings of directors and shareholders. (b) President: The president shall be the chief executive officer of the Corporation and shall have, subject to the authority of the board, general supervision and control of the business and affairs of the Corporation. During the absence or disability of the chairman of the board and when no chairman of the board is appointed, the president shall exercise the powers and discharge the duties of that office. He shall report to the board in a timely manner on the exercise of his powers. (c) Vice-President: Each vice-president shall exercise such powers and discharge such duties as the chief executive officer may prescribe from time to time. During the absence or disability of the president and when no president is appointed his powers may be exercised and his duties may be discharged by the vice-president or, if there are more than one, by a vice-president in order of seniority (as determined by the directors), except that no vice-president shall preside at a meeting of directors if he is not a director. (d) Secretary: The secretary shall attend and act as secretary of all meetings of directors, its committees and shareholders. He shall send or cause to be sent all notices and -9- documents the Corporation is required to send to shareholders, directors, the auditor, the Director and governmental or regulatory bodies or agencies. He shall prepare or cause to be prepared all lists of shareholders and all registers and records (other than accounting records) required under the Act and shall be the custodian of all books, papers, records, documents and other instruments belonging to the Corporation except to the extent that some other person has been appointed for that purpose, and of the stamp used for affixing the corporate seal, if any, of the Corporation. He shall also exercise such other powers and discharge such other duties as the chief executive officer may prescribe from time to time. (e) Treasurer: The treasurer, under the direction of the directors, shall control the deposit of money, the safekeeping of securities and the disbursement of funds of the Corporation. Whenever required he shall render to the board an account of his transactions as treasurer and report to and advise the directors on the financial position and requirements of the Corporation and the results of its operations. During the absence or disability of the controller and when no controller has been appointed, the treasurer shall exercise the powers and discharge the duties of that office. He shall also exercise such other powers and discharge such other duties as the chief executive officer may prescribe from time to time. If there is no vice-president, finance, the treasurer shall be the chief financial officer of the Corporation. (f) Controller: The controller shall have charge of and cause to be kept adequate accounting records in which shall be recorded all receipts and disbursements of the Corporation in accordance with all applicable laws. He shall advise the directors on the accounting procedures and methods used by the Corporation and shall exercise such other powers and discharge such other duties as the chief executive officer may prescribe from time to time. (g) Other Officers: The powers and duties of all other officers of the Corporation shall be such as the terms of their engagement call for or as the chief executive officer may prescribe from time to time. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and discharged by such assistant, unless the directors or the chief executive officer otherwise directs. 6.05. Agents and Attorneys: The directors, by resolution, or any officer designated by the directors from time to time by resolution, may appoint agents or attorneys for the Corporation with such lawful powers (including the power to sub-delegate) as may be thought fit. ARTICLE SEVEN CONDUCT OF DIRECTORS AND OFFICERS AND INDEMNITY -10- 7.01. Standard of Care: Every director and officer of the Corporation in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the Corporation and shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. 7.02. Disclosure of Interest: A director or officer who (a) is a party to a material contract or proposed material contract with the Corporation, or (b) is a director or an officer of or has a material interest in any person who is a party to a material contract or proposed material contract with the Corporation, shall disclose in writing to the Corporation or request to have entered in the meetings of meetings of directors the nature and extent of his interest. Except as permitted by the Act, a director so interest shall not vote on any resolution to approve such contract or transaction. A general notice to the directors by a director or officer, declaring that he is a director or officer of or has a material interest in a person and is to be regarded as interested in any contract made with that person, is a sufficient declaration of interest in relation to any contract so made. 7.03. Effect of Disclosure: A material contract between the Corporation and one or more of the directors or officers, or between the Corporation and another person of which a director or officer of the Corporation is a director or officer or in which he has a material interest, is neither void nor voidable by reason only of that relationship or by reason only that a director with an interest in the contract is present at or is counted to determine the presence of a quorum of a meeting of directors or committee of directors that authorized the contract, if the director disclosed his interest in accordance with the Act, and the contract was approved by the directors or the shareholders and it was reasonable and fair to the Corporation at the time it was approved. 7.04. Indemnity: Every person who at any time is or has been a director or officer of the Corporation or who at any time acts or has acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor, and the heirs and legal representatives of every such person, shall at all times be indemnified by the Corporation in every circumstance where the Act so permits or requires. In addition and without prejudice to the foregoing and subject to the limitations in the Act regarding indemnities in respect of derivative actions, every person who at any time is or has been a director or officer of the Corporation or properly incurs or has properly incurred any liability on behalf of the Corporation or who at any time acts or has acted at the Corporation's request (in respect of the Corporation or any other person), and his heirs and legal representatives, shall at all times be indemnified by the Corporation against all costs, charges and expenses, including an amount paid to settle an action or satisfy a fine or judgment, -11- reasonably incurred by him in respect of or in connection with any civil, criminal or administrative action, proceeding or investigation (apprehended, threatened, pending, under way or completed) to which he is or may be made a party, or in which he is or may become otherwise involved, by reason of being or having been such a director or officer or by reason of so incurring or having so incurred such liability or by reason of so acting or having so acted (or by reason of anything alleged to have been done, omitted or acquiesced in by him in any such capacity or otherwise in respect of any of the foregoing), and all appeals therefrom, if: (a) he acted honestly and in good faith with a view to the best interests of the Corporation; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing his conduct was lawful. Nothing in this section shall affect any other right to indemnity to which any person may be or become entitled by contract or otherwise, and no settlement or plea of guilty in any action or proceeding shall alone constitute evidence that a person did not meet a condition set out in clause (a) or (b) of this section or any corresponding condition in the Act. From time to time the board may determine that this section shall also apply to the employees of the Corporation who are not directors or officers of the Corporation or to an., particular one or more or class of such employees, either generally or in respect of a particular occurrence or class of occurrences and either prospectively or retroactively. From time to time thereafter the board may also revoke, limit or vary the continued such application of this section. 7.05. Limitation of Liability: So long as he acts honestly and in good faith with a view to the best interests of the Corporation, no person referred to in section 7.04 (including, to the extent it is then applicable to them, any employees referred to therein) shall be liable for any damage, loss, cost or liability sustained or incurred by the Corporation, except where so required by the Act. 7.06. Insurance: Subject to the Act, the Corporation may purchase liability insurance for in the benefit of any person referred to in section 7.04. ARTICLE EIGHT SHARES 8.01. Issue: Subject to the articles, the directors may by resolution issue all or from time to time any of the unissued shares in the capital of the Corporation to such persons and for such consideration as the directors may determine by resolution. No share shall be issued until the Corporation has received the requisite consideration for it in compliance with the Act. -12- 8.02. Commissions: From time to time the directors may authorize the Corporation to pay a reasonable commission to any person in consideration of his purchasing or agreeing to purchase shares of the Corporation from the Corporation or from any other person, or in consideration of his procuring or agreeing to procure purchasers for such shares. 8.03. Share Certificates: Every shareholder is entitled at his option to a share certificate that complies in the Act and states the number, class and series designation, if any, of shares held by him as appears on the records of the Corporation., or a non-transferable written acknowledgment of his right to obtain such a share certificate. However, the Corporation is not bound to issue more than one share certificate or acknowledgement in respect of shares held jointly by several persons, and delivery of such certificate or acknowledgement to one of such persons is sufficient delivery to all of them. Share certificates and acknowledgments shall be in such forms as the board shall approve from time to time and, unless otherwise ordered by the board, shall be signed by the chairman of the board or the president together with the Secretary and need not be under corporate seal. However, certificates representing shares in respect of which a transfer agent has been appointed shall be signed manually by or on behalf of such transfer agent and other share certificates and acknowledgements shall be signed manually by at least one signing officer. 8.04. Replacement of Share Certificates: The directors may prescribe either generally or in a particular case the conditions, in addition to those provided in the Act, upon which a new share certificate may be issued in place of any share certificate which is claimed to have been lost, destroyed or wrongfully taken, or which has become defaced. 8.05. Transfer Agent: From time to time the directors may by resolution appoint or remove a trustee, transfer agent or other agent to keep the securities register and the register of transfers, one or more persons or agents to keep branch registers, and a registrar, trustee or agent to maintain a record of issued security certificates and warrants. Subject to the Act, one person may be appointed for purposes of the foregoing in respect of all securities and warrants of the Corporation or any class thereof. 8.06. Registration of Transfer: No transfer of shares need be recorded in the register of transfers except upon presentation of the certificate representing such shares endorsed by the appropriate person under the Act, together with reasonable assurance that the endorsement is genuine and effective, and upon compliance with such restrictions on transfer, if any, as are authorized by the articles and effective against the transferee, upon satisfaction of any debt for which the Corporation has a lien on the shares that is effective against the transferee, and upon compliance with all other conditions set out in the Act. 8.07. Lien for Indebtedness: If the articles of the Corporation provide that the Corporation has a lien on a share registered in the name of a shareholder or his legal representative for a debt of that shareholder to the Corporation, the directors of the Corporation may apply any dividends or other distributions paid or payable on or in respect of the share or shares in respect of which the -13- Corporation has such a lien in repayment of the debt of that shareholder to the Corporation. Subject to the Act, the Corporation may enforce such lien without notice or liability by: (a) refusing to register a transfer of any such shares until the debt is paid; (b) setting off against the debt any dividends or other distributions (including any proceeds of redemption or purchase for cancellation) payable by the Corporation to such shareholder; (c) purchasing any such shares and applying the purchase price, less any taxes thereon and costs of purchase, to the debt; (d) selling any such shares as if the Corporation were the owner thereof, at any time and place and to any person and on any commercially reasonable terms, and applying to the debt the cash proceeds of the sale, less any taxes thereon and all reasonable expenses incurred in connection with the sale; or (e) canceling such shares in satisfaction of the debt, or by any other method permitted by law or by any combination of any of the foregoing. 8.08. Dealings with Registered Shareholder: Subject to the Act, the Corporation may treat the registered owner of a share as the person exclusively entitled to vote, to receive notices, to receive any dividend or other payment in respect of the share and otherwise to exercise all the rights and powers of a holder of the share. The Corporation may, however, and where required by the Act shall treat as the registered shareholder any executor, administrator, heir, legal representative, guardian, committee, trustee, curator, tutor, liquidator or trustee in bankruptcy who furnishes appropriate evidence to the Corporation establishing his authority to exercise the rights relating to a share of the Corporation. ARTICLE NINE DIVIDENDS AND RIGHTS 9.01. Dividends: Subject to the Act and the articles, the directors from time to time may declare dividends payable to the shareholders according to their respective rights and interests in the Corporation. Dividends may be paid in money or property or by issuing fully paid shares of the Corporation or options or rights to acquire such shares. The directors shall by resolution determine the value of any such property, shares, options or rights and such determination shall be conclusive evidence of the value thereof. 9.02. Dividend Cheques: A dividend payable to any shareholder in money may be paid by cheque payable to the order of the shareholder and shall be mailed to the shareholder by prepaid mail -14- addressed to him at his recorded address unless he directs otherwise. In the case of joint holders the cheque shall be made payable to the order of all of them, unless such joint holders direct otherwise in writing. The mailing of a cheque as aforesaid, unless it is not paid on due presentation, shall discharge the Corporation's liability for the dividend to the extent of the amount of the cheque plus the amount of any tax thereon which the Corporation has properly withheld. If any dividend cheque sent is not received by the payee, the Corporation shall issue to such person a replacement cheque for a like amount on such reasonable terms as to indemnity, reimbursement of expenses and evidence of non-receipt and of title as the directors or any person designated by them may require. 9.03. Record Date for Dividends and Rights: The directors may by resolution fix in advance a date preceding by not more than 50 clear days the date for the payment of any dividend or the making, of any distribution or for the issue of any warrant or other evidence of right to acquire securities of the Corporation, as a record date for the determination of the persons entitled to receive payment of such dividend or distribution or to receive such right. In every such case only the persons who are holders of record of the relevant shares at the close of business on the date so fixed shall be entitled to receive payment of such dividend or distribution or to receive such right. Notice of any such record date fixed by the directors shall be given as and when required by the Act. Where no such record date is fixed by the directors, the record date for the determination of the persons entitled to receive payment of such dividend or distribution or to receive such right shall be the close of business on the day on which the board passes the resolution relating thereto. ARTICLE TEN MEETINGS OF SHAREHOLDERS 10.01. Annual Meeting: Subject to the Act, the annual meeting of the shareholders shall be held on such day and at such time as the directors from time to time may determine by resolution, for the purpose of receiving the financial statements and reports required by the Act to be placed before each annual meeting of shareholders, electing directors (if required), appointing the auditor (if required) and fixing or authorizing the directors to fix his remuneration and transacting such other business as may properly be brought before the meeting. 10.02. Special Meeting: From time to time the directors may by resolution call a special meeting of the shareholders to be held on such day and at such time as the directors may determine. The holders of not less than 5% of the issued shares of the Corporation carrying the right to vote at the meeting sought to be held may requisition a special meeting of shareholders. Any special meeting of shareholders may be combined with an annual meeting. 10.03. Place of Meetings: Meetings of shareholders shall be held at the registered office of the Corporation or at such other place within Canada as the directors from time to time may by resolution determine. -15- 10.04. Record Date: The directors may by resolution fix in advance a record date, preceding the date of any meeting of shareholders by not more than 50 clear days nor less than 21 clear days, for the determination of the shareholders entitled to notice of the meeting, and where no such record date for notice is fixed by the directors, the record date for notice shall be the close of business on the day immediately preceding the day on which notice is given. Notice of any such record date fixed by the directors shall be given as and when required by the Act. 10.05. Shareholder List: For each meeting of shareholders the secretary shall prepare or cause to be prepared an alphabetical list of shareholders entitled to receive notice of the meeting showing the number of shares entitled to be voted at the meeting and held by each such shareholder. The list shall be prepared (a) if a record date for such notice is fixed by the directors, not later than 10 clear days thereafter, (b) if no such record date is fixed by the directors, at the close of business on the day immediately preceding the day on which notice of the meeting is given, or (c) if no notice is given, on the day on which the meeting is held. The list shall be available for examination by any shareholder prior to the meeting during usual business hours at the registered office of the Corporation or at the place where the securities register is kept, and at the meeting. Where a separate list is not prepared, the names of the shareholders entitled to receive notice of the meeting and the number of shares entitled to be voted thereat and held by them, respectively, as they appear in the securities register at the requisite time (excluding shares not entitled to be voted at the meeting), shall constitute the list prepared in accordance with this section. 10.06. Notice: Notice in writing of the time, place and purpose for holding each meeting of shareholders shall be sent not less than 21 clear days and not more than 50 clear days, before the date on which the meeting is to be held, to each director, the auditor (if any) of the Corporation and each person who on the record date for notice appears in the securities register of the Corporation as the holder of one or more shares carrying the right to vote at the meeting or as the holder of one or more shares the holders of which are otherwise entitled to receive notice of the meeting. Notice of a meeting of shareholders shall state or be accompanied by a statement of the nature of all special business to be transacted at the meeting, in sufficient detail to permit the shareholder to form a reasoned judgment thereon, and the text of any special resolution or by-law to be submitted to the meeting. For this purpose all business transacted at a special meeting of shareholders and all business transacted at an annual meeting of shareholders, except consideration of the minutes of an earlier meeting, the financial statements and auditor's report, election of directors and reappointment of the incumbent auditor, is "special business'. Reference is made to Article Eleven. -16- 10.07. Proxy and Management Information Circular: Whenever the Corporation is offering its securities to the public, the secretary shall, concurrently with sending notice of a meeting of shareholders, (a) send a form of proxy and management information circular in accordance with the Act to each shareholder who is entitled to receive notice of and appears entitled to vote at the meeting, (b) send such management information circular to any other shareholder who is entitled to receive notice of the meeting, to any director who is not a shareholder entitled thereto and to the auditor, and (c) file with the Ontario Securities Commission and any other agencies entitled thereto a copy of all documents sent in connection with the meeting. 10.08. Financial Statements: Not less than 21 clear days before each annual meeting of shareholders or before the signing of a resolution in lieu thereof, the secretary shall send a copy of the annual financial statements and reports required by the Act to be placed before the annual meeting to each shareholder who has not informed the Corporation in writing that he does not want such documents. Whenever the Corporation is offering its securities to the public the secretary shall file a copy of its financial statements with the Ontario Securities Commission and any other agencies entitled thereto, as and when required. 10.09. Shareholder Proposal: Any shareholder entitled to vote at a meeting of shareholders may submit to the Corporation notice of any proposal that he wishes to raise at the meeting and may discuss at the meeting any matter in respect of which he would have been entitled under the Act to submit a proposal. Where so required by the Act, the management information circular prepared in respect of the meeting shall set out or be accompanied by the proposal. 10.10. Persons Entitled to be Present: The only persons entitled to attend a meeting of shareholders shall be those persons entitled to notice thereof and others who although not entitled to notice are entitled or required under any provision of the Act or the by-laws to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. 10.11. Chairman, Secretary and Scrutineer: The chairman of the board, or in his absence, the president, or in their absence a vice-president, or any other person designated from time to time in writing by the chairman of the board shall be chairman of any meeting of shareholders. If no such officer is present within 15 minutes after the time appointed for the holding of the meeting, the persons present and entitled to vote shall choose one of their number to be chairman. If the secretary is absent, the chairman shall appoint some person, who need not be a shareholder, to act as secretary of the meeting. One or more scrutineers, who need not be shareholders, may be appointed by the chairman or by a resolution of the shareholders. -17- 10.12. Quorum: The quorum for the transaction of business at any meeting of shareholders shall be two persons present and entitled to vote not less than 51 % of the shares entitled to be voted at the meeting. If a quorum is present at the opening of the meeting the shareholders may proceed with the business of the meeting notwithstanding that a quorum is not present throughout. If a quorum is not present within such reasonable time after the time appointed for the holding of the meeting as the persons present and entitled to vote may determine, they may adjourn the meeting to a fixed time and place. 10.13. Persons Entitled to Vote: Without prejudice to any other right to vote, every shareholder recorded on the shareholder list prepared in accordance with section 10.05 is entitled, at the meeting to which the list relates, to vote the shares shown thereon opposite his name, except to the extent that the shareholder transfers ownership of any such shares after the record date for notice of the meeting and the transferee establishes that he owns the shares and requests not later than seven clear days before the meeting that his name be included in the list (in which case the transferee is entitled to vote such shares at the meeting). However, where two or more persons hold the same shares jointly, any one of them may in the absence of the others vote in respect of such shares but if more than one of such persons are present or represented and vote, they shall vote together as one on the shares jointly held by them or not at all. 10.14. Proxies: Every shareholder entitled to vote at a meeting of shareholders may by means of a proxy appoint a proxy holder or alternate proxy holders, who need not be shareholders, as his nominee to attend and act at the meeting in the manner, to the extent and with the authority conferred by the proxy. A proxy shall be in writing and signed by the shareholder or his attorney authorized in writing or, if the shareholder is a body corporate, by an officer or attorney thereof duly authorized. A proxy shall conform to the requirements of the Act. 10.15. Time for Deposit of Proxies: The directors may specify in the notice calling a meeting of shareholders a time, not exceeding 48 hours (excluding any day which is not a business day) preceding the meeting or any adjournment thereof, before which proxies must be deposited with the Corporation or its agent. A proxy shall be acted upon only if, prior to the time so specified, it shall have been deposited with the Corporation or an agent thereof specified in such notice or, where no such time is specified in such notice, if it has been received by the secretary of the Corporation or the chairman of the meeting or any adjournment thereof before the time of voting. 10.16. Revocation of Proxies: In addition to revocation in any other manner permitted by law, a proxy may be revoked by an instrument in writing signed in the same manner as a proxy and deposited either at the registered office of the Corporation at any time up to and including the last day (excluding any day which is not a business day) preceding the date of the meeting or any adjournment thereof at which the proxy is to be used, or with the chairman of such meeting or any adjournment thereof before the time of voting. 10.17. Authorized Representatives: A shareholder that is a body corporate or association may, by resolution of its governing body, authorize an individual to represent it at meetings of shareholders. -18- Where a certified copy of such resolution has been deposited with the secretary, the authorized individual may exercise at meetings of shareholders all the rights and privileges which the shareholder he represents could exercise if it were an individual shareholder, until the secretary receives a certified copy of another resolution of such governing body authorizing a different individual to represent the shareholder at meetings of shareholders or otherwise rescinding the former resolution. 10.18. Voting: At each meeting of shareholders every question shall be decided by a majority of the votes duly cast thereon, unless otherwise provided by the Act, the articles, the by-laws or any unanimous shareholder agreement. In case of an equality of votes the chairman of the meeting shall not be entitled to a casting vote. 10.19. Show of Hands: At each meeting of shareholders voting shall be by show of hands unless a ballot is required or demanded as hereinafter provided. Upon a show of hands every person present and entitled to vote on the show of hands shall have one vote. Whenever a vote by show of hands has been taken upon a question, unless a ballot thereon be so required or demanded and such requirement or demand is not withdrawn, a declaration by the chairman of the meeting that the vote upon the question was carried or carried by a particular majority or not carried or not carried by a particular majority, and an entry to that effect in the minutes of the meeting, shall be prima facie evidence of the result of the vote without proof of the number or proportion of votes cast for or against. 10.20. Ballots: On any question proposed for consideration at a meeting of shareholders a ballot may be required by the chairman or demanded by any person present and entitled to vote, either before or after any vote by show of hands. If a ballot is so required or demanded and such requirement or demand is not withdrawn, a poll upon the question shall be taken in such manner as the chairman of the meeting shall direct. Subject to the articles, upon a ballot each person present shall be entitled to one vote in respect of each share which he is entitled to vote at the meeting on the question. 10.21. Adjournment: The chairman of a meeting of shareholders may with the consent of the meeting adjourn any meeting of shareholders from time to time to a fixed time and place and if the meeting is adjourned for less than 30 days no notice of the time and place for the holding of the adjourned meeting need be given to any shareholder, other than by announcement at the earliest meeting that is adjourned. If a meeting of shareholders is adjourned by one or more adjournments for an aggregate of 30 days or more, notice of the adjourned meeting shall be given as for an original meeting but, unless the meeting is adjourned by one or more adjournments for an aggregate of more than 90 days, subsection 149(l) of the Act does not apply. Any adjourned meeting shall be duly constituted if held in accordance with the terms of the adjournment and a quorum is present thereat. The persons who formed a quorum at the original meeting are not required to form the quorum at the adjourned meeting. If there is no quorum present at the adjourned meeting, the original meeting shall be deemed to have terminated forthwith after its adjournment. Any business may be brought before or dealt with at any adjourned meeting which might have been brought before or dealt with at the original meeting in accordance with the notice calling the same. -19- 10.22. Signed Resolutions: Subject to the Act, (a) a resolution in writing signed by all the shareholders entitled to vote on that resolution at a meeting of shareholders is as valid as if it had been passed at a meeting of shareholders; and (b) a resolution in writing dealing with all matters required by the Act to be dealt with at a meeting of shareholders, and signed by all the shareholders entitled to vote at that meeting, satisfies all the requirements of the Act relating to meetings of shareholders. Any such resolution may be signed in counterparts and if signed as of any date shall be deemed to have been passed on such date. ARTICLE ELEVEN NOTICES 11.01. To Shareholders, Directors: Any notice or document required or permitted to be sent by the Corporation to a shareholder or director may be mailed by prepaid Canadian mail in a sealed envelope addressed to, or may be delivered personally to, such person at his recorded address, or may be sent by any other means permitted under the Act. If so mailed, the notice or document shall be deemed to have been received by the addressee on the fifth clear day after mailing. If notices or documents so mailed to a shareholder are returned on three consecutive occasions because he cannot be found, the Corporation need not send any further notices or documents to such shareholder until he informs the Corporation in writing of his new address. 11.02. To Others: Any notice or document required or permitted to be sent by the Corporation to any other person may be (a) delivered personally to such person, (b) addressed to such person and delivered to his recorded address, (c) mailed by prepaid Canadian mail in a sealed envelope addressed to such person at his recorded address, or (d) addressed to such person and sent to his recorded address by telecopy, telegram, telex or any other means of legible communication then in business use in Canada. A notice or document so mailed or sent shall be deemed to have been received by the addressee when deposited in a post office or public letter box (if mailed) or when transmitted by the Corporation on its equipment or delivered to the appropriate communication -20- agency or its representative for dispatch, as the case may be (if sent by telecopy, telegram, telex or other means of legible communication). 11.03. Changes in Recorded Address: The secretary may change the recorded address of any person in accordance with any information the secretary believes to be reliable. 11.04. Computation of Days: In computing any period of days or clear days under the by-laws or the Act, the period shall be deemed to commence on the day following the event that begins the period and shall be deemed to end at midnight on the last day of the period except that if the last day of the period falls on any day which is not a business day, the period shall end at midnight of the day next following that is a business day. 11.05. Omissions and Errors: The accidental omission to give any notice to any person, or the non- receipt of any notice by any person or any immaterial error in any notice shall not invalidate any action taken at any meeting held pursuant to such notice or otherwise founded thereon. 11.06. Unregistered Shareholders: Subject to the Act, every person who becomes entitled to any share shall be bound by every notice in respect of such share which was duly given to any predecessor in title prior to such person's name and address being entered on the securities register of the Corporation. 11.07. Waiver of Notice: Any person entitled to attend a meeting of shareholders or directors or a committee thereof may in any manner and at any time waive notice thereof, and attendance of any shareholder or his proxy holder or authorized representative or of any other person at any meeting is a waiver of notice thereof by such shareholder or other person except where the attendance is for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. In addition, where any notice or document is required to be given under the articles or by-laws or the Act, the notice may be waived or the time for sending the notice or document may be waived or abridged at any time with the consent in writing of the person entitled thereto. Any meeting may be held without notice or on shorter notice than that provided for in the by-laws if all persons not receiving the notice to which they are entitled waive notice of or accept short notice of the holding of such meeting. Enactment RESOLVED that the foregoing by-law is made a by-law of the Corporation. -21- EX-10.9(4) 4 CREDIT AGREEMENT CONSENT AND AMENDMENT [CHASE LOGO] September 26, 1996 GGS Management, Inc. GGS Management Holdings, Inc. c/o Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: David L. Bates, Esq. Re: Consent and Amendment Gentlemen: We refer to the Credit Agreement dated as of April 30, 1996 (as amended, supplemented and otherwise modified and in effect on the date hereof, the "Credit Agreement"; terms defined in the Credit Agreement to have their respective defined meanings when used herein) between GGS Management, Inc. (the "Company") certain banks (the "Banks") and The Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank (National Association)), as agent for the Banks (the "Administrative Agent"). In connection with a public offering by SIG of up to 3,450,000 shares of its common stock pursuant to Form S-1 dated September __, 1996, we understand that (1) the parties to the Stockholder Agreement wish to amend and restate such Stockholder Agreement in substantially the form of Exhibit A attached hereto (the "Amended and Restated Stockholder Agreement") so that the Company and GGS may be consolidated with SIG for financial reporting purposes and (2) the parties to the GGS Stock Purchase Agreement wish to enter into a Third Amendment to the Stock Purchase Agreement in substantially the form of Exhibit B attached hereto (the "Third Amendment"). - 2 - With the consent of the Majority Banks, we consent to GGS entering the Amended and Restated Stockholder Agreement and the Third Amendment on the condition that simultaneously therewith, the Credit Agreement shall, automatically and without any further action by the parties hereto, be amended in the following respects: 1. The first sentence of Section 8.08 of the Credit Agreement shall be amended by deleting therefrom the text from and including the words "except that Pafco may pay to SIG a dividend" to and including the words "and Goran". 2. Section 8.12 of the Credit Agreement shall be amended by deleting the words "clauses (e) and (f)" and replacing them with "clause (b)". The foregoing consent shall become effective upon receipt by the Administrative Agent of a copy of this letter duly executed on behalf of the Company and GGS as below provided. This letter agreement shall be governed by and construed in accordance with, the law of the State of New York. Very truly yours, THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ J. David Parker, Jr. ------------------------ J. David Parker Vice President CONSENT: GGS MANAGEMENT, INC. By /s/ A Y Zuror - - - ------------------------ Title: President GGS MANAGEMENT HOLDINGS, INC. By /s/ A Y Zuror - - - ------------------------ Title: President EX-10.9(5) 5 CREDIT AGREEMENT SECOND AMENDMENT [CHASE LOGO] December 31, 1996 GGS Management, Inc. GGS Management Holdings, Inc. c/o Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, Indiana 46205 Attention: David L. Bates, Esq. Re: Second Amendment Gentlemen: We refer to the Credit Agreement dated as of April 30, 1996 (as amended by a Consent and Amendment dated as of October 31, 1996, the "Credit Agreement"; terms defined in the Credit Agreement to have their respective defined meanings when used herein) between GGS Management, Inc. (the "Company") certain banks (the "Banks") and The Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank (National Association)), as agent for the Banks (the "Administrative Agent"). You have requested that the Credit Agreement be amended to provide for an amendment of a certain mandatory prepayment provision in the Credit Agreement. Having received the consent of the all the Banks, we agree that the Credit Agreement is hereby amended in the following respect: Subsection (a) of Section 2.08 of the Credit Agreement shall be amended to add the following at the end thereof: "; provided that, without making any such prepayment, the Company may make an Equity Issuance for up to but not exceeding $6,000,000 in the aggregate to GGS at any time from and including December 20, 1996 to and including December 31, 1996 so long as all of such proceeds are -3- contributed as Statutory Surplus to the Insurance Subsidiaries on or before December 31, 1996." The foregoing amendment shall become effective upon receipt by the Administrative Agent of a copy of this letter duly executed on behalf of the Company and GGS as below provided. This letter agreement shall be governed by and construed in accordance with, the law of the State of New York. THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ J. David Parker, Jr. ------------------------ J. David Parker Vice President CONSENT: GGS MANAGEMENT, INC. By /s/ - - - --------------------------------- Title: CFO GGS MANAGEMENT HOLDINGS, INC. By /s/ David L. Bates - - - --------------------------------- Title: VP & General Counsel EX-10.9(6) 6 CREDIT AGREEMENT THIRD AMENDMENT [Execution Copy] AMENDMENT NO. 3 Amendment No. 3 dated as of December 31, 1996, between GGS MANAGEMENT, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of thelenders that is a signatory hereto (individually, a "Bank" and collectively, the "Banks"); and THE CHASE MANHATTAN BANK, a New York banking company, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, the Banks and the Administrative Agent (successor by merger to The Chase Manhattan Bank (National Association)) are parties to a Credit Agreement dated as of April 30, 1996 (as heretofore modified and supplemented and in effect on the date hereof, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for loans to be made by said Banks to the Company in an aggregate principal amount not exceeding $48,000,000. The Company, the Banks and the Administrative Agent wish to amend the Credit Agreement in certain respects, and accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 3, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Subject to the satisfaction of the conditions precedent specified in Section 4 below, but effective as of the date hereof, the Credit Agreement shall be amended as follows: 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and'hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement shall be amended by adding the following new definitions and inserting the same in the appropriate alphabetical locations, as follows: "Guaranteed Note" shall mean the promissory note of GGS date December 31, 1996 in the principal amount of $4,800,000 payable to Superior on or before March 28, 1997, guaranteed in part by SIG in accordance with terms thereof. Amendment No. 3 -2- "1997 Equity Contribution" shall mean a common equity capital contribution by SIG and GS Capital to GGS during the period from and including March 17, 1997 to andincluding March 28, 1997, aggregating not less than $4,800,000 and not more than $6,000,000, a portion of which shall be used directly for the payment in full of the principal of and accrued interest on Guaranteed Note on or before March 28, 1997 and the remainder of which will be contributed to the common equity of the Company. 2.03. The proviso to subsection (a) of Section 2.08 of the Credit Agreement shall be amended to read in its entirety as follows: "; provided that, no such prepayment need be made in respect of any Equity Issuance to GGS resulting from either (x) the 1997 Equity Contribution (or the use of the proceeds thereof) or (y) the issuance to Superior of, or any payment made in respect of the Guaranteed Note; and any such Equity Issuance and any payment made in respect of the Guaranteed Note shall not be deemed to violate any provision of Section 8.15." 2.04. Section 8.07(b) of the Credit Agreement shall be amended by adding the following proviso immediately after the first proviso of said Section 8.07(b): "; provided further, that, notwithstanding the forgoing, Superior may make the Investment referred to in the proviso to subsection (a) of Section 2.08 hereof." 2.05. Section 8.09(e) of the Credit Agreement shall be amended to read in its entirety as follows: "(e) Maximum Statutory Net Premiums Written. The Company shall not permit its Insurance Subsidiaries (on a combined basis) to have Statutory Net Premiums Written during any period of four consecutive fiscal quarters of such Insurance Subsidiaries (including any portion of such period prior to the Closing Date when they were not Subsidiaries of the Company) to exceed 3 times the combined Statutory Surplus of Pafco and Superior as at the end of such period, provided that for the period of four consecutive fiscal quarters ending September 30, 1996 and December 31, 1996 and March 31, 1997, the Company shall not permits its Insurance Subsidiaries (on a combined basis) to have Statutory Net Premiums Written during such period to Amendment No. 3 -3- exceed 3.15 times the combined Statutory Surplus of Pafco and Superior as at the end of such period." 2.06. Section 8.10 of the Credit Agreement shall be amended to read in its entirety as follows: "8.10 Risk-Based Capital Ratio. The Company will not on any date permit the Risk Based Capital Ratio (a) of Pafco to be less than 2 to 1 or (b) of Superior to be less than (x) 2.70 to 1 prior to June 30, 1997 or (y) 3 to 1 on or after June 30, 1997." Section 3. Representations and Warranties. The Company represents and warrants to the Banks that the representations and warranties set forth in Section 7.01, 7.04, 7.05 and 7.06 of the Credit Agreement are true and correct on the date hereof as if made on and as of the date hereof and as if each reference in said Sections to "the Agreement" included reference to the Credit Agreement as amended by this Amendment No. 3. Section 4. Conditions Precedent. As provided in Section 2 above, the amendments to the Credit Agreement set forth in said Section 2 shall become effective, as of the date hereof, upon the satisfactions of the following conditions precedent: 4.01. Execution by All Parties. This Amendment No. 3 shall have been executed and delivered by each of the parties hereto. 4.02 1997 Equity Contribution. Evidence that the 1997 Equity Contribution shall have occurred, and the Administrative Agent shall have receivec copies of each of the documents and instruments pursuant to which the 1997 Equity Contribution shall have occurred. 4.03 Repayment of Guaranteed Note. Evidence that the Guaranteed Note has been paid in full in cash. 4.04. Stock Certificates. Pursuant to the Pledge Agreements, the Administrative Agent shall have received in connection with the Equity Issuances referred to in the proviso to subsection (a) of Section 2.08 of the Credit Agreement (a) all stock certificates (if any) received in consideration for any Equity Issuance by the Company, accompanied by stock powers executed in blank and (b) all stock certificates (if any) received in consideration for any Equity Issuance by Superior, accompanied by stock powers executed in blank. Amendment No. 3 -4- 4.05. Amendment Fee; Expenses. Chase shall have received payment by the Company, in immediate available funds, of (a) an amendment fee as separately agreed to by the Company and Chase in the Fee Letter date of even date herewith and (b) all reasonable out-of-pocket costs and expenses of Chase (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel of Chase) from October 29, 1996 to the execution and delivery of this Amendment No. 3 in connection with the preparation, negotiation, execution and delivery of this Amendment No. 3. 4.06. Other Documents. The Administrative Agent shall have received such other documents as the Administrative Agent or any Bank or special New York counsel to Chase may reasonably request. The Administrative Agent shall notify the Company and the Banks of the date on which the conditions specified in this Section 4 have been satisfied. Such letter shall constitute conclusive evidence that such conditions have been satisfied. Section 5. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 3 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 3 by signing any such counterpart. This Amendment No. 3 shall be governed by, and construed in accordance with, the law of the State of New. York. Amendment No. 3 -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to be duly executed and delivered as of the day and year first above written. GGS MANAGMENT, INC. By: /s/ David L. Bates Title: Vice President, General Counsel & Secretary -6- THE CHASE MANHATTAN BANK By: /s/ Peter Platten Title: Vice President DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: Title: DEUTSCHE BANK By: Title: COMERICA BANK By: Title: Amendment No. 3 -6- THE CHASE MANHATTAN BANK By: Title: DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: /s/ John S. Runnion Title: Vice President /s/ John Sweeney Title: Vice President DEUTSCHE BANK By: Title: COMERICA BANK By: Title: Amendment No. 3 -6- THE CHASE MANHATTAN BANK By: Title: DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: Title: DEUTSCHE BANK AG, NEW YORK AND/ OR CAYMAN ISLANDS BRANCHS By: /s/ Eckhard Osenberg Title: Assistant Vice President /s/ John S. McGill Title: Vice President COMERICA BANK By: Title: Amendment No. 3 THE CHASE MANHATTAN BANK By: Title: DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCH By: Title: DEUTSCHE BANK By: Title: COMERICA BANK By: /s/ Phillip A. Coosaia Title: Vice President Amendment No. 3 EX-11 7 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS GORAN CAPITAL INC. - Consolidated Analysis of Earnings Per Share As at December 31, 1996 December 31, December 31, 1996 1995 TSE Trading Activity Period Volume Value Average Covered # (US $) Price (US$) (US $) January to December 1996 1,684,061 $23,551,580 $ 13.98 $6.20 Proceeds from Exercise of Warrants and Options (US $) $3,789,130 $1,353,460 Shares Repurchased - Treasury Method 270,943 218,396 Shares Outstanding - Weighted Average 5,286,270 5,012,005 Add: Options & Warrants Outstanding 709,149 774,035 Less: Treasury Method - - - - Shares Repurchased (207,943) (218,396) Shares Outstanding for U.S. GAAP Purposes 5,724,476 5,567,644 Net Earnings in Accordance with U.S. GAAP $31,294,636 $6,665,935 Earnings Per Share - U.S. GAAP (Primary and Fully Diluted) $5.47 $1.20 EX-13.1 8 1996 GORAN ANNUAL REPORT [Goran logo, which appears throughout entire annual report on upper outside corner] Corporate Profile Goran Capital Inc. owns subsidiaries engaged in a number of business activities. The most important of these is the property and casualty insurance business conducted in 31 U.S. states, Canada and Barbados, on both a direct and reinsurance basis through a number of subsidiaries collectively referred to in this report as Goran. Goran owns 67% of Symons International Group, Inc. which began trading on the NASDAQ on November 5, 1996 under the symbol SIGC. Symons owns 100% of IGF Insurance Company of Des Moines, Iowa which is the 5th largest crop insurer in the United State. Symons owns 52% of GGS Management Holdings, Inc. which owns 100% of Superior Insurance Company of Atlanta, Georgia and Pafco General Insurance Company of Indianapolis, Indiana. These insurers provide nonstandard automobile insurance and together are the 16th largest writers of such insurance in the United States. On April 30, 1996 Goran Capital, through its affiliation with GS Capital Partners II, L.P., purchased Superior Insurance Company. The Canadian subsidiaries, Granite Reinsurance Company Ltd. and Symons International Group, Inc. - Florida underwrites finite (limited risk) reinsurance in Bermuda, the United States and Canada and offers commercial insurance coverage. The investment portfolios of the insurance subsidiaries include debt and government instruments. The majority of holdings of the portfolios are publicly traded and most of the holdings of the debt portfolio have ratings greater than A+. Goran is a public company listed in The Toronto Stock Exchange under the symbol GNC and NASDAQ under the symbol GNCNF. Table of Contents Financial Highlights 1 Chairman's Report 2 Management's Discussion and Analysis 5 Consolidated Financial Statements 14 Notes to Consolidated Financial Statements 17 Auditors' Report 35 Corporate Directory 36 Subsidiaries and Branch Offices IBC Shareholder Information IBC [Bar Graph omitted] Financial Highlights (dollars in thousands, except per share amounts) For The Years Ended December 31, 1996 1995 1994 1993 1992 Gross Premium Revenue 307,634 151,717 126,978 114,135 128,440 Net Earnings, Before Unusual Item 13,127 7,171 3,940 1,397 4,413 Earnings Per Share Before Unusual Item 2.48 1.43 0.81 0.29 0.94 Shareholders' Equity 47,258 12,622 5,067 1,088 (739) Book Value Per Share 8.74 2.49 1.03 0.22 (0.15) Market Value Per Share 20.08 8.57 5.20 3.55 2.08 (1) In 1996 Goran recorded a gain of $18,169 or $3.44 per share on the sale of SIG stock as part of SIG's initial public offering. The gain is recorded as an unusual item. CORPORATE STRUCTURE Goran Capital, Inc. Toronto, Ontario ("Goran" or the "Company") | | __________________________________________________________________ | | | | 100% Owned 67% Owned 100% Owned 100% Owned Symons Symons International Granite Reinsurance Granite International Group, Inc., Company, Ltd. Insurance Group, Inc. Indianapolis, Indiana Indianapolis, Indiana Company Florida ("SIG") ("Granite Re") ("Granite") | | _____________________|________________________ | | 100% Owned 52% Owned Funds Affiliated IGF Holdings, Inc. GGS Management ----48%-----With Goldman ("IGFH") Holdings, Inc. Sachs & Co. | ("GGSH" or ("GS Funds") | "GGS Holdings") 100% Owned | IGF Insurance | Company 100% Owned ("IGF") GGS Management, Inc. ("GGS Management") | _________________________|______________________ | | 100% Owned 100% Owned PAFCO General Superior Insurance Insurance Company Company ("Pafco") ("Superior") | ___________________________| | | 100% Owned 100% Owned Superior Guaranty Superior American Insurance Company Insurance Company CHAIRMAN'S LETTER REPORT TO SHAREHOLDERS It's that time of the year when I sit down at my word processor and try to make like I know it all, by telling you where we have been and where we are going. At least what I think is going to be the results of our travel. In latter years I have done pretty well, even though my superego has been advising me to temper my comments and not be overly optimistic. A difficult position to take when the signposts indicate we are on a winning track. A good place to start this, or so it seems to me, is to briefly review last year's Chairman's Report. From that we can judge how well your company met the projections I outlined at the time. I said we were budgeting for Gross Income in 1996 to double over 1995. The results presented in the following tables shows that we did. I indicated that the overall result, taking into consideration profit and growth, would be outstanding. I believe they have been. Nonstandard auto improved its pre-tax income by $9,400,000 (U.S.) while crop insurance pre-tax is up by about 60%. Net income for all operations has increased from $7,171,000 (U.S.) to $13,127,000 (U.S.) You will note from the following financial information that we hit our targets of double growth for 1995 to 1996. While we don't expect to double again in 1997, we do expect to hit our corporate goal to exceed 25% compound annual growth both top and bottom line. You may recall in last year's report I referred to a major transaction initiated on January 31, 1996, whereby in conjunction with Goldman Sachs we entered into an agreement with Fortis to purchase from them the Superior Insurance Group. Acquiring insurance companies involves obtaining clearance from the regulators and it was May 1, 1996 before we took over the Superior Group of companies. Immediately following this date we began to implement changes in procedures to conform with our underwriting methods and management style. The premium income has since grown at a significant rate. For 1996, auto premiums reached $225,027,000 ($187,176,000 U.S.) compared with $66,157,000 ($49,005,000 U.S.) for 1995. Pafco, the company we started from scratch in 1987, contributed about $95,000,000 ($70,000,000 U.S.) with the balance (approximately $159,000,000 ($117,000,000 U.S.)) coming from the Superior acquisition over the eight months since we secured it. We have seen a reduction in our combined loss ratio of 111.3% for 1995 to 101.4% for 1996 mainly due to improved underwriting and major reductions in the cost of doing business. I thought it was meaningful that the premium income of Superior for 1995, the year before we acquired it, was $127,921,000 ($94,756,000 U.S.) with a profit of $2,226,000 ($1,649,000 U.S.). - - - -2- CHAIRMAN'S LETTER 1995 1996 Canadian U.S. Canadian U.S. Dollars Dollars Dollars Dollars Gross Premiums Written $208,216,000 $151,727,000 $419,151,000 $307,634,000 Shareholders' Equity $ 17,232,000 $ 12,622,000 $ 64,724,000 $ 47,258,000 Net Income $ 9,841,000 $ 7,171,000 $ 17,886,000 $ 13,127,000 A look at the information provided in the table above shows a significant improvement in the company's performance since we took over. This would be a good story if I left it right here but there is more. It is not sufficient to write great gobs of premium unless that income is producing profit. Through a series of changes that management effected the loss and expense ratio of the company was reduced by 9.9%. The final piece de resistance to this episode, at least for now, is that the pre-tax income from our nonstandard auto division went from $(2,685,000) ($(1,989,000) U.S.) in 1995 to $10,129,000 ($7,434,000 U.S.) in 1996. Expanding premium income requires expanded capital for most insurers. In taking on the acquisition of Superior we needed to not only raise funds to pay for it but we had to consider the increase in capital that would be needed to write a fast growing volume of business. To some degree we accomplished that when we took into our nonstandard auto business GS Capital Partners II, L.P. for 48%. We, of course, have to be responsible for our share of further capital needs, either to accommodate requirements of GGS Management Holdings, Inc., the nonstandard holding company, for premium writing purposes or for future acquisitions in that field. GGS includes in its group of companies, the Superior companies and Pafco General Insurance Company. On November 5,1996 we took our U.S. holding company, Symons International Group, Inc., public on NASDAQ, selling 3 million shares out of a total of 10 million shares outstanding and then sold 450,000 shares to the underwriters of the issue for the over-allotment that they had contracted to pick up. The shares had an initial price of $12.50 (U.S.) and after expenses we realized approximately $38,000,000 (U.S.) from the transaction. Price at this writing was $17,500,000 (U.S.). This transaction allowed us to reduce debt and to create funds for future capital needs. Over the last three years the star performer of our group has been our crop insurance company, IGF Insurance Company of Des Moines, Iowa. It has grown from a small rural insurer with $30,000,000 ($22,222,000 U.S.) of premium, in November 1990, to $150,000,000 ($110,000,000 U.S.) at the end of 1996, and is now the fifth largest company in this field. Crop insurance is the fastest growing segment of commercial insurance, the result of the government withdrawing as a provider of coverage, and nonstandard auto insurance is the fastest growing segment of personal insurance. No, our growth hasn't been done with mirrors. There are sound principles working to assist us in our endeavors. The effect of our increasing profitability and raising of public funds has had a profound consequence on two segments of our financial lives. Because of these factors, we have been able to reduce our debt/equity ratio and increase the Shareholder's Equity substantially. Putting together an initial public offering (IPO), requires an astounding amount of work. We had been there before when we first went public with Goran's predecessor company, Pafco Financial Holdings. In the period leading up to November 5, when Symons International Group, Inc., became a "public" entity, the members of our staff were called on to do yeomen service. The gathering and assembling of the financial information was of particular significance for what is an IPO but a financial and accounting -3- CHAIRMAN'S LETTER For The Years Ended December 31, 1993 1994 1995 1996 Book Value Per Share CDN $0.30 $1.39 $3.36 $11.97 US $0.22 $1.03 $2.49 $ 8.74 Long Term Debt to Equity 16.1 to 1 2.86 to 1 .99 to 1 .53 to 11 1Excluding minority interest portion of $48 million term debt performance. The members of our Accounting Department, now headed by Gary Hutchcraft, worked long hours to meet the needs of the underwriters. Our U.S. auditors, Coopers & Lybrand, assisted us and were available for the tedious chore of sanctifying the information we assembled. Our attorneys, Barnes & Thornburg, were most helpful in directing our efforts so as to avoid pitfalls that crop up in these matters. The issue was successful and the public have realized a substantial gain in their investment since November 5, 1996. I would be remiss if I didn't make mention of the gentlemen who did such an effective job in the period of the "dog and pony shows" which pre-sold the issue. Team No. 1 was made up of Alan Symons and Dennis Daggett, the President of IGF. Team Number 2 included Doug Symons and Tom Gowdy, the second man at IGF. The fact that the issue was oversold bears testimony to the effective way that these two teams presented the facts to the financial organizations they visited. During this three week period, they made presentations in 16 different cities. Needless to say, the year has been one of trial and success. The President and CEO of Goran, Alan Symons, has worked long hours and most effectively to bring in an outstanding year and one that has been accepted by the knowledgeable public as it moved our share price from $8.75(U.S.) in January to $19.13(U.S.) in the ensuing 12 months. He instigated the moves that resulted in our making a deal for Superior, which in my opinion, is going to play a leading role in our growth on the way to a $1 Billion of gross premiums by the year 2000. The "boys" behemoths would better describe them, Tom Gowdy and Dennis Daggett, have come through with another stellar performance in their efforts to take IGF to the top in the crop field. I have mentioned the efforts of Doug Symons and Gary Hutchcraft before and the roles they played in certain of our endeavors, but there are a number of others that should be given equal billing. I can only mention that we have assembled a first rate team who in my opinion will continue to produce above average results. We have a much larger representation on the Boards of the two public companies and you will find their names listed in the latter page of this report. They have all put in a lot of time to assist us in our decisions and I wish to thank them for their judicious assistance in the past year. We now have a staff of 709 persons which has grown from 460 over the past two years. I mention this for it is an indication of our growth which I believe will go on to bigger and better things in the years ahead. Last, I wish to thank the shareholders who have shown their faith in us. We recognize that the shareholder is sacrosanct, for all of our senior people are shareholders. We do it for you and we do it for ourselves. I trust that we will all have a wonderful trip. /s/G. Gordon Symons Chairman of the Board February 19, 1997 - - - -4- MANAGEMENT'S DISCUSSION AND ANALYSIS Financial Condition and Results of Operations Results of Operations [Large Goran logo] 1996 proved to be a major financial turning point for Goran Capital Inc. ("Goran") and its subsidiaries. Three actions during 1996 changed the future forever for Goran: A. The investment by Goldman Sachs affiliate GS Capital Partners II, L.P. ("Goldman Sachs") for 48% of our nonstandard unit and the resulting acquisition of Superior Insurance Company ("Superior") on May 1, 1996, brought Goran into the big leagues of nonstandard automobile insurance. We are now the 16th largest nonstandard automobile insurance provider in the United States. B. The quantum leaps and superb profits of IGF Insurance Company ("IGF"), our crop insurance company, thrust IGF into the No. 5 spot in the United States for crop insurance. The profit for 1996 at IGF finally put IGF's capital to a level that will allow it to grow significantly. C. The IPO of Goran's U.S. holding company, Symons International Group, Inc., ("SIG") reduced overall long-term debt to a debt to equity ratio of .53:1, excluding minority interest portion of $48 million term debt, it increased the capital of IGF by $9 million and it awakened the public to the Goran story. The Company's 1996 gross premium written increased to $307.6 million from $151.7 million in 1995. The increase in premiums in 1996 over 1995 resulted from growth in both the crop and nonstandard automobile insurance segments. Gross premiums written for crop insurance grew $39.7 million in 1996 from $70.4 million in 1995, with premium growth coming from both the multi-peril crop insurance ("MPCI") and the crop hail business. The nonstandard automobile segment gross written premiums grew to $187.2 million in 1996 from $49.0 million in 1995 due to the acquisition of Superior and elimination of quota share reinsurance. All other lines of business experienced gross written premium changes from 1995 to 1996 as follows: Finite reinsurance premiums decreased by $32.7 million to $2.1 million and surplus lines premiums increased by $2.0 million to $9.0 million. In 1996, net premiums written (gross written less reinsurance to government FCIC program and third party reinsurers) increased by 155% from $86.3 million in 1995 to $220.4 million in 1996. This increase resulted from higher premium volumes on a gross basis as described above, combined with a reduced dependence on quota share reinsurance in both the nonstandard automobile lines (reduced from approximately 25% in 1995 to 0% in 1996) and on crop hail reinsurance. In 1996, Goran's net premiums earned grew to $214.3 million from $76.1 million in 1995. Since the earning of premium follows the term of the respective policies, net premiums earned trails net premiums written. -5- For example, in a growing book of business, net premiums earned will also grow but will lag behind the written premium. In 1996, investment income grew to $7.8 million from $3.5 million in 1995, an increase of approximately 122%. Of this increase, $4.7 million was the result of investment income subsequent to the acquisition of Superior with the remainder due to an increase in the portfolio at Pafco General Insurance Company ("Pafco"). Other income, primarily billing fees, increased to $8.5 million in 1996 from $2.3 million in 1995, the acquisition of Superior generated billing fees of $4.7 million subsequent to the acquisition in 1996 with increased billing fees due to higher volume at Pafco providing the remainder. Net claims incurred increased to $151.4 million in 1996 from $54.2 million in 1995, which increase is more than offset by the increase in net premiums earned. The loss ratio decreased from 71.2% in 1995 to 70.6% in 1996 primarily as a result of improved loss ratios from the crop hail business, which were 74.3% in 1995 and 55.3% in 1996. The loss ratio for the nonstandard automobile business was 73.7% in 1996 compared to 73.8% in 1995. Net commissions expense is composed of three components: (i) commission expense paid to the Company's agents; (ii) commission income from reinsurers, including a 31% commission earned by the Company's crop operations with respect to MPCI; and (iii) underwriting gain or loss on the Company's MPCI business reported by the Company as an adjustment to the Company's commission income on this business. Commissions and operating expenses of $50.4 million in 1996 compared with $16.4 million in 1995, with such expenses increasing proportionately with net premiums earned in the respective years with an expense ratio on this basis of 21.5% in 1995 and 23.5% in 1996. The expense ratio for the nonstandard automobile division decreased to 29.6% in 1996 from 37.5% in 1995. Interest expense in 1996 was $5.0 million compared to $1.8 million in 1995. Increased interest expense in 1996 was due primarily to $2.8 million incurred with the acquisition of Superior from April 30, 1996, increased interest costs at IGF due to growth, offset by the payoff of the Company's debenture holders in November 1996 from the proceeds of the SIG offering. In 1996, income tax expense of $8.1 million relates to a tax provision on income emanating from the U.S. operations compared to a tax provision in 1995 of $2.5 million. Financial Condition The Company's assets have grown to $381.3 million in 1996, up from $160.8 million in 1995. Assets of $165.8 million were obtained in connection with the Superior acquisition. The largest component of assets is investments in bonds and stocks. A breakdown of these investments is highlighted in the Notes to Consolidated Financial Statements. The Company's second largest asset category is accounts receivable. This primarily represents monies held on behalf of our insurance and reinsurance subsidiaries by major third party reinsurance or insurance companies to support outstanding claims and unearned premiums. Receivables from insurance companies were $33.9 million in 1996, compared to $34.8 million in 1995. Total receivables represented 26.6% of total assets in 1996 and 29.4% in 1995. Also included in the above receivables is premium recorded but not yet received from the insured. This is business that has been taken on but the premium has not been paid to us at the date of this statement. Deferred acquisition costs is the amount paid to agents and premium tax that would be refunded to us should all our policies in force be canceled on December 31. The offset is the unearned premium. In 1996 deferred acquisition costs increased to $13.9 million from $7.6 million in 1995. This increase in deferred costs reflects increases in unearned premiums to $91.2 million in 1996 from $33.2 million in 1995. The total liabilities of the Company were $334.1 million in 1996, compared to $148.2 million in 1995. Outstanding claims increased in 1996 to $127.0 million from $87.7 million -6- in 1995, reflecting the acquisition of Superior and an increase in volume in 1996 over 1995, partially offset by a lower loss ratio from 71.2% in 1995 to 70.6% in 1996. Management believes the capital and surplus of IGF is sufficient to support its current level of premiums written. Management expects that additional capital will be necessary to support the growth in nonstandard automobile premiums or reinsurance will be utilized. Should reinsurance not be utilized, such capital is expected to be provided by the insurers' management company, GGS Management, Inc. and through additional debt leverage. The Company is currently in the process of negotiating with its lenders and expects its additional financing needs to be approximately $12.0 million in 1997 should this course be taken. Shareholders' equity has continued to grow, reaching $47.3 million at year-end 1996, compared to $12.6 million at the end of 1995. While shareholders' equity is now $47.3 million, it does not reflect the equity upon which Goran conducts its various insurance operations. The underlying insurance subsidiaries had statutory surplus at December 31, 1996 of: Pafco, $18.1 million; Superior, $57.1 million; IGF, $29.5 million and Granite Re, $15.6 million. This amounts to a total $120.3 million. It is on these equity bases that the Company's insurance business is written. Goran's long term debt increased to $48.0 million in 1996 from $11.1 million in 1995. This increase was the result of the acquisition debt for Superior offset by the payoff of the debentures from the proceeds of the SIG offering. Although total debt increased, the acquisition debt provides better leverage for profitable operations that can be repaid from such operations. [photographs of building down right margin of page] Overview U.S. Operations SIG is now a 67% owned subsidiary of Goran. Last year, it was a wholly owned subsidiary but on November 5, 1996, we took SIG public and listed it on NASDAQ at $12.50 a share and sold 3,450,000 shares. Today, Goran owns 7,000,000 shares of SIG. The subsidiaries of SIG write various lines of insurance, including nonstandard automobile and crop insurance. SIG operates the following companies: Pafco General Insurance Company ("Pafco"), Indianapolis, Indiana, (nonstandard automobile) Superior Insurance Company ("Superior"), Tampa, Florida (nonstandard automobile) Superior American Insurance Company ("Superior American"), Tampa, Florida, (nonstandard automobile) Superior Guaranty Insurance Company ("Superior Guaranty"), Tampa, Florida, (nonstandard automobile) IGF Insurance Company ("IGF"), Des Moines, Iowa - IGF maintains five branches throughout the U.S. (crop insurance) The results of each of these subsidiaries are discussed below, following a general discussion on the consolidated results of the U.S. operations. For the benefit of the reader, it is felt that the entity discussions should center on the specific product lines written by each organization (i.e. nonstandard which encompasses Pafco and the three Superior companies, and crop, which is IGF). Consolidated Results of SIG Gross premium volume for the U.S. operations increased 145.1% to $305.5 million in 1996 versus $124.6 million in 1995. Both product lines showed significant increases in 1996. Net written premiums for 1996 were $209.6 million compared to $53.4 million in 1995. This was an increase of 292.1% resulting from the acquisition of Superior, reduction in Pafco's dependence on quota share reinsurance and growth in crop revenues. This allowed SIG to retain more of the gross premiums being written by its nonstandard automobile segment as well as its crop insurance business. IGF's crop insurance business continued its significant growth during 1996 as a result of the Crop Insurance Reform Act signed into law in October 1994 (the "1994 Reform Act") and the Freedom to Farm Act of 1996 (the "1996 Farm Act"). These two bills -8- [photographs of a building down right margin and across top of page] enabled the crop insurance industry to increase its premium writings from a global of $900 million to $1.5 billion and further growth is anticipated through the introduction of new products like crop revenue coverage ("CRC") and named perils coverage. With increased premium production and normal crop growing seasons, the MPCI business produced good underwriting profits although not as good on an underwriting gain as 1995 (but still very satisfactory). The crop hail business continued to improve and the Company outpaced the entire industry due to its unique in-house adjusted program. Volume for crop hail grew by $11.0 million, or 64.8% in 1996. IGF has broadened its geographical spread to encompass 31 states and through diversification in crops, thus spreading its risk and reducing its exposure to any one peril. IGF also utilizes a unique stop loss reinsurance program through major reinsurers that minimizes the effects of adverse weather conditions in the Company's results. Nonstandard automobile insurance operations experienced a large increase of premium as a result of restructuring Pafco's operations and streamlining of operations. Pafco's volume increased from $49.0 million to $70.0 million from 1995 to 1996. In 1995, Superior produced $95.0 million prior to our owning it. For 1996, we were able to increase the overall volume to $159.0 million (we only take the benefit of that increase from May 1st through December 31st which amounted to $117.0 million). The Company believes that in order for nonstandard auto to be successful it has to be a low cost provider. SIG is an agency writer and therefore the combination of working with its independent agents and automation enables SIG to reduce operating costs which directly effect the bottom line. The acquisition of Superior also brought with it financial partners, financial affiliates through Goldman Sachs which participates for 48% of the activities in our nonstandard automobile division with the controlling 52% held by SIG. Accordingly, we consolidate the results of our nonstandard automobile operation and account for Goldman Sachs' participation as minority interest. The formation of GGS Management Holdings Inc. ("GGSH") where Goldman Sachs' holds their 48% interest and SIG holds its 52% interest is designed to be an acquisition and internal growth vehicle. Pro- forma growth in nonstandard automobile for 1996 grew by 31% over 1995, assuming ownership of Superior since January 1, 1995. Pafco General Insurance Company [Pafco logo] Pafco underwrites nonstandard automobile business through its headquarters in Indianapolis, Indiana. A portion of the business is placed through IGF -9- [photographs of a building down right margin and across top of page] in order to utilize licenses it has in Missouri, Arkansas and Illinois. Pafco's gross written premiums in 1996, excluding crop insurance fronted for IGF, were $70.4 million as compared to $49.0 million in 1995. Net premiums also grew significantly to $68.3 million in 1996 as compared to $34.0 million in 1995. The growth in net premiums was a result of an elimination of quota share reinsurance on the nonstandard automobile business. The pre-tax operating results for 1996 improved to $3.0 million compared to a loss of $2.0 million for 1995. The improvements in operating results for 1996 was a result of a decrease in the loss and expense ratio from 111.3% to 103.1% due to better loss experience and efficiencies in the claims process. Pafco's statutory capital and surplus in 1996 increased to $18.1 million up from $11.9 million in 1995. Superior Insurance Company and Subsidiaries Superior and its subsidiaries, Superior American Insurance Company and Superior Guaranty Insurance Company, underwrite nonstandard automobile business through its offices in Atlanta, Georgia, and Tampa, Florida. Superior's gross written premiums in 1996 were $159.0 million of which $117.0 million were written subsequent to the acquisition on April 30, 1996. Gross written premiums in 1995 were $95.0 million. The increase in premiums was a result of greater marketing efforts and the use of multi-tiered products. Pre-tax operating results for 1996 were $14.7 million of which $9.0 million was realized subsequent to the acquisition. Included in operating results prior to the acquisition was a $1.3 million reduction in claim reserves. Pre-tax operating results for 1995 were $5.8 million. The improvement in operating results in 1996 was a result of a decrease in the loss and expense ratio from 107.6% to 99.5% due to economies of scale, underwriting, and claims efficiencies and technological advancements. Superior's statutory capital and surplus was $57.1 million at December 31, 1996 compared to $49.3 million at December 31, 1995. IGF Insurance Company [IGF Logo] IGF writes principally MPCI and crop hail insurance and provides licenses for Pafco's nonstandard automobile insurance in three states. Although premiums for this coverage are included in IGF, the net profit or loss is transferred to Pafco through reinsurance programs. Gross premiums written for crop insurance in 1996 were $110.1 million as compared to $70.4 million in 1995. IGF's 1996 performance increased significantly as a result of gains in its crop insurance -10- [photographs of a building down right margin and across top of page] business which reflect favorable growing conditions. The 1994 Reform Act and the 1996 Farm Act provided opportunity for the crop insurance industry to increase its premium volumes. IGF benefited from these Acts and also grew at a rate faster than most of its principal competitors due to the marketing efforts of its management team. IGF exceeded industry results on its MPCI and crop hail business, because of its unique underwriting criteria. IGF continued to benefit from its change in 1994 to an in-house adjusting force, which resulted in enhanced effectiveness on adjusting crop claims. By hiring full-time employees to perform this function, IGF has benefited by tighter claims controls and cost savings. IGF's statutory capital and surplus increased in 1996 to $29.5 million from $9.2 million in 1995. The increase in surplus in 1996 related to increases in underwriting profits and a $9.0 million contribution from the proceeds of the offering. Symons International Group, Inc. - Florida ("SIGF") [SIGF logo] Goran's wholly-owned subsidiary, Symons International Group, Inc. - Florida's a specialized surplus lines underwriting unit. Goran writes third party property and casualty coverage using Pafco, IGF and other insurance companies under contract with SIGF. The volume of business grew by 22% however, the underwriting profits were not as good as 1995. SIGF produced an overall loss to the Company of $1.2 million compared to a profit for 1995. Through the implementation of automation, focus on strong underwriting controls, and reorganizing the product lines it is anticipated SIGF will return to profits for 1997. Non-U.S. Operations Granite Insurance Company ("Granite") [Granite logo] Granite is a Canadian federally licensed insurance company which is presently servicing its investment portfolio and a very few outstanding claims. Granite stopped writing business on December 31, 1989 and sold its book of Canadian business in June 1990. The outstanding claims continue to be settled in accordance with actuarial estimates with some redundancies showing in the most recent year. Granite's invested assets reduced to $4.5 million from $5.5 million in 1995. This is the result of settlement of claims and the run-off of outstanding claims. Total outstanding claims decreased to $1.9 million in 1996 from -11- [photographs of a building down right margin of page] $4.7 million in 1995. It is expected that the run-off of outstanding claims will continue at least until 1998. Granite's net earnings were $50,000 in 1996, compared to $200,000 in 1995. This is reflective of the reduction in invested assets, which in turn reduces earnings from investment yields. Investment income in 1996 and 1995 was $500,000. Granite Reinsurance Company Limited ("Granite Re") [Granite Re logo] Granite Re is managed by Atlantic Security of Bermuda and Colybrand in Barbados. Granite Re underwrites finite risk reinsurance, stop loss reinsurance and quota share reinsurance. This reinsurance involves a defined maximum risk at the time of entering into a contract. The Company participates in various programs in Bermuda, United States and Canada. On December 31, 1995 its Canadian quota share terminated and is now in run -off which is expected to yield investment revenue and underwriting gains for the next five to six years. The loss portfolio transfer program that it took on June 30, 1990, is now winding down in accordance with management's forecast and is producing profits as anticipated. During 1995 and 1996, Granite Re participated in certain stop loss programs for Goran's crop subsidiary, IGF. These covers were in accordance with third party placements where Granite Re took a portion after terms having been established by substantial third party reinsurers. Granite Re also participated on numerous small contracts with third parties. On January 1, 1996, it assumed all of the outstanding losses and the book of business of Pafco's premium writings from the surplus lines operation in Florida. Accordingly, Granite Re's gross written premiums are starting to increase again. Gross premiums written during the 12 months ended November 30, 1996 (Granite Re has a year-end different from Goran) were $12.3 million compared to $34.8 million for the corresponding period in 1995. Net income was $2.6 million in 1996 compared to $4.0 million in 1995. During 1996, as a result of the proceeds from the initial public offering of SIG, Granite Re realized a repayment of an outstanding loan from SIG. Granite Re, during 1996, lent Goran $5.5 million which was used by Goran to retire its Eurobond note. Total capital and surplus of Granite Re increased to $15.8 million in 1996 from $13.2 million in 1995. The Company initially started July 1, 1990 with a capital base of $825,000. Granite Re intends to continue to broaden its base to include captive reinsurance, finite reinsurance, and its existing programs as outlined above. The programs currently underwritten by Granite Re generate a loss portfolio that is matched with cash. -12- [photographs of a building down right margin and across top of page] Such portfolios take about eight to nine years to run- off, thus generating investment returns and underwriting gains during the life of the run-off. New business underwritten in 1995 and 1996 is added to the portfolio of outstanding losses and invested assets, thus perpetuating the growth of Granite Re through fees, investment income and underwriting profits. -13- CONSOLIDATED FINANCIAL STATEMENTS As at December 31 (in thousands of US dollars) 1996 1995 Assets Cash and Investments (Note 5) $206,671 $54,366 Accounts Receivable Premiums Receivable 63,874 11,233 Due From Insurance Companies 33,905 34,837 Due From Associated Companies 140 --- Accrued and Other Receivables 3,330 1,231 101,249 47,301 Reinsurance Recoverable on Outstanding Claims 33,113 41,667 Prepaid Reinsurance Premiums 14,983 6,263 Capital Assets (Note 6) 4,801 2,088 Deferred Policy Acquisition Costs 13,860 7,641 Deferred Income Taxes --- 73 Goodwill (Notes 7 and 13) 1,330 --- Other Assets (Notes 7 and 13) 5,335 1,417 $381,342 $160,816 Liabilities and Shareholders' Equity (Note 11) Accounts Payable Due to Insurance Companies $ 5,755 $ 1,986 Due to Associated Companies --- 188 Accrued and Other Payables 21,051 8,310 26,806 10,484 Outstanding Claims (Notes 2(e) and 4) 127,045 87,655 Unearned Premiums (Notes 4) 91,207 33,159 Bank Loans (Note 8) 48,000 5,811 Debentures (Note 9) --- 11,085 Minority Interest in Subsidiaries 41,410 --- 334,084 148,194 Contingent Liabilities and Committments (Note 15) 47,258 12,622 $381,342 $160,816 See accompanying notes to Consolidated Financial Statements Approved on behalf of the board /s/ /s/ Director Director - - - -14- CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 (in thousands of U.S. dollars, except per share data) CONSOLIDATED STATEMENTS OF EARNINGS (in thousands of US dollars except per share data) 1996 1995 REVENUE Gross Premiums Written $307,634 $151,717 Net Premiums Earned $214,346 $ 76,102 Net Investment and Other Income (Notes 4 and 13(a) 16,406 5,872 Total Revenue 230,752 81,974 EXPENSES Net Claims Incurred 151,384 54,193 Commissions and Operating Expenses (Note 17(b)) 50,352 16,352 Interest Expense 4,961 1,761 Total Expenses 206,697 72,306 Earnings Before Undernoted Items 24,055 9,668 Provision for Income Taxes (Note 12) 8,127 2,497 Minority Interest 2,801 --- Earnings Before Unusual Item 13,127 7,171 Unusual Item (Note 3) 18,169 --- Net Earnings After Unusual Item $31,296 $7,171 Earnings Per Share Before Unusual Item $2.48 $1.43 Earnings Per Share $5.92 $1.43 Earnings Per Share - Fully Diluted $5.28 $1.26 See accompanying Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT) 1996 1995 Retained Earnings/(Deficit), Beginning of Year ($3,895) ($11,066) Net Earnings for the Year 31,296 7,171 Retained Earnings/(Deficit), End of Year $27,401 ($3,895) See accompanying Notes to Consolidated Financial Statements -15- CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 (in thousands of U.S. dollars) CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES 1996 1995 Cash Provided By (Used In): Operating Activities Net Earnings $ 31,296 $ 7,171 Items Not Involving Cash: Amortization (note 13) 2,438 693 Minority Interest Share in Net Earnings 2,801 (16) Loss on Sale of Investments 637 198 Gain on Sale of Capital Assets (4) (7) Working Capital Provided by Operating Activities 37,168 8,039 Changes in Working Capital Relating to Operations (Note 18) 30,897 9,637 Financing Activities Reduction of Debentures (11,085) (1,462) Increase of Borrowed Funds 42,189 220 Increase of Minority Interest 38,225 --- Increase in Contributed Surplus 2,775 --- Issue of Share Capital 599 303 72,703 (939) Investing Activities Acquisition of Superior (66,590) --- Net Purchase of Marketable Securities (11,996) (4,147) Net Purchase of Capital Assets (2,459) (1,681) Other, Net 563 155 (80,482) (5,673) Increase in Cash Resources During the Year 23,118 3,025 Cash Resources, Beginning of Year 10,613 7,588 Case Resources, End of Year $33,731 $10,613 Cash Resources are Comprised of: Cash 4,679 4,171 Short-Term Investments 29,052 6,442 $33,731 $10,613 See accompanying Notes to Consolidated Financial Statements - - - -16- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) 1. Organization Goran Capital Inc. ("Goran" or the "Company") is the parent company of the Goran group of companies. The consolidated financial statements include the accounts of all subsidiary companies of Goran, as follows: 1. Symons International Group, Inc. ("SIG") is a 67% owned subsidiary of Goran. SIG is primarily involved in the sale of nonstandard automobile insurance and crop insurance. Its products are marketed through independent agents and brokers, within a 31 state area, primarily in the Midwest and Southern United States. SIG's subsidiaries are as follows: GGS Management Holdings, Inc. ("GGSH") - a holding company for the nonstandard automobile operations which includes GGS Management, Inc., Pafco General Insurance Company and the Superior Insurance Company entities - 52% owned; GGS Management, Inc. ("GGS") - a management company for the nonstandard automobile operations domiciled in Delaware- 52% owned; Superior Insurance Company ("Superior") - an insurance company domiciled in Florida - 52% owned; Superior American Insurance Company ("Superior American") - an insurance company domiciled in Florida - 52% owned; Superior Guaranty Insurance Company ("Superior Guaranty") - an insurance company domiciled in Florida - 52% owned; and Pafco General Insurance Company ("Pafco") - an insurance company domiciled in Indiana - 52% owned; IGF Holdings, Inc. ("IGFH") - a holding company for the crop operations which includes IGF and Hail Plus Corp - 100% owned; IGF Insurance Company ("IGF") - an insurance company domiciled in Indiana - 100% owned; and Hail Plus Corp - an Iowa-based premium finance company - 100% owned. 2. Granite Reinsurance Company Ltd. ("Granite Re") - a finite risk reinsurance company based in Barbados. (100% owned) 3. Granite Insurance Company ("Granite") - a Canadian federally licensed insurance company which ceased writing new insurance policies on January 1, 1990. (100% owned) 4. Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIGF") - a Florida based surplus lines insurance agency. (100% owned) On January 31, 1996, Goran and SIG entered into an agreement with GS Capital Partners II, L.P. ("Goldman Sachs") to create a company, GGSH, to be owned 52% by SIG and 48% by Goldman Sachs. GGSH created GGS, a management company for the nonstandard automobile operations which includes Pafco and the Superior entities. -17- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) On April 30, 1996, GGSH acquired the Superior entities through a purchase business combination. The Company's consolidated results of operations for the year ended December 31, 1996 include the results of operations of the Superior entities subsequent to April 30, 1996, the date of the acquisition. On January 1, 1996, SIG sold its excess and surplus lines insurance operations, SIGF to the Company for book value of $2. Accordingly, no gain or loss was recognized on this transaction in 1996. 2. Summary of Significant Accounting Policies These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in Canada ("Canadian GAAP"). a) Basis of Consolidation The consolidated financial statements include the accounts of Goran and its subsidiary companies. All significant intercompany transactions and balances have been eliminated. b) Premiums Premiums are taken into income evenly over the lives of the related policies. c) Commissions Commission expenses and related reinsurance commission recoveries are recorded at the effective date of the respective insurance policy. d) Deferred Policy Acquisition Costs Deferred policy acquisition costs comprise of agents' commissions, premium taxes and certain general expenses which are related directly to the acquisition of premiums. These costs, to the extent that they are considered recoverable, are deferred and amortized over the same period that the related premiums are taken into income. e) Outstanding Claims The reserve for outstanding claims includes estimates for reported unpaid losses and losses incurred but not reported. Reserves are established using case-basis valuations and statistical analysis as claims are reported. Those estimates are subject to the effects of trends in loss severity and frequency. While management believes the reserves are adequate, the provision for losses are necessarily based on estimates and are subject to considerable variability. Changes in the estimated reserves are charged and credited to operations as additional information on the estimated amount of a claim becomes known during the course of its settlement. The reserve for outstanding claims has been reported on by independent actuaries. The Company's policy regarding the recognition of the time value of money on outstanding claims is as follows: - - - -18- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) i) Direct claims The reserve includes the recognition of the time value of money on direct claims liabilities. Using an interest rate of 7.5% (1995 - 7.5%) net claims incurred have been increased by $66 (1995 - decreased by $161) and outstanding claims at December 31, 1996 reduced by $1,261 (1995 - $1,327). ii) Assumed claims The Company has not recognized the time value of money with respect to assumed claims liabilities over which it does not have direct control over the timing of settlement of the liabilities. If the Company had discounted these claims using an interest rate of 7.5% (1995 - 7.5%) net claims incurred would have been increased by $730 (1995 - increased by $1,147 ) and outstanding claims at December 31, 1996 would have been reduced by $1,618 (1995 - $2,348). f) Investments Investments in bonds, mortgages and debentures are carried at amortized cost providing for the amortization of the discount or premium to maturity date. Investments in short-term investments, real estate, and equities are carried at cost. Gains and losses on disposal of investments are taken into income when realized. When there has been a loss in value of an investment that is other than a temporary decline, the investment is written down to recognize the loss. g) Capital Assets Capital assets are recorded at cost, net of accumulated amortization. Amortization is provided at rates sufficient to amortize the costs over the estimated useful lives of the assets. h) Foreign Currency Translation Foreign currency transaction gains and losses are included in the statement of earnings. Goran and each of its subsidiaries have been determined to be self-sustaining foreign operations and are translated using the current rate method whereby all assets and liabilities are translated into U.S. dollars at the year end rate of exchange and revenue and expense items are translated at the average rate of exchange for the year. The resulting unrealized translation gain or loss is deferred and shown separately in shareholders' equity. These adjustments are not included in operations until realized through a reduction in the Company's net investment in such operations. i) Use of Estimates The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in future as more information becomes known which could impact the amounts reported and disclosed herein. j) Comparative Figures Certain comparative figures have been reclassified to conform to the basis of presentation adopted in 1996. -19- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) 3. Corporate Reorganization, Acquisition and Initial Public Offering In April 1996, Pafco contributed all of the outstanding shares of capital stock of IGF to IGFH, a wholly- owned and newly formed subsidiary of Pafco, and the Board of Directors of IGFH declared an $11,000 distribution to Pafco in the form of cash or $7,500 and a note payable of $3,500 ("Pafco Note"). IGFH borrowed the $7,500 portion of the distribution from a bank ("IGFH Note"). The notes were paid in full from the proceeds of the Offering. Following the distribution, Pafco distributed all of the outstanding common stock of IGFH to SIG. Although SIG believes the plan of reorganization or spin off did not result in gain or loss, no assurance can be given that the Internal Revenue Service will not challenge the transaction. On January 31, 1996, the Company and SIG entered into an agreement ("Agreement") with Goldman Sachs to create GGSH, to be owned 52% by the Company and 48% owned by the Goldman Sachs. In accordance with the Agreement, on April 30, 1996, the Company contributed certain capital assets and Pafco with a combined book value, determined in accordance with generally accepted accounting principles, of $17,186, to GGSH. Goldman Sachs contributed $21,200 to GGSH, in accordance with the Agreement. In return for the cash contribution of $21,200, Goldman Sachs received a minority interest share in GGSH at the date of contribution of $18,425, resulting in a $2,775 increase to contributed surplus from the sale of Pafco common stock and certain assets. In connection with the above transactions, GGSH acquired (the "Acquisition") all of the outstanding shares of common stock of Superior and its wholly-owned subsidiaries, domiciled in Florida, (collectively referred to as "Superior") for cash of $66,550. In conjunction with the Acquisition, the Company's funding was through a senior bank facility of $48,000 in addition to the cash contribution from Goldman Sachs. Assets Acquired: Cash and Investments $118,665 Accounts Receivable 34,933 Deferred Policy Acquisition Costs 7,925 Other Assets 4,303 Total 165,826 Liabilities Assumed: Outstanding Claims 44,423 Unearned Premiums 45,280 Accrued and Other Payables 10,863 Total 100,566 Net Assets Acquired 65,260 Purchase Price 66,590 Goodwill $1,330 - - - -20- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars, except per share data) Goodwill is amortized over a 25-year period on a straight-line basis based upon management's estimate of the expected benefit period. SIG's results from operations for the year ended December 31, 1996 include the results of Superior subsequent to April 30, 1996. On November 5, 1996, SIG sold 3,000,000 shares at $12.50 per share in an initial public offering ("IPO") of common stock. An additional 450,000 shares were sold in December 1996 representing the exercise of the overallotment option. SIG generated net proceeds after underwriter's discount and expenses, of $37,969 from the offering, the proceeds of which were used to repay the IGFH and Pafco Notes, repay indebtedness to Goran and Granite Re of approximately $7,500 and pay Goran a dividend of $3,500. The Company used its proceeds to pay off the debentures (see Note 9). Assuming that these transactions took place (including the IPO) at January 1, 1995 or at January 1, 1996, the pro-forma effect of these transactions would result in summarized company consolidated statements of operations as follows: 1996 1995 (unaudited) Revenues $274,837 $189,233 Net Earnings $ 33,487 $ 9,435 Net Earnings Per Common Share $ 6.33 $ 1.88 The pro-forma results are not necessarily indicative of what actually would have occurred if these transactions had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results. As a result of the IPO, the Company effectively disposed of a 33% interest in SIG. The change in the Company's share of SIG's net identifiable assets at the time of the IPO, represented by the Company's 67% proportionate interest in the net IPO proceeds over the 33% proportionate share of the book value of SIG disposed, amounts to a gain of $18,169 and is reported as unusual income. 4. Reinsurance a) The Company's insurance subsidiaries follow a policy of underwriting and reinsuring contracts of insurance which limits their liability to a maximum amount on any one claim for nonstandard automobile of $220 (1995 - $220) in Canada, and $250 (1995 - $250) in the U.S., with the result that unearned premiums and outstanding claims are stated net of reinsurance. The crop division reinsures losses through stop loss in excess of 80% loss ratio for crop hail and 100% loss ratio for MPCI. As the primary insurers, the Company's insurance subsidiaries maintain the principal liability to the policyholder. b) The effect of reinsurance on the activities of the Group can be summarized as follows: 1996 Gross Ceded Net Premiums Written $307,634 $ (87,202) $220,432 Premiums Earned 308,650 (94,304) 214,346 Incurred Losses and Loss Adjustment Expenses 242,992 (91,608) 151,384 Commission Expense 48,601 (44,096) 4,505 (Note 17(b)) Outstanding Claims 127,045 (33,113) 93,932 Unearned Premiums 91,207 (14,983) 76,224 -21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) 1995 Gross Ceded Net Premiums Written $151,717 $ (65,357) $ 86,360 Premiums Earned 145,366 (69,264) 76,102 Incurred Losses and Loss Adjustment Expenses 148,001 (93,808) 54,193 Commission Expense 25,069 (25,950) (881) (Note 17(b)) Outstanding Claims 87,655 (41,667) 45,988 Unearned Premiums 33,159 (6,263) 26,896 c) On June 30, 1991 Granite Re assumed an outstanding claims portfolio of $22,630, with loss dates of May 31, 1990 and prior, and received a bond and short-term investment portfolio with a value of $22,546. The December 31, 1996 balances in the claims portfolio and the investment portfolio are $1,353 (1995 - $3,509) and $1,884 (1995 - $4,761) respectively. This portfolio has been deposited with a Canadian trust company to support the liabilities assumed. The invested funds are used to settle claims liabilities as they become due. 5. Cash and Investments 1996 1995 Book Value Market Value Book Value Market Value Cash $ 4,679 $ 4,679 $ 4,171 $ 4,171 Short-Term Investments 29,052 29,052 6,442 6,442 Equities 28,075 28,729 6,421 6,069 Bonds and Debentures 137,812 138,383 27,949 28,080 Mortgages 2,430 2,430 3,583 3,583 Real Estate 4,548 4,548 3,922 3,922 Other Loan receivable 75 75 1,878 1,878 Total Cash & Investments $206,671 $207,896 $54,366 $54,145 a) At December 31, 1996, cash and investments of approximately $41,659 (1995 - $20,510) are on deposit or held in trust by cedents, and to a limited amount regulatory authorities, to secure certain of the outstanding claims of the Company. b) The Company realized a net gain of $637 (1995 - $198) from the sale of investments during the year, and recorded an unrealized loss of $NIL (1995 - $58) on equities. The carrying value of equities and bonds held at December 31, 1996 includes a provision of $69 (1995 - $357) for investments considered to have a decline in value that is other than temporary. Where market value is not readily determinable, book value is used as an approximation. c) As part of the sale of a subsidiary in 1990, the Company and its subsidiaries invested in junior subordinated participating debentures of the purchaser maturing on January 1, 1996 equivalent to $2,007 bearing interest at a rate of 10% per annum, and preferred shares of a subsidiary of the purchaser. The debentures and shares were redeemed by the issuer during 1995. - - - -22- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) 6. Capital Assets 1996 1995 Accumulated Cost Amortization Net Net Furniture, $8,709 $3,921 $4,788 $2,074 Fixtures and Equipment Automobiles 70 57 13 15 Total $8,779 $3,978 $4,801 $2,088 See also Note 13. 7. Goodwill and Intangible Assets Included in other assets are intangible assets composed of deferred debt issuance costs of $1,232 (1995 - $155 ) and organizational costs (GGSH) of $1,527 (1995 - $NIL). Deferred debt issuance costs are amortized over the term of the debt (six years). Organizational costs are amortized over five years. Amortization of intangible assets were $510 and $144 in 1996 and 1995, respectively. Goodwill is composed of $1,330 (1995 - $NIL) arising from the acquisition of Superior. Goodwill is amortized on a straight-line basis over twenty-five years. Amortization of goodwill was $95 and $63 in 1996 and 1995, respectively. 8. Bank Loans a) IGF maintained a secured revolving line of credit, bearing interest at prime plus 25 basis points, in the amount of $7,000 at December 31, 1996. Interest on this line of credit was at the New York prime rate (8.25% at December 31, 1996) plus 0.25% adjusted daily. This line is collateralized by the crop-related uncollected premiums, reinsurance recoverable on paid losses, Federal Crop Insurance Corporation (FCIC) annual settlement and FCIC premium tax recoverables, and a first lien on the real estate owned by IGF. The line requires IGF to maintain its primary banking relationship with the issuing bank, limits dividend payments and capital purchases and requires the maintenance of certain financial ratios. At December 31, 1996, IGF was in compliance with all covenants associated with the line, except the covenant pertaining to certain investments as a percentage of total admitted assets, for which IGF obtained a waiver. The weighted average interest rate on the line of credit was 8.6% and 9.7% during 1996 and 1995, respectively. At December 31, 1996, IGF had outstanding borrowings in the amount of $NIL (1995 - $5,811). b) The term debt at GGS, with an outstanding principal balance of $48,000, matures on April 30, 2002, and will be repaid in 11 consecutive semiannual installments, the first of which will occur on the first anniversary of the closing date. The first installment of principal repayments will be $3,128 and $2,886 in 1997, respectively, with the remaining annual -23- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars, except share data) installments over the term of the debt to be paid as follows: 1998 - $6,494; 1999 - $7,938; 2000 - $9,742; 2001 - $11,612; and 2002 - $6,200. Interest on the term debt is payable quarterly at LIBOR plus 2.75%. In 1996, SIG entered into an interest rate swap agreement to protect SIG against interest rate volatility. As a result, SIG fixed its interest rate on the term debt at 8.31% through November 1996, 8.85% through January 1997, 9.08% through April 1997, 9.24% through July 1997 and 8.80% through October 1999. The term debt is collateralized by a pledge of all of the tangible and intangible assets of GGS, including all of the outstanding shares of capital stock of Pafco and Superior. This term debt is not guaranteed by SIG or Goran. As of December 31, 1996, GGS was in default of three covenants in the term debt. The commercial bank lenders under the term debt have either amended the agreement to eliminate the default or have agreed in writing such default has been cured. The first covenant required Pafco and Superior to maintain a combined ratio of statutory net premiums written to surplus of 3:1. While there can be no assurance that GGS will have in the future sufficient cash flow after satisfaction of its debt service requirements to permit GGS to infuse sufficient capital into its insurance subsidiaries to permit them to maintain a ratio of net premiums written to surplus not in excess of 3:1, the Company believes that it or GGS will be able either to contribute additional capital to Pafco and Superior or, if necessary, to obtain reinsurance, reduce premium writings or obtain additional financing in order to permit them to satisfy this covenant in future years. The second covenant violation relates to insufficient funds posted by Granite Re to cover its obligations under reinsurance treaties with Pafco. Granite Re posted sufficient funds early in March 1997 and GGS does not expect future violations of this covenant to occur. The third covenant violation relates to Superior's risk based capital ratio being less than 3:1 due to growth in premium writings. The commercial bank lenders have amended the agreement to cure this violation. 9. Debentures The debentures were paid in full in 1996 from the proceeds of the SIG offering. At December 31, 1996, the Company had secured and unsecured notes in the amount of $11,085. 10. Capital Stock The Company's authorized share capital consists of: First Preferred Shares An unlimited number of first preferred shares of which none are outstanding at December 31, 1996 (1995 - NIL). Common Shares An unlimited number of common shares of which 5,405,820 are outstanding as at December 31, 1996 (1995 - 5,060,229). During the year, pursuant to the exercise of warrants and options, the Company issued 341,591 (1995 - 141,450) common shares for aggregate consideration in the amount of $599 (1995 - $303). - - - -24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars, except share data) The Company has reserved for issue 709,149 (1995 - 774,035) common shares consisting of: a) 182,250 (1995 - 337,625) shares issuable on the exercise of warrants for the purchase of common shares at $2.19 per share, issued to former debenture holders; and b) 526,899 (1995 - 436,410) shares pursuant to the employee incentive share option plan as follows: Number of Shares Exercise Price Expiry Date 157,500 1.15 September 15, 1997 47,049 1.81 March 8, 1998 48,000 3.83 July 14, 1999 52,364 5.29 April 25, 2000 8,000 8.03 December 7, 2000 213,986 12.05 May 13, 2001 526,899 c) On November 1, 1996 SIG adopted the SIG 1996 Stock Option Plan. The SIG 1996 Stock Option Plan provides authority to grant nonqualified stock options and incentive stock options to officers and key employees of SIG and its subsidiaries and nonqualified stock options to nonemployee directors of SIG and Goran. A total of 1,000,000 shares of common stock have been reserved for issuance under the SIG 1996 Stock Option Plan. On November 1, 1996, SIG issued 830,000 stock options to the Company's nonemployee directors and certain Goran directors and certain officers, and certain other key employees of SIG and Goran. The options were granted an exercise price equal to the initial public offering price of SIG's common stock. SIG has granted (i) options to purchase 20,000 shares of commons stock to the nonemployee directors of SIG, (ii) options to purchase 791,000 shares of common stock to officers and key employees of SIG and its subsidiaries, (iii) options to purchase 6,000 shares of common stock to certain nonemployee directors of Goran and (iv) options to purchase 13,000 shares of common stock to certain employees of Goran and its subsidiaries who have provided valuable service or assistance for the benefit of SIG and its subsidiaries. The options granted to the Company's Chairman vest and become exercisable in full of the first anniversary of the grant date. All of the remaining outstanding stock options vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant. GGS Holdings Stock Option Plan. The Board of Directors of GGSH adopted the GGS Management Holdings, Inc. 1996 Stock Option Plan (the "GGS Stock Option Plan"), effective as of April 30, 1996. Issued and outstanding shares of GGSH's common stock (on a fully diluted basis assuming exercise in full of all options) may be made the subject of options granted under the GGS Stock Option Plan. A total of 111,111 shares of common stock of GGSH have actually been reserved for issuance under the GGS Stock Option Plan, which authorizes the grant of nonqualified and incentive stock options to such officers and other key employees as may be designated by the Board of Directors of GGSH. Stock options of 55,972 were granted in 1996. Stock options granted under the GGS Stock Option Plan will be exercisable at such times and at such exercise prices as the Board of Directors of GGSH shall determine, but in any event not prior to the earlier of (i) an initial public offering of GGSH, and (ii) a GGSH Sale, as defined, and not later than ten years from the date of the grant. Options granted under the GGS Stock Option Plan vest at a rate of 20% per year for five years after the date of the grant. The exercise price of options granted as of April 30, 1996 is, with respect to 50% of the shares subject to each such option, $44.17 per share. The exercise price per share for the remaining 50% is $44.17, subject to a compound annual increase in the exercise price of 10% over the five year vesting period. The exercise price of any options granted under the GGS Stock Option Plan after NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) April 30, 1996, will be subject to a similar formula, with 50% of the shares subject to any such option having an exercise price of $44.17 and the other 50% having an exercise price which increases on each anniversary of the date of the grant over the five year vesting period. No option granted under the GGS Stock Option Plan is transferable by the option holder other than by the laws of descent and distribution. Shares received upon exercise of such an option are not transferable except as provided in the Stockholders Agreement among the Company and Goldman Sachs. 11. Shareholders' Equity Shareholders' equity is comprised of the following components: 1996 1995 Capital Stock $17,416 $16,875 Contributed Surplus 2,775 --- Retained Earnings (Deficit) 27,401 (3,895) Cumulative Translation Adjustment (334) (358) Shareholders' Equity $47,258 $12,622 12. Income Taxes The provision for (recovery of) income taxes is analyzed as follows: 1996 1995 Consolidated Net Earnings Before Income Taxes $39,423 $9,668 Income Taxes at Canadian Statutory Rates 17,480 4,287 Effect on Taxes Resulting From: Tax Exempt Income (1,078) (1,571) US Statutory Rate Differential (1,339) (750) Application of Losses Carried Forward and Reserves (6,042) (399) Non-taxable portion of Gain (2,014) --- Operating Loss for Which No Current Income Tax Benefit is Recognized 1,023 785 Deferred Income Taxes 73 145 Other, Net 24 --- $8,127 $2,497 At December 31, 1996, the Company's Canadian subsidiary had reserves, unclaimed for income tax purposes, of $1,027 (1995 - $2,161). In addition, the Company and its consolidated subsidiaries have operating loss carry forwards of approximately $12,591 for tax purposes which expire primarily after 1996. The Company also has net capital losses carried forward of approximately $8,097 which can be applied to reduce income taxes on any future taxable capital gains. The potential tax benefit of the reserves and losses carried forward have been recorded in these financial statements to the extent of the tax benefit of $6,042 realized as a reduction of deferred tax liability that would otherwise have been incurred on the unusual income. - - - -26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) 13. Amortization The Company recorded amortization for the year as follows: 1996 1995 Amortization of: Goodwill $ 95 $ 63 Capital Assets 1,811 483 Investments 22 3 Other Assets 510 144 $2,438 $693 14. Related Party Transactions a) In 1989, the Company wrote off a loan of $5,135 owed by a subsidiary of Symons International Group Ltd. ("SIGL"). SIGL, the majority shareholder of Goran, guaranteed this loan and pledged 1.2 million escrowed common shares of Goran (the "escrowed shares") as security for the loan. During 1994 SIGL entered into agreements with Goran whereby as consideration for the release of 766,600 of the escrowed shares, SIGL repaid $1,465 of the loan. The balance due to Goran of $3,670 continues to be guaranteed by SIGL and is secured by the 433,400 remaining escrowed shares. b) Included in other receivables are $595 (1995 - $563) due from certain shareholders and directors which relate to the purchase of common shares of the Company. Approximately half of the amounts due bear interest and are subject to principal repayment schedules. The Company also provided, indirectly, an officer with a second mortgage on a residence in the amount of $278 which bears interest at 7% (1995 - $278) which was repaid in full in February 1997. 15. Contingent Liabilities and Commitments a) The Company, and its subsidiaries, are named as defendants in various lawsuits relating to their business. Legal actions arise from claims made under insurance policies issued by the subsidiaries. These actions were considered by the Company in establishing its loss reserves. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. b) IGF is responsible for the administration of a run-off book of business. The Federal Crop Insurance Corporation ("FCIC") has requested that IGF take responsibility for the claim liabilities under its administration of these policies and IGF has requested reimbursement of certain expenses from the FCIC with respect to this run-off activity. It is the Company's opinion, and that of its legal counsel, that there is no liability on the part of the Company for claim liabilities of other companies under IGF's administration. c) SIG received a commitment from a commercial bank which provided funds to certain executives and a director of SIG to purchase 69,500 shares in the Directed Share Program in SIG's Offering. SIG agreed to guarantee 100% of the aggregate principal amount, including unpaid accrued interest, extended by the commercial bank under this commitment. The amount of SIG's guarantee under this commitment is approximately $869. -27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) d) IGF has entered into a purchase agreement to acquire an office building in Des Moines, Iowa, to be used as its crop insurance division home office. The purchase price was $2.6 million, of which $2.4 million was escrowed on February 1, 1997. The terms include a floating closing date whereby the transaction will close on the earlier of February 1, 1998 or thirty days after the closing of IGF's currently occupied home office building, also located in Des Moines. The purchase of the new building is not contingent on the sale of the current building. 16. Segmented Information
1996 Canada United States United States Other Foreign Eliminations Consolidated Crop Nonstandard Auto Gross Written Premiums $ --- $110,059 $195,440 $12,753 ($10,618) $307,634 Net Premiums Earned $ 98 $ 23,013 $168,746 $22,685 $ 0 $214,346 Segmented Operating Profit $ 983 $ 12,141 $ 58,159 $ 9,813 $ (1,728) $ 79,368 General Expenses 3,149 2,110 52,312 7,382 (1,513) 63,440 Minority Interest --- --- 2,801 ---- --- 2,801 Unusual Income 18,169 --- --- ---- --- 18,169 Net Earnings $16,003 $10,031 $ 3,046 $ 2,431 $ (215) $31,296 Identifiable Assets $ 5,784 $72,916 $267,253 $ 45,197 $ (9,808) $381,342 1995 Canada United States United States Other Foreign Eliminations Consolidated Crop Nonstandard Auto Gross Written Premiums $ --- $ 67,828 $ 54,260 $34,837 ($ 5,208) $151,717 Net Premiums Earned $ (84) $ 11,608 $ 38,034 $26,544 $ --- $ 76,102 Segmented Operating Profit $ 1,900 $ 447 $ 13,910 $12,898 $ (1,374) $ 27,781 General Expenses 3,746 (7,122) 15,934 9,356 (1,304) 20,610 Net Earnings (Loss) (1,846) 7,569 $ (2,204) $ 3,542 $ (70) $ 7,171 Identifiable Assets $ 6,884 $59,733 $ 47,372 $ 55,921 $ (9,094) $160,816
The Canadian results are comprised of the operations of Goran as an entity which incurred a loss of $2,084 (1995 - loss of $1,472), the run-off insurance activities of Granite which incurred a loss of $82 (1995 - loss of $374) and the gain of $18,169 (1995-$NIL) resulting from the SIG IPO. Segmented operating profit is composed of premiums earned, plus investment and other income net of claims incurred. - - - -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) General expenses are composed of commissions and operating expenses, interest and income taxes. The United States results are comprised of the consolidated operations of SIG and SIGF Other foreign results are comprised of the operations of Granite Re. See also Note 1. 17. Regulatory Matters a) Goran's insurance subsidiaries are subject to certain requirements and restrictions in accordance with the regulations of their respective jurisdictions. Statutory regulations require that the subsidiaries maintain a minimum amount of capital to support outstanding insurance in force and new premium writing. This requirement and other regulations in the respective jurisdictions, restricts the amount of dividends payable in any year by the subsidiaries to the parent. The statutory surplus of the Company's active insurance subsidiaries at December 31, 1996 amounted to $120,229 (1995 - $34,436). Subsequent to Board of Directors and regulatory approval, IGF declared and paid in December, 1995 an extraordinary dividend to Pafco in the amount of $2,000 on the convertible preferred stock owned by Pafco. In December, 1995, upon Board of Directors and regulatory approval, Pafco declared and paid to SIG a $1,500 dividend on the common stock owned by SIG. b) Superior, Pafco and IGF, domiciled in Florida and Indiana, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Indiana Department of Insurance ("IDOI") or the Florida Department of Insurance ("FDOI"). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. IGF received written approval from IDOI to reflect its business transacted with the FCIC as a 100% cession with any net underwriting results recognized in ceding commissions for statutory accounting purposes, which differs from prescribed statutory accounting practices. As of December 31, 1996, that permitted practice had no effect on statutory surplus or net earnings. The net underwriting results, included in commissions and operating expenses, for the years ended December 31, 1996 and 1995 were a gain of $12,277 and $9,653, respectively. 18. Changes in Working Capital Relating to Operations 1996 1995 Increase in Accounts Receivable $(19,448) $(6,252) Decrease (Increase) in Reinsurance Recoverable on Outstanding Claims 8,464 (25,930) Decrease (Increase) in Prepaid Reinsurance Premiums (8,785) 916 Decrease (Increase) in Deferred Policy Acquisition Costs 1,649 (3,058) Decrease in Deferred Income Taxes 73 147 Increase in Other Assets (2,433) (470) Increase (Decrease) in Accounts Payable 5,576 (2,291) Increase (Decrease) in Outstanding Claims (4,545) 29,289 Increase in Unearned Premiums 13,178 9,247 $(6,271) $1,598 -29- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) 19. Reconciliation of Canadian GAAP and United States Generally Accepted Accounting Principles ("U.S. GAAP") and Additional Information The consolidated financial statements are prepared in accordance with Canadian GAAP. Material differences between Canadian and U.S. GAAP are described below: (a) Earnings and retained earnings 1996 1995 Net Earnings in Accordance with Canadian GAAP $31,296 $7,171 Add Effect of Difference in Accounting for: Deferred Income Taxes (see Note (d)) (64) (344) Outstanding Claims (see Note (e)) 62 (161) Net Earnings in Accordance with US GAAP $31,294 $6,666 Applying U.S. GAAP, deferred income tax assets would be increased by $1,357 and $1,466, outstanding claims would be increased by $1,261 and $1,327, and cumulative translation adjustment would be increased by $41 and $36 as at December 31, 1996 and 1995, respectively. As a result of these adjustments, retained earnings would be increased by $96 and $139 as at December 31, 1996 and 1995, respectively. The effect of the above noted differences on other individual balance sheet items and on working capital is not significant. (b) Earnings per share Earnings per share, as determined in accordance with U.S. GAAP are set out below. Primary earnings per share are computed based on the weighted average number of common shares outstanding during the year plus common share equivalents consisting of stock options and warrants. Primary and fully diluted earnings per share are calculated using the Treasury Stock method and assume conversion of securities when the result is dilutive. The following average number of shares were used for the compilation of primary and fully diluted earnings per share: 1996 1995 Primary 5,724,476 5,567,644 Fully Diluted 5,724,476 5,567,644 Earnings per share, as determined in accordance with U.S. GAAP, are as follows: 1996 1995 Primary Earnings Per Share $5.47 $1.20 Fully Diluted Earnings Per Share $5.47 $1.20 - - - -30- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) (c) Supplemental cash flow information Cash paid for interest and income taxes is summarized as follows: 1996 1995 Cash Paid for Interest $4,005 $1,548 Cash Paid for Income Taxes, Net of Refunds $9,825 $1,953 (d) Income taxes The difference in accounting for deferred income taxes reflects the adoption for U.S. GAAP, effective January 1, 1993, of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported in the balance sheet. Deferred tax assets recognized under Canadian GAAP, which require realization beyond a reasonable doubt in order to record the assets, amounted to $NIL and $73 at December 31, 1996 and 1995, respectively, and pertained to Canadian operations only. The adoption of SFAS No. 109 results in additional deferred tax assets recognized for deductible temporary differences and loss carry-forwards in the amount of $3,531 and $2,581 net of valuation allowances of $NIL and $69 and deferred tax liabilities recognized for taxable temporary differences in the amount of $2,174 and $1,114 at December 31, 1996 and 1995, respectively. (e) Outstanding claims The difference in accounting for outstanding claims reflects the application for U.S. GAAP of SEC Staff Accounting Bulletin No. 62, "Discounting by Property/Casualty Insurance Companies". This standard does not allow discounting of unpaid claim liabilities by public companies, except in specific circumstances that are not applicable to the Company. (f) Receivables from sale of capital stock The SEC Staff Accounting Bulletins require that accounts or notes receivable arising from transactions involving capital stock should be presented as deductions from shareholders' equity and not as assets. Accordingly, in order to comply with U.S. GAAP, shareholders' equity would be reduced by $595 and $563 as at December 31, 1996 and 1995, respectively, to reflect the loans due from certain shareholders which relate to the purchase of common shares of the Company. -31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 (in thousands of US dollars) (g) Unrealized loss on investments U.S. GAAP require that unrealized losses on investment portfolios be included as a component in determining shareholders' equity. In addition, SFAS No. 115 permits prospective recognition of unrealized gains on investment portfolios for year-ends commencing after December 15, 1993. As a result, shareholders' equity would be increased by $1,225 and reduced by $221 as at December 31, 1996 and 1995, respectively. As the Company classifies its debt and equity securities as available for sale, the adoption of SFAS No. 115 in 1994 has no effect on net earnings. (h) Changes in shareholders' equity A reconciliation of shareholders' equity from Canadian GAAP to U.S. GAAP is as follows: 1996 1995 Shareholders' Equity in Accordance with Canadian GAAP $47,258 $12,622 Add (Deduct) Effect of Difference in Accounting For: Deferred Income Taxes (See Note (a)) 1,357 1,466 Outstanding Claims (See Note (a)) (1,261) (1,327) Receivables From Sale of Capital Stock (See note (f)) (595) (563) Unrealized Gain (Loss) on Investments (See Note (g)) $1,225 $(221) Shareholders' Equity in Accordance with U.S. GAAP $47,984 $11,977 - - - -32- FORWARD-LOOKING STATEMENTS The statements contained in this Annual Report which are not historical facts, including but not limited to, statements concerning (i) the impact of federal and state laws and regulations on the Company's business and results of operations, (ii) the competitive advantage afforded to the Company's crop insurance operations by approaches adopted by management in the areas of information, technology, claims handling and underwriting, (iii) the sufficiency of the Company's cash flow to meet the operating expenses, debt service obligations and capital needs of the Company and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense Reimbursements on the Company's results of operations, are forward-looking statements. The company desires to take advantage of the "safe harbor" afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. Such cautionary statements which discuss certain risks associated with the Company's business including the variability of the results of operations of the Company's crop insurance business as a result of weather and natural perils, the highly competitive nature of both the Company's crop insurance and nonstandard automobile insurance business and the effects of state and federal regulation, the capital intensive nature of the property and casualty business and potential limitations on the ability of the Company to raise additional capital set forth under the heading "Forward-Looking Statements -- Safe Harbor Provisions" in Item 1 - Business in the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996. MANAGEMENT RESPONSIBILITY Management recognizes its responsibility for conducting the Company's affairs in the best interests of all its shareholders. The consolidated financial statements and related information in this Annual Report are the responsibility of management. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which involve the use of judgement and estimates in applying the accounting principles selected. Other financial information in this Annual Report is consistent with that in the consolidated financial statements. The Company maintains systems of internal controls which are designed to provide reasonable assurance that accounting records are reliable and to safe-guard the Compnay's assets. The independent accounting firm of Coopers & Lybrand L.L.P. has audited and reported on the Company's financial statements. Their opinion is based upon audits conducted by them in accordance that the consolidated financial statements are free of material misstatements. The Audit Committee of the Board of Directors, the members of which include outside directors, meets with the independent external auditors and management representative to review the internal accounting controls, the consolidated financial statements and other financial reporting matters. In addition to having unrestricted access to the books and records of the Company, the independent external auditors also have unrestricted access to the Audit Committee. The Audit Committee reports its findings and makes recommendations to the Board of Directors. Alan G. Symons Chief Executive Officer /s/ Gary P. Hutchraft Gary P. Hutchraft Vice Presidnet and Chief Financial Officer March 21, 1997 - - - -33- AUDITORS' REPORT To the Shareholders of Goran Capital Inc. [Large Goran Logo] We have audited the consolidated balance sheets of Goran Capital Inc. as at December 31, 1996 and 1995 and the consolidated statements of earnings, retained earnings (deficit) and changes in cash resources for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on lity is to express an opinion onadoption for U.S. GAAP, effective January 1, 1993, of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported in the balance sheet. Deferred tax assets recognized under Canadian GAAP, which require realization beyond a reasonable doubt in order to record the assets, amounted to $NIL and $73 at December 31, 1996 and 1995, respectively, and pertained to Canadian operations only. The adoption of SFAS No. 109 results in additional deferred tax assets recognized for deductible temporary differences and loss carry-forwards in the amount of $3,531 and $2,581 net of valuation allowances of $NIL and ion for the years then ended in accordance with generally accepted accounting principles. Toronto, Ontario March 21, 1997 Chartered Accountants MARKET INFORMATION The Company's common shares began trading on the Toronto Stock Exchange under the symbol "GNC" in 1986. The Company's common shares began trading on the NASDAQ National Market under the symbol "GNCNF" on November 8, 1994. As of December 31, 1996 there were approximately 105 Common shareholders of record, including many brokers holding shares for the individual clients. The number of individual shareholders on the same date is estimated at 900. The number of common shares outstanding on December 31, 1996 totaled 5,405,820. Information relating to the common shares is available through the NASDAQ National Market system and the Toronto Stock Exchange. The following table sets forth the high and low closing sale prices for the common shares for each quarter of 1995 and 1996. Toronto Stock Exchange 1996 1995 Quarter Ended High Low High Low March 31 14.02 8.76 6.19 4.92 June 30 14.05 10.59 6.10 5.37 September 30 19.35 11.32 7.10 6.10 December 31 20.26 16.79 8.74 7.47 NASDAQ 1996 1995 Quarter Ended High Low High Low March 31 13.125 8.625 6.250 3.800 June 30 13.125 10.750 6.125 5.125 September 30 19.375 11.125 7.125 5.250 December 31 22.000 17.000 8.750 6.625 Dividend Policy Since 1988, the Company has not paid a dividend on its stock. The Company has no present intention to pay dividends on its common stock. Directors G. Gordon Symons Hamilton, Bermuda Chairman of the Board Goran Capital Inc. J. Ross Schofield Toronto, Ontario President Schofield Insurance Brokers David B. Shapira Toronto, Ontario President Medbers Limited Douglas H. Symons Indianapolis, Indiana Vice President and Chief Operating Officer *James G. Torrance, Q.C. Toronto, Ontario Partner Emeritus Smith, Lyons, Barristers & Solicitors *John K. McKeating Toronto, Ontario Partner Vision 2120, Inc. *Alan G. Symons Toronto, Ontario President and Chief Executive Officer Goran Capital Inc. *Members of Audit Committee Officers G. Gordon Symons Chairman of the Board Alan G. Symons President and Chief Executive Officer Douglas H. Symons Vice-President and Chief Operating Officer Gary P. Hutchcraft, C.P.A. Vice President and Chief Financial Officer David L. Bates, J.D., C.P.A. Vice President and General Counsel Professionals and Agents Actuaries Tillinghast Philadelphia, Pennsylvania J.S. Cheng & Partners Inc. Toronto, Ontario Trustee and Registrar Montreal Trust Company of Canada Toronto, Ontario Auditors Schwartz Levitsky Feldman Chartered Accountants Toronto, Ontario Coopers and Lybrand, L.L.P. Indianapolis, Indiana Managers - Granite Reinsurance Company Ltd. Atlantic Security Ltd. Hamilton, Bermuda Subsidiaries and Branch Offices Head Office Canada Goran Capital Inc. 181 University Avenue Box 11, Ste 1101 Toronto, Ontario Canada M5H 3M7 Tel: 416-594-1155 Fax: 416-594-0711 Head Office U.S. Goran Capital Inc. 4720 Kingsway Drive Indianapolis, IN 46205 Tel: 317-259-6400 Fax: 317-259-6395 Shareholder Information Stock Exchange Listings The common shares are listed on The Toronto Stock Exchange (GNC) and on NASDAQ (GNCNF). Annual Meeting The Annual Meeting of Shareholders will be held on May 21, 1997 at 181 University Avenue, Ste 1101, Toronto, Ontario. Shareholder Inquiries Inquiries should be directed to: Alan G. Symons President and Chief Executive Officer Goran Capital Inc. Tel: 416-594-1155 (Canada) 317-259-6302 (U.S.) Subsidiaries and Branches Granite Insurance Company 181 University Avenue, Box 11, Ste 1101 Toronto, Ontario Canada M5H 3M7 Tel: 416-594-1155 Fax: 416-594-0711 Symons International Group, Inc. 4720 Kingsway Drive Indianapolis, IN 46205 Tel: 317-259-6300 Fax: 317-259-6395 Pafco General Insurance Company 4720 Kingsway Drive Indianapolis, Indiana 46205 Tel: 317-259-6300 Fax: 317-259-6395 Symons International Group, Inc. (Florida) 5900 North Andrews Drive Suite 800 Fort Lauderdale, Florida 33309 Tel: 954-772-5061 Fax: 954-772-9873 Superior Insurance Company 280 Interstate North Circle N.W. Atlanta, Georgia Tel: 770-952-4885 Fax: 770-9567504 Superior Insurance Company 3030 N. Rocky Point Drive, Ste 770 Tampa, Florida 33607 Tel: 813-281-2444 Fax: 813-281-8036 Superior Insurance Company 1745 W. Orangewood Road Orange, CA 92868 Tel: 714-978-6811 Fax: 714-978-0353 IGF Insurance Company 2882 106th Street Des Moines, Iowa 50322 Tel: 515-276-2766 Fax: 515-276-8305 IGF North 208 S. Main Stanley, North Dakota 58784 Tel: 701-628-3536 Fax: 701-628-3537 IGF South 101 Business Park Drive Jackson, Mississippi Tel: 601-957-9780 Fax: 601-957-9793 IGF East 4720 Kingsway Drive Indianapolis, IN 46205 Tel: 317-253-9998 Fax: 317-253-9870 IGF West 407 Campus Drive Garden City, Kansas 67846 Tel: 316-276-4111 Fax: 316-275-6453 IGF California 1750 Bullard Avenue, Ste 106 Fresno, CA 93710 Tel: 209-432-0196 Fax: 209-432-0294 Granite Reinsurance Company Ltd. Bishop's Court Hill St. Michael, Barbados, W.I. (Managers: Atlantic Security Ltd.) Tel: 441-295-5425 Fax: 441-295-5444 [Goran logo] GORAN CAPITAL INC. 181 Unviersity Avenue 4720 Kingsway Drive Box 11, Suite 1101 Indianapolis, Indiana Toronto, Ontario 46205 Canada M5H 3M7 Telephone 416-594-1155 Tel: 317-259-6400 Fax 416-594-0711 Fax: 317-259-6395 EX-13.1 9 1995 GORAN ANNUAL REPORT Chairman's Letter We've been around for 32 years in Canada and the U.S. I'd like to tell you about some of the significant milestones we have passed. December 31, 1976, ended our twelfth year since the inception of the originating company in our group. We concluded that year by writing $20 million of gross premiums and had a profit of $600,000, record figures for our company, which, at the time, had offices in four locations; Vancouver, Toronto, Montreal and Fort Lauderdale. As exciting as the year was, it was of consequence to only a small group of people, for we were a "private" company at the time, with a staff of forty. In 1978 we formed Symons General Insurance Company and followed that with the acquisition of Pafco Insurance Company in 1983. In less than three years we took Pafco Financial Holdings "public" on the Toronto Stock Exchange, with a market valuation of twenty times the net price we paid for the underlying company, Pafco Insurance Company Ltd. In 1985 we acquired the Ontario General Insurance Company which we later sold to take advantage of certain financial aspects in the company. In 1987 we began focusing on our development in the United States. We purchased the "desirable" business of a company in Indianapolis which specialized, as did Pafco Insurance Company of Canada, in the writing of non-standard automobile insurance. To underwrite this and other business, we licensed Pafco General Insurance Company of Indiana and then expanded its operations to other states, obtaining licensing where it was advantageous to do so. In June of 1990, in a move to strengthen our Untied States operations, we sold The Canadian Pafco Insurance Company and the Canadian book of insurance business in Granite Insurance Company, formerly Symons General Insurance Company. Concurrently we formed Granite Reinsurance Company of Barbados to provide a finite reinsurance facility. Granite Reinsurance concluded 1995 with a gross premium income of $47,810,000 and a profit of $4,862,000 for the year. Originally established with a paid in capital of $125,000 and a contribution of $700,000 to surplus from Granite Insurance Company. Granite Re ended 1995 with a net worth of $18,087,000, which, apart from the contributions to capital noted above, was self funded from the operations of the company. In November of 1990, we acquired IGF Insurance Company of Des Moines, a crop insurer, for $6.1 million and have seen it develop to such an extent that we were recently offered in excess of 6 times our original acquisition price. This was declined by the Board of Directors because it was considered to be inadequate as there are better means of capitalizing its growth potential. As you will read in this report, IGF increased its profits substantially in 1995 and doubled its gross revenues to $93,087,147 (U.S.). For the first quarter of 1996 we have seen this pattern of growth continue and, with the recently enacted 1996 Farm Bill signed by President Clinton on April 5, 1996, we expect this growth to accelerate. This asset, IGF, has become increasingly important to our Group, not only for the extraordinary growth of its income, but for the increasingly profitable nature of that income. A major business transaction was initiated on January 31, 1996, which may well prove to be the most outstanding thing we have done to date. We formed a partnership arrangement with Goldman Sachs Capital Partners II, an affiliate of Goldman Sachs & Co., the highly regarded U.S. investment house, creating GGS Management Holdings, Inc. This new company will become a major player in the non-standard auto insurance business in the United States. The Company entered into an agreement to acquire the Superior American Insurance Company, Superior Guaranty Insurance Company and another corporation known as Standard Plan, Inc. We merged our Pafco General Insurance Company to GGS Management. (No, the initials aren't mine, they represent Goran, Goldman Sachs.) Superior writes in excess of $100 million in non-standard auto insurance, which, along with similar business underwritten by Pafco General Insurance Company of approximately $49 million, will make the new entity the 13th largest writer of non-standard auto insurance in the U.S. This segment of the insurance business exceeded $15 billion of premium nationwide in 1995. The acquisition of Superior, et. al. was at a very attractive price of 5% over GAAP book value, approximately $67 million. As a comparison to this, the sale of our Canadian business in June of 1990 has approximated 200% over GAAP book value, albeit over a period of five years. Oh yes, we now operate in 13 locations throughout Canada, the U.S., Barbados and Bermuda. It has been a fabulous year for the Company and I can't wait to conclude a report on the activities for 1996. They could be even more outstanding. As an example of our anticipated growth, we have set as a target for 1996 to double gross sales of our products. This would require that we exceed $400 million of business, a large step towards the stated aim of Goran's President to reach annual sales of $500 million by the year 2000. No company can succeed without a great deal of effort. We are no exception and it would be less than fitting if I didn't mention that a lot of hard work and long hours go into our results. We have progressed to such a degree that I would have to fill most of a page if I were to single out those who have made sacrifices of their time to the improvement and development of the company. In fact, I would probably have to include the names of all of our more than 400 employees. During the year, we extended the Board of Goran to include Jim Torrance Q.C., a former Director who again agreed to serve with the company, and John McKeating, a new appointee. This brought the complement of the Board back to where it should be, with more outside Directors than "insiders", a desirable position for a public company. We have had extensive meetings throughout the year, not unusual considering the many activities of our group. The Board has given unstinting assistance to me and I wish to thank them and praise them for their considered and practical deliberations and advice. /s/ G. Gordon Symons G. Gordon Symons Chairman of the Board April 16, 1996 ============================================================== "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this letter are forward looking statements that involve risks and uncertainties, including, but not limited to, product demand and market acceptance risks, the effect of economic conditions, the impact of competitive products and pricing, product develop- ment, the results of financial efforts, acquisitions completed or attempted, the effect of the Company's accounting policies, and other risks detailed in the Company's Securities and Exchange Commission filings. ============================================================= ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management Discussion and Analysis of Financial Conditions and Results of Operations for Superior Insurance Company and its Subsidiaries, Superior American Insurance Company, Superior Guaranty Insurance Company, and Standard Plan. Superior Insurance Company and its subsidiaries were purchased by GGS Management Company, a joint venture of SIG Inc. (52%) and Goldman Sachs Investment Fund (48%) on April 30, 1996. The following is a brief summary of the results of operations of Superior and its subsidiaries. In 1995, the company's gross premiums written decreased to $94,755,672 from $112,891,444 in 1994 and $115,674,036 in 1993. The decrease in premium in 1995 resulted from the withdrawal from several unprofitable territories including Texas. The Company reorganized following a poor year in 1994, and returned to profit in 1995. The results from 1993 to 1994 showed a slight reduction of approximately $3,000,000 of premiums mainly due to a very competitive market. Net Premiums Written The net premiums written are not materially different from gross premiums written in any years, as the company does not reinsure proportional coverage. The Company only buys excess of loss reinsurance protection. Net Premiums Earned Net premiums earned in 1995 were $97,614,483 compared with $112,822,969 in 1994 and $118,100,000 in 1993. When a company's volume reduces, the earned premium is slightly greater than the written premium, and the opposite is true when a company is growing. Net Investment Income Investment income in 1995 was $8,406,613 compared with $6,632,374 in 1994. The increase in investment income principally was from realized gains on its investment portfolio as a result of a positive bond market at December 1995. The investment income in 1994 of $6,632,374 compares with $11,728,516 in 1993. The significant reduction was a result of substantially reduced assets through dividends to its parent company in 1993 and 1994 (collectively of approximately $21,000,000). In addition, as the loss ratio increased in 1994, the available cash for investment reduced substantially and interest rates reduced between 1993 and 1994, thus reducing the overall investment yields. Other Income Other income increased in 1995 to $2,325,628 up from $1,321,419 in 1994. This compares with $4,731,990 in 1993. The distinct changes in the year-to-year Other Income is affected by writeoffs of bad debts on premiums outstanding, which were substantial in 1994, billing fee income which was affected by a ruling in the state of Florida in 1994 and a reduction in premiums in 1995. Other income is principally billing fee income which usually represents between 3 1/2% and 4% of gross written premiums. So, other income follows the premium volume plus with minus bad debt recovery writeoff. Combined Loss Ratios The determination of profitability of property and liability insurance companies is best determined by its combined loss ratio. This is a ratio of the net premiums earned as a ratio of all claims and operating expenses. The combined loss ratio in 1995 for the Company was 107.6%. This compared with 116.3% for 1994. The dramatic improvement was a direct result of reducing expenses, closure of 6 regional offices, improvement in insurance rates and product distribution and the withdrawal from unprofitable Texas, the increase in rates and dual products in Florida, and continued emphasis in building business in the profitable state of California, brought the loss ratio from 77.3% in 1994 down to 68.1% in 1995. The 1993 combined ratio was 103.4%. This ballooned to 116.3% in 1994 as a result of the expense ratios dramatically increasing due to additional offices, increased cost of telephones, computers and payroll. The loss ratio ballooned to 77.3% in 1994 compared to 67% in 1993 as a direct result of bad faith claims, which were not protected by reinsurance then (these are now protected). The increase in loss ratio was also contributed to by the lack of new rate increases in its prime terri- tories, increased claims and generally, an overall inability to control the claims department during the period until June 1995 when Superior hired a new senior claims executive. Net Income The net income after tax for Superior, was $4,100,000 for 1995. This compares with a loss of $4,500,000 for 1994. The improvement in 1995, as mentioned earlier, is a result of reduction in expenses and a reduction in loss ratio. The loss of $4.5M in 1994 compares with a profit of $11,000,000 in 1993. The cause of this loss was explained in the previous paragraph. Included in the change in profit, was a reduction in investment income from $11,700,000 to $6,600,000 from 1993 to 1994. Liquidity and Capital Resources The capital surplus of Superior has been greater than is necessary for non standard automobile. Insurance companies. The Company has operated at less than 3:1 premium writing to capital and surplus. In 1995, the statutory capital and surplus was $49,276,000 compared to net premiums of $94,800,000 a ratio of 1.92 of premiums to 1 of surplus. The assets of the Company are invested conservatively in liquid bonds and a limited amount of equities. The surplus of the Company changed from 1995 when an additional $5,699,473 was added to the surplus through earnings, compared to a reduction in surplus in 1994 of $13,078,722. Through dividend and losses, $12,000,000 of this reduction in surplus was a dividend to the parent company. This compares to an addition to surplus in 1993 of $389,925 after giving effect to a $10,000,000 dividend to the parent company in 1993. The parent company of Superior has dividends of $42,000,000 through the period of 1991 to 1994. The Company has available for dividend for the 1995 year, earned surplus in excess of $5,000,000. Summary Superior is a non standard automobile operation, operating principally from offices located in Tampa, Florida, Anaheim, California, and Atlanta, Georgia. It also writes business in Virginia, Ohio, and Texas and a smaller amount in other states. The Company writes non standard automobile, with limits and driver classes similar to Pafco operations. The location of business fits well with Pafco's with no duplication of states. Financial Condition and Results of Operations Results of Operations - - - -------------------------------------------------------------------------------- Once again, Goran's gross premium and net income reached record levels in 1995. The Company's 1995 gross premium written increased to $208,216,310 from $173,413,709 in 1994. More than half of the increase in premium in 1995 over 1994 resulted from growth in the crop insurance business, gross premium written grew $18.9 million in 1995 as compared to 1994, with premium growth coming from both the multi peril and the hail business. The crop premium volume in 1995 of $93.3 million recognized a gain in U.S. government subsidies of $28.2 million compared to $16.3 million of subsidies in 1994 included in a total crop premium of $74.4 million for 1994. Gross written premiums for 1994 was restated to include the subsidy of $16.3 million on a basis consistent with that of 1995. All other lines of business experienced gross written premium increases from 1994 to 1995 as follows: finite reinsurance premiums increased by $8.1 million to $40.7 million, nonstandard automobile premiums increased by $5.1 million to $67.3 million and surplus lines premiums increased by $2.7 million to $7.0 million. In 1995, net premiums written (gross written less reinsurance to government FCIC program and third party reinsurers) increased by 48.3% from $79.9 million in 1994 to $118.5 million in 1995. This increase resulted from higher premium volumes on a gross basis as described above, combined with a reduced dependence on quota share reinsurance in both the nonstandard automobile lines (reduced from approximately 38% in 1994 to 25% in 1995) and on hail reinsurance. The quota share reinsurance that was placed with third party reinsurers in 1994 was taken over internally for 1995. In 1995, the Groups net premiums earned grew to $104.4 million from $75.0 million in 1994. The earning of premium follows the term of the respective policies, net premiums earned trails net premiums written. For example, in a growing book of business, net premiums earned will also grow but will lag behind the written premium. In 1995, investment income grew to $4.8 million from $4.6 million in 1994, an increase of approximately 5%. The increase of the Company's investment portfolio in 1995 was partially offset by reduced investment yields in 1995 as interest rates trended lower. Investment income in 1993 of $5.6 million reduced to an investment income of $4.6 million in 1994 due to lower yields, and lower investment assets in 1994 in Granite Reinsurance due to settlement of claims. Other income includes billing fees and bad debt provisions, decreased to $3.2 million in 1995 from $4.4 million in 1994, which later amount included a payment of $2 million of a written down note from the Company's parent, Symons International Group Ltd. Without this unusual income in 1994, other income would have increased from $2.4 million in 1994 to $3.2 million in 1995. Approximately half of the increase resulted from increased billing fee revenue from a combination of increased nonstandard automobile volume along with an increased billing fee rate implemented in the last half of 1995. In addition other income increased in 1995 due to increased commissions from business written in the Company's surplus lines operations. Net claims incurred increased to $74.4 million in 1995 from $58.2 million in 1994, which increase is more than offset by the increase in net premiums earned. The loss ratio decreased from 77.5% in 1994 to 71.2% in 1995 primarily as a result of improved loss ratios from the finite reinsurance division which were 71.3% in 1994 and 59.1% in 1995, as well as increased profitability in the Company's crop hail business in 1995 compared with 1994. Net commissions expense is composed of three components: (i) commission expense paid to the Company's agents; (ii) commission income from reinsurers, including a 31% commission earned by the Company's crop operations with respect to multi peril crop insurance; and (iii) underwriting gain or loss on the Company's multi peril crop insurance business reported by the Company as an adjustment to the Company's commission income on this business. In 1995 the Company recorded a net commission recovery of $1.2 million compared to a net commission expense of $2.0 million in 1994. Commissions paid to the Company's agents in 1995 of $34.4 million remained relatively constant with that paid in 1994 of $35.0 million. Ceded commission income in 1995 of $35.6 million increased from $33.0 million in 1994. Included in these amounts is an underwriting gain adjustment from the multi peril crop line of business of $13.2 million in 1995 and $4.5 million in 1994. The effect of the increased multi peril underwriting gain included in commission income is partly offset by reduced ceding commissions on nonstandard automobile quota share reinsurance in 1995 versus 1994. Operating expenses of $23.7 million in 1995 compared with $15.1 million in 1994, with such expenses increasing proportionately with net premiums earned in the respective years with an expense ratio on this basis of 20.2% in 1994 and 22.6% in 1995. Included in 1995's operating expenses is an accrual for bad debt expenses of $1.9 million with respect to the nonstandard automobile book of business, of which $960,000 relates to an adjustment of 1993 and 1994 balances. During 1995, the Company identified such uncollected amounts and implemented a full collection department to curtail such write-offs in the future. Without the write-off in 1995 of bad debt expense relating to prior years, the expense ratio for 1995 would have been 21.7%. Interest expense in 1995 was $2.4 million compared to$2.5 million in 1994. Interest savings in 1995 and 1994 resulting from principal repayments to the Company's debenture holders and the retirement of the Company's term loan by SIG in June 1995. In 1995, income tax expense of $3.4 million relates to a tax provision on income emanating from the U.S. operations. By comparison, a tax provision in 1994 of $939,000 was accounted for by an amortization of deferred income taxes of $300,000 with the balance of the provision emanating from a tax provision on the income from U.S. operations. Financial Condition The Company's assets have grown to $154,112,461 in 1995, up from $130,372,717 in 1994 and $112,852,129 in 1993. The largest component of assets is investments in bonds and stocks. A breakdown of these investments is highlighted in the Notes to Consolidated Financial Statements. The Company's second largest asset category is accounts receivable. This primarily represents monies held on behalf of our insurance and reinsurance subsidiaries by major third party reinsurance or insurance companies to support outstanding claims and unearned premiums. The majority of these funds earn interest and are held in trust for Granite Re. Receivables from insurance companies were $47,559,037 in 1995, up from $34,391,569 in 1994 due to increased volume and the corresponding increased reinsurance claims reserves, and 1994 was up from $24,922,897 in 1993, also due to increased insurance claims reserves that follows increased business. Total receivables represented 42% of total assets in 1995 and 43% in 1994. Also included in the above receivables is premium recorded but not yet received from the insured. This is business that has been taken on but the premium has not been paid to us at the date of this statement. Deferred acquisition costs is the amount paid to agents and premium tax that would be refunded to us should all our policies in force be canceled on December 31. The offset is the unearned premium. In 1995 increased to $10.4 million from $6.3 million in 1994. This increase in deferred costs reflects increases in unearned premiums to $36.7 million in 1995 from $22.8 million in 1994. The total liabilities of the Company were $136,880,727 in 1995, compared to $123,264,530 in 1994. Outstanding claims increased in 1995 to $62.8 million from $58.2 million in 1994, reflecting an increase in volume in 1995 over 1994, partially offset by a lower loss ratio from 77.5% in 1994 to 71.2% in 1995. Management believes the capital and surplus of the Company is currently sufficient to support its current level of premiums written. However, from time to time the Company may consider raising additional capital to pursue acquisition opportunities or to finance internal growth. Shareholders' equity has continued to grow, reaching $17,231,734 at year-end 1995, compared to $7,108,187 at the end of 1994. While shareholders' equity is now $17,231,734, it does not reflect the equity upon which Goran conducts its various insurance operations. The underlying insurance subsidiaries had statutory surplus at December 31, 1995 of: Pafco, $11,967,800 (U.S.); IGF, $9,219,463 (U.S.); Granite Re, $18,086,777; and Granite, $3,792,638. This amounts to a total $50.8 million. It is on these equity bases that the Company's insurance business is written as a ratio to capital and surplus of $50.8 million is 2.33 to 1.00, which is well below the industry threshold of 3.00 to 1.00. Goran's long term debt decreased to $15,132,250 in 1995 from $18,530,800 in 1993. The repayment of debt resulted from scheduled principle payments to the Company's debenture holders in the amount of $1,995,750 at December 31, 1995 and the scheduled retirement of SIG's term loan with a fixed payment of $1,000,000 during 1995. During 1995, debenture holders exercised warrants at $3 per common share, yielded a total of $393,750. The number of outstanding warrants at December 31, 1995 was 337,625. These warrants do not trade. During 1995, IGF continued to profit by borrowing funds under a revolving line of credit to finance premium receivables from the farmers. By utilizing this lower cost of credit, revolving line of credit, IGF stops the running of 15% interest payable to FCIC while continuing to earn 15% interest on the receivables from the farmer. Overview U.S. Operations Symons International Group, Inc. ("SIG") is a wholly owned subsidiary of Goran Capital, Inc. SIG is a holding company located in Indianapolis, Indiana. Its subsidiaries write various lines of insurance. SIG owns 100% and operates the following companies: Pafco General Insurance Company ("Pafco"), Indianapolis, IN (nonstandard automobile) IGF Insurance Company ("IGF"), Des Moines, IA and has 5 branch offices throughout the U.S.A (crop insurance) Symons International Group, Inc. (Florida) ("SIGF"), Ft Lauderdale, FL (surplus lines insurance) The results of each of these subsidiaries are discussed below, following a general discussion on the consolidated results of the U.S. operations. For the benefit of the reader, it is felt that the entity discussions should center on the specific product lines written by each organization. Pafco would refer to the nonstandard automobile insurance business of Goran which is written predominantly by Pafco; however, the licenses of IGF are used in certain states where we write non standard automobile but Pafco does not have a license. The crop insurance business is written by IGF, however, the licenses of Pafco are used in certain jurisdictions to facilitate business where IGF is not licensed itself. The remaining aspects of the U.S. operations is surplus lines property and casualty business written through SIG Florida, predominantly on a surplus lines basis. Consolidated Results of SIG Gross premium volume for the U.S. operations increased 18.4% to $122,088,007 (U.S.) in 1995 versus $103,133,564 (U.S.). All three product lines showed increases in 1995 with a significant increase coming from the crop insurance business. Net written premiums for 1995 were $53,447,000 (U.S.) compared to $35,139,000 (U.S.) in 1994. This was an increase of 52.1% resulting primarily from the Company's decision to reduce its dependence on quota share reinsurance. This allowed the Company to retain more of the gross premiums being written by its nonstandard automobile segment as well as its crop insurance business. IGF's crop insurance business enjoyed significant growth and profitability during 1995. The Crop Insurance Reform Act signed into law in October 1994 enabled the crop insurance industry to increase its premium writings, and IGF materially grew its premium volume as well. With increased premium production and normal crop growing season, the multi peril crop business produced good underwriting profits. The crop hail business also produced profits along with a growth in premium writings from $9 million in 1994 to $16 million in 1995. IGF focused on increasing its crop hail premium writings in order to spread its risk. The Company utilizes stop loss reinsurance minimize the effect of adverse weather conditions on the Company's results. The recently enacted "Freedom to Farm" bill will allow IGF to experience increased growth for 1996, as the government withdraws from the delivery basis catastrophe insurance coverage and the insurance industry takes this over. Nonstandard automobile insurance operations experienced a slight growth in premium volume during 1995, reversing a two year period of decline. During 1995 the operations focused on simplifying its processes and on improving service to customers. Although premium production grew, competition remained strong. The competitive market kept the company from meaningless growth and rate increase resulting in a higher than expected loss ratio for the year. In addition, severe winter storm activity at the end of the year added to the loss ratio. The expense ratio of non standard automobile was much higher than budgeted as the company geared up for the growth and improved business for 1996. The first quarter of 1996 is benefiting by these expenses in 1995 as premiums is growing and less ratios reducing. SIG Florida continued the growth it enjoyed in both 1993 and 1994 by recording gross premiums written on behalf of Pafco of $6,792,490 (U.S.) in 1995 as compared to $5,159,795 (U.S.) in 1994. The Florida operation continues to prosper from the growth in the surplus lines market opportunities in the southeast United States, and the addition of sound management and marketing staff, SIG Florida also generates commission income on products sold for third party companies. Pafco General Insurance Company ("Pafco") [PAFCO LOGO] Pafco underwrites nonstandard automobile business through its headquarters in Indianapolis, Indiana. A portion of the business is placed through IGF in order to utilize licenses it has in Missouri, Arkansas and Illinois. Pafco's gross written premiums in 1995, excluding crop insurance fronted for IGF, were $44,577,000 (U.S.) as compared to $39,795,000 (U.S.) in 1994. In spite of a moderate growth in gross premiums, net premiums grew significantly to $34,018,000 (U.S.) in 1995 as compared to $24,713,000 (U.S.) in 1994. The growth in net premiums was principally a result of a further reduction in quota share reinsurance on the nonstandard automobile business. The net operating results of $(250,000) for 1995 compared to $(350,000) for 1994 are inclusive of dividend income from IGF Insurance Company in 1995 of $2,000,000 (U.S.) and $350,000 (U.S.) in 1994. 1995 saw the Company focus its attention on improving its service to its agents and the ease by which both agents and our customers are able to do business with Pafco. This has borne fruit in the first quarter of 1996 with material increase in volume and improved combined loss ratio. Pafco's statutory capital and surplus in 1995 increased to $11,967,800 (U.S.) up from $7,848,000 (U.S.) in 1994. The strong performance of the crop insurance business on IGF increased the value of Pafco's investment in IGF significantly. IGF Insurance Company ("IGF") [IGF LOGO] IGF writes principally MPCI and crop hail insurance and provides licenses for Pafco's automobile insurance in three states. Although premiums for this coverage are included in IGF, the net profit or loss is transferred to Pafco through reinsurance programs. Gross premiums written in 1995 were $78,216,551 (U.S.) as compared to $64,239,124 (U.S.) in 1994. IGF's 1995 performance increased significantly as a result of gains in its crop insurance business which reflect favorable growing conditions. The Crop Insurance Reform Act enacted in October 1994 provided opportunity for the crop insurance industry to increase its premium volumes. IGF benefited from this Act and also grew at a rate faster than most of its principal competitors due to the marketing efforts of its management team. IGF exceeded industry results on its multi peril and crop hail business, because of its unique underwriting criteria. IGF continued to benefit from its change in 1994 to an in-house adjusting force, which resulted in enhanced effectiveness on adjusting crop claims. By hiring full time employees to perform this function, IGF has benefited by tighter claims controls and cost savings. IGF's statutory capital and surplus increased in 1995 to $9,219,463 (U.S.) from $4,875,465 (U.S.) in 1994. The increase in surplus 1995 related to crop insurance increase in business and underwriting profits. In 1995, IGF concluded its repurchase of the balance of its outstanding common shares which were principally held by small investors who purchased stock when IGF was created in 1972. At year-end 1995, Goran owned 100% of the Company versus 98.8% in 1994. Symons International Group, Inc. (Florida) ("SIGF") Through its specialized surplus lines underwriting unit, Goran writes third party property and casualty insurance coverage in Pafco and other insurance companies under contract with SIG Florida. The volume of business continues to increase and operating results have further improved as a result of decreased competition in the southeast United States in this market segment and addition of quality underwriters. Further automation in 1995 has enhanced the processing capabilities in the office in order to accommodate its growth in premium writing. Non-U.S. Operations Goran's business outside the United States is conducted through the following wholly-owned subsidiaries: Granite Insurance Company (Toronto, Canada) ("Granite") (sold its business in 1990 in runoff) Granite Reinsurance Company Limited (Barbados and Bermuda) ("Granite Re") (Finite reinsurance) Granite Insurance Company ("Granite") [Granite Insurance LOGO] Granite is a Canadian federally licensed insurance company which is presently servicing its investment portfolio and its very few outstanding claims. Granite stopped writing business on December 31, 1989 and sold its book of Canadian business in June 1990. The outstanding claims continue to be settled in accordance with actuarial estimates and management's expectations. During 1995, Granite's invested assets reduced to $7,456,155 from $10,195,091 in 1994. This was the result of settlements of claims and the runoff of outstanding claims. Total outstanding claims decreased to $2,950,000 in 1995 from $4,411,000 in 1994. It is expected that the run off of outstanding claims will continue at least until 1998. Granite's net earnings were $270,156 in 1995, compared to $826,423 in 1994 reflecting the reduction of invested assets, which in turn reduces earnings from investment yields. [PAGE CONTAINS PHOTOGRAPHS OF AUTOMOBILES IN THE MIDDLE MARGIN] Investment income in 1995 was $683,637 compared to $986,683 in 1994. Granite Reinsurance Company Limited ("Granite Re") [Granite Reinsurance LOGO] Granite Re is managed by Jardine Pinehurst Management Company Ltd. of Bermuda. Granite Re underwrites finite risk reinsurance and stop loss reinsurance. This reinsurance involves a defined maximum risk at the time of entering into a contract. The Company participates in various programs of reinsurance in Bermuda, the United States and Canada. Reinsurance normally requires that a substantial premium be paid upon the purchase of cover. Such premiums are invested in high grade bonds, some of which are pledged to support the liabilities assumed under the reinsurance program. The amount pledged is reflected in the Notes To Consolidated Financial Statements. One of Granite Re Canadian Treaties has expired and will not be renewed. The runoff will provide continuous revenue for years to come but gross written premiums of about $30,000,000 will cease and will be replaced with new programs over the next few years. Gross premiums written during the 12 months ended November 30, 1995 were $34,802,851 (U.S.) compared to $23,844,330 (U.S.) during the 11 months ended November 30, 1994. Net income rose to $3,975,350 (U.S.) in 1995 compared to $1,887,687 (U.S.) in 1994. This increased profitability resulted primarily from a reduced loss ratio on the Company's finite book from 71.6% in 1994 to 59.1% in 1995, combined with increased premium volumes in 1995. Granite Re began operation on July 1, 1990, with a capital base of $125,000 (U.S.) And $700,000 (U.S.) In 1992. The impact of profitable underwriting since the inception of the Company is reflected in the growth of its shareholders' equity to $13,248,445 (U.S.) in 1995 from $9,343,095 (U.S.) in [PAGE CONTAINS PHOTOGRAPHS OF FARM SCENERY IN THE MIDDLE MARGIN] 1994. Granite Re will continue to focus selling reinsurance that limits its liability to a defined amount. In addition, Granite Re intends to broaden its base to include captive reinsurance, which will generate fees for the Company on a risk free basis. Such programs are risk free because they generally require that users furnish full collateral funds, which the reinsurer then reinvests. Granite Re thereby expects funds available for reinvestment to increase, generating greater investment returns. The programs currently underwritten by Granite Re generate a loss portfolio that is matched with cash. Such portfolios take about eight years to runoff, thus generating investment returns and underwriting gains during the life of the runoff. Meanwhile, new business written in 1995 and beyond will be added to the portfolio of outstanding losses and invested assets, perpetuating the growth of Granite Re through fees, investment income and underwriting profits. GORAN CAPITAL INC. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 GORAN CAPITAL INC. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 TABLE OF CONTENTS Auditors' Report 1 Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Deficit 4 Consolidated Statements of Changes in Cash Resources 4 Notes to Consolidated Financial Statements 5 - 18 AUDITORS' REPORT To the Shareholders of Goran Capital Inc. We have audited the consolidated balance sheets of Goran Capital Inc. as at December 31, 1995 and 1994 and the consolidated statements of operations, deficit and changes in cash resources for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at December 31, 1995 and 1994 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. /s/ Schwartz Levitsky Feldman Toronto, Ontario March 18, 1996 Chartered Accountants Except as to notes 2(h) and 20, which are March 11, 1997 - - - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - - - -------------------------------------------------------------------------------- AS AT DECEMBER 31 (In thousands of U.S. dollars) Assets 1995 1994 -------- -------- Cash and investments (note 4) $ 54,366 $ 46,328 -------- -------- Accounts receivable Premiums receivable 11,233 13,948 Due from insurance companies 34,837 24,516 Accrued and other receivables 1,231 1,485 -------- -------- 47,301 39,949 Reinsurance recoverable on outstanding claims 41,667 15,315 Prepaid reinsurance premiums 6,263 6,987 Capital assets (note 5) 2,088 861 Other assets (notes 6 and 12) 1,417 1,063 Deferred policy acquisition costs 7,641 4,460 Deferred income taxes 73 214 Goodwill -- 62 -------- -------- Total Assets $160,816 $115,239 Liabilities Accounts payable Due to insurance companies $ 1,986 $ 8,441 Due to associated companies 188 135 Accrued and other payables 8,310 3,858 -------- -------- 10,484 12,434 Outstanding claims (notes 2(e) and 3) 87,655 56,801 Unearned premiums (note 3) 33,159 23,270 Bank loans (note 7) 5,811 5,441 Debentures (note 8) 11,085 12,210 Minority interest in subsidiary -- 16 -------- -------- Total Liabilities 148,194 110,172 Shareholders' Equity (note 10) 12,622 5,067 -------- -------- Total Liabilities and Shareholders' Equity $160,816 $115,239 /s/ /s/ Director Director Approved on behalf of the board 2 - - - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - - - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (In thousands of U.S. dollars, except per share data) 1995 1994 --------- --------- Revenue Gross premiums written $ 151,717 $ 126,978 Net premiums earned $ 76,102 $ 54,944 Net investment and other income (note 4 and 13(a)) 5,872 6,624 --------- --------- 81,974 61,568 --------- --------- Expenses Net claims incurred 54,193 42,595 Commissions and operating expenses (note 16(b)) 16,352 12,516 Interest expense 1,761 1,843 --------- --------- 72,306 56,954 --------- --------- Income before undernoted items 9,668 4,614 Provision for income taxes (note 11) 2,497 688 Minority interest -- (14) --------- --------- Net income $ 7,171 $ 3,940 ========= ========= Earnings per share - basic $ 1.43 $ 0.81 ========= ========= Earnings per share - fully diluted $ 1.26 $ 0.71 ========= ========= - - - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF DEFICIT - - - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (In thousands of U.S. dollars) 1995 1994 -------- -------- Retained earnings (deficit), beginning of year $(11,066) $(15,006) Net income for the year 7,171 3,940 -------- -------- Retained earnings (deficit), end of year $ (3,895) $(11,066) - - - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES - - - -------------------------------------------------------------------------------- (In thousands of U.S. dollars) 1995 1994 -------- -------- Cash provided by (used in): Operating activities Net income $ 7,171 $ 3,940 Items not involving cash 11,010 7,058 Changes in working capital relating to operations (8,544) (12,422) -------- -------- 9,637 (1,424) -------- -------- Financing activities Reduction of debentures (1,462) (1,047) Increase of borrowed funds 220 722 Issue of share capital 303 34 -------- -------- (939) (291) -------- -------- Investing activities Net (purchase) sale of marketable securities (4,147) 2,118 Net purchase of capital assets (1,681) (628) Foreign currency translation adjustment 155 (402) -------- -------- (5,673) 1,088 -------- -------- Increase (decrease) in cash resources during the year 3,025 (627) Cash resources, beginning of year 7,588 8,215 -------- -------- Cash resources, end of year $ 10,613 $ 7,588 Cash resources are comprised of: Cash (bank overdraft) $ 4,171 $ (116) Short-term investments 6,442 7,704 -------- -------- $ 10,613 $ 7,588 - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 1. Organization - - - -------------------------------------------------------------------------------- Goran Capital Inc. ("Goran") is the parent company of the Goran group of companies. The consolidated financial statements include the accounts of all subsidiary companies of Goran, which are 100% owned, as follows: 1. Symons International Group, Inc. ("SIG Inc.") including its subsidiary companies for which SIG Inc. acts as a manager, as follows: a) Pafco General Insurance Company ("PGIC") - an Indiana based insurance company; b) IGF Insurance Company ("IGF") - an Indiana based insurance company; c) Pafco Premium Finance Company - an Indiana based premium finance company; d) Hailplus, Corp. - an Iowa based premium finance company; and e) Symons International Group, Inc. of Ft. Lauderdale, Florida ("SIG-FL") - a Florida based managing general insurance agency. 2. Granite Reinsurance Company Ltd. ("Granite") - a finite risk reinsurance company based in Barbados. 3. Granite Insurance Company ("GIC") - a Canadian federally licensed insurance company which ceased writing new insurance policies on January 1, 1990. - - - -------------------------------------------------------------------------------- 2. Summary of significant accounting policies - - - -------------------------------------------------------------------------------- These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in Canada ("Canadian GAAP"). a) Basis of consolidation The consolidated financial statements include the accounts of Goran and its subsidiary companies, all of which are 100% owned. All significant intercompany transactions and balances have been eliminated. b) Premiums Premiums are taken into income evenly over the lives of the related policies. c) Commissions Commission expenses and related reinsurance commission recoveries are recorded at the effective date of the respective insurance policy. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 2. Summary of significant accounting policies (cont'd) - - - -------------------------------------------------------------------------------- d) Deferred policy acquisition costs Deferred policy acquisition costs comprise of agents' commissions, premium taxes and certain general expenses which are related directly to the acquisition of premiums. These costs, to the extent that they are considered recoverable, are deferred and amortized over the same period that the related premiums are taken into income. e) Outstanding claims The reserve for outstanding claims has been reported on by independent actuaries. The Company's policy regarding the recognition of the time value of money on outstanding claims is as follows: i) Direct claims The reserve includes the recognition of the time value of money on direct claims liabilities. Using an interest rate of 7.5% (1994 - 7.5%) net claims incurred have been decreased by $161 (1994 - increased by $88) and outstanding claims at December 31, 1995 reduced by $1,327 (1994 - $1,134). ii) Assumed claims The Company has not recognized the time value of money with respect to assumed claims liabilities over which it does not have direct control over the timing of settlement of the liabilities. If the Company had discounted these claims using an interest rate of 7.5% (1994 - 7.5%) net claims incurred would have been increased by $1,147 (1994 reduced by $1,264) and outstanding claims at December 31, 1995 would have been reduced by $2,348 (1994 - $3,401). f) Investments Investments in bonds, mortgages and debentures are carried at amortized cost providing for the amortization of the discount or premium to maturity date. Investments in short-term investments, real estate, and equities are carried at cost. Gains and losses on disposal of investments are taken into income when realized. When there has been a loss in value of an investment that is other than a temporary decline, the investment is written down to recognize the loss. g) Capital assets Capital assets are recorded at cost, net of accumulated amortization. Amortization is provided at rates sufficient to amortize the costs over the estimated useful lives of the assets. h) Foreign currency translation Foreign currency transaction gains and losses are included in the statement of operations. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 2. Summary of significant accounting policies (cont'd) - - - -------------------------------------------------------------------------------- h) Goran and each of its subsidiaries have been determined to be self-sustaining operations and are translated using the current rate method whereby all assets and liabilities are translated into U.S. dollars at the year end rate of exchange and revenue and expense items are translated at the average rate of exchange for the year. The resulting unrealized translation gain or loss is deferred and shown separately in shareholders' equity. These adjustments are not included in operations until realized through a reduction in the Company's net investment in such operations. - - - -------------------------------------------------------------------------------- 3. Reinsurance - - - -------------------------------------------------------------------------------- a) The Company's insurance subsidiaries follow a policy of underwriting and reinsuring contracts of insurance which limits their liability to a maximum amount on any one claim of $220 (1994 - - - - $214) in Canada, and $250 (1994 - $350) in the USA, with the result that unearned premiums and outstanding claims are stated net of reinsurance. As the primary insurers, the Company's insurance subsidiaries maintain the principal liability to the policyholder. b) The effect of reinsurance on the activities of the Group can be summarized as follows: 1995 Gross Ceded Net ---- ----- ----- --- Premiums written $151,717 $(65,357) $86,360 Premiums earned 145,366 (69,264) 76,102 Incurred losses and loss adjustment expenses 148,001 (93,808) 54,193 Commission expense (note 16(b)) 25,069 (25,950) (881) Outstanding claims 87,655 (41,667) 45,988 Unearned premiums 33,159 (6,264) 26,895 1994 Gross Ceded Net ---- ----- ----- --- Premiums written $126,978 $(68,503) $58,475 Premiums earned 120,241 (65,297) 54,944 Incurred losses and loss adjustment expenses 76,321 (33,726) 42,595 Commission expense (note 16(b)) 25,617 (24,174) 1,443 Outstanding claims 56,801 (15,315) 41,486 Unearned premiums 23,270 (6,987) 16,283 c) On June 30, 1991 Granite assumed an outstanding claims portfolio of $22,630, with loss dates of May 31, 1990 and prior, and received a bond and short-term investment portfolio with a value of $22,546. The December 31, 1995 balances in the claims portfolio and the investment portfolio are $3,509 (1994 - $5,535) and $4,761 (1994 - $8,333) respectively. This portfolio has been deposited with a Canadian trust company to support the liabilities assumed. The invested funds are used to settle claims liabilities as they become due. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 4. Cash and investments - - - -------------------------------------------------------------------------------- 1995 1994 ------------------------- ------------------------- Book Value Market Value Book Value Market Value Cash (overdraft) $ 4,171 $ 4,171 $ (116) $ (116) Short-term investments 6,442 6,442 7,704 7,704 Equities 6,421 6,069 7,634 6,867 Bonds and debentures 27,949 28,080 21,557 20,971 Mortgages 3,583 3,583 3,713 3,683 Real estate 3,922 3,922 3,912 3,912 Other loan receivable 1,878 1,878 1,924 1,924 -------- -------- -------- -------- $ 54,366 $ 54,145 $ 46,328 $ 44,945 ======== ======== ======== ======== a) At December 31, 1995, cash and investments of approximately $20,510 (1994 - $20,031) are on deposit or held in trust by cedents, and to a limited amount regulatory authorities, to secure certain of the outstanding claims of the Company. b) The Company realized a net gain of $198 (1994 - $358) from the sale of investments during the year, and recorded an unrealized loss of $58 (1994 - $161) on equities, and $Nil (1994 - $190) on bonds. The carrying value of equities and bonds held at December 31, 1995 includes a provision of $357 (1994 - $950) for investments considered to have a decline in value that is other than temporary. Where market value is not readily determinable, book value is used as an approximation. c) The hotel property in Las Vegas that was acquired in 1992 was sold in 1994 for $4,533. PGIC took back an 8% first mortgage of $3,000 from the purchaser, and realized a gain of $147. d) As part of the sale of a subsidiary in 1990, the Company and its subsidiaries invested in junior subordinated participating debentures of the purchaser maturing on January 1, 1996 equivalent to $2,007, bearing interest at a rate of 10% per annum, and preferred shares of a subsidiary of the purchaser. The debentures and shares were redeemed by the issuer during 1995. - - - -------------------------------------------------------------------------------- 5. Capital assets - - - -------------------------------------------------------------------------------- 1995 1994 ---------------------------- -------- Accumulated Cost Amortization Net Net Furniture, fixtures and equipment $3,686 $1,613 $2,073 $ 836 Automobiles 133 118 15 25 ------ ------ ------ ------ Total $3,819 $1,731 $2,088 $ 861 ====== ====== ====== ====== See also note 12. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands U.S. dollars) - - - -------------------------------------------------------------------------------- 6. Other assets - - - -------------------------------------------------------------------------------- Included in other assets are deferred charges relating to financing activities and the acquisition of subsidiaries amounting to $155 (1994 - $257). - - - -------------------------------------------------------------------------------- 7. Bank Loans - - - -------------------------------------------------------------------------------- a) IGF maintained a secured revolving line of credit, bearing interest at prime rate, in the amount of $6,000 at December 31, 1995, and is due for renewal May 15, 1996. At December 31, 1995, IGF had outstanding borrowings in the amount of $5,811 (1994 - $4,191). b) In December 1994, SIG Inc. obtained an unsecured line of credit, bearing interest at prime rate plus 1% in the amount of $250. At December 31, 1995, SIG Inc. had outstanding borrowings in the amount of $ NIL (1994 - $250). c) As at December 31, 1995, the Company was in compliance with all covenants under its bank loans. - - - -------------------------------------------------------------------------------- 8. Debentures - - - -------------------------------------------------------------------------------- At December 31, 1995, the Company had secured and unsecured notes in the amount of $11,085 (1994 - $12,210) outstanding. The notes all bear an interest rate of 8% and mature on December 30, 1998. The Company has also agreed to secure these notes with a general security agreement providing a fixed and floating charge over all the assets of the Company and by a guarantee from Goran, whereby the Company pledged the issued and outstanding common shares of PGIC, GIC and Granite. As at December 31, 1995, the Company was in compliance with, or subsequently received waivers with respect to, all covenants pertaining to the debentures. The notes are due for principal repayment as follows: December 30, 1996 $ 1,848 December 30, 1997 2,233 December 30, 1998 7,004 ------- $11,085 ======= The Company paid the principal payment of $1,462 due on December 30, 1995. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars, except share data) - - - -------------------------------------------------------------------------------- 9. Capital Stock - - - -------------------------------------------------------------------------------- The Company's authorized share capital consists of: First Preferred Shares An unlimited number of first preferred shares, of which none are outstanding at December 31, 1995 (1994 - NIL). Common Shares An unlimited number of common shares, of which 5,060,229 are outstanding as at December 31, 1995 (1994 - 4,933,779). During the year, pursuant to the exercise of warrants and options, the Company issued 141,450 (1994 - 49,375) common shares for aggregate consideration in the amount of $305 (1994 - $34). The Company has reserved for issue 774,035 (1994 - 915,485) common shares consisting of: a) 337,625 (1994 - 468,875) shares issuable on the exercise of warrants for the purchase of common shares at $2.19 per share, issued to debentureholders, and; b) 436,410 (1994 - 446,610) shares pursuant to the employee incentive share option plan as follows: Number of Exercise Shares Price Expiry Date 92,500 $0.37 July 31, 1996 224,166 $1.16 September 15, 1997 3,000 $1.48 December 7, 1997 63,099 $1.82 March 8, 1998 53,645 $3.85 July 14, 1999 -------- 436,410 - - - -------------------------------------------------------------------------------- 10. Shareholders' equity - - - -------------------------------------------------------------------------------- Shareholders' equity is comprised of the following components: 1995 1994 -------- -------- Capital stock $ 16,875 $ 16,126 Deficit (3,895) (11,066) Cumulative translation adjustment (358) 7 -------- -------- Shareholders' equity $ 12,622 $ 5,067 - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of dollars) - - - -------------------------------------------------------------------------------- 11. Income taxes - - - -------------------------------------------------------------------------------- The provision for (recovery of) income taxes is analyzed as follows: 1995 1994 ------- ------- Consolidated net income before income taxes $ 9,668 $ 4,628 ------- ------- Income taxes at Canadian statutory rates 4,287 2,052 Effect on taxes resulting from: Tax exempt income (1,571) (1,070) U.S. statutory rate differential (750) (155) Application of losses carried forward and reserves (399) (359) Operating loss for which no current income tax benefit is recognized 785 -- Deferred income taxes 145 220 ------- ------- $ 2,497 $ 688 At December 31, 1995, the Company's Canadian subsidiary had reserves, unclaimed for income tax purposes, of $2,161 (1994 - $2,495). In addition, the Company and its consolidated subsidiaries have operating loss carry forwards of approximately $13,768 for tax purposes which expire primarily after 1996. The Company also has net capital losses carried forward of approximately $8,057 which can be applied to reduce income taxes on any future taxable capital gains. The potential tax benefit of these reserves and loss carry forwards have not been recorded in these financial statements. - - - -------------------------------------------------------------------------------- 12. Amortization - - - -------------------------------------------------------------------------------- The Company recorded amortization for the year as follows: 1995 1994 ----- ----- Amortization of: Goodwill $ 63 $ 47 Capital assets 483 336 Investments 3 (39) Other assets 144 222 ----- ----- $ 693 $ 566 - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 13. Related party transactions - - - -------------------------------------------------------------------------------- a) In 1989, the Company wrote off a loan of $5,135 owed by a subsidiary of Symons International Group Ltd. (SIGL). SIGL, the majority shareholder of Goran, guaranteed this loan and pledged 1.2 million escrowed common shares of Goran (the "escrowed shares") as security for the loan. During 1994 and subsequent to year-end, SIGL entered into agreements with Goran whereby as consideration for the release of 766,600 of the escrowed shares, SIGL repaid $1,465 of the loan. The balance due to Goran of $3,670 continues to be guaranteed by SIGL and is secured by the 433,400 remaining escrowed shares. Pursuant to the agreements, it is the intention of SIGL to repay the balance of the loan wihin the next 4 years. The $1,465 loan repayment was recorded in 1994 as a recovery and included in other income. b) Included in other receivables are $563 (1994 - $593) due from certain shareholders and directors which relate to the purchase of common shares of the Company. Approximately half of the amounts due bear interest and are subject to principal repayment schedules. The Company also provided, indirectly, an officer with a second mortgage on a residence in the amount of $278 which bears interest at 7% (1994 - $278). c) Included in cash and investments is a $1,700 loan to a third party corporation ("TPC"), together with capitalized interest of $178 (1994 - $201) for a total of $1,878 (1994 - $1,901). The loan is secured by a guarantee and a collateral mortgage from a corporation one third owned by an individual who is related to the majority shareholder of SIGL. The TPC loaned the $1,700 to SIGL. The interest rate is 7.8% per annum. The interest accrued at December 31, 1995, was NIL (1994 - NIL). Additional security for the loan is held in the form of 250,000 common shares of Goran pledged by SIGL. The security is guaranteed by a $350 guarantee by SIGL. - - - -------------------------------------------------------------------------------- 14. Contingent liabilities - - - -------------------------------------------------------------------------------- a) The Company, and its subsidiaries, are named as defendants in various lawsuits relating to their business. Legal actions arise from claims made under insurance policies issued by the subsidiaries. These actions were considered by the Company in establishing its loss reserves. The Company believes that the ultimate disposition of these lawsuits will not materially affect the Company's operations or financial position. b) IGF is responsible for the administration of a run-off book of business. The Federal Crop Insurance Corporation ("FCIC") has requested that IGF take responsibility for the claim liabilities under its administration of these policies and IGF has requested reimbursement of certain expenses from the FCIC with respect to this run-off activity. It is the Company's opinion, and that of its legal counsel, that there is no liability on the part of the Company for claim liabilities of other companies under IGF's administration. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 15. Segmented information - - - --------------------------------------------------------------------------------
United United States States Other Canada Crop Other P&C Foreign Elimination Consolidated 1995 Gross premiums written $ -- $ 67,828 $ 54,260 $ 34,837 $(5,208) $ 151,717 ========= ========= ========= ========= ========= ========= Net premiums earned $ (84) $ 11,608 $ 38,034 $ 26,544 $ -- $ 76,102 ========= ========= ========= ========= ========= ========= Segmented operating profit $ 1,900 $ 447 $ 13,910 $ 12,898 $(1,374) $ 27,781 General expenses 3,746 (7,122) 15,934 9,356 (1,304) 20,610 --------- --------- --------- --------- --------- --------- Net income (loss) $ (1,846) $ 7,569 $ (2,024) $ 3,542 $ (70) $ 7,171 ========= ========= ========= ========= ========= ========= Identifiable assets $ 6,884 $ 59,733 $ 47,372 $ 55,921 $(9,094) $ 160,816 ========= ========= ========= ========= ========= ========= 1994 Gross premiums written $ -- $ 54,455 $ 48,679 $ 23,844 $ -- $ 126,978 ========= ========= ========= ========= ========= ========= Net premiums earned $ (61) $ 4,565 $ 27,561 $ 22,879 $ -- $ 54,944 ========= ========= ========= ========= ========= ========= Segmented operating profit $ 3,606 $ (2,286) $ 10,259 $ 8,812 $(1,418) $ 18,973 General expenses 3,069 (3,707) 10,775 6,328 (1,418) 15,047 Minority interest -- -- (14) -- -- (14) --------- --------- --------- --------- --------- --------- Net income (loss) $ 537 $ 1,421 $ (502) $ 2,484 $ -- $ 3,940 ========= ========= ========= ========= ========= ========= Identifiable assets $ 12,363 $ 29,085 $ 35,749 $ 45,033 $(6,991) $ 115,239 ========= ========= ========= ========= ========= =========
- - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 15. Segmented information (cont'd) - - - -------------------------------------------------------------------------------- The Canadian results are comprised of the operations of Goran as an entity which incurred a loss of $1,472 (1994 - profit of $400) and the run-off insurance activities of GIC which incurred a loss of $374 (1994 - - - - profit of $137). Segmented operating profit is composed of premiums earned, plus investment and other income net of claims incurred. General expenses are composed of commissions and operating expenses, interest and income taxes. The United States results are comprised of the consolidated operations of SIG Inc. Other foreign results are comprised of the operations of Granite. See also note 1. - - - -------------------------------------------------------------------------------- 16. Regulatory matters - - - -------------------------------------------------------------------------------- a) Goran's insurance subsidiaries are subject to certain requirements and restrictions in accordance with the regulations of their respective jurisdictions. Statutory regulations require that the subsidiaries maintain a minimum amount of capital to support outstanding insurance in force and new premium writing. This requirement and other regulations in the respective jurisdictions, restricts the amount of dividends payable in any year by the subsidiaries to the parent. The statutory surplus of the Company's active insurance subsidiaries at December 31, 1995 amounted to $34,436 (1994 - $23,616). Subsequent to Board of Directors and regulatory approval, IGF declared and paid in December, 1995 an extraordinary dividend to PGIC in the amount of $2,000 on the convertible preferred stock owned by PGIC. In December, 1995, upon Board of Directors and regulatory approval, PGIC declared and paid to SIG Inc. a $1,500 dividend on the common stock owned by SIG Inc. b) PGIC and IGF, domiciled in Indiana, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the Indiana Department of Insurance ("IDOI"). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. IGF received written approval from IDOI to reflect its business transacted with the Consolidated Farm Services Agency ("CFSA") as a 100% cession with any net underwriting results recognized in ceding commissions for statutory accounting purposes, which differs from prescribed statutory accounting practices. As of December 31, 1995, that permitted transaction had no effect on statutory surplus or net income. The net underwriting results, included in commissions and operating expenses, for the years ended December 31, 1995 and 1994 were a gain of $9,653 and $3,275, respectively. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) 16. Regulatory matters (cont'd) c) During the year IGF and PGIC entered into a reinsurance agreement in which IGF ceded $17,696 of multi peril crop business to PGIC, who in turn ceded it to the CFSA. As a matter of course, inter-company reinsurance agreements are filed with the IDOI for their approval. IDOI approval has not yet been received with respect to this agreement; however, management believes it will be received in due course. - - - -------------------------------------------------------------------------------- 17. Events subsequent to December 31, 1995 - - - -------------------------------------------------------------------------------- Subsequent to December 31, 1995, the Company entered into an agreement to purchase Superior Insurance Company ("Superior") for a purchase price equal to 105% of the GAAP net book value of Superior at the time of Closing. For 1995, Superior reported premiums in the amount of $94,800, assets of $160,100 and a net book value of $61,600. The acquisition is subject to normal regulatory approvals. Management believes that such approvals will be forthcoming and that the transaction is expected to close on or about April 30, 1996. In addition, the Company has entered into agreements with Goldman, Sachs & Co. to create a joint venture to acquire Superior. The Company has agreed to contribute (i) its rights under the Superior Purchase Agreement; (ii) 100% of the capital stock of PGIC at a minimum book value of $14,000 and (iii) certain operational capital assets. Investment funds affiliated with Goldman Sachs ("Goldman Entities") agreed to contribute cash of approximately $20,000. With the cash contributed by the Goldman Entities and the proceeds of a Senior Bank Facility, the new company, GGS Management, Inc., will acquire Superior. SIG Inc. will have a 52% interest in GGS Management, Inc. through its ownership of shares in GGS Management Holdings, Inc. - - - -------------------------------------------------------------------------------- 18. Reconciliation of Canadian GAAP and United States generally accepted accounting principles ("U.S. GAAP") and additional information - - - -------------------------------------------------------------------------------- The consolidated financial statements are prepared in accordance with Canadian GAAP. Material differences between Canadian and U.S. GAAP are described below: (a) Earnings and retained earnings 1995 1994 ------- ------- Net earnings in accordance with Canadian GAAP $ 7,171 $ 3,940 Add effect of difference in accounting for: Deferred income taxes [see note (d)] (344) 1,180 Outstanding claims [see note (e)] (161) 88 ------- ------- Net earnings in accordance with U.S. GAAP 6,666 5,208 - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars, except share data) - - - -------------------------------------------------------------------------------- 18. Reconciliation of Canadian GAAP and United States generally accepted accounting principles ("U.S. GAAP") and additional information (cont'd) - - - -------------------------------------------------------------------------------- (a) Earnings and retained earnings (cont'd) Applying U.S. GAAP, deferred income tax assets would be increased by $1,466 and $1,742, outstanding claims would be increased by $1,327 and $1,134, and cumulative translation adjustment would be increased by $36 and $84 as at December 31, 1995 and 1994, respectively. As a result of these adjustments, accumulated deficit would be decreased by $139 and $608 as at December 31, 1995 and 1994, respectively. The effect of the above noted differences on other individual balance sheet items and on working capital is not significant. (b) Earnings per share Earnings per share, as determined in accordance with U.S. GAAP are set out below. Primary earnings per share are computed based on the weighted average number of common shares outstanding during the year plus common share equivalents consisting of stock options and warrants. Primary and fully diluted earnings per share are calculated using the Treasury Stock method and assume conversion of securities when the result is dilutive. The following average number of shares were used for the compilation of primary and fully diluted earnings per share: 1995 1994 ---------- ---------- Primary $5,567,644 $5,399,463 Fully diluted 5,567,644 5,399,463 Earnings per share, as determined in accordance with U.S. GAAP, are as follows: 1995 1994 ---------- ---------- Primary earnings per share $1.20 $0.96 Fully diluted earnings per share 1.20 0.96 (c) Supplemental cash flow information Cash paid for interest and income taxes is summarized as follows: 1995 1994 ---------- ---------- Cash paid for interest 1,548 1,773 Cash paid for income taxes, net of refunds 1,953 166 - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 18. Reconciliation of Canadian GAAP and United States generally accepted accounting principles (U.S. GAAP) and additional information (cont'd) - - - -------------------------------------------------------------------------------- (d) Income taxes The difference in accounting for deferred income taxes reflects the adoption for U.S. GAAP, effective January 1, 1993, of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." This standard requires an asset and liability approach that takes into account changes in tax rates when valuing the deferred tax amounts to be reported in the balance sheet. Deferred tax assets recognized under Canadian GAAP, which require realization beyond a reasonable doubt in order to record the assets, amounted to $73 and $214 at December 31, 1995 and 1994, respectively, and pertained to Canadian operations only. The adoption of SFAS No. 109 results in additional deferred tax assets recognized for deductible temporary differences and loss carry-forwards in the amount of $2,581 and $2,375 net of valuation allowances of $69 and $260 and deferred tax liabilities recognized for taxable temporary differences in the amount of $1,114 and $633 at December 31, 1995 and 1994, respectively. (e) Outstanding claims The difference in accounting for outstanding claims reflects the application for U.S. GAAP of SEC Staff Accounting Bulletin No. 62, "Discounting by Property/Casualty Insurance Companies". This standard does not allow discounting of unpaid claim liabilities by public companies, except in specific circumstances that are not applicable to the Company. (f) Receivables from sale of capital stock The SEC Staff Accounting Bulletins require that accounts or notes receivable arising from transactions involving capital stock should be presented as deductions from shareholders' equity and not as assets. Accordingly, in order to comply with U.S. GAAP, shareholders' equity would be reduced by $563 and $593 as at December 31, 1995 and 1994, respectively, to reflect the loans due from certain shareholders which relate to the purchase of common shares of the Company. (g) Unrealized loss on investments U.S. GAAP require that unrealized losses on investment portfolios be included as a component in determining shareholders' equity. In addition, SFAS No. 115 permits prospective recognition of unrealized gains on investment portfolios for year-ends commencing after December 15, 1993. As a result, shareholders' equity would be reduced by $221 and $1,383 as at December 31, 1995 and 1994, respectively. As the Company classifies its debt and equity securities as available for sale, the adoption of SFAS No. 115 in 1994 has no effect on net income. - - - -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - - - -------------------------------------------------------------------------------- DECEMBER 31, 1995 AND 1994 (In thousands of U.S. dollars) - - - -------------------------------------------------------------------------------- 18. Reconciliation of Canadian GAAP and United States generally accepted accounting principles (U.S. GAAP) and additional information (cont'd) - - - -------------------------------------------------------------------------------- (h) Changes in shareholders' equity A reconciliation of shareholders' equity from Canadian GAAP to U.S. GAAP is as follows: 1995 1994 ------- ------- Shareholders' equity in accordance with Canadian GAAP 12,622 5,067 Add (deduct) effect of difference in accounting for: Deferred income taxes (see note (a)) 1,466 1,742 Outstanding claims (see note (a)) (1,327) (1,134) Receivables from sale of capital stock (see note (f)) (563) (593) Unrealized loss on investments (see note(g)) (221) (1,383) ------- ------- Shareholders' equity in accordance with U.S. GAAP 11,977 3,699 ====== ===== - - - -------------------------------------------------------------------------------- 19. Comparative figures - - - -------------------------------------------------------------------------------- Certain comparative figures have been reclassified to conform to the basis of presentation adopted in 1995. - - - -------------------------------------------------------------------------------- 20. Reporting currency - - - -------------------------------------------------------------------------------- These financial statements, which are denominated in U.S. dollars, reflect the conversion of the previously issued Canadian dollar denominated financial statements, which were issued together with an auditors' report thereon dated March 18, 1996. EX-99 10 PROXY STATEMENT GORAN CAPITAL INC. NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN that the Annual and Special Meeting of the Shareholders of Goran Capital Inc. (the "Corporation") will be held at 181 University Avenue, Suite 1101, Toronto, Ontario, on Wednesday, May 21, 1997, at 10:00 a.m., Toronto time, for the following purposes: 1. To receive the Annual Report and financial statements for the year ended December 31, 1996, and the report of the auditor thereon; 2. To elect Directors; 3. To appoint an auditor and to authorize the Directors to fix the auditor's remuneration; 4. To consider and, if deemed advisable, to confirm, subject to such amendments, variations and additions as may be approved at the Meeting, new Bylaw No. 1 enacted by the Directors which repealed and replaced the former general Bylaw and which relates generally to the transaction of the business and affairs of the Corporation. 5. To transact such other business as may properly come before the Meeting or any adjournment thereof. The accompanying management information circular provides additional information relating to the matters to be dealt with at the Meeting and forms part of this Notice. Shareholders who are unable to attend the Meeting are requested to date, sign and return the accompanying Form of Proxy in the envelope provided for that purpose. DATED at Toronto, this 27th day of March, 1997. BY ORDER OF THE BOARD /s/ ALAN G. SYMONS CEO and President March 27, 1997 Dear Shareholder: Re: Supplemental Mailing List If you wish to have your name added to the supplemental mailing list of Goran Capital Inc. so you may receive the Corporation's quarterly reports which contain interim unaudited financial statements, please fill in your name and address in the space provided below and return to Adams & Aihoshi Shareholder Services Ltd., 461 Alden Road, Unit 33, Markham, Ontario, L3R 3L4, Telephone (905) 940-9535. NAME: Please print ADDRESS: CITY: PROVINCE: POSTAL CODE: I hereby confirm that I am the owner of shares issued by the above-mentioned Corporation. SIGNATURE: DATE: GORAN CAPITAL INC. MANAGEMENT PROXY CIRCULAR Solicitation of Proxies This Management Proxy Circular is furnished in connection with the solicitation of proxies by the management of Goran Capital Inc. (the "Corporation") for use at the Annual and Special Meeting (the "Meeting") of Shareholders of the Corporation to be held Wednesday, May 21, 1997, at 10:00 a.m., or at any and all adjournments thereof, for the purposes set forth in the accompanying notice of the Meeting. It is expected that the solicitation will be primarily by mail, but proxies may also be solicited personally, by telephone or by telecopier, by directors, officers or regular employees of the Corporation. The costs of such solicitation will be borne by the Corporation. Revocation of Proxies A shareholder who has given a proxy may revoke at any time to the extent it has not been exercised. In addition to revocation in any other manner permitted by law, a proxy may be revoked by instrument in writing executed by the shareholder or his attorney authorized in writing, and deposited either at the registered office of the Corporation at any time up to 5:00 p.m. (Toronto time) on the last business day preceding the day of the Meeting, or any adjournment thereof, at which the Proxy is to be used, or with the Chairman of the Meeting prior to the beginning of the Meeting on the day of the Meeting, or any adjournment thereof or in any other manner provided by law. Voting of Shares Represented by Management Proxies The persons named in the enclosed form of proxy will vote the shares in respect of which they are appointed by proxy on any ballot that may be called for in accordance with the instructions thereon. In the absences of such specifications, such shares will be voted in favour of each of the matters referred to herein. The enclosed form of proxy confers discretionary authority upon the persons named therein with respect to amendments to or variations of matters identified in the Notice of meeting and with respect to other matters, if any, that may properly come before the Meeting. At that date of this Circular, management of the corporation knows of no such amendments, variations or other matters to come before the Meeting. However, if any other matters that are not known to management should properly come before the Meeting, the proxy will be voted on such matters in accordance with the best judgment of the named proxy. Voting Securities The only voting securities of the Corporation currently outstanding and entitled to be voted at the Meeting are 5,569,652 common shares, each of which carries one vote. In accordance with the provisions of the Canada Business Corporations Act, the Corporation will prepare a list of the holders of common shares at the close of business on the day immediately preceding the day on which Notice of the Meeting is given. Each person named in such list is entitled to vote the shares shown opposite his name on such list at the Meeting except to the extent that he has transferred ownership of any of his shares after that date and the transferee of those shares produces properly endorsed share certificates or otherwise establishes that he owns the shares and demands not later than 10 days before the Meeting that his name be included in the list before the Meeting, in which case the transferee is entitled to vote his shares at the Meeting or any adjournment thereof. Principal Holders of Voting Securities To the knowledge of the directors and officers of the Corporation, the following are the only persons who beneficially own or exercise control or direction over more than 10% of the outstanding common shares of the Corporation: Number of Common Shares Beneficially Owned Percentage Controlled or of Outstanding Name Directed (1) Common Shares Symons International Group Ltd.(2) 1,646,413 29.6% G. Gordon Symons 890,167 16.0% Alan G. Symons 449,183 8.1% 1Reflect ownership as verified by the persons listed as of March 14, 1997. 2Mr. G. Gordon Symons is the controlling shareholder of Symons International Group Ltd., a private company. Particulars of Matters to be Acted Upon At the Meeting, shareholders will be asked to elect directors, to appoint an auditor and to authorize the directors to fix the auditor's remuneration, to confirm new Bylaw No. 1 for the Corporation and to deal with other matters which may properly come before the Meeting. Election of Directors The Articles of the Corporation currently provide for a board consisting of a minimum of three and a maximum of ten directors. The board currently consists of seven Directors until otherwise determined by further resolution of the board of directors of the Corporation. Unless otherwise specified therein, proxies received in favour of management nominees will be voted for the following proposed nominees (or for substitute nominees in the event of contingencies not known at present) whose term of office will continue until the next Annual Meeting of Shareholders or until they are removed or their successors are elected or appointed in accordance with the Canada Business Corporations Act and the bylaws of the Corporation. Number of Common Shares of the Name and Position in Year First Corporation Principal the Became Beneficially Occupation Corporation Director Owned (1) G. Gordon Chairman of 1986 890,167 Symons the Board Chairman of the Board Goran Capital Inc. Alan G. CEO, President 1986 449,183 Symons (2) and Secretary CEO, President and Secretary Goran Capital Inc. Douglas H. COO and Vice 1989 197,483 Symons President President, Symons International Group, Inc., Chief Operating Officer, Goran Capital Inc. Ross Schofield Director 1992 3,800 President Schofield Insurance Brokers David B. Shapira Director 1989 100,000 President Medbers, Inc. James G. Director 1995 2,000 Torrance, Q.C. (2) Partner Emeritus Smith, Lyons Barristers & Solicitors John K. Director 1995 -0- McKeating (2) Partner Vision 2120, Inc. 1Information as to the shareholdings of each nominee has been provided by the nominee. 2Member of the Audit Committee. Each of the foregoing nominees has held the principal occupation indicated above during the past five years except: (i) Alan G. Symons who prior to June 4, 1992, was the President of both Symons Capital Fund Ltd. and Symons International Group Ltd.; and (ii) David B. Shapira who prior to 1995 was the President of Morse Jewellers Inc. Directors' and Officers' Remuneration The aggregate remuneration paid by the Corporation and its subsidiaries to its five highest paid employees or Officers, including the three inside Directors, during the financial year ended December 31, 1996 was $1,643,492, all in the form of salary, bonus and consulting fees. In 1996, the Corporation's directors received (i) a flat annual fee of $10,000 for each Director; and (ii) a $1,000 meeting fee for each board or committee meeting attended. Interest of Insiders in Material Transactions Reference is made to the 1996 Annual Report, sent to each shareholder with this Management Proxy Circular, and to Note 14, Related Party Transactions. Indebtedness of Officers and Directors of the Corporation The following directors and officers of the Corporation were indebted to the Corporation in amounts exceeding $10,000 during the financial year ended December 31, 1996, on account of loans to purchase common shares of the Corporation and its affiliates certain of which were pursuant to the Employee Share Purchase Plan (see below): Name and Municipality of Date of Largest Blance Present Residence Loan During Period Balance G. Gordon Symons June 27, 1986 $148,000 $148,000 Bermuda June 30, 1986 $200,000 $200,000 May 31, 1988 $ 51,729 (US) $ 51,729 (US) Alan G. Symons June 30, 1986 $ 40,172 $ 29,772 Indianapolis, February 25, Indiana 1986 $ 27,309 (US) $ 27,309 (US) Douglas H. Symons June 30, 1986 $ 15,000 $ 15,000 Indianapolis, February 25, Indiana 1986 $ 2,219 (US) $ 2,219 (US) The foregoing loans dated June 27, 1986 and June 30, 1986 made for the purchase of common shares of the Corporation require that the shares acquired be pledged for the benefit of the Corporation as security until these amounts are fully paid. The other loans are each unsecured. The loans dated prior to 1988 are payable on demand and are interest free. The loans dated in 1988 are payable on demand and bear interest at 90 day T-Bill rates. Mr. G. Gordon Symons has an unsecured loan in the amount of $70,000 not relating to the purchase of common shares of the Corporation. This loan was taken out on January 2, 1988, is payable on demand and is interest free. In November, 1990, the Corporation loaned Douglas H. Symons $39,377 (U.S.) for acquisition of a residence. This loan bears interest at prime plus 1% and has accrued an unpaid interest of $21,168. In February, 1997, Mr. G. Gordon Symons repaid in full the U.S. mortgage note principal amount of $277,502 (U.S.) supported by a residential collateral mortgage, originally taken out on October 3, 1988. Executive Compensation The Corporation had five Executive Officers during 1996. The aggregate cash compensation paid by the Corporation and its subsidiaries to the Corporation's Executive Officers including salaries, fees, commissions and bonuses, during 1996 was $1,643,492. The aggregate value of compensation, other than that referred to above, paid to Executive Officers during 1996 does not exceed $10,000 times the number of Executive Officers. Table 1 sets forth certain compensation information, paid by the Corporation and its subsidiaries, to the Corporation's Chief Executive Officer and each of the Corporation's other Executive Officers during the Corporation's three most recently completed fiscal years. TABLE 1: SUMMARY COMPENSATION TABLE Annual Long- Compensation Term Awards Securities Other Under Options Salary Bonus Annual Granted (#) All Other Name and US $ US $ Comp- Note C Compensation Principal Note A Note A ensa- US $ Position Year US $ Note B
G. Gordon 1996 $171,000(h) $393,945 NIL 51,524 $170,799(E) Symons 1995 $175,000 70,000 NIL 18,946 25,272(D) Chairman 1994 $150,000 $ 36,611 NIL 15,000 21,425(D) Alan G. 1996 $242,786(f) $143,333(g) NIL 51,399 Note B Symons 1995 $148,077 $ 42,893 NIL 18,945 Note B 1994 $142,361 $ 55,810 NIL 15,000 Note B Douglas H. 1996 $195,973(I) $ 50,000 NIL $54,333 Note B Symons 1995 $149,982 $100,000 NIL $ 9,473 Note B 1994 $150,041 $ 14,000 NIL $15,000 Note B Gary P. 1996 $ 55,418(I) $28,000(I) NIL 0 Note B Hutchcraft 1995 $ N/R N/R NIL N/R N/R Vice President 1994 $ N/R N/R NIL N/R N/R and Treasurer David L. Bates 1996 $ 95,162(I) $97,076(I) NIL $ 3,165 Note B Vice President 1995 $ 63,237 -0- NIL $ -0- Note B and General 1994 N/R N/R NIL N/R N/R Counsel
N/R Not required. Note A Salary and bonus are stated in U.S. dollars as the majority of payments are actually made in U.S. dollars. Note B Aggregate amounts not greater than the lesser of $50,000 and 10% of the total of the annual salary and bonus. Note C No stock appreciation rights (SAR's), restricted shares, or restricted share units were granted during any of the past three completed fiscal years. Note D Imputed interest on interest-free stock purchase loan. Note E Consulting fees paid to companies owned by Mr. G. Gordon Symons including $52,411 paid to such companies by the Company's 67% owned subsidiary, Symons International Group, Inc. Note F Includes $142,786 paid by Symons International Group, Inc. Note G Includes $133,333 paid by Symons International Group, Inc. Note H Amount paid by a subsidiary of the Company. Note I Amount paid by Symons International Group, Inc. Employee Share Option Plan The Corporation has a Share Option Plan (the "Plan"). Under the Plan, common shares equal to 10% of the number of common shares outstanding from time to time have been reserved for issuance. The terms, conditions and limitations of options granted under the Plan are determined by the board of directors of the Corporation with respect to each option, within certain limitations. The exercise price per share shall be the closing price on The Toronto Stock Exchange on the date of grant of the option. The exercise price per share is payable in full on the date of exercise. Options granted under the Plan are not assignable. During 1996, options to purchase a total of 213,986 common shares were granted to Executive Officers and Directors pursuant to the Plan, excluding options granted and subsequently canceled during the year. Including the options referred to above, there are outstanding options to purchase a total of 527,399 common shares as of December 31, 1996, at an average price of $8.29. TABLE 2: OPTION GRANTS DURING 1996 Market Value % of Total of Securities Securities Option Underlying Under Granted To Exercise Options on the Options Employees or Base Date of Grant Expiration Name Granted (#) 1996 Price ($/Security) Date ($/Security) G. Gordon 51,524 24.1% $16.50 $16.50 May 12, 2006 Symons Alan G. 51,399 24.0% $16.50 $16.50 May 12, 2006 Symons Douglas 54,333 25.6% $16.50 $16.50 May 12, 2006 H. Symons David L. 3,165 1.5% $16.50 $16.50 May 12, 2006 Bates Dennis G. 20,000 9.4% $16.50 $16.50 May 12, 2006 Daggett Thomas F. 20,000 9.4% $16.50 $16.50 May 12, 2006 Gowdy TABLE 3: AGGREGATED OPTION EXERCISES DURING 1996 AND FINANCIAL YEAR-END OPTION VALUES Value of Unexercised Unexercised In- Securities Options at The-Money Options Acquired Aggregate FY-End (#) Exercisable/ On Value Exercisable/ Unexercisable Name Exercise Realized Unexercisable G. Gordon Symons 92,500 $1,513,250 273,470/0 $6,129,230/0 Alan G. Symons 49,383 $ 761,856 85,344/0 $ 982,775/0 Douglas H. Symons 33,333 $ 493,995 94,855/0 $1,524,787/0 Composition of the Compensation Committee The following Goran Directors served as members of the Board's Compensation Committee during 1996: J. Ross Schofield, Douglas H. Symons and James G. Torrance. At its meeting on March 19, 1997, the Board reconfigured the Compensation Committee to consist of Messrs. Schofield, Shapira and and Douglas H. Symons. Mr. Douglas H. Symons was Chief Operating Officer and Vice President of the Corporation throughout 1996. The role of the Compensation Committee is to review the total compensation of the Corporation's Executive Officers in an effort to ensure that the Corporation attracts and retains the talent commensurate with its business objectives. Report On Executive Compensation The Corporation's Executive Compensation Policy (the "Policy") considers an individual's experience, market conditions (including industry surveys), individual performance and overall financial performance of the Corporation. The Company's total compensation program for officers includes base salaries, bonuses and the grant of stock options pursuant to the Company's stock option plan. The Company's primary objective is to achieve above-average performance by providing the opportunity to earn above-average total compensation (base salary, bonus, and value derived from stock options) for above-average performance. Each element of total compensation is designed to work in concert. The total program is designed to attract, motivate, reward and retain the management talent required to serve shareholder, customer and employee interests. The Company believes that this program also motivates the Company's officers to acquire and retain appropriate levels of stock ownership. It is the opinion of the Compensation Committee that the total compensation earned by the Company's officers during 1996 achieves these objectives and is fair and reasonable. At its meeting on March 19, 1997, the Board of Directors of the Company voted to retain an independent compensation consultant to review the Company's executive compensation plan and to make recommendations concerning the compensation levels and type necessary to achieve the Company's stated objectives. Compensation is comprised of base salary, annual cash incentive (bonus) opportunities, and long-term incentive opportunities in the form of stock options. Individual performance is determined in relation to short and long-term objectives that are established and maintained on an on-going basis. Performance to these objectives is formally reviewed annually and base salary adjusted as a result. Bonus rewards are provided upon the attainment of corporate financial performance objectives as well as the individual's direct responsibilities and their attainment of budget and other objectives. The Policy also strives to establish long-term incentives to Executive Officers by aligning their interests with those of the Corporation's shareholders through award opportunities that can result in the ownership of the Corporation's common stock. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN OF GORAN CAPITAL INC. WITH TSE 300 [Graph Omitted] 1991 1992 1993 1994 1995 1996 GNC $100 $886 $1,572 $2,443 $3,933 $9,108 TSE300 $100 $ 98 $ 134 $ 134 $ 155 $ 195 Performance Graph The graph shown above compares the total cumulative shareholder return for $100 invested in common shares of GNC on December 31, 1990, with the cumulative total return of the TSE 300 Stock Index for the six most recently completed financial years. Appointment of Auditor Unless otherwise instructed, the persons named in the enclosed Form of Proxy intend to vote for the appointment of Schwartz, Levitsky, Feldman, Chartered Accountants as auditor of the Corporation to hold office until the next annual meeting of shareholders. Schwartz Levitsky Feldman was first appointed auditor of the Corporation in 1990. The New Bylaw At its meeting on March 19, 1997, the Board of Directors of the Corporation approved and adopted a new Bylaw relating to the transaction of the business and affairs of the Corporation. The action of the board in approving and adopting a new Bylaw made it effective immediately. However, absent confirmation by the Shareholders, the new Bylaw lapses on the earlier of March 19, 1998 or the date of the Corporation's next shareholderm meeting. The following is a summary of the principle provisions of the new Bylaws, a copy of which will be furnished upon request. Summary of Principal Bylaw Provisions The Bylaws provide that, unless otherwise determined by Board resolution, any contract or documents requiring execution by the Corporation may be signed by any Director or Officer of the Corporation and that a document so executed shall be binding upon the Corporation without further authorization or formality. The Board has the further power to specifically delineate which of its Directors or Officers may execute certain contracts or documents. Further, if so authorized by a resolution of the Board, such signatures or the affixing of the corporate seal may be done mechanically or electronically with the same binding effect as if such were an original signature. Except as otherwise determined by a resolution of the Board, all persons authorized to sign contracts or documents on behalf of the Corporation may execute and deliver instruments of proxy or otherwise vote securities owned by the Corporation. Subject to a contrary resolution of the Board, the Board may, without shareholder authorization, borrow money on the credit of the Corporation, issue, reissue, sell or pledge debt obligations of the Corporation, give a guaranty on behalf of the Corporation to secure performance of an obligation and mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the Corporation, owned or subsequently acquired, to secure any obligation of the Corporation. An individual may be a member of the Board of Directors of the Corporation as long as such individual is 18 years of age or greater, of sound mind, and is not bankrupt. The number of Directors required to constitute a quorum for the transaction of business at a meeting of the Board shall be 51% or more of the Directors or the minimum number of Directors required by the Articles. A Director shall serve a term of office from the date of election until the close of the Annual Meeting of Shareholders next following his election or appointment or until his successor is elected or appointed. The resignation of any Board member becomes effective at the time a written resignation is sent to the Corporation, or at the time specified in the resignation, whichever is later. Directors may be removed by the Shareholders by a resolution at a special meeting and a vacancy created by the removal of a Director may be filled at the meeting of Shareholders at which the Director is removed. Directors may attend meetings by telephone or other communication facilities. The Chairman of the Board shall be Chairman of any meeting of Directors and any questions arising at a meeting of Directors shall be decided by a majority of the votes cast at such meeting. In the case of a tie, the Chairman of the meeting shall be entitled to cast the deciding vote. In lieu of a meeting, the Directors may act by a written resolution signed by all Directors entitled to vote as if such resolution had been presented at a meeting of the Directors. The Board may appoint at least three (3) of its members, from time to time, to act as the Audit Committee of the Board. A majority of the members of the Audit Committee shall not be Officers or employees of the Corporation. The Audit Committee shall review the annual financial statements of the Corporation and report thereon to the Directors before such financial statements are approved by the Directors. The Board may, by resolution, appoint from among their number any one or more other committees. From time to time, the Directors may appoint a Chairman of the Board, a President, one or more Vice Presidents (to which title may be added words indicating seniority or function), a Secretary, a Treasurer, a Controller and such other Officers as the Directors may by resolution determine. Any Officer so appointed may be removed by the Directors at their pleasure without prejudice to the rights of any such person. In the event that a Director or Officer is party to a material contract or proposed material contract with the Corporation or has a material interest in any person who is a party to a material contract or proposed material contract with the Corporation, such Director or Officer shall disclose in writing to the Corporation the facts of same and, if a Director, shall not vote on any resolution to approve such contract or transaction. The Bylaws provide that every Director or Officer of the Corporation shall be indemnified by the Corporation to the maximum extent provided by applicable law. Subject to the Articles of Incorporation, the Directors, by resolution, may issue any or all of the unissued shares in the capital of the Corporation to such persons and for such consideration as the Directors may determine by resolution. The Bylaws authorize, but do not require, the Board to declare dividends of the Corporation and the Directors may, by resolution, fix in advance a date preceding by not more than fifty (50) clear days, the date for the payment of any dividend or the making of any distribution or for the issue of any warrant or other evidence of right to acquire securities of the Corporation. The Directors shall set the date and time for the Annual Meeting of Shareholders and, by resolution, may call a special meeting of the Shareholders. All meetings of Shareholders shall be held at the Corporation's offices or at such other place within Canada as the Directors from time to time may determine. Notice of such meeting of Shareholders shall be given to the Shareholders not less than twenty-one (21), nor more than fifty (50) days before the date on which such meeting is to be held. The Secretary of the Corporation is directed to send a form of proxy and Management Information Circular to each Shareholder concurrently with the notice of a meeting of Shareholders. The quorum necessary for the transaction of business at any shareholders' meeting shall be two (2) persons present and entitled to vote not less than 51% of the Shares entitled to be voted at the meeting. At each meeting of Shareholders, every question shall be decided by a majority of the votes duly cast thereon (including those cast by proxy). Any Shareholder entitled to vote at a meeting of Shareholders may submit to the Corporation a notice of any proposal that such Shareholder wishes to raise at the meeting and may discuss at the meeting any matter in respect of which he would have been entitled under applicable law to submit a proposal. Where so required by applicable law, the Management Information Circular prepared in respect to the meeting shall sit out or be accompanied by such a proposal. Directors' Approval The contents of this information circular and the sending thereof have been approved by the Board of Directors of the Corporation. March 27, 1997 /s/ Alan G. Symons President and CEO GORAN CAPITAL INC. STATEMENT OF CORPORATE GOVERNANCE PRACTICES Symbols: TSE - GNC NASDAQ - GNCNF New Guidelines In February, 1995, the Toronto Stock Exchange ("TSE") announced that all companies with a year-end on or after June 30, 1995 would be required to describe their practices of corporate governance with reference to TSE Guidelines previously published. Goran conforms with the majority of these Guidelines except as noted below: "Corporate Governance" is the process and structure used to direct and manage the business and affairs of the Corporation to achieve shareholders' objectives. The shareholders of the Corporation elect the directors who, in turn, are responsible for overseeing all aspects of the operation of the Corporation, appointing management and ensuring that the business is managed properly, taking into account the interests of the shareholders. The Guidelines suggest that the chairman of the board of directors not be a member of management and state that members of the board's nominating committee should be exclusively non-management directors. In this respect, the Corporation does not comply. The Corporation currently does not have a nominating or corporate governance committee. Further, the knowledge and experience of G. Gordon Symons, the founder of the Corporation and its current chairman, are very important to the Corporation and the board. Further, it is believed that the best interests of the Corporation's shareholders, the Corporation and the board would not be properly served with either Mr. Symons relinquishing his management function or the board appointing a different chairman. The board of the Corporation is currently comprised of seven members, four of whom are "unrelated" within the meaning of the guidelines and this majority of unrelated directors allows the board the independence of management which is a fundamental cornerstone of the TSE Guidelines. Another guideline states that position descriptions should be developed for the board and for the chief executive officer which delineate and define management's responsibilities. The segregation of duties and responsibilities between the board and its chief executive officer have been traditionally understood but have not been formalized. The Corporation has a significant shareholder and the percentage of shares held by individuals or entities who are not directly or indirectly related to the Corporation's significant shareholder is less than 50%. Yet, the Corporation has a majority of its directors who are unrelated directors. The number of such directors more than fairly reflects the investment in the Corporation by shareholders other than the significant shareholder and those persons or entities directly or indirectly related to the significant shareholder. Therefore, the unrelated directors (and the board as a whole) are in a position to fairly represent minority shareholders. Mandate Of The Board The responsibility of the Corporation's board of directors is to oversee the conduct of the Corporation's business and to supervise management. The board discharges its responsibilities either directly or through its committees. The board met four times during 1996 and also acted through the medium of unanimous written consent. The board has three committees. All of these committees (except the executive committee) have a majority of members who are unrelated directors. During 1996, the audit committee was comprised of Alan G. Symons, David B. Shapira, John K. McKeating and James G. Torrance. At its meeting on March 19, 1997, the Board selected Messrs. Torrance, McKeating and Alan G. Symons to serve on the Board's Audit Committee. Its principal responsibilities are to review annual audited financial statements prior to submission to the board for approval, review the nature and scope of the annual audit, evaluate auditors' performance, review fees and make recommendations as to the appointment of auditors for the ensuing year and review the adequacy of internal accounting control procedures and systems. During 1996, the compensation committee was comprised Douglas H. Symons, J. Ross Schofield and James G. Torrance. At its meeting on March 19, 1997, the Board selected Messrs. Schofield, Shapira and Douglas H. Symons to serve on the Board's compensation committee. Its role is to review the performance of the chairman and chief executive officer as regards compensation, determine compensation practices for the officers of the Corporation, periodically review the Corporation's long-range plans and policies for recruiting, developing and motivating personnel, and to make recommendations to the board concerning stock option grants. Decisions Requiring Prior Approval Of The Board In general, the management of the Corporation is empowered to run the business on a day-to-day basis. The board approves the annual business and strategic plan and reviews performance against those plans on an interim basis throughout the year. The board, of necessity, would approve any action leading to a material change in the nature of the business of the Corporation, including any acquisition or disposition of a significant operating unit. The board also approves key borrowing and financing decisions. The board also appoints the officers of the Corporation, determines directors' compensation and declares dividends (if any). Recruitment Of New Directors Currently, if vacancies should occur on the board, the board seeks and receives input from individual board members and reviews the qualifications of prospective members while taking into consideration current board composition and the Corporation's needs. It is anticipated that a nominating committee will be formed by the board in the near future. Measures For Receiving Shareholder Feedback The board has requested management to make it aware, on an on-going basis, of any significant shareholder concerns which are communicated to management. The Board's Expectation Of Management The board expects management to operate the Corporation in accordance with prudent business practices and the direction of the board. The goal of management, the Corporation and the board is to protect and enhance shareholder value while managing the Corporation in a prudent manner as a fiduciary for the Corporation's shareholders. Management is expected to provide regular financial and operating reports to the board and to make the board aware of all important issues and major business developments, especially those which have not been anticipated. Consistent with its previously enunciated goal, management is expected to seek out opportunities for business acquisitions and expansion and to forward appropriate recommendations to the board for its action. -----END PRIVACY-ENHANCED MESSAGE-----